[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted three to two to adopt a proposal intended to modernize and improve disclosure regarding company stock repurchases. Issuers have something to be relieved about and something to be mildly anxious about. The good news is what the SEC didn’t do: the new rule does away with the proposed Form SR for domestic companies and backs off the proposed requirement for almost real-time (daily) reporting of share repurchases. Instead, the final rule moves to quarterly reporting of detailed quantitative information on daily repurchase activity, filed as exhibits to issuers’ periodic reports. The more vexing aspect is that domestic issuers will be required to begin this reporting, along with the new narrative disclosure, starting with the first Form 10-Q or 10-K covering the first full fiscal quarter (i.e., for the 10-K, the 4th quarter) that begins on or after October 1, 2023. That means that companies will need to get on the stick to begin to develop processes and procedures for collection of that data. In addition, the information will be deemed “filed” and not “furnished,” as originally proposed, which means that it could be subject to Section 18 and Section 11 liability. The amendments will also revise and expand the narrative requirements and add a new requirement for disclosure regarding a company’s adoption and termination of Rule 10b5-1 trading arrangements. In the press release, Chair Gary Gensler observed that “[i]n 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022….Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities. Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets.” Commissioners Hester Peirce and Mark Uyeda dissented, with Peirce remarking that “better-than-it-might-have-been is not my standard for supporting a final rule.”
Under current rules adopted in 2003, a company is required to disclose in its periodic reports (including, for foreign private issuers, in Form 20-F) under Reg S-K Item 703, information about purchases made by or on behalf of the company, or any affiliated purchaser, of shares or other units of any class of the company’s equity securities registered under Section 12 of the Exchange Act, whether open market or private transactions. The current rules require companies to disclose, by month, the total number of shares repurchased during the period, the average price paid per share, the total number of shares purchased under a publicly announced repurchase plan or program and the maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs. The rules also require footnote disclosure of the principal terms of all publicly announced repurchase plans or programs, the number of shares purchased other than through a publicly announced plan or program, and the nature of the transaction.
The adopting release observes that companies typically disclose repurchase plans or programs when they are authorized by the board, but “are not required to, and typically do not, disclose the specific dates on which they will execute trades pursuant to an announced repurchase plan or program.” As a result, investors usually don’t find out about a company’s actual trading activity until it files its periodic reports, leading to information asymmetries.
As discussed in the release, “share repurchases can have a positive or negative impact on the market for an issuer’s securities.” In some cases, “share repurchases may represent an efficient use of the issuer’s capital, such as when returning money to shareholders exceeds other possible internal investments of capital.” Some studies have found that issuers use repurchases to maximize shareholder value (e.g., to offset share dilution after new stock is issued), to facilitate stock-based employee comp programs, to signal that the company views its stock to be undervalued or simply because the board believes a repurchase to be a prudent use of cash. For some investors, repurchases may offer potential tax advantages over dividends.
However, the SEC observed, some repurchases may not be efficient or may be motivated in part by factors other than long-term value maximization, such as “repurchases conducted to increase management compensation or to affect various accounting metrics, in either case when those actions do not increase the value of the firm.” Some studies have shown that repurchases can be used for earnings management (by decreasing the EPS denominator) to help executives meet or beat consensus forecasts. Studies have also found that announcements of repurchases and actual repurchase trades can help to increase share prices, which, some contend, could incentivize executives with share price- or EPS-tied comp to undertake buybacks to maximize their compensation. Other studies have found trading by insiders close in time to predictable price increases caused by repurchases or repurchase-plan announcements, such as in the period immediately following the issuer’s repurchase.
Some commenters questioned these assertions regarding the possible deliberate use of repurchases; however, the SEC continued to affirm its view that “personal benefit may be a factor in determining whether to undertake a share repurchase.” Even if opportunism does not drive the timing of most issuer share repurchases, the SEC contended, it is still “appropriate for investors to have more useful information about such repurchases.”
It’s worth noting, however, that a 2020 staff study cited in the notes to the release and highlighted by Commissioner Peirce in her statement, found that “a majority of the issuers included in the study either did not have EPS-linked compensation targets or had EPS targets but their board considered the impact of repurchases when determining whether performance targets were met or in setting the targets”; approximately 18% of repurchasing issuers, however, “made compensatory awards based in part on EPS.” It is “difficult,” the staff study further observed, “to ascertain the motivations underlying insider sales,” concluding that “the data is consistent with firms using repurchases to maintain optimal levels of cash holdings and to minimize their cost of capital.”
Under current rules, the SEC believes, investors are given “insufficient insight into the efficiency, purposes, and impacts of an issuer’s share repurchases” to enable investors to “separate out and assess the different motivations and impacts of share repurchases.” These inadequacies make it difficult for investors to properly “value a company or identify when an issuer’s use of cash is well-managed, reducing investor confidence and market liquidity.” The SEC believes that “mandatory disclosures are necessary to overcome these informational asymmetries between issuers and their managers on the one hand and investors on the other.” In addition, the new “daily repurchase disclosure is necessary to protect all investors and the efficient operation of securities markets because daily data, in combination with other data, would allow investors to infer when repurchases may have been timed to benefit managers or otherwise at the expense of some investors.” The new quantitative data may “reveal patterns in which repurchases were undertaken at times or under conditions that were likely to affect imminent accounting metrics, or prior to the release of material nonpublic information by the issuer.” Similarly, the new qualitative disclosures “will provide investors with additional information about the structure of an issuer’s repurchase program and its share repurchases that will enable them to better understand how and why those repurchases are conducted. The qualitative disclosures, when combined with the daily repurchase activity disclosure, will allow investors to draw clearer and more informed conclusions about the purposes and effects of share repurchases.”
The final rules
Share repurchase disclosure
As noted above, the SEC had originally proposed (see this PubCo post) that companies furnish daily detail on share repurchases on new Form SR before the end of the first business day following the day on which the company executes a share repurchase. However, there was substantial opposition to that aspect of the proposal for multiple reasons, notably concerns about cost, compliance burden and information overload, and many suggested scaling back the requirement. In response, the SEC made a significant change: the filings will instead be made quarterly. Although the information content remains the same, still, the shift to quarterly reporting should alleviate some of the concerns about the compliance burden and information overload. One commenter, the Chamber of Commerce, contended that tabular disclosure of daily repurchases imposed a compelled-speech burden that would violate the First Amendment. The SEC disagreed, arguing that the disclosure was factual in nature and advanced important interests. (Remember that the compelled speech argument was successful in overturning a portion of the conflict minerals rules. See this PubCo post.)
Some commenters suggested exempting FPIs that already make repurchase disclosure under home-country rules and making special accommodations for smaller reporting companies, but the SEC elected not to exempt FPIs or provide accommodations for smaller companies in light of its view that the detailed disclosure will be beneficial for all investors in companies that conduct repurchases, especially companies, “such as SRCs, [that] have relatively high information asymmetries.” With regard to FPIs, the SEC noted that, if an FPI’s home country disclosures furnished on Form 6-K satisfy the Form F-SR requirements, it can incorporate those disclosures by reference into its Form F-SR. (But see below for the criticism of Commissioner Mark Uyeda that the final rule essentially upended the historical treatment of FPIs.)
Under the final amendments, companies reporting on domestic forms will be required to file quarterly, in tabular format, exhibits to their Forms 10-Q and 10-K disclosing, for the period covered by the report (or the fourth quarter, for a Form 10-K), the total purchases made each day by or on behalf of the company or any “affiliated purchaser,” as defined in Rule 10b-18, of any class of equity securities registered under Section 12. (Note that the format of the table and the rules related to the tabular disclosure are set forth in Item 601-Exhibits.) The final rules require the same level of detail as proposed, including, for each day,
- the date of execution;
- the class of shares;
- the average price paid per share;
- the total number of shares purchased, regardless of whether made pursuant to publicly announced repurchase plans or programs;
- the total number of shares purchased on that date as part of publicly announced repurchase plans or programs;
- the aggregate maximum number of shares (or approximate dollar value) that may yet be purchased under a publicly announced plan;
- the total number of shares purchased on the open market;
- the total number of shares purchased that are intended to qualify for the safe harbor in Rule 10b-18; and
- the total number of shares purchased under a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).
