On December 15, 2021, the U.S. Securities and Exchange Commission (SEC), by a 3-2 vote, proposed amendments to require more frequent and detailed disclosure surrounding repurchases of an issuer’s registered equity securities, often called buybacks.1 Specifically, the proposed rules would introduce a new disclosure form — Form SR — on which an issuer would be required to disclose details regarding share repurchases made by the issuer or any of its “affiliated purchasers” within one business day of the execution of the corresponding share repurchase order. The SEC also proposed to amend Item 703 of Regulation S-K to expand the share repurchase disclosures required in periodic reports. Finally, the proposed rules would impose structured data requirements for repurchase disclosures.
The SEC Commissioners who supported the rule proposal expressed frustration with the infrequent, aggregate nature of the current disclosure requirements for buybacks, which they view as ineffective in protecting market integrity. They argued that this system has produced information asymmetries between investors and issuers.2 A stated goal of the proposed amendments is to give investors more timely, detailed and relevant information about share repurchases to allow them to better evaluate the market for a company’s stock and the motivations behind share repurchases.
The two dissenting Commissioners criticized the proposed rules, with one Commissioner describing them as “painfully granular” and the other describing the Form SR requirement as “overly burdensome,” and both questioning the adequacy of the proposed rules’ justification.3 Both challenged a key justification offered in the proposing release: to curtail opportunistic share repurchases – that is, repurchases intended to increase executive compensation or insider stock value. Citing a recent study conducted by SEC staff on this topic, the dissenting Commissioners argued that this problem does not appear to be prevalent. They also suggested that any information asymmetries could be addressed with a more tailored and less burdensome approach. Notably, one of the dissenting Commissioners expressed concerns that detailed daily disclosures on Form SR might provide “a roadmap for traders to figure out the company’s upcoming trades and trade ahead of them,” which “would artificially raise the stock price for everyone and reduce market efficiency.”
Proposed Form SR to be Furnished One Business Day Following the Repurchase
According to the SEC’s release, the proposed rules aim to achieve increased transparency about corporate buybacks by introducing a new Form SR to provide more timely and detailed disclosure than that currently required in periodic reports filed under the Exchange Act. Proposed Exchange Act Rule 13a-21 would require an issuer to furnish a Form SR with respect to the execution of a repurchase order4 by or on behalf of the issuer or one of its “affiliated purchasers”5 for equity securities of the issuer that are registered under Section 12 of the Exchange Act.6 The proposed submission deadline is one business day after execution, potentially triggering daily form submissions when repurchases are made on a daily basis over a period of time. Form SR would require the following information in a tabular format, by date, for each class or series of securities:
- identification of the class of securities purchased
- total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs
- average price paid per share (or unit)
- aggregate total number of shares (or units) purchased on the open market
- aggregate total number of shares (or units) purchased in reliance on the safe harbor in Rule 10b-18
- aggregate total number of shares (or units) purchased pursuant to a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)
The proposed rules contemplate that Form SR would be furnished, rather than filed, meaning the disclosure in the form would not subject an issuer to liability under Section 18 of the Exchange Act, be incorporated by reference into Securities Act filings (unless expressly incorporated) for purposes of liability under Section 11 of the Securities Act or affect Form S-3 eligibility. If an issuer furnished a Form SR that included material errors, it would be required to furnish an amended Form SR to correct the information. The amendment provision is in part a recognition that executed repurchases may be reportable on Form SR prior to expected settlement and that corrective disclosure will be required for transactions that do not settle as originally contemplated.
Proposed Expansion of Item 703 Tabular Disclosure of Share Repurchases
Currently, pursuant to Item 703 of Regulation S-K, issuers must disclose in a table on Form 10-Q (for the first three quarters of the fiscal year) and Form 10-K (for the last quarter of the fiscal year) the following information about repurchases of the issuer’s equity securities that are registered under Section 12 of the Exchange Act: (1) the number of shares (or units) purchased by an issuer or affiliated purchaser during the previous quarter, reported on a monthly basis and by class, including a footnote disclosing the number of shares purchased other than through a publicly announced plan or program and the nature of the transaction, (2) the average price paid per share (or unit), (3) the total number of shares (or units) purchased as part of a publicly announced plan or program and (4) the maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under such plans or programs. Additionally, Item 703 requires footnote disclosure detailing the principal terms of all publicly announced repurchase plans or programs.
