SEC Approves New Rules Expanding Disclosure Requirements for Issuer Share Repurchases

On May 3, 2023, the US Securities and Exchange Commission (SEC) approved a final rule, on a 3-2 vote, which will require enhanced disclosure relating to issuer share repurchases. This client alert discusses both the new rules and some of their potential impacts. The final rule reflects several notable changes to the requirements contemplated by the initial proposal made by the SEC in December 2021. The new rules are intended to provide investors and the markets with a more extensive disclosure regime regarding repurchases of an issuer’s equity securities. 

The major amendments, described in more detail below, will require issuers to:

• disclose daily quantitative repurchase data on a quarterly or semi-annual basis, depending on the type of issuer;
• add checkbox disclosure for indicating if Section 16 officers or directors bought or sold company securities that fall under a company share repurchase plan within four business days before or after the public announcement of an issuer’s repurchase plan or program or an increase in a repurchase plan or program;
• provide narrative disclosure about the issuer’s repurchase programs and practices in each periodic report on Form 10-Q and Form 10-K regarding (1) the objectives or rationale for each share repurchase plan along with the process or criteria used to determine the amount of repurchases and (2) any policies or procedures relating to purchaser and sales of the issuer’s securities during a repurchase program by its offers and directors, including any restriction on such transactions; and
• disclose in the issuer’s periodic reports on Forms 10-Q and 10-K the adoption and termination of Rule 10b5-1 trading arrangements.

Timeline and Implementation

The new rules and requirements take effect for domestic corporate issuers with the first quarterly or annual report that covers the first full fiscal quarter that begins on, or after, October 1, 2023. For companies with fiscal years ending on December 31, the first report that must comply with the new rule will be the Form 10-K report for the year ending December 31, 2023. 

Foreign private issuers (FPIs) reporting on FPI forms will be required to disclose daily share repurchase information on a new Form F-SR, to be filed within 45 days after the end of an FPI’s fiscal quarter, beginning with the filing that covers the first full fiscal quarter that begins on or after April 1, 2024. Form 20-F filers must include the narrative disclosure in their first annual report that ends after the FPI’s has filed its first Form F-SR.

The amended rule also applies to closed-end management investment companies that are exchange-traded (closed-end funds). Closed-end funds are now required to disclose daily quantitative repurchase data in their annual and semi-annual reports on Form N-CSR, beginning with the first six-month period that begins on or after January 1, 2024.

Background

This is the final result of the SEC’s December 2021 proposed rules, which received significant pushback from public companies as being overly burdensome. The goal of the proposed rules was to provide investors with more detailed and more frequent disclosure about issuer buybacks. The 2021 proposed rules would have required companies to report share repurchases on a new Form SR one business day after the company executes a share repurchase. The 2021 proposed rules also required an issuer to disclose several pieces of information, including the rationale for its share repurchases and the processes used to determine the amount of share repurchases, among other requirements; this requirement carries over to the 2023 adopted rule. While the new rules are less restrictive in some ways then the proposed rules, they still impose additional disclosure requirements.

Quarterly/Semi-annual Tabular Disclosure of Daily Repurchase Activity

As a result of the new rule, on a quarterly basis domestic corporate issuers and FPIs will be required to make disclosure of daily information regarding repurchases. The final rule requires domestic corporate issuers to file—as an exhibit to the Form 10-Q report for the relevant fiscal quarter or Form 10-K for the fourth fiscal quarter—a table in the format specified in Item 601(b)(26) reporting the total purchase of any class of the company’s publicly traded equity securities by or on behalf of the company or any “affiliated purchaser,” defined in Rule 10b-18(a)(3). Under the new amendments, FPIs, which have a class of equity securities registered pursuant to Section 12 of the Exchange Act and do not file Forms 10-Q and 10-K, will be required to file Form F-SR within 45 days after the end of each quarter disclosing the aggregate stock repurchases made each day during the prior quarter. Listed closed-end funds will include the data in their annual and semi-annual reports on Form N-CSR.

