- Would require next day reporting by companies of repurchases and new periodic enhanced disclosures
On December 15, 2021, the U.S. Securities and Exchange Commission (SEC) proposed amendments to its rules regarding disclosure about repurchases of an issuer’s equity securities that are registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act). Companies likely will find certain aspects of the proposal to be objectionable. Because the comment period on the proposal ends in a mere 45 days after publication in the Federal Register, companies should not delay in reviewing and evaluating the proposed amendments.
The following summary is principally taken from the SEC’s fact sheet on the proposal. The SEC’s proposing release, which includes the full text of the proposed amendments, is available here.
Next Day Reporting of Purchases – Proposed Form SR
The proposed rules would require an issuer, including a foreign private issuer and certain registered closed-end funds, to report any purchase 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 that is registered by the issuer pursuant to Section 12 of the Exchange Act. The issuer would have 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.
Proposed Form SR would require the following disclosures:
- Date of the repurchase;
- Identification of the class of securities purchased;
- The total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs;
- The average price paid per share (or unit);
- The aggregate total number of shares (or units) purchased on the open market;
- The aggregate total number of shares (or units) purchased in reliance on the safe harbor in Exchange Act Rule 10b-18; and
- The aggregate total number of shares (or units) purchased pursuant to a plan intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5- 1(c).
Enhanced Periodic Disclosure
The proposed rules also would require additional disclosures in Form 10-K and Form 10-Q for domestic issuers, Form 20-F for foreign filers and Form N-CSR for registered closed-end funds. These include:
- The objective or rationale for its share repurchases and process or criteria used to determine the amount of repurchases;
- 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;
- Whether repurchases were made pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c), and if so, the date that the plan was adopted or terminated; and
- Whether repurchases were made in reliance on the Exchange Act Rule 10b-18 non-exclusive safe harbor.
The proposed rules also would require the issuer to check a box indicating whether any of the issuer’s officers or directors subject to the reporting requirements under Exchange Act Section 16(a) purchased or sold shares or other units of the class of the issuer’s equity securities that is the subject of an issuer share repurchase plan or program within 10 business days before or after the announcement of such plan or program.
Cost of Proposed Rules
The SEC proposing release discusses a variety of benefits, costs and alternatives to the proposed rules if adopted. In addition to the compliance cost, the SEC identifies several indirect costs, the key one being that daily disclosure may cause a company’s stock price to rise more than it would absent such disclosure, making additional purchases more costly. The SEC speculates that this cost could more pronounced for Rule 10b5-1 repurchases to the extent that such trades exhibit a greater degree of periodicity and occur over a period of time, enabling market participants to predict and front run the issuer.
Related SEC Proposed Rule Making
Companies should be aware that on the same day by means of a separate rulemaking, the SEC proposed rules that, among other things, would require an issuer’s Rule 10b5-1 repurchase plan to include at least a 30-day cooling off period before transactions can commence after adoption or amendment of such plan, and would require an issuer to disclose quarterly the adoption, modification, or termination of Rule 10b5‑1 repurchase plans and other trading arrangements. We discuss these proposals here.