SEC increases disclosure requirements for issuer equity repurchases
On May 3, 2023, the Securities and Exchange Commission (the SEC or the Commission) adopted new disclosure requirements related to repurchases of a public company’s equity securities that are registered under the Securities Exchange Act of 1934, as amended (the Exchange Act).
The amendments will become effective 60 days after publication in the Federal Register and require more detailed and frequent disclosure about an issuer’s share repurchases, including requiring issuers to provide disclosure of daily repurchase activity on a quarterly or semi-annual basis, depending on the type of issuer.
The new rules at a glance
- The new rules apply to all issuers, regardless of reporting status – this includes smaller reporting companies (SRCs), emerging growth companies (EGCs) and foreign private issuers (FPIs).
- Compliance dates:
- Domestic issuers – Compliance required for the first full fiscal quarter that begins on or after October 1, 2023
- FPIs – Compliance required for the first full fiscal quarter that begins on or after April 1, 2024 and
- Exchange traded registered closed-end management investment companies (Funds) – Compliance required for the first six-month period that begins on or after January 1, 2024.
- Quarterly (rather than daily) disclosure of a corporate issuer’s daily quantitative share repurchase information (Daily Repurchase Data):
- Domestic issuers – New Exhibit 26 filed with Form 10-Q and Form 10-K (for the last fiscal quarter of the year) and
- FPIs – New Form F-SR due 45 days after the end of an FPI’s fiscal quarter.
- For Funds, semi-annual disclosure of Daily Repurchase Data on Form N-CSR, which is generally due ten days after a Fund disseminates its annual or semi-annual report to stockholders.
- Daily Repurchase Data disclosure will be filed instead of furnished, and thus subject to the liability provisions of Section 18 of the Exchange Act, as well as Section 11 of the Securities Act of 1933, amended (the Securities Act) when deemed incorporated by reference into Securities Act filings.
- Daily Repurchase Data disclosure will include a new checkbox indicating whether certain officers and directors traded in the relevant securities in the four business days before or after the announcement of the repurchase plan or program.
- Enhanced disclosure requirements, including new requirement for disclosure of the objectives or rationales for a company’s share repurchase plans.
- New Item 408(d) to Regulation S-K, requiring quarterly disclosure in periodic reports of an issuer’s adoption and termination of any Rule 10b5-1 trading arrangements.
- New disclosure must be reported using Inline XBRL.
In 2003, the SEC adopted Item 703 of Regulation S-K to require disclosure of an issuer’s share repurchases on a quarterly basis (currently in Forms 10-Q and 10-K). When the rule was first adopted, the disclosure was intended to inform investors whether, and to what extent, issuers had followed through on proposed plans for repurchases.
On December 15, 2021, the Commission proposed amendments to the disclosure requirements regarding share repurchases to require, among other things: (i) quantitative daily repurchase disclosure on a new Form SR that would be furnished no later than the business day following execution of each share repurchase, (ii) additional detail regarding the structure of an issuer’s repurchase program and its share repurchases, and (iii) that information disclosed pursuant to Item 703 of Regulation S-K be reported using a structured data language (specifically, Inline XBRL).
New disclosure requirements
Quarterly and semi-annual disclosures of daily repurchase data
The new rules will require corporate issuers to disclose daily quantitative information relating to any share buybacks on a quarterly basis, with semi-annual reporting for Funds. The issuer must disclose this information for each day a share buyback occurred. In response to comments, including those from DLA Piper, the final rules eliminated the proposed next business day disclosure obligation. Instead, the final rules require that Daily Repurchase Data be filed:
- For corporate issuers reporting on domestic forms, quarterly by filing a new Exhibit 26 to their Forms 10-Q and 10-K (for issuer’s fourth fiscal quarter)
- For FPIs, quarterly by filing a new Form F-SR due 45 days after the end of each fiscal quarter and
- For Funds, semi-annually on Form N-CSR.
