United States: SEC Proposes New Rules For Share Buybacks And Automatic Trading Plans

The U.S. Securities and Exchange Commission (SEC) has published for comment proposed amendments to the disclosure rules governing issuers' share buyback programs¹. It has also proposed amendments to the rules governing Rule 10b5-1 trading plans², which are similar to automatic securities disposition plans and automatic securities purchase plans in Canada³.

As discussed below, certain of the proposed amendments, if adopted, would affect all issuers that have securities listed on a U.S. national securities exchange or otherwise have a class of equity securities registered under section 12 of the Securities Exchange Act of 1934 (Exchange Act), including Canadian companies relying on the multijurisdictional disclosure system (MJDS) and other foreign private issuers. However, some of the proposed new disclosure requirements would apply only to U.S. domestic companies and/or non-MJDS foreign private issuers.

What you need to know

• If adopted, the proposed amendments to the SEC's rules for company share buybacks would require SEC reporting companies (including MJDS issuers) to report information about share buybacks on new Form SR within one business day of the relevant transaction. U.S. domestic issuers and non-MJDS foreign private issuers would also have to provide more extensive disclosure about their share buyback plans in annual reports on Form 10-K and 20-F and (for U.S. domestic issuers) quarterly reports on Form 10-Q.
• The proposed amendments to Rule 10b5-1 would, among other things, add new conditions to the availability of the affirmative defense to insider trading liability in Rule 10b5-1⁴. For example, issuers and insiders would be subject to mandatory cooling-off periods of 30 days and 120 days, respectively, before executing any trade under a new or modified 10b5-1 trading plan.
• The proposed new restrictions on 10b5-1 trading plans could make it more complicated for companies and their insiders to sell or buy securities under such plans. Among other things, the restrictions could impose liquidity costs on insiders and make it more difficult for them to achieve optimal portfolio diversification. For issuers, the 30-day cooling-off period requirement could make it more more difficult and expensive for companies to conduct repurchase programs.
• U.S. domestic companies and non-MJDS foreign private issuers would also be subject to new disclosure requirements regarding their insider trading policies and procedures and the adoption, modification and termination of 10b5-1 trading plans and similar arrangements. U.S. domestic companies would also be subject to additional disclosure requirements regarding their stock option policies and procedures and regarding the timing of certain equity compensation awards to directors and officers.
• We expect the SEC to move swiftly to finalize the rules after the 45-day comment period ends.

Proposed amendments to rules for share buyback programs

Next day reporting on new Form SR

• If adopted, the proposed rules for share buyback programs would require an SEC reporting company (including an MJDS issuer or other foreign private issuer) to furnish a Form SR to the SEC before the end of the first business day after any day upon which it executed a share repurchase. Form SR would require disclosure of the class of securities purchased, the total amount purchased, and the average price paid. It would also require issuers to specify the aggregate total amount of shares purchased on the open market in reliance upon Rule 10b-18 (the safe harbour from liability for market manipulation) or pursuant to a 10b5-1 trading plan.
• Importantly, Form SR would be "furnished" rather than "filed", so that a failure to furnish Form SR on a timely basis would not affect an issuer's Form S-3 or F-3 eligibility or its "well-known seasoned issuer" status. Furthermore, issuers would not be subject to liability under Section 18 of the Exchange Act and the information would not be incorporated by reference into registration statements, prospectuses or other filings under the Securities Act of 1933 (Securities Act).

Additional annual and quarterly reporting requirements for non-MJDS reporting companies

The SEC currently requires non-MJDS reporting companies to disclose information about share repurchases in their annual reports on Form 10-K or Form 20-F and, as applicable, quarterly reports on Form 10-Q⁵, with the share repurchase data broken down on a monthly, quarterly and annual basis. The required disclosure is limited to the number of securities purchased by the issuer or any affiliated purchaser during the relevant period, average price paid per security, total number purchased as part of a publicly announced repurchase program, maximum number (or approximate dollar value) of securities that may yet be purchased under such program, and principal terms of any such repurchase programs.

The SEC is proposing to amend Item 703 of Regulation S-K, which applies to Forms 10-K and 10-Q filed by U.S. domestic issuers, and to amend Form 20-F for non-MJDS foreign private issuers, to require additional disclosure in these reports about:

• the objective or rationale for the company's share repurchase plans;
• the process or criteria used to determine the repurchase amounts;
• for publicly announced plans, the date each plan was announced, the dollar amount approved, the plan expiration date, each plan that has expired and each plan the company had terminated prior to the plan's expiration;
• whether the company was making its repurchases pursuant to a 10b5-1 trading plan and/or the conditions of the safe harbour from market manipulation liability in Rule 10b-18; and
• any policies or procedures relating to purchases and sales of the company's securities by its directors and officers during a repurchase program, including any restrictions on such transactions.

