December 21, 2017

Rulemaking by Guidance: DOJ Says “Bye-Bye”

Many conservative groups have criticized federal agencies for allegedly using “guidance” as a substitute for the traditional “notice & comment” rulemaking process.  In recent years, these complaints have gotten some traction in federal court & in Congress, but many agencies – including the SEC – continue to rely heavily on the use of guidance as part of their oversight activities.

That’s why this recent memo from Attorney General Jeff Sessions is big news – it basically says that the DOJ is out of the “rulemaking by guidance” business. Here’s an excerpt from the press release accompanying Sessions’ memo:

In the past, the Department of Justice and other agencies have blurred the distinction between regulations and guidance documents.  Under the Attorney General’s memo, the Department may no longer issue guidance documents that purport to create rights or obligations binding on persons or entities outside the Executive Branch.

The press release says that the Attorney General’s Regulatory Reform Task Force will review existing DOJ documents and will recommend candidates for repeal or modification in the light of the memo’s principles.

It’s unknown whether the SEC or other agencies will feel compelled to follow the DOJ’s lead – but coming on the heels of the GAO’s recent decision that banking agencies’ leveraged lending guidelines were actually rulemaking subject to the Congressional Review Act, the AG’s action is another sign that agency guidance practices are being viewed with a jaundiced eye in DC.

Bye-Bye Buybacks? (Maybe Not)

Bad news for all you financial engineers out there – this WSJ article says that it looks like stock buybacks may be falling out of favor:

Companies in the S&P 500 are on pace to spend $500 billion this year on share buybacks, or about $125 billion a quarter, according to data from INTL FCStone. That is the least since 2012 and down from a quarterly average of $142 billion between 2014 and 2016.

Buybacks have been popular in recent years, in part because tepid economic growth limited perceived investment opportunities as well as expected returns on new plant and expanded operations. Adding to their appeal, repurchases can make shares more attractive to investors by lowering the share count and accordingly increasing earnings per share. The post crisis surge in buybacks has been frequently cited by stock-market bears as a sign that the market’s eight-year-long advance has been driven more by financial engineering than by long-term growth.

The article says that companies’ decisions to ease up on the throttle when it comes to buybacks are a result of an improving global economy, rising consumer & investor sentiment, and concerns about the staying power of this year’s stock market rally.

Wait a sec. . . According to this MarketWatch article, reports of buybacks’ demise may be greatly exaggerated. In fact, they appear to have exploded this month – perhaps hinting at what companies intend to do with the increased cash they expect to have on hand post-tax reform.

Bye-Bye CEOs?  One in Three Gets Pushed Out

Earlier this year, I blogged about the research firm called “exechange” – and the “Push-out Score” model it uses to analyze the extent to which CEO departures were voluntary or involuntary.  Based on the firm’s analysis of more than 200 changes in top management of public companies, a whole lot of CEOs are getting kicked to the curb.  Here’s an excerpt from the firm’s recent study:

exechange uses a scoring system with a scale of 0 to 10 to determine the likelihood of a forced executive change. A Push- out Score of 0 indicates a completely voluntary management change, and a score of 10 indicates an overtly forced departure. The Push-out Score incorporates facts from company announcements and other publicly available data, including the age of the outgoing manager, time in office and share price performance. The system also interprets the sometimes-cryptic language in corporate communications, using a proprietary algorithm.

Around 36 percent of the Push-out Scores of CEO departures in the U.S. from the past 12 months reached values between 6 and 10, which suggest strong pressure on the outgoing CEO. Every third CEO in the U.S. steps down under pressure.

Mel Brooks’ version of Louis XVI said it was “good to be da King” – and a quick glance at any summary comp table says that there’s plenty of evidence for that.  However, this report suggests that Shakespeare’s Henry IV also was on to something when he said, “uneasy lies the head that wears a crown.”

John Jenkins