Category: Securities
SEC proposes new rules on stock buybacks [updated]
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting last week, the SEC voted three to two to propose new rules regarding company stock repurchases. (At the same time, the SEC also voted unanimously to propose new rules regarding Rule 10b5-1 plans. See this PubCo post.) The amount that companies have spent on stock repurchases has generally increased substantially over the years—in 2020, companies spent almost $700 billion to repurchase their own shares, which, the SEC asserts, “has been accompanied by public interest in corporate payouts in the form of share repurchases.” These repurchases can impact the market, and, the SEC suggests, questions have been raised as to the adequacy of buyback disclosure. The proposal is intended to modernize and improve that disclosure, taking into consideration the academic literature and the SEC’s own analysis, according to the remarks of Corp Fin Director Renee Jones at the open meeting. The proposal would enhance transparency around stock repurchases, including by requiring daily reports of stock repurchases on a new Form SR and expanding the disclosure required regarding repurchases in periodic reports, including a requirement for use of Inline XBRL. According to SEC Chair Gary Gensler, “[s]hare buybacks have become a significant component of how public issuers return capital to shareholders….I think we can lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosures that today’s proposal would provide.” Dissenting Commissioners Hester Peirce and Elad Roisman seemed to view the proposal as a rulemaking without much of a reason. There is a 45-day comment period after publication in the Federal Register, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
Happy holidays and happy new year!!
SEC Commissioner Roisman to resign
Today, SEC Commissioner Elad Roisman informed President Biden that he intended to resign as commissioner by the end of January. A Republican appointee, he has served as a commissioner since 2018, and his term was not set to expire until 2023. In a statement, SEC Chair Gary Gensler acknowledged that they “didn’t always agree on policy matters,” but that he had “come to rely on his judgment and expertise,” and has “enjoyed a positive working relationship with him.”
Corp Fin urges redaction of personally identifiable information from Rule 14a-8 submissions
At the end of last week, the Corp Fin staff made an announcement advising companies and shareholder proponents, effective immediately, to redact all personally identifiable and other sensitive information from Rule 14a-8 submissions and related materials prior to submitting them to Corp Fin. The staff may require parties to resubmit any materials the staff receives “that contain personally identifiable or sensitive information, in which case the staff will not consider the substance of those materials until they are resubmitted.”
SEC proposes new rules on 10b5-1 plans [updated]
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting last week, the SEC voted—unanimously—to propose new rules regarding Rule 10b5-1 plans. (The SEC also voted three to two to propose new rules regarding issuer stock repurchases. The proposing release on stock buybacks will be discussed in a subsequent post.) Concerns about potential abuse of Rule 10b5-1 plans have been percolating for many years, and the proposal to add new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: 10b5-1 plans, he said back in June, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post and the SideBar below.) And in the related press release, Gensler again highlighted concerns about “gaps in Rule 10b5-1—gaps that today’s proposals would help fill.” What wasn’t anticipated was that the vote to issue the proposal would be unanimous! (Remember, though, even former SEC Chair Jay Clayton had discussed the need for “good corporate hygiene” in connection with Rule 10b5-1 plans. See this PubCo post.) But how likely is it that this newfound spirit of unanimity will carry forward to adoption? Time will tell. But do the statements on the proposal, discussed below, of Commissioners Hester Peirce and Elad Roisman already give us a preview of issues they might raise in possible future dissents on adoption of the rulemaking? There is a 45-day comment period after publication in the Federal Register, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
SEC proposes new rules on 10b5-1 plans and stock buybacks
At an open meeting yesterday, the SEC voted to propose new rules addressing trading in the market by insiders and companies. The commissioners voted—unanimously—to propose new rules regarding Rule 10b5-1 plans and voted three to two to propose new rules regarding issuer stock repurchases. The proposal to add new conditions to use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: 10b5-1 plans, he said back in June, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post.) Yesterday, Gensler again highlighted concerns about “gaps in Rule 10b5-1—gaps that today’s proposals would help fill.” What wasn’t anticipated was that the vote to issue the proposal would be unanimous! (Remember, though, even former SEC Chair Jay Clayton had discussed the need for “good corporate hygiene” in connection with Rule 10b5-1 plans. See this PubCo post.) But how likely is it that this newfound spirit of unanimity will carry forward to adoption? Time will tell. But do the statements on the proposal, discussed below, of Commissioners Hester Peirce and Elad Roisman already give us a preview of issues they might raise in possible future dissents on adoption of the rulemaking? The second proposal, stock buyback disclosure, is designed to enhance transparency around stock repurchases, including by requiring daily reports of stock repurchases on a new Form SR and expanding the disclosure required regarding repurchases in periodic reports, including a requirement for use of Inline XBRL. According to Gensler, “[s]hare buybacks have become a significant component of how public issuers return capital to shareholders….I think we can lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosures that today’s proposal would provide.” Both Peirce and Roisman seemed to view the proposal as a rulemaking without much of a reason. There is a 45-day comment period after publication in the Federal Register for both of these proposals, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
SEC offers another packed agenda for Fall 2021
The SEC’s new Fall reg-flex agenda is posted and, no surprise, it’s packed. Here is the short-term agenda and here is the long-term version. And just as with the spring agenda, Commissioners Hester Peirce and Elad Roisman have lambasted it in a dissenting statement. The agenda is laden with major proposals that were on the Spring agenda, but didn’t quite make it out the door, such as plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, Rule 14a-8 amendments and SPACs, as well as a new, already controversial, proposal to amend the definition of “holders of record.” Some of the agenda items have recently been proposed, for example, new rules regarding mandated electronic filings (see this PubCo post) and amendments to the proxy rules governing proxy voting advice (see this PubCo post). Similarly, three items identified as at the “final rule stage” have already been adopted: universal proxy (see this PubCo post), filing fee disclosure (see this PubCo post) and amendments under the Holding Foreign Companies Accountable Act (see this PubCo post). The agenda also identifies a couple of topics that are still just at the pre-rule stage, such as exempt offerings (updating the financial thresholds in the accredited investor definition, amendments to Rule 701 and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda (see this PubCo post), nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
SEC staff speaks up on LIBOR transition
Last week, the SEC staff issued a new statement on the LIBOR transition. LIBOR, the London Interbank Offered Rate, is a widely used reference rate calculated based on estimates submitted by banks of their own borrowing costs. LIBOR has been used extensively as a benchmark reference for short-term interest rates for various commercial and financial contracts—including interest rate swaps and other derivatives, as well as floating rate mortgages and corporate debt. In 2012, the revelation of the LIBOR rigging scandals made clear that the benchmark was susceptible to manipulation, and British regulators decided to phase it out at the end of 2021. The staff statement addresses a wide variety of issues for various market participants, but central for many public companies is the discussion of applicable disclosure obligations with respect to the transition away from LIBOR.
Staff returns to responding by letter to Rule 14a-8 no-action requests
You might recall that, in 2019, Corp Fin discontinued its longstanding approach of responding by written letter to each no-action request to exclude a shareholder proposal. Instead, the staff responded by letter only when it believed “doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8,” and declined to respond by letter to requests that it considered to be ordinary course. The vast majority of responses were publicly communicated on a chart posted on the Corp Fin website. At the time, the staff indicated that the change was intended to make the process more efficient and effective. (See this PubCo post.) On review, the staff has now decided to revert back to prior practice.
Gensler on SPACs: treat like cases alike
What could Aristotle possibly have to say about SPACs? In remarks on Thursday before the Healthy Markets Association, SEC Chair Gary Gensler shared his thoughts on the regulation of SPACs with a theme drawn from antiquity: Aristotle’s maxim that we must “treat like cases alike.” That concept, in Gensler’s view, should apply as finance evolves in response to new technologies and new business models. Take SPACs, for example—a type of transaction that, while not exactly new, has really “taken off in the last couple of years.” A SPAC, he said, is really an alternative method of conducting an IPO. The question addressed by Gensler in his remarks is how “this competitive market innovation [should] be treated under our public policy framework,” in effect, giving us a preview of what we may see in SPAC rulemaking, possibly next year.
SEC charges company and finance executives with raiding the cookie jar
Just in time for the holidays—cookie jars full of…revenue adjustments! In this complaint, the SEC charged American Renal Associates Holdings, Inc., a national provider of dialysis services, and three of its finance executives with securities fraud and other misconduct. According to the SEC, the alleged fraudulent scheme involved a “series of revenue adjustments to make it appear that ARA had beat, met, or come close to meeting various predetermined financial metrics, when in fact its financial performance was materially worse.” After receiving an inquiry from the SEC, ARA conducted an internal investigation that led the company to restate its financials, which, according to the SEC, showed that the company had overstated its net income by over 30% for 2017 and by more than 200% for the first three quarters of 2018. The revenue adjustments in the cookie jar, the SEC charged, were one of the key ingredients used in this alleged effort to cook the company’s books.
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