U.S. domestic issuers and non-MJDS foreign private issuers would also have to indicate, by checking a box in their periodic reports on Form 10-K, 10-Q and 20-F (as applicable), if any of their officers or directors subject to Section 16 of the Exchange Act had traded in the company's stock within 10 days before or after the announcement of the company's share repurchase plan.

Proposed changes affecting 10b5-1 trading plans

New conditions

The proposed rules would add new conditions to the availability of the affirmative defense to insider trading liability under Rule 10b5-1(c)(1), affecting all SEC reporting companies (including MJDS issuers and other foreign private issuers) and their corporate insiders. The proposed new conditions include the following:

• Cooling-off periods. The proposed rules, if adopted, would prescribe minimum cooling-off periods of 120 days for corporate officers and directors and 30 days for issuers, which would apply from the date a 10b5-1 trading plan was adopted or modified to the first transaction made under the plan. Because there is no materiality qualification for plan amendments, any change would trigger a new cooling-off period.
• Limitations on number of plans. The defense in Rule 10b5-1(c)(1) would be amended so that it would not apply to multiple, overlapping 10b5-1 trading plans for open market trades in the same class of securities. This proposed restriction, however, would not apply to transactions where the insider acquires from or sells securities to the issuer (e.g., through an employee stock participation plan or dividend reinvestment plan). In addition, 10b5-1 trading plans to execute a single trade would be limited to one plan per 12-month period.
• Good faith. Currently, to take advantage of the defense in Rule 10b5-1, the trade in question must be have been executed under a plan that was adopted in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5. The SEC is proposing to extend this condition to also require that the plan be operated in good faith. This proposed amendment is intended to deter fraudulent or manipulative conduct, e.g., by an insider cancelling or modifying a plan to avoid the prohibitions in the rule or attempting to make a trade more profitable or reduce a loss by manipulating the timing of corporate disclosures.
• Certification. Officers and directors would have to certify that they were not aware of any material non-public information about the issuer or relevant security whenever a 10b5-1 trading plan was adopted or amended, and would have to retain those certifications for 10 years.

New disclosure requirements for U.S. domestic issuers and non-MJDS foreign private issuers

• Policies and procedures.
  • The proposed rules would require U.S. domestic issuers and non-MJDS foreign private issuers to disclose in their annual reports on Form 10-K or 20-F, as applicable, whether or not (and if not, why not) they had adopted insider trading policies and procedures reasonably designed to promote compliance with insider trading laws and to disclose any such policies and procedures. The SEC has not proposed to amend Form 40-F (the annual report filed by MJDS issuers) to require such disclosures.
  • U.S. domestic issuers (but not MJDS issuers or other foreign private issuers) would also have to disclose in their annual reports on Form 10-K and/or annual meeting proxy statements their policies and practices regarding stock options, stock appreciation rights and similar instruments. Such issuers would also have to include a table disclosing any such grants that were made within 14 days before or after the filing of a periodic report on Form 10-Q or 10-K, an issuer share repurchase, or the filing or furnishing of a Form 8-K that contained material non-public information. The table would also have to disclose the market price of the underlying securities on the trading day before and trading day after the release of the material non-public information.
  • These disclosures would be subject to the officer certification requirements in Section 302 of the Sarbanes-Oxley Act of 2002.
• Trading arrangements. Proposed item 408(a) of Regulation S-K would require U.S. domestic issuers to disclose on Form 10-Q and Form 10-K whether, in the company's last fiscal quarter, they or any of their directors or officers had adopted or terminated any 10b5-1 trading plan or any other contract, instruction or written plan to buy or sell the issuer's securities, and if so, to describe the material terms of any such arrangement. As proposed, this reporting requirement would not apply to foreign private issuers that file annual reports pursuant to Form 20-F or MJDS issuers that file annual reports on Form 40-F. However, the SEC is soliciting feedback on whether foreign private issuers should be subject to the proposed requirements.
• Form 4 and 5 disclosures. U.S. domestic companies' section 16 insiders⁶ would have to check a box on Form 4 or 5, as applicable, if the transaction they were reporting was made pursuant to a 10b5-1 trading plan. In addition, section 16 insiders would have to promptly disclose any bona fide gifts of securities on Form 4, which would be due within 2 business days of transaction. (Currently, such gifts must be reported on Form 5, which is not due until 45 days after the calendar year-end.)