On May 3, 2023, the U.S. Securities and Exchange Commission (SEC) adopted amendments to its rules that will require additional detail regarding the structure of share repurchase plans or programs and share repurchases by corporate issuers and listed closed-end funds, require the filing of daily quantitative repurchase data on a periodic basis, and eliminate the requirement to disclose monthly repurchase data in an issuer's periodic reports.1 The amendments also expand the existing periodic disclosure requirements about share repurchases and, for certain issuers, will require periodic disclosure regarding an issuer's adoption and termination of Rule 10b5-1 trading arrangements.
Specifically, under the final amendments, issuers will be required to:
- disclose daily quantitative repurchase data at the end of every quarter (or semi-annually, in the case of a listed closed-end fund);
- include a checkbox above the tabular disclosures indicating whether certain officers and directors purchased or sold shares or other units of the class of the issuer's equity securities that are the subject of an issuer share repurchase program within four business days before or after the announcement of a share repurchase program or the announcement of an increase of an existing share repurchase program;
- disclose the objectives or rationales for the issuer's share repurchases and the process or criteria used to determine the amount of repurchases and any policies and procedures relating to purchases and sales of the issuer's securities during a share repurchase program by its officers and directors, including any restriction on such transactions; and
- disclose the issuer's adoption and termination of Rule 10b5-1 trading arrangements, depending on the type of issuer.
Further, the final amendments will eliminate current requirements to disclose monthly repurchase data in periodic reports. Information required pursuant to these new disclosure requirements must be tagged using Inline XBRL.
In December 2021, the SEC had proposed new Rule 13a-21 under the Securities Exchange Act of 1934, as amended (Exchange Act) and new Form SR, which would have required issuers, including domestic issuers, foreign private issuers and certain listed closed-end funds, to report any purchase made by or on behalf of an issuer or any affiliated purchaser of shares or other units of any class of the issuer's equity securities that is registered by the issuer pursuant to Section 12 of the Exchange Act. Under the proposed rules, the issuer would have had to furnish a new Form SR before the end of the first business day following the day on which the issuer executes a share repurchase. In the final amendments adopted in May 2023, the SEC determined that it was instead appropriate for issuers to "file" (rather than "furnish") aggregate daily repurchase data on a periodic basis and provide additional disclosure regarding share repurchases and depending on the type of issuer, the issuer's adoption and termination of Rule 10b5-1 trading arrangements.
The new share repurchase disclosure requirements adopted by the SEC will apply to companies that file periodic reports on Form 10-Q and Form 10-K, foreign private issuers and listed closed-end funds. Compliance with the new requirements will be phased in over the next year based on the type of issuer.
Background of the SEC's Share Repurchase Rulemaking
Share repurchase activity has received significant attention in the past several years, as politicians, institutional investors, the media, academics, regulators and governance experts have criticized share repurchase programs for a variety of reasons. This criticism has focused on the potential for share repurchases to, among other things: (i) promote the use of capital for short-term purposes to the detriment of long-term initiatives; (ii) manage reported per-share earnings metrics in an effort to meet or exceed consensus analyst estimates; (iii) benefit corporate insiders who sell their stock when share prices have appreciated after the announcement and implementation of a stock repurchase program; and (iv) allocate capital that could be used to benefit employees in the form of higher wages or enhanced benefits. The focus on share repurchase activity sharpened during the COVID-19 pandemic and the period of economic uncertainty that has followed the pandemic.
Prior to the SEC's most recent rulemaking action, public companies have been subject to reporting obligations relating to share repurchases in their periodic reports. In particular, Item 703 of Regulation S-K, Forms 10-Q and 10-K, Form 20-F (applicable to foreign private issuers) and Form N-CSR (applicable to listed closed-end funds) require detailed monthly disclosure of repurchases of the issuer's own equity securities along with information about share repurchase programs. Certain information regarding share repurchases is also required to be disclosed in an issuer's financial statements, including in the statements of cash flows indicating the amount of cash paid for repurchased securities and the statements of changes in shareholders' equity indicating any reduction in securities outstanding and additional paid-in capital for the securities repurchased. Companies often disclose share repurchase activity in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section required in periodic reports under Item 303 of Regulation S-K and in the "Operating and Financial Review and Prospects" under Item 5 of Form 20-F.
On December 15, 2021, the SEC proposed amendments that would have required public companies to provide more timely disclosure of share repurchases on a new Form SR, which would have required the reporting of repurchases of the issuer's equity securities for each day, within one business day after execution of a share repurchase order.2 The proposed amendments would have also required additional detail regarding the structure of an issuer's share repurchase program and its share repurchases and would have required the information about repurchases to be reported using Inline XBRL.
The SEC indicated in the Proposing Release that these proposed amendments resulted from an ongoing, comprehensive evaluation of the SEC's disclosure requirements regarding share repurchases. In 2016, the Commission issued a Concept Release on the business and financial disclosures required by Regulation S-K, including disclosure required pursuant to Item 703 of Regulation S-K.3 That Concept Release requested comment on, among other things, whether Item 703 of Regulation S-K disclosure is important to investors, whether the SEC should require more detailed or more frequent disclosure regarding share repurchase transactions, and whether there should be a de minimis monetary threshold for disclosure of share repurchases. The SEC also noted that it received a rulemaking petition expressing general support for the current regulatory regime for issuer share repurchases but recommending revisions to the SEC's executive compensation disclosure requirements to require disclosure of whether issuer share repurchases have affected the calculation of the repricing of any options, stock appreciation rights, or option-like instruments.4
The SEC stated in the Proposing Release that, given the growth of issuer share repurchase plans in recent years and the concerns expressed by commentators, "investors could benefit from improving the quality, relevance, and timeliness of information related to issuer share repurchases." The SEC expressed concern that, because companies are repurchasing their own securities, asymmetries may exist between companies and affiliated purchasers and investors with regard to information about the issuer and its future prospects. To help address these information asymmetries, the SEC proposed more comprehensive disclosure requirements regarding issuer share repurchases.
The SEC reopened the comment period for the share repurchase rulemaking twice. The first reopening occurred in October 2022 because certain comments on the Proposing Release were potentially affected by a technological error in the SEC internet comment form.5 The second reopening occurred on December 2022, when the SEC voted to reopen the comment period in connection with the addition to the comment file of a staff memorandum analyzing the potential economic effects of the new excise tax contained in the Inflation Reduction Act of 2022 (Inflation Reduction Act) on the proposed amendments.6
After considering the comments received on the Proposing Release, the Commission ultimately determined to adopt a requirement for the reporting of daily share repurchase data on a periodic basis, rather than on a real-time basis. The SEC noted in the Adopting Release:
The current reporting regime, in which investors receive information only about the monthly aggregate repurchases of issuers, fails to provide enough detail for investors to draw informed conclusions about the purposes and effects of many repurchases. In contrast, the amendments we are adopting will provide investors with data about the daily repurchase activity of an issuer and additional qualitative disclosures that investors can combine with other disclosures, such as the timing of compensatory awards or executive equity transactions, to observe whether a given repurchase was apt to affect executive compensation. Data on daily transactions and the additional qualitative disclosures would also 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. Investment advisers may use this data in assisting investors in assessing the purposes and effects of share repurchases.
As adopted, the SEC's final amendments will significantly increase the amount of detailed information about share repurchases that is available to investors after share repurchases have been completed, rather than requiring real-time disclosure of share repurchase activity as originally proposed.
