Company Fined for Internal Control Failures on Stock Buybacks
Commentary by Steven Lofchie
A broadband connectivity company settled charges with the SEC for failing to maintain internal accounting controls intended to ensure that the company's stock buybacks were conducted in accordance with management authorizations.
In an Order, the SEC found that the company's internal accounting controls were insufficient to ensure that the company's corporate transactions, including share repurchases, were so executed, and that access to assets were only provided based on the company's management's directive. The SEC found that the company executed stock buybacks using nine trading plans with "accordion" provisions, which resulted in the company retaining discretion over trading activity after the adoption of the plans.
The SEC found that the company violated Exchange Act Section 13(b)(2)(B) ("Periodical and other reports").
To settle the charges, the company agreed to (i) cease and desist from further regulatory violations and (ii) pay a civil money penalty of $25 million.
Statement
In a joint statement of dissent, SEC Commissioners Hester M. Peirce and Mark T. Uyeda called the Order the SEC's "latest example" of leveraging Exchange Act Section 13(b)(2)(B) as a "multi-use tool" for compelling companies to adopt procedures that the SEC deems good practice. The dissenting Commissioners argued that the SEC does not have the authority to tell companies how to operate. The Commissioners said that the Order fails to include any evidence that the company's management (i) used more funds than authorized by the board for share buybacks, (ii) purchased shares at a quantity or time inconsistent with the board's authorization or (iii) failed to record the expenditure of corporate funds.
Commentary
If the SEC majority can not convince the full slate of Commissioners that there has been a rule violation, perhaps the majority should consider whether rulemaking would be the appropriate course, rather than an enforcement action. There is nothing that smacks as much of "rulemaking by enforcement" as an enforcement action where two of the five Commissioners do not believe that there was any violation of law.