In a footnote to the table, companies must report the date that any 10b5-1 plan for the shares reported was adopted or terminated. FPIs that report on FPI forms will be required to provide disclosure of daily repurchase data on new Form F-SR, which must be filed quarterly, within 45 days after the end of the FPI’s fiscal quarter. The new rules eliminate the current requirement in Reg S-K Item 703 and in Form 20-F to provide quantitative share repurchase disclosures on a monthly basis. The SEC also observes that, if any of additional disclosures, such as more information about the 10b5-1 plan, are “material and necessary to make other repurchase disclosures not misleading under the circumstances, the issuer must provide those disclosures.”
In another change from the proposal, the final amendments will require the daily repurchase data to be filed instead of furnished. Because companies “will have more time to obtain, verify, and compile the disclosure,” the SEC finds it appropriate for companies to be subject to Section 18 liability for the new repurchase disclosure (as is current disclosure under Item 703) and to Section 11 liability to the extent that the information is incorporated by reference into filings under the Securities Act.
Narrative (and checkbox) revisions to Item 703 and Form 20-F
Under the final rules, companies will be required to provide narrative disclosure in response to revised item 703 of Reg S-K including:
- “The objectives or rationales for each repurchase plan or program and process or criteria used to determine the amount of repurchases”; and
- “Any policies and procedures relating to purchases and sales of its securities by its officers and directors during a repurchase program, including any restriction on such transactions.”
It’s worth noting that commenters were largely opposed to the proposed enhanced narrative regarding the company’s rationale and process, expressing concern that the required disclosure “could divulge competitive or sensitive information that would be harmful to the issuer or result in meaningless boilerplate.” In response, the SEC indicated that, “[a]lthough the disclosures required by the final amendments should convey a thorough understanding of the issuer’s objectives or rationales for the repurchases, and the process or criteria it used in determining the amount of the repurchase, the final amendments do not require issuers to provide disclosure at a level of granularity that would reveal any competitive or sensitive information beyond what may already be gleaned from other disclosures regarding the business and financial condition of the issuer.” With regard to the potential for boilerplate disclosure, the SEC advised that the narrative “should be appropriately tailored to an issuer’s particular facts and circumstances” and relayed several suggestions submitted by commenters, such as discussing “other possible ways to use the funds allocated for the repurchase and comparing the repurchase with other investment opportunities that would ordinarily be considered by the issuer, such as capital expenditures and other uses of capital”; the “expected impact of the repurchases on the value of remaining shares”; “factors driving the repurchase, including whether their stock is undervalued, prospective internal growth opportunities are economically viable, or the valuation for potential targets is attractive”; and “the sources of funding for the repurchase, where material, such as, for example, in the case where the source of funding results in tax advantages that would not otherwise be available for a repurchase.”
The final amendments also require the inclusion of some disclosure in the narrative text that is currently required by Item 703 in a footnote to the monthly repurchase table (which is being eliminated and replaced by the daily repurchase table). Specifically, companies will now need to disclose in the text “the number of shares (or units) purchased other than through a publicly announced plan or program, and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions), and certain disclosures for publicly announced repurchase plans or programs,” such as various details relating to the plans and their expiration.
The final amendments require the inclusion of a checkbox, located before the tabular disclosure of repurchases, indicating whether any directors and officers subject to the reporting requirements of Section 16(a) (or, for FPIs, directors or senior management that would be identified pursuant to Item 1 of Form 20-F), purchased or sold shares that were the subject of a publicly announced repurchase plan or program within four business days before or after the company’s announcement of the repurchase plan or an increase in the size of an existing share repurchase plan. The proposal had used a ten-business-day period. Why the change to four business days? The SEC observed that the “larger window of time may potentially result in added attention for a number of transactions that are not as significant, reducing the value of the checkbox.”