The proposed rules would expand an issuer’s periodic reporting requirements by revising Item 703 to also require disclosure of the following items in a footnote or narrative accompanying the table:
- the objective or rationale behind share repurchases, along with the process or criteria the issuer used to determine the amount of repurchase
- any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restrictions on such transactions
- whether the issuer made its repurchases pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and if so, the date that the 10b5-1 plan was adopted or terminated
- whether purchases were made in reliance on the Rule 10b-18 non-exclusive safe harbor
Additionally, the SEC proposed a new checkbox located above the Item 703 tabular disclosure where an issuer would be required to indicate whether or not any officers or directors subject to the reporting requirements under Section 16(a) of the Exchange Act bought or sold shares (or units) of the same class that is the subject of a repurchase plan or program within 10 business days before or after the issuer’s announcement of a repurchase plan or program. The checkbox is designed to streamline information access for investors because they would no longer need to separately review Section 16(a) filings to determine whether a director or officer has purchased or sold equity securities around the time of a repurchase announcement.
The proposed amendments to Item 703 with respect to a domestic issuer’s Form 10-Q and Form 10-K would also apply to parallel provisions of Form 20-F for foreign filers and Form N-CSR for registered closed-end funds.
Proposed Requirement to Tag Repurchase Disclosures in Inline XBRL
Finally, the proposed rules would require issuers to tag the quantitative and narrative repurchase disclosures in Inline XBRL, a structured data language readable by both humans and machines. This is designed to allow investors and other market participants to more easily extract and compare quantitative and other information on executed repurchases to further bridge the information divide between issuers and investors.
The proposed amendments would significantly alter the current share repurchase disclosure regime and create significant new obligations on companies regarding such repurchases. Companies may wish to discuss the proposed rules with their boards and their officers who are responsible for execution and disclosure of corporate buybacks, in order to start considering the processes and disclosures that would be necessary to comply with the proposed rules in the event the SEC adopts them.7
Companies may also consider submitting comments on the proposed rules as requested by the SEC. The SEC has requested comments on a number of substantive issues, including (1) whether the proposed next-day timing of the new Form SR is appropriate or should be extended, (2) whether the Form SR should be filed rather than furnished, as proposed, and (3) whether the SEC should require all open market share repurchase plans to be publicly announced. The SEC will accept comments on the proposed rules for 45 days after their publication in the Federal Register.
1 “Share Repurchase Disclosure Modernization,” Release No. 34-93783 (Dec. 15, 2021), https://www.sec.gov/rules/proposed/2021/34-93783.pdf (hereinafter, “Share Repurchase Disclosure Modernization”); Fact Sheet: Share Repurchase Disclosure Modernization: Proposed Rules (Dec. 15, 2021), https://www.sec.gov/files/buybacks-fact-sheet.pdf.
2 See Chair Gary Gensler, Statement on Share Repurchase Disclosure Modernization (Dec. 15, 2021), https://www.sec.gov/news/statement/gensler-share-repurchase-20211215?utm_medium=email&utm_source=govdelivery.
3 Commissioner Hester M. Peirce, Dissenting Statement on Buybacks Disclosure Proposal (Dec. 15, 2021), https://www.sec.gov/news/statement/peirce-buyback-20211215; Commissioner Elad L. Roisman, Dissenting Statement on Proposed Rules Regarding Share Repurchases (Dec. 15, 2021), https://www.sec.gov/news/statement/roisman-buybacks-20211215?utm_medium=email&utm_source=govdelivery.
4 The proposing release explains that “execution” for these purposes corresponds to the “trade date” – i.e., when terms are settled and the parties become contractually bound, rather than the time of “settlement,” which is the ending point of a transaction when securities and payment are exchanged.
5 The term “affiliated purchaser” is defined in Exchange Act Rule 10b-18(a)(3).
6 This category generally includes the shares of public companies that are listed on a U.S. securities exchange.
7 Also on December 15, 2021, the SEC approved a rule proposal that would significantly limit the use of Rule 10b5-1 trading plans and require new disclosures about 10b5-1 trading plans and insider trading policies and procedures. We have summarized those proposed rules in a separate Sidley Update available here. When taken together, the proposed rules may require substantial restructuring of future shareholder repurchase plans or programs.
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