Reporting Daily Repurchase Data
After considering commenters' objections to the disclosure of detailed repurchase data on Form SR within one business day of executing a share repurchase as originally proposed, the final amendments require:
·corporate issuers, regardless of filer status, that file on domestic forms to disclose the total repurchases made each day for the quarter in an exhibit to their Form 10-Q and Form 10-K (for their fourth fiscal quarter);
·listed closed-end funds to disclose daily quantitative repurchase data in their semi-annual and annual reports on Form N-CSR; and
·foreign private issuers reporting on the foreign private issuer forms7 to disclose daily quantitative repurchase data at the end of every quarter in new Form F-SR, which will be due 45 days after the end of each of the foreign private issuer's fiscal quarters (including the fourth fiscal quarter).8
The SEC indicates in the Adopting Release that it believes providing the same level of detail about share repurchases that was proposed, but on a less frequent basis, would "avoid many of the costs that commenters noted while still providing important disclosures that address the informational deficiencies in current reporting that we have identified."
The SEC has adopted a tabular disclosure format that companies will utilize for reporting, for the period covered by the applicable report, the total purchases made each day by or on behalf of the issuer or any "affiliated purchaser" as such term is defined in Exchange Act Rule 10b-18,9 of shares or other units of any class of the issuer's securities that are registered pursuant to Section 12 of the Exchange Act. This new tabular disclosure will replace the monthly share repurchase disclosure currently required by Item 703 of Regulation S-K. The required tabular disclosure is formatted as follows:
The final amendments require corporate issuers and listed closed-end funds to disclose, by footnote to the table, the date of adoption or termination of any plan for share repurchases that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).
The final amendments require issuers to include a checkbox above its tabular disclosures indicating whether certain officers and directors purchased or sold shares or other units of the class of the issuer's equity securities that are the subject of an issuer share repurchase plan or program within four business days before or after the share repurchase plan or program announcement or the announcement of an increase of an existing share repurchase plan or program. For domestic corporate issuers and listed closed-end funds, this checkbox requirement applies to any officer or director subject to the reporting requirements under Section 16(a) of the Exchange Act. For foreign private issuers, this requirement applies to any director and member of senior management who would be identified pursuant to Item 1 of Form 20-F, regardless of whether the foreign private issuer is reporting on the forms exclusively available to foreign private issuers or on domestic forms.
The amendments include a provision in new Item 601(b)(26) of Regulation S-K and new Item 14(a)(iii) in Form N-CSR that permits an issuer to rely on Forms 3, 4, and 5 filed pursuant to Section 16 of the Exchange Act in determining whether to check the checkbox that accompanies the tabular disclosure. Form F-SR contains an analogous provision for foreign private issuers, permitting a foreign private issuer to rely on written representations from its directors and senior management, provided that the reliance is reasonable.
In a change from the proposal, the daily quantitative repurchase data required by the final amendments will be treated as "filed" in Form 10-Q, Form 10-K, Form N-CSR, and Form F-SR, instead of as "furnished." As a result, the repurchase disclosure will be subject to liability under Section 18 of the Exchange Act and the information will be deemed incorporated by reference into filings under the Securities Act of 1933, as amended (Securities Act) which will be subject to liability under Section 11 of the Securities Act.
Narrative Disclosure Regarding Share Repurchases
In addition to the tabular disclosure of aggregated daily repurchase data and the accompanying checkbox, issuers will be required to provide expanded narrative disclosure regarding share repurchase plans and programs, including:
- the objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of repurchases;
- 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);
- for publicly announced repurchase plans or programs:
- the date each plan or program was announced;
- the dollar amount (or share or unit amount) approved;
- the expiration date (if any) of each plan or program;
- each plan or program that has expired during the period covered by the tabular disclosure; and
- Each plan or program the issuer has determined to terminate prior to expiration or under which the company does not intend to make further purchases; and
- 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.
The issuer must disclose the specified information in narrative form with respect to the issuer's repurchases of equity securities disclosed in the table and refer to the particular repurchases in the table that correspond to the different parts of the narrative, if applicable.