Some commenters expressed concern that the checkbox “could give the incorrect impression that insiders were trading securities as a result of the issuer’s repurchase announcement instead of for other reasons, such as long-established 10b5-1(c) plans or automatic sales to fund tax withholding on share vesting.” However, the SEC concluded that “the checkbox requirement will assist investors in identifying issuers where there is a possibility that repurchases affected the value of executive compensation, permitting investors to further investigate whether this possibility should affect their assessment of the repurchase. If an issuer believes any of the required disclosures would result in misleading or confusing information, the issuer may provide additional disclosure to put the required information in context.” The SEC also makes clear that, in determining whether to check the box, a domestic company may rely on Forms 3, 4, and 5, although not if the company “knows or has reason to believe that a form was filed inappropriately or that a form should have been filed but was not.” Because securities of FPIs are exempt from Section 16, FPIs may rely on written representations from its directors and senior management “provided that the reliance is reasonable.”
New Item 408(d)
In December last year, the SEC adopted new rules regarding Rule 10b5-1 plans and related disclosure. Under the final rules, companies will be required to disclose whether, during the last quarter, any director or officer has adopted or terminated any 10b5-1 plan or “non-Rule 10b5-1 trading arrangement,” as defined in Item 408(c), and describe the material terms, other than pricing. Originally, the SEC had proposed to also require that same disclosure for companies’ 10b5-1 plans, but scrapped that idea in the final rules, noting that “further consideration of the potential application of the disclosure requirement for purchases of equity securities by the issuer was warranted.”
Upon further consideration, the SEC has decided to adopt new Item 408(d), which substantially mirrors the original proposed disclosure requirement with respect to the adoption or termination of 10b5-1 plans by companies that issued the securities. However, the SEC thought that information about companies’ use of non-Rule 10b5-1 trading arrangements had more limited value to investors and, in a change from the proposal, did not adopt a requirement in the final rules to provide disclosure about those arrangements.
Under new Item 408(d), each company will be required to disclose, in its Forms 10-Q and 10K, whether, during its most recently completed fiscal quarter (the fourth quarter for a 10-K), the company adopted or terminated a contract, instruction or written plan to purchase or sell its securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). (Keep in mind that Rule 10b5-1 provides that “[a]ny modification or change to the amount, price, or timing of the purchase or sale of the securities underlying a contract, instruction, or written plan as described in paragraph (c)(1)(i)(A) of this section is a termination of such contract, instruction, or written plan, and the adoption of a new contract, instruction, or written plan.”) In addition, companies must provide a description of the material terms of the plan, other than price, such as the date of adoption or termination of the plan, the duration of the plan and the aggregate number of securities to be purchased or sold under the plan.
Despite some overlap with Item 703, the SEC believes that new Item 408(d) will complement the new Item 703 disclosure, given that one applies largely to repurchases and the other applies to adoption and termination of plans. However, to avoid duplication, the SEC is adding a note to Item 408(d)(1), stating that, “if the disclosure provided pursuant to Item 703 contains disclosure that would satisfy the requirements of Item 408(d)(1), a cross-reference to that disclosure will satisfy the Item 408(d)(1) requirements.”
While the new disclosure rules related to insiders’ 10b5-1 plans will now apply in large part to companies issuing securities, the SEC notes that issuing companies will not be subject to other 10b5-1 restrictions, specifically, a cooling-off period, any limitation on the use of multiple overlapping plans or any limitation on the use of single-trade plans.
The final rules require companies to “tag” the information disclosed pursuant to Items 601 and 703 of Reg S-K, Item 16E of Form 20-F and Form F-SR in a structured, machine-readable data language—Inline XBRL. The SEC believes that “requiring Inline XBRL tagging of the repurchase disclosures is beneficial because it makes them more readily available and easily accessible to investors, market participants, and others for aggregation, comparison, filtering, and other analysis.”