There are no exemptions for any category of issuers, such as EGCs or SRCs. In a departure from the proposed rules, the information in this exhibit will be considered filed, not furnished, making such disclosures subject to the liability provisions of Exchange Act and the Securities Act, as applicable.
All companies must report the following information in a tabular format:
- the class of shares
- the average price paid per share
- the total number of shares purchased
- the aggregate maximum number of shares that may yet be purchased under a publicly announced plan
- the total number of shares purchased on the open market
- the aggregate total of shares purchased in reliance on the Rule 10b-18 safe harbor and
- the aggregate shares purchased under a 10b5-1 plan.
“Check-the-box” requirement for trades by insiders
The applicable exhibit or form reporting the issuers’ Daily Repurchase Data must also include a checkbox indicating whether certain officers and directors traded in the relevant securities in the four business days before or after the announcement of the repurchase plan or program. The SEC originally proposed a ten-business-day period for this requirement, but the period was reduced in the final rules.
- A domestic corporate issuer may rely on Forms 3, 4, and 5 filed with the Commission by Section 16 insiders in determining if it should check the box, provided that the reliance is reasonable (for example, it would not be reasonable to rely on forms that issuer knows were filed inappropriately).
- The checkbox requirement for FPIs will apply to any director and member of senior management who would be identified pursuant to Item 1 of Form 20-F, and an FPI is permitted to rely on written representations from its directors and senior management provided that the reliance is reasonable.
Disclosure of issuer 10b5-1 trading arrangements
Further, the amendments add a new Item 408(d) to Regulation S-K, which will require disclosure of an issuer’s adoption and termination of a contract, instruction, or written plan to purchase or sell its own securities that is intended to satisfy the affirmative defenses conditions of Rule 10b5-1(c). In a departure from the proposal, new Item 408(d) will not require disclosure of non-Rule 10b5-1 trading arrangements (as the term is defined in Item 408(c)). While an issuer will be required to disclose the material terms of a Rule 10b5-1(c) arrangement, in response to comments, including those from DLA Piper, new Item 408(d) will not require disclosure of the price at which the party executing the trading arrangement is authorized to trade.
To prevent duplicative disclosures, the new rules allow disclosure provided pursuant to Item 703 of Regulation S-K which satisfies the disclosure requirements of Item 408(d)(1) to be crossed referenced to such item.
Enhancement of and changes to existing disclosure
Amended Item 703(a) of Regulation S-K and Item 16E(a) of Form 20-F expand the current disclosure requirements for share repurchase programs by requiring issuers to disclose:
- the objectives or rationales for its share repurchase and the process or criteria used to determine the amount of repurchases
- the number of shares purchased other than through a publicly announced plan or program and the nature of the transaction
- information about each plan or program announced (date of announcement, dollar or share amount, expiration date, plans expired during the period, and plans terminated or under which the issuer does intend to make further purchases) and
- any policies or procedures relating to trading of issuer securities by its officers and directors during a repurchase program (including any restrictions on such transactions).
The Commission noted that, as part of an issuer’s discussion of the objectives and rationales for its share repurchases, issuers should not rely on boilerplate disclosures and could discuss, among others:
- factors driving the repurchase, including whether their stock is undervalued
- economically viable prospective internal growth opportunities
- attractive valuation of potential targets and
- sources of funding for the repurchase, where material, such as in the case where the course of funding results in tax advantages that would not otherwise be available for a repurchase.
Finally, considering the more detailed daily aggregated information requirements, the amendments also eliminate the current requirements in Regulation S-K, Form 20-F, and Form N-CSR to disclose monthly repurchase data in periodic reports.
Issuers are also required to tag 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 inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual. The requirements include detail tagging of quantitative amounts disclosed within the required tabular disclosures and block text tagging and detail tagging of narrative and quantitative information disclosed in the footnotes to the tables required by such forms.