Company Rule 10b5-1 Trading Arrangement Disclosure
The final amendments require issuersthat file on domestic forms to disclose whether, during the issuer's last fiscal quarter, the issuer adopted or terminated any Rule 10b5-1 trading arrangement, as that term is defined in Item 408(a)(1)(i) of Regulation S-K.10
In addition, the issuer must provide a description of the material terms of the Rule 10b5-1 trading arrangement (other than terms with respect to the price at which the party executing the Rule 10b5-1 trading arrangement is authorized to trade), such as:
- the date on which the issuer adopted or terminated the Rule 10b5-1 trading arrangement;
- the duration of the Rule 10b5-1 trading arrangement; and
- the aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 trading arrangement.
If the required narrative disclosure regarding share repurchases described above would satisfy these new requirements regarding Rule 10b5-1 trading arrangements, the issuer may cross-reference that disclosure to also satisfy these requirements.
Structured Data Requirements
The final amendments require companies to tag the information disclosed pursuant to Items 601 and 703 of Regulation S-K, Item 16E of Form 20-F, Item 14 of Form N-CSR, and Form F-SR in a structured, machine-readable data language in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual. In this regard, the final amendments require detail tagging using Inline XBRL of the quantitative amounts disclosed within the required tabular disclosures and block text tagging and detail tagging of required narrative and quantitative information.
Foreign private issuers that file on foreign private issuer forms will be required to comply with the new disclosure and tagging requirements in 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, which is required by Item 16E of Form 20-F, and the related tagging requirements will be required beginning with the first Form 20-F filed after a foreign private issuer's first Form F-SR has been filed.
Listed closed-end funds will be required to comply with the new disclosure and tagging requirements in their Exchange Act periodic reports beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024.
All other issuers will be required to comply with the new disclosure and tagging requirements in their Exchange Act periodic reports on Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.
1. Release No. 34-97424, Share Repurchase Disclosure Modernization (May 3, 2023) (Adopting Release).
2. Release No. 34-93783, Share Repurchase Disclosure Modernization (Dec. 15, 2021) (Proposing Release).
3. Release No. 33-10064, Business and Financial Disclosure Required by Regulation S-K (Apr. 13, 2016) (Concept Release).
4. Rulemaking Petition 4-772, Request to Amend Regulation S-K (17 C.F.R. § 229.402(d), instruction (7)) (Apr. 21, 2021).
5. Release No. 33-11117, Resubmission of Comments and Reopening of Comment Periods for Several Rulemaking Releases Due to a Technological Error in Receiving Certain Comments (Oct. 7, 2022).
6. Release No. 34-96458, Reopening of Comment Period for Share Repurchase Disclosure Modernization (Dec. 7, 2022).
7. Multijurisdictional Disclosure System (MJDS) filers that file on Form 40-F are not subject to the final amendments. Release No. 33-6902, Multijurisdictional Disclosure and Modifications to the Current Registration and Reporting System for Canadian Issuers (Jun. 21, 1991).
8. If a foreign private issuer's home country disclosures furnished on a Form 6-K satisfy the Form F-SR requirements, it can incorporate by reference its Form 6-K disclosures into its Form F-SR.
9. Under Rule 10b-18, an "affiliated purchaser" is: (i) a person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer's securities; or (ii) an "affiliate" who controls the issuer's purchases or whose purchases are controlled by or under common control with the issuer. An "affiliate" is any person who controls, is controlled by, or is under common control with the issuer. The definition of affiliated purchaser does not include a broker or dealer (solely by reason of that broker effecting purchases on behalf of the issuer), or any officer or director of the company (solely by reason of that officer's or director's participation in the decision to authorize Rule 10b-18 purchases on behalf of the issuer).
10. For more information about the SEC's amendments to Rule 10b5-1 and related disclosures, please see the client alert,U.S. SEC Adopts Amendments to Rule 10b5-1 and Requires Related Disclosures.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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