As noted above, companies filing on domestic forms will be required to comply with the new disclosure and tagging requirements in their Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first report covering the first full fiscal quarter that begins on or after October 1, 2023. For most calendar-year companies, that will mean the fourth quarter of 2023 to be included in the 2023 Form 10-K filed in 2024. FPIs that file on FPI forms will be required to comply with the new disclosure and tagging requirements in new Form F-SR beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024. The Form 20-F narrative disclosure that relates to the Form F-SR filings, required by Item 16E of that form and related tagging requirements, will be required starting in the first Form 20-F filed after the FPI’s first Form F-SR has been filed. (Note that the rule also applies to listed closed-end funds, not discussed in this post.)
At the open meeting
In his statement, Gensler maintained that the new tabular and narrative disclosures will enhance the transparency and integrity of the buyback process and help investors “to better assess issuer buyback programs. The disclosures also will help lessen some of the information asymmetries inherent between issuers and investors in buybacks. Based on public comment, the final rule adjusts the proposed cadence of the daily-buyback disclosure to be provided periodically rather than one business day after execution.”
Peirce issued a dissenting statement. Although she was pleased that final rule “scrap[ped] the proposed requirement to disclose share repurchases within one business day,” she could not vote in favor of a rule “that mandates immaterial disclosures without sensible exemptions.” In her view, the “release fails to demonstrate a problem in need of a solution”: it only hinted at potential problems—buybacks “could be ‘conducted to increase management compensation or to affect various accounting metrics,’ rather than to increase firm value”—and suggested “that granular disclosure might unearth nefarious practices related to buybacks.” Although some might argue—and perhaps correctly—that companies should use excess cash for employee wage increases or R&D, “share repurchases are not inherently problematic. To the contrary, they enable companies to return excess cash to shareholders with greater tax-efficiency than dividends.” This “skepticism” about buybacks, she contended, is inconsistent with the 2020 staff study (referred to above) which found that “repurchases help issuers ‘maintain optimal levels of cash holdings and minimize their cost of capital’ and ‘on average’ have ‘a positive effect on firm value.’ The study also found that increasing or meeting executive compensation levels or meeting ‘earnings-per-share (EPS)-based performance targets’ is ‘unlikely’ to motivate ‘most repurchase activity.’”
In addition, she criticized the final rule for its excessive granularity. Citing TSC Industries, she argued that the “reasonable investor does not need to know about every repurchase by every public issuer. Disclosure of daily repurchase information will ‘bury [investors] in an avalanche of trivial information[,] a result that is hardly conducive to informed decision-making.’” Although investors may not be certain about the purpose of every repurchase, they’re likewise uncertain about the motives behind every capital investment or R&D project. “The antidote,” she said, “is not requiring companies to describe in painstaking detail every corporate action.” She also expressed concern about the possible costs of the rule, the potential for release of confidential information, the absence of reasonable accommodations for small companies, the failure to adhere to the historical treatment of FPIs and the “unnecessarily aggressive compliance deadlines.” Peirce concluded that, while the final rule was “not as bad as it could have been,… better-than-it-might-have-been is not my standard for supporting a final rule.”
Following her statement, Peirce raised several questions: Did the staff believe that the level of buybacks was suboptimal? Corp Fin Director Erik Gerding took no position. How would the staff judge the effectiveness of the rule retrospectively? What are the markers? Gerding responded that he would look to whether the shareholders received high-quality disclosure. What was the reason for the aggressive deadlines? Were companies given adequate time to adopt procedures for disaggregation of data? Gerding replied that he did not think they were aggressive, given that reporting would not begin before 2024 and the disclosure was similar to the current disclosure required under (to be eliminated) Item 703.