Corporate issuers reporting on domestic forms must include the Daily Repurchase Data as an exhibit to, and provide the necessary narrative disclosure in, their Forms 10-Q and 10-K, beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023. For calendar-year companies, this means the fourth quarter of 2023 must be included in the 2023 Form 10-K filed in 2024.
FPIs must comply with these requirements by filing a Form F-SR for periods beginning with the first full fiscal quarter that begins on or after April 1, 2024, which for calendar year companies will be the second quarter of 2024.
Funds must comply with these requirements in their Form N-CSR that covers the first six-month period that begins on or after January 1, 2024.
With compliance deadlines only a few months away for most issuers, registrants are encouraged to start preparing by taking the following actions:
- Enhancing data collection and review procedures related to share repurchases to support disclosure of the Daily Repurchase Data, which includes tendering already outstanding shares as payment for stock option exercises. While companies routinely collect and summarize share repurchase data on a monthly aggregate basis, now repurchase data (including multiple repurchases on the same day) must be presented on a daily basis. Companies should assess whether they need to augment their disclosure controls and procedures to gather, organize and verify the information needed to disclose the Daily Repurchase Data. While the Commission did not address how the new rules may impact disclosure of accelerated share repurchase programs (ASRs), companies should assess the information they receive under existing ASRs and develop a plan for how future ASRs will comply with these new rules.
- Considering how the enhanced disclosure requirements translate into disclosure of existing repurchase plans. Amended Item 703(a) of Regulation S-K will require disclosure regarding both newly adopted plans and existing plans. Therefore, if an existing repurchase plan will still be in effect on the compliance date (applicable to that issuer), an issuer should revisit how that previously approved plan fits within the new disclosure regime, in particular whether it has well articulated objectives and rationales and the process or criteria used to determine the amount of repurchases, and supplementing prior determinations as needed.
- Evaluating whether current share repurchase and executive compensation practices and procedures could result in heightened scrutiny and, if so, whether any revisions to those practices are appropriate. For example, the timing of repurchase plan announcements may foreseeably overlap with equity award vesting schedules or with transactions the company’s compliance officer knows will take place under established Rule 10b5-1 trading plans. Issuers can prepare by reviewing their existing practices and plans and considering modifications as needed to avoid unwanted allegations that repurchase plans are intentionally timed to boost the value of equity awards or transactions by insiders.
- Considering whether to revise existing insider trading policies, such as to add an automatic blackout of directors and officers during the four business days before and after the announcement of the repurchase plan, or to address whether directors and officers may sell shares during the pendency of a repurchase program.
- Considering whether to update (or adopt) policies regarding a company’s own transactions in securities. Under the new insider trading disclosure requirements of Item 408(b) of Regulation S-K, companies will soon be required to disclose whether they have adopted insider trading policies and procedures governing transactions by the registrant itself. Companies that have such policies can prepare by considering whether updates are appropriate in light of the new repurchase plan rules, such as changes to prohibit adoption of a repurchase plan until at least four business days have lapsed from a purchase by a director or officer, to require formal determinations of the plan’s objectives or rationales, or to mandate that repurchase plans are structured to comply with Rule 10b5-1 and/or Rule 10b-18. Companies that do not have policies applicable to their own securities transactions may wish to consider whether to adopt them.
- Providing updated training to officers and directors on the company’s policies and procedures related to share repurchases and insider trading, including timely filing of Section 16 reports to enhance the company’s reliance on such reports for purposes of complying with the new checkbox requirement. We expect the SEC to continue to focus on insider trading and company transactions in securities.
For more information and assistance in understanding and implementing the requirements, please contact the authors of this article or your DLA Piper relationship attorney.
 After the initial comment period closed on April 1, 2022, the Commission reopened the comment period in October 2022 in light of a technical error that may have impacted comments, and again on December 7, 2022 through January 11, 2023, to consider the potential economic effects of the new excise tax on share repurchases contained in the Inflation Reduction Act of 2022.