New Checkbox Disclosure

 Companies will now be required to check a box indicating whether or not any of their Section 16 officers or directors bought or sold company securities that fall under a company share repurchase plan within four business days before or after the public announcement of an issuer’s repurchase plan or program. A Section 16 officer, defined in Rule 16a-1(f), includes the company’s president, principal financial officer, principal accounting officer, any vice-president of the company in charge of a principal business unit or division or any other officer or person who engages in a policy-making function for the company.

Officers of a company’s parents or subsidiaries are considered officers if they conduct policy-making functions for the company. In the case of a limited partnership, officers or employees of the general partners who engage in policy-making functions for the limited partnership are considered officers of the limited partnership. For a trust, officers or employees of the trustees who conduct policy-making functions for the trust are considered officers of the trust.

Rule 10b-18 Safe Harbor Tabular Disclosure

Rule 10b-18 provides an issuer and its affiliated purchasers with a non-exclusive safe harbor from liability under certain market manipulation rules and Rule 10b-5 under the Securities Exchange Act of 1934 when repurchases of the issuer’s common stock satisfy the Rule’s conditions. The new tabular disclosure requires companies to indicate the number of shares or units purchased that are intended to qualify for the safe harbor in Rule 10b-18.

Filed Not Furnished

Companies should know that the disclosures required by the amended rule will be filed, rather than furnished, under the federal securities laws, and will therefore be incorporated by reference into the company’s registration statements and subject to potential liability under Section 11 and Section 12 of the Securities Act of 1933.

Elimination of Monthly Repurchase Disclosure

The adopted rule eliminates the requirement in current Reg S-K Item 703(a) for disclosure of monthly quantitative repurchase data in a company’s periodic reports. Instead, daily share repurchase information is required to be filed quarterly.

Expansion of Narrative Disclosure Requirements Item 703 and Form 20-F

The new rule expands the narrative disclosure requirements for Item 703 and Form 20-F. Item 703, as amended, requires narrative disclosures to state the objectives and rationales for each of the company’s repurchase plans, the process used to determine buyback amounts, and any policies and procedures relating to purchases and sales of company securities by its directors and officers during a repurchase program. The Form 20-F narrative disclosure relating to the Form F-SR filings will be required starting in the first Form 20-F filed after the FPI’s first Form F-SR has been filed.

New Disclosure Under Item 408(d) Regarding Rule 10b5-1 Plans

The new narrative disclosures require issuers to include whether the company adopted, modified, or terminated any Rule 10b5-1 trading arrangement during the company’s most recent fiscal quarter and a description of any material terms—other than price—of such an arrangement in order to satisfy the affirmative defense conditions provided by Rule 10b5-1(c). Such terms might include: the date on which the company adopted or terminated the Rule 10b5-1 trading arrangement; the duration of the trading arrangement; and the aggregate number of securities to be bought or sold pursuant to the trading arrangement. If the Item 703 disclosure discussed above satisfies these requirements, companies may comply by providing a cross-reference to that disclosure in lieu of a full description.

Repurchase Disclosures Must be Tagged in Inline XBRL

The tabular information must be filed with the pertinent Form 10-Q or 10-K report as an Interactive Data File and must be tagged using Inline XBRL.

Implications and Next Steps

Companies should begin preparing for the new rules going in to effect by making sure they have proper processes and controls in place to collect the information and repurchase data required for the enhanced disclosure. Companies may also want to review their existing insider trading policies in light of new disclosure requirements to consider limiting trading by executives and directors in the four days before and after the announcement of a share purchase program. In addition, companies should take consideration of the new rules when adopting or modifying share purchase plans and may want to consider whether any existing plans need modified. 

Challenges to the New Rules

On May 12, 2023, a group of trade associations filed a petition for review in the federal Fifth Circuit Court of Appeals against the SEC to challenge the new rules regarding stock repurchases. The petition challenges the SEC’s rules under the Administrative Procedure Act. It also alleges that the mandatory disclosure requirements risk the publication of company managerial decisions and also compel speech violating the First Amendment. Absent a stay or injunction of the new rules, companies should continue making plans to comply based on the deadlines described above.