In her statement, Commissioner Caroline Crenshaw observed that the new rule “advances the goals of the foundational statutes of our agency; statutes that provide investors and the markets with a continuous disclosure regime that evolves according to, and modernizes with, investor and market needs.” In her view, the disclosures will “provide more comprehensive information for investors, allowing them to better understand how such programs are impacting the market, the corporation’s motivation and rationale to use funds to conduct buybacks rather than other projects, and executive transactions during buybacks announcements and activity—all ultimately shedding more light on corporate value.” In support, she cites an article by former Commissioner Robert Jackson, Jr., which stated, in connection with insider transactions executed close in time to buyback announcements, that “[e]xecutives often claim that a buyback is the right long-term strategy for the company, and they’re not always wrong. But if that’s the case, they should want to hold the stock over the long run, not cash it out once a buyback is announced. If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is.”
Uyeda, who dissented, focused his statement on one key issue: while the rulemaking was about repurchase disclosure, “in the future,” in his view, “these amendments may be remembered as the beginning of the end for the Commission’s approach to foreign private issuers.” For 55 years, he observed, FPIs have been able to report under a separate regime that largely bends to their home country rules. However, the new repurchase disclosure rules “will require FPIs to make quarterly filings to report share repurchases regardless of their home country’s disclosure requirements. This change fundamentally upends the Commission’s long-standing and bipartisan approach of largely deferring to the disclosures made by FPIs pursuant to their home country reporting requirements. Given the significance of this shift in regulatory philosophy, the Commission should have undertaken a separate rulemaking on the issue, instead of including this change as part of a rulemaking focused on share repurchase disclosure.” This approach sends a message to our foreign partners that the SEC “will sacrifice principles of mutual recognition and international comity to impose its own views on the rest of the world. This approach may ultimately harm U.S. investors and companies,” through, among other things, higher prices and lower returns.
In addition, he contended that the final rules “fail to recognize important differences between FPIs and domestic companies.” The SEC justified the need for daily repurchase data as a way to enable investors to determine if repurchases were motivated by a desire to increase executive comp or achieve accounting targets. But FPIs “are neither subject to Section 16 of the Exchange Act nor extensive executive compensation disclosure. Thus, it will be nearly impossible for FPI investors to use the daily data to determine whether repurchases were motivated by executive compensation reasons.” In addition, FPIs are not required to report their financial results quarterly; as a result, quarterly disclosure of repurchase activity may not be “aligned with its disclosure of financial results, [and] investors will be hard pressed to use the repurchase data to assess whether the FPI was attempting to reach an accounting target.”
Commissioner Jaime Lizárraga used part of his statement to respond to the issue of FPIs raised by Uyeda. He contended that the 2020 Holding Foreign Companies Accountable Act (see this PubCo post) “reinforced the principle that absent compelling reasons, foreign issuers should not be treated differently than U.S. issuers; instead, there should be a level playing field for all companies that choose to raise capital in our markets. Stated another way, whether investing in a U.S. or a foreign issuer, investors should be equally protected. While our periodic reporting system for private foreign issuers differs from domestic issuers in several respects, wherever possible, it is in the interest of investor protection to strive for a level playing field.”
In addition, he argued that, given the 2022 annual record for repurchases by S&P 500 companies of $923 billion (as compared with global IPO offerings of less than $180 billion or even $626 billion in 2021), it just “stands to reason that information on repurchases is material to investors.” If repurchase activity is motivated by “opportunistic insider behavior,” it can negatively affect “the issuer and its shareholders—for example, by foregoing investments that could have resulted in better returns.” The final rules will allow investors to “distinguish between repurchases intended to increase shareholder value, and those that are motivated by other reasons, such as short-term attempts to boost share price.” In addition, the new requirement to disclose the rationale for repurchases and the “process or criteria used to determine the amount” should not elicit boilerplate disclosures; “[t]o the contrary, issuers are able to provide tailored disclosures of how a repurchase program compares to other investment opportunities that generate financial returns, such as capital expenditures or workforce investments, to improve their quality and help avoid boilerplate. The same applies to discussions of sources of funding that would make it more or less advantageous for an issuer from a tax, cost, or other perspective.”