Proposed Rule2022-01068
Share Repurchase Disclosure Modernization
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 15, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission is proposing amendments to modernize and improve disclosure about repurchases of an issuer's equity securities that are registered under the Securities Exchange Act of 1934. Specifically, the proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments would also enhance the existing periodic disclosure requirements about these purchases.
Full Text
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<title>Federal Register, Volume 87 Issue 31 (Tuesday, February 15, 2022)</title>
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[Federal Register Volume 87, Number 31 (Tuesday, February 15, 2022)]
[Proposed Rules]
[Pages 8443-8472]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-01068]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 232, 240, 249, and 274
[Release Nos. 34-93783; IC-34440; File No. S7-21-21]
RIN 3235-AM94
Share Repurchase Disclosure Modernization
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing amendments
to modernize and improve disclosure about repurchases of an issuer's
equity securities that are registered under the Securities Exchange Act
of 1934. Specifically, the proposed amendments would require an issuer
to provide more timely disclosure on a new Form SR regarding purchases
of its equity securities for each day that it, or an affiliated
purchaser, makes a share repurchase. The proposed amendments would also
enhance the existing periodic disclosure requirements about these
purchases.
DATES: Comments should be received on or before April 1, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>); or
Paper Comments
<bullet> Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-21-21. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method of submission. The Commission will post all comments on the
Commission's website (<a href="http://www.sec.gov/rules/proposed.shtml">http://www.sec.gov/rules/proposed.shtml</a>).
Comments also are available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549-1090, on official business days between the hours of 10 a.m. and
3 p.m. Operating conditions may limit access to the Commission's public
reference room. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Steven G. Hearne, Senior Special
Counsel, Office of Rulemaking, at (202) 551-3460, Division of
Corporation Finance; and, with respect to the application of the
proposal to investment companies, Bradley Gude, Special Counsel, at
(202) 551-6792, Investment Company Regulation Office, Division of
Investment Management; U.S. Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing to amend or add the
following rules and forms:
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Commission reference CFR citation
(17 CFR)
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Regulation S-K.............. Item 10 through 1305 Sec. Sec. 229.10
through 229.1305.
Item 601............ Sec. 229.601.
Item 703............ Sec. 229.703.
Regulation S-T.............. Rule 10 through 903. Sec. Sec. 232.10
through 232.903.
Rule 405............ Sec. 232.405.
Securities Exchange Act of Proposed Rule 13a-21 Sec. 240.13a-21.
1934 (Exchange Act) \1\.
Proposed Form SR
Form 20-F........... Sec. 249.220f.
Form N-CSR.......... Sec. Sec. 249.331
and 274.128.
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Table of Contents
I. Introduction
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\1\ 15 U.S.C. 78a et seq.
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II. Discussion of Proposed Amendments
A. Proposed Form SR
B. Proposed Revisions to Item 703, Form 20-F, and Form N-CSR
1. Additional Disclosure
2. Clarifying Amendments
C. Structured Data Requirement
III. General Request for Comment
IV. Economic Analysis
A. Baseline and Affected Parties
1. Affected Parties
2. Baseline
B. Benefits
C. Costs
D. Reasonable Alternatives
V. Paperwork Reduction Act
VI. Small Business Regulatory Enforcement Fairness Act
VII. Initial Regulatory Flexibility Analysis Statutory Authority
[[Page 8444]]
I. Introduction
We are proposing changes to the requirements for disclosure of
purchases of equity securities made by or on behalf of an issuer or any
affiliated purchaser.\2\ Issuers may repurchase their shares through,
among other means, open market purchases, tender offers, private
negotiated transactions, and accelerated share repurchases. Issuers
typically disclose repurchase plans or programs at the time that the
share repurchases are authorized by the board of directors. Most share
repurchases are executed over time through open market purchases
through such share repurchase plans or programs. Issuers are not
required to, and typically do not, disclose the specific dates on which
they will execute trades pursuant to an announced repurchase plan or
program. Investors and other market participants normally do not become
aware of an issuer's actual share repurchase-related trading activity
until they are reported in an issuer's periodic reports, long after the
trades have been executed.
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\2\ For purposes of this release, the term ``issuer'' includes
affiliated purchasers and any person acting on behalf of the issuer
or an affiliated purchaser. The term ``affiliated purchaser'' as
used in Item 703 is defined in 17 CFR 10b-18(a)(3). References
throughout this release to ``issuer repurchases'' include purchases
by affiliates of the issuer and purchases by any person acting on
behalf of the issuer or an affiliated purchaser.
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The proposed amendments are intended to improve the quality,
relevance, and timeliness of information related to issuer share
repurchases. This proposal results from an ongoing, comprehensive
evaluation of our disclosure requirements. As part of this evaluation,
in April 2016, the Commission issued a Concept Release on the business
and financial disclosure required by Regulation S-K, including
disclosure pursuant to Item 703.\3\
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\3\ See Business and Financial Disclosure Required by Regulation
S-K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (Apr. 22,
2016)] (``Concept Release''). The release requested comment on,
among other things, whether Item 703 disclosure is important to
investors, whether the Commission should require more granular or
more frequent repurchase disclosure, and whether there should be a
de minimis monetary threshold for disclosure. We received
approximately 30 comment letters that addressed Item 703 and we
discuss these comments throughout this release, where relevant.
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The Commission adopted Item 703 in 2003 to require disclosure on a
quarterly basis of 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 registered under Section 12 of the Exchange
Act.\4\ The disclosure requirement applies to both open market and
private transactions. When it adopted Item 703, the Commission noted
that an issuer's stock price often increases following an issuer's
public announcement of a repurchase plan or program and that some
issuers publicly announce repurchase programs, but do not actually
purchase any securities or purchase only a small portion of the
announced amount.\5\ The Commission concluded that disclosure of an
issuer's actual purchases would inform investors whether, and to what
extent, the issuer had followed through on its original plan.\6\
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\4\ See Purchases of Certain Equity Securities by the Issuer and
Others, Release No. 33-8335 (Nov. 10, 2003) [68 FR 64952 (Nov. 17,
2003)] (``Adopting Release'').
\5\ Id. at 64963.
\6\ Id.
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Currently, Item 703 share repurchase disclosure is required in Form
10-Q (17 CFR 249.308a) for the issuer's first three fiscal quarters and
in Form 10-K (17 CFR 249.310) for the issuer's fourth quarter.\7\ The
same disclosure is required in Form 20-F on an annual basis for foreign
private issuers and in Form N-CSR on a semi-annual basis for certain
closed-end funds. In particular, Item 9 of Form N-CSR implements the
requirements of Item 703 for certain registered closed-end investment
management companies (``registered closed-end funds''), varying from
Item 703 only to account for the different reporting period covered by
Form N-CSR.\8\ Similarly, Item 16E of Form 20-F applies the Item 703
requirements to foreign private issuers.\9\ Accordingly, unless the
context otherwise requires, references in this release to ``Item 703''
should be read to include these parallel provisions of Form N-CSR and
Form 20-F.
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\7\ Certain information regarding share repