Amendments to Rules Governing Share Repurchases

On December 15, 2021, the Securities and Exchange Commission (the "SEC" or the "Commission") voted 3-2 to propose  changes to the requirements for disclosure of purchases of equity securities made by or on behalf of an issuer or an  affiliated purchaser.1   

Currently, issuers typically disclose repurchase programs following authorization of the program by the board of directors  and most share repurchases are executed over time through open market transactions.2  Issuers typically do not disclose  the specific dates on which they executed trades pursuant to an announced repurchase program.3  However, pursuant to  Rule 703 of Regulation S-K, each issuer is currently required to disclose in its periodic reports on a quarterly basis (i)  information as to any share repurchases by the issuer or an affiliated purchaser during such quarter, and (ii) the principal  terms of all publicly announced repurchase programs.4

Form SR. The proposed amendments would require an issuer5 to report any repurchase made by or on behalf of the  issuer or any affiliated purchaser of shares or other units of any class of the issuer's equity securities registered pursuant  to Section 12 of the Exchange Act before the end of the first business day following execution by the issuer of a share  repurchase.6

 The issuer would report such repurchases on new Form SR.

Form SR would require the following disclosures:

  • identification of the class of securities purchased;
  • the total number of shares purchased, whether or not made pursuant to a publicly announced program;
  • the average price paid;
  • the aggregate total number of shares purchased on the open market;
  • the aggregate total number of shares purchased in reliance on the safe harbor of Rule 10b-18; and
  • the aggregate total number of shares purchased pursuant to a Rule 10b5-1 plan.7

Form SR would be furnished, rather than filed, and the information would not be deemed incorporated by reference into  filings under the Securities Act; thus, issuers would not be subject to liability under Section 11 of the Securities Act for  such disclosures unless the issuer expressly incorporated such information.8   

Additional Periodic Disclosure. The Share Repurchases Proposing Release also provides for amendments to Item 703 of  Regulation S-K that would require an issuer to make the following additional disclosures in its periodic reports:

  • the objective or rationale for its share repurchases and the process or criteria used to determine the amount of repurchases;
  • any policies relating to purchases and sales of the issuer's securities by its officers and directors during an issuer repurchase program;
  • whether repurchases were made pursuant to a Rule 10b5-1 plan;
  • whether repurchases were made in reliance on the safe harbor of Rule 10b-18; and
  • whether any of the issuer's officers or directors subject to the reporting requirements under Section 16(a) of the Exchange Act purchased or sold any shares that are the subject of an issuer repurchase program  within 10 business days before or after the announcement of an issuer repurchase program.9

In discussing the rationale for the proposed amendments, the Share Repurchases Proposing Release notes research  finding (i) repurchases can serve as a form of earnings management, and (ii) compensation arrangements tied to share  price or earnings per share could incentivize management to undertake repurchases in a manner to maximize their  compensation.10 The Share Repurchases Proposing Release also notes that certain commentators (x) view share  repurchases as a tool to raise the stock price in a manner that allows insiders to extract value from the issuer rather than  using the funds to invest in the issuer and its employees and (y) noted the potential for repurchases to be made by issuers  in a non-transparent manner when the stock has been undervalued by investors.11   

Commissioner Roisman issued a statement in dissent, noting that share repurchases have become a politically charged  issue and that the SEC staff conducted a study last year of the 50 firms that repurchased the most stock in 2018 and 2019  and concluded that it was unlikely that most buybacks were motivated by a desire to inflate share prices to benefit insiders  compensated in stock, which study was sent to Congress on December 23, 2020.12  Commissioner Roisman also noted a  concern that the proposed daily reporting of share repurchases will be overly burdensome to companies and a concern  that the daily reports could be used by traders to trade ahead of the issuer and artificially raise the stock price and reduce  market efficiency.13   

Comments on the proposed share repurchase amendments must be received within 45 days after the Share  Repurchases Proposing Release is published in the Federal Register.

Download >> SEC Proposes Amendments To Rules Governing Share Repurchases And Rule 10b5-1 Plans

Footnotes

1 See Share Repurchase Disclosure Modernization, Securities Exchange Act of 1934 (the "Exchange Act") Release No. 93783 (Dec.15, 2021) (the "Share Repurchases Proposing Release").

2 Id. at p. 4.

3 Id. at p. 4.

4 Id. at p. 5-7. Registered closed-end investment companies are required to disclose share repurchase programs, including information regarding purchases of their equity securities registered pursuant to Section 12 of the Exchange Act, in their reports on Form N-CSR.

5 "Issuer" would include any foreign private issuer, business development company or registered closed-end investment company. Id. at p.11.

6 Id. at p. 11-12. The Share Repurchases Proposing Release provides that the "date of execution" (i.e., the trade date) is the point of a securities transaction at which the parties have agreed to terms and are contractually obligated to settle the trade. Id. at note 23.

7 Id. at p. 12.

8 Id. at p. 17. In addition, by requiring Form SR to be furnished, a late submission of the form would not affect eligibility to use Form S-3 or to file a short-form registration statement under General Instruction A.2 of Form N-2.

9 Id. at p. 22.

10 Id. at p. 7-8.

11 Id. at p. 8-9.

12 See Dissenting Statement on Proposed Rules Regarding Share Repurchases, Commissioner Elad L. Roisman (Dec. 15, 2021).

13 Id.

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