On May 3, 2023, the SEC adopted new disclosure requirements for stock buybacks, including disclosure of daily share repurchase activity on a quarterly basis. These quarterly reports of daily share repurchase activity will be mandatory, not just for U.S. domestic companies, but also for foreign private issuers (FPIs) other than MJDS filers.
The final rules require:
Domestic companies will be required to comply with the new rules beginning with the first Form 10-Q or 10-K that covers the first full fiscal quarter that begins on or after October 1, 2023. This means that for calendar-year-end companies, disclosures will be first required in the Form 10-K for the year ending December 31, 2023, filed in 2024.
FPIs must begin filing the new Form F-SR, a new form for FPI quarterly reporting of repurchase activity, on a quarterly basis for the first full fiscal quarter that begins on or after April 1, 2024, and include narrative disclosures in the first Form 20-F filed after the first Form F-SR. For calendar-year-end companies, this means that the first Form F-SR will be due, with respect to the second fiscal quarter of 2024 by August 14, 2024, and narrative disclosures must be first included in the Form 20-F for the year ending December 31, 2024, filed in 2025.
There are no exemptions or longer transition periods applicable to smaller reporting companies or other categories.
The new rules require both domestic companies and FPIs (other than MJDS filers) to report their daily repurchase activity after the end of the quarter in which the repurchases occur. The information is required to be provided in tabular format, including, for each day on which shares were repurchased:
Companies will need to disclose, in a footnote to the table, the date that any Rule 10b5-1 plan pursuant to which listed purchases were made was adopted or terminated.
Domestic companies will be required to provide disclosures of daily share repurchase activity for a completed quarter in exhibits to their Forms 10-Q and 10-K.
FPIs will be required to provide disclosures of daily share repurchase activity for a completed quarter on new Form F-SR, which will be due within 45 days of the end of each quarter.
Current requirements of Forms 10-Q, 10-K and 20-F that call for disclosure of share repurchase activity aggregated on a monthly basis will be eliminated.
These quarterly reports will be treated as filed in the relevant Form 10-Q, 10-K, 20-F and Form F-SR, and not furnished as the SEC had initially proposed.
The exhibit (for domestic companies) or form (for FPIs) containing the tabular disclosure described above will also need to include a checkbox to indicate whether any director or certain officers purchased or sold securities of the same type that are subject to the repurchase plan within four business days before or after the announcement of the repurchase plan. The disclosure requirement applies even if the director or officer sold the securities under a Rule 10b5-1 trading plan during the covered period.
For domestic companies, the checkbox disclosure will capture directors and Section 16 officers.
For FPIs, the checkbox disclosure will be required for directors and for individuals who are identified as senior management in Item 1 of Form 20-F.
The rules specifically permit reasonable reliance for this purpose by domestic companies on their directors’ and officers’ Section 16 filings and by FPIs on written representations from the relevant individuals if those representations are retained for two years for SEC inspection.
The final amendments also expand the requirements for narrative disclosures in connection with a company’s repurchase programs.
Specifically, companies will now be required to disclose, with respect to the share repurchase activity they had reported during the relevant period:
Companies will continue to be required to disclose:
Domestic companies must include these narrative disclosures quarterly in their Forms 10-Q and 10-K, while FPIs must include them annually in their Forms 20-F.
These narrative disclosures are in addition to the requirement that the SEC adopted in December 2022, in connection with its amendments to Rule 10b5-1 that would require domestic companies to disclose policies and procedures designed to promote compliance with insider trading laws. We discuss this requirement in our client note, “SEC Changes Requirements for Rule 10b5-1 Plans.”
The amendments will require domestic companies, on a quarterly basis, to disclose whether the company adopted or terminated a Rule 10b5-1 trading arrangement (defined as any contract, instruction or written plan designed to meet the conditions of Rule 10b5 1) and describe the material terms of the arrangement (but not pricing terms), including:
Unlike the narrative disclosures described above that are triggered by repurchase activity during the quarterly period, the Rule 10b5-1 plan disclosures are focused on the adoption and termination of plans during the quarterly period and not on repurchase activity under the plan. It is expected that there will be overlap between these disclosures.
This is the same information that domestic companies will be required to report for Rule 10b5-1 trading arrangements of directors and officers, starting with the periodic report that covers the first full fiscal quarter that begins on or after April 1, 2023 (October 1, 2023 for smaller reporting companies). Unlike for directors and officers, there will be no requirement to report the adoption or termination of non-Rule 10b5-1 trading arrangements (essentially arrangements that would have satisfied Rule 10b5-1 prior to the SEC’s latest amendments from December last year, which we discussed in “SEC Changes Requirements for Rule 10b5-1 Plans” at the time).
