SEC Proposes New Share Repurchase Disclosure Requirements

On December 15, 2021, the SEC proposed new rules regarding disclosure of an issuer’s share repurchases (also referred to as stock buybacks). The proposed rules would institute reporting of issuer share repurchases on a daily basis, as well as expand current disclosure requirements about issuer share repurchases in annual and quarterly reports.[1] The proposed rules would, among other things:

• Require issuers to report share repurchases made by or on behalf of the issuer or by an affiliated purchaser by furnishing to the SEC a report on new Form SR before the end of the first business day following the day a share repurchase order is executed; and
• Enhance existing periodic disclosure to require additional detail regarding the structure of an issuer’s repurchase program and its share repurchases.

The proposed rules are subject to a public comment period of 45 days after publication in the Federal Register.

Proposed New Form SR

The proposed rules create a new report on Form SR, on which an issuer would be required to disclose specified information about the purchase of any class of its registered equity securities made by it or on its behalf or by an affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934 (the “Exchange Act”)) on a given day. This report would be furnished to the SEC on EDGAR by the end of the first business day following the day on which a share repurchase is executed. Notably, the Form SR would not be deemed “filed” and a failure to timely furnish a Form SR would not affect an issuer’s eligibility to use Form S-3. The proposed rules would also require the furnishing of an amended Form SR if there are material errors in, or material changes to, the information in a prior Form SR.

Form SR would disclose in tabular format, by date, for each class or series of registered equity securities, the following:

• Identification of the class of securities purchased;
• The total number of shares purchased on the day covered by the report (even if not purchased pursuant to a publicly announced plan or program);
• The average price paid per share, excluding brokerage fees and other costs of execution;
• The total number of shares purchased on the open market;
• The total number of shares purchased in reliance on the safe harbor in Rule 10b-18 under the Exchange Act; and
• The total number of shares purchased under a Rule 10b5-1(c) trading plan.

The information called for by Form SR would need to be tagged in a machine readable format using Inline XBRL.

The new reporting requirement on Form SR would apply to issuers (including foreign private issuers and certain registered closed-end funds) that repurchase equity securities registered under Section 12 of the Exchange Act.

Augmented Disclosure in Periodic Reports

The proposed rules would amend Item 703 of Regulation S-K to require additional disclosure about an issuer’s share repurchases in its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. This new disclosure would supplement the monthly tabular information about issuer share repurchases already required by Item 703. Under the proposal, issuers would now also be required to disclose, by footnote to the current table or narrative accompanying the table, the following:

• The objective or rationale for each issuer share repurchase plan or program and the process or criteria used to determine the repurchase amounts;
• 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 restriction on such transactions;
• The number of shares purchased other than through a publicly announced plan or program, and if so, the nature of the transaction;
• The number of shares purchased under aRule 10b5-1(c) trading plan, and if so, the date that the plan was adopted or terminated; and
• The number of shares purchased in reliance on the non-exclusive safe harbor in Rule 10b-18 under the Exchange Act.

In addition, a new check box would be added above the Item 703 share repurchase table to indicate whether any officers or directors purchased or sold securities that are the subject of a repurchase plan or program within 10 business days before or after the announcement of such plan or program.

The proposed rules would also make corresponding changes to Form 20-F for foreign private issuers and Form N-CSR for certain registered closed-end funds. While foreign private issuers and closed-end funds currently are required to disclose share repurchase information annually and semi-annually, respectively, new Form SR would require daily reporting of share repurchases by these entities.

Rationale and Looking Forward

Public companies may use share repurchases for a variety of reasons, including as a means of returning capital to shareholders. Increased use of share repurchases has led to increased public interest in, and scrutiny of, share repurchases. This has led the SEC to revisit its disclosure rules around share buybacks for the first time since 2003.

The SEC’s proposal garnered the support of only three of the SEC Commissioners, all Democrats. They argue that the proposed rules will provide greater transparency for investors around share repurchases through more detailed, timely and structured disclosure. They note the potential for companies to engage in share repurchases in order to effect short-term upward price pressure, and to influence metrics like earnings-per-share, which may, in turn, affect executive compensation. Commissioner Allison Lee noted that the proposed rules do not “prescribe how or why companies may elect to engage in share repurchases.” Instead, the proposed rules are intended to enhance the ability of investors to evaluate how, why, and to what effect companies are engaging in buybacks.

Taking a contrary view, Republican Commissioners Elad Roisman and Hester Peirce both dissented from the SEC’s vote on the proposed rules. Commissioner Roisman noted that while there were regulatory enhancements that might be beneficial, the proposed rules “could likely result in companies reducing their use of buybacks, even when they believe that conducting a buyback would be in the best interest of the company and shareholders.”

If you have any questions concerning the material discussed in this client alert, please contact the members of our Securities and Capital Markets practice.