Companies must tag the new disclosures discussed above in inline XBRL, with detail tagging of the quantitative amounts disclosed within the required tabular disclosures and block text tagging and detail tagging of required narrative and quantitative information. Companies will have to comply with the inline XBRL tagging requirements on the same timeline as for the new disclosures themselves.
The newly required tabular disclosure of share repurchase activity calls for the same categories of repurchase information that companies are already providing each quarter (or annually for FPIs), except that activity will be aggregated on a daily, rather than monthly, basis and the total number of shares repurchased on each day must be further broken down to disclose the number of shares purchased on the open market, with the intention to qualify for the safe harbor in Rule 10b-18, and pursuant to a Rule 10b5-1 plan.
While the SEC ultimately required quarterly reporting of daily share repurchase activity, rather than daily reporting, companies should still consider what implications the availability of daily repurchase data may have and how that data will be interpreted by market participants. Apparent pauses in otherwise continuous repurchase activity could draw questions from investors and analysts, and companies should consider whether and how to respond or adopt a “no comment” policy.
The risk of predatory trading against a company by sophisticated actors on the basis of data concerning daily share repurchase activity has been significantly reduced (albeit perhaps not completely eliminated) by the SEC’s decision to require the disclosure of that data only after the end of the quarter. However, market participants could still look for patterns in a company’s repurchase activity.
The new tabular disclosures will, additionally, still enable the private securities litigation bar and the SEC to mine extensive amounts of machine-readable information that could be used to construct allegations of misconduct or serve as the basis of regulatory investigations into a company’s repurchase activities, including for repurchases that the company identifies as not covered by Rule 10b-18 or Rule 10b5-1.
The same considerations of investor questions and potentially greater public, legal and regulatory scrutiny apply to the newly required quarterly disclosures about the adoption or termination (which under SEC interpretations includes modification) of company Rule 10b5-1 trading arrangements. Recently adopted amendments to Rule 10b5-1 require companies to “act in good faith” with respect to those Rule 10b5-1 trading arrangements, and the detailed disclosure about the timing of adoption and termination (including modification) may present opportunities for the SEC to investigate companies’ motives for adoption, termination or modification decisions.
The checkbox disclosure of trading activity by directors and officers within four business days of announcement of a share repurchase program, coupled with the disclosure of any policies in connection with director and officer trading during a share repurchase program, is likely to invite greater public scrutiny of any perceived relationship between director and officer trades and a company’s share repurchases.
It remains to be seen whether some companies will adopt and disclose policies that restrict trading by directors and officers during a share repurchase program or around the time of the program’s announcement—not because such trading is inappropriate, but to avoid the public perception issues the corresponding disclosure may create.
Companies should expect SEC scrutiny and comments on the newly required narrative disclosures about the objectives or rationales for company share repurchase plans and process or criteria used to determine the amount of repurchases. The SEC expressed its expectation that companies will provide these narrative disclosures without relying on boilerplate. The SEC also listed suggestions received from commenters for factors that companies might discuss, including alternative uses of the funds allocated for the repurchase, a comparison of the repurchase with other investment opportunities (such as capital expenditures), expected impact on the value of the remaining shares and factors driving the repurchase (such as undervalued stock, the lacking economic viability of internal growth opportunities, or the lack of targets with attractive valuations).
When crafting share repurchase disclosures, companies will need to balance the need for specificity in response to SEC expectations with the desire to minimize the burden on management and visibility into sensitive business information and strategy. The more specific these narrative disclosures are, the more they risk becoming stale over time. Companies will have to design appropriate disclosure controls to ensure relevant information is collected and analyzed for responsiveness to the rules’ requirements, and that the resulting disclosures are regularly reviewed and refreshed for any updates.
Companies will also need to make arrangements with their brokers and repurchase counterparties to ensure that they collect the relevant data about daily repurchase activity and receive appropriate assurances about the accuracy of that information.
In a change from the SEC’s original proposal, the daily repurchase data will be deemed “filed,” rather than “furnished,” and will (at least for domestic companies) be deemed incorporated by reference into filings under the Securities Act, which will be subject to Securities Act Section 11 liability.
The SEC’s decision to impose a new quarterly reporting requirement on FPIs represents a change from the SEC’s historical deference to home country practice when it comes to reporting by FPIs.
The SEC has long required FPIs to file an annual report on Form 20-F with information comparable to disclosure provided by domestic companies but otherwise deferred to home country practice by only requiring FPIs to furnish a Form 6-K for any material information disclosed by the FPI under its home country laws, reported pursuant to stock exchange requirements or provided to its shareholders.
If this relatively discrete and arguably immaterial information is now found to warrant mandating quarterly reporting for FPIs, will the SEC soon stop making accommodations for FPIs and require disclosure in other areas, too? The SEC gave no indication that any such plans are currently on its agenda, but this may be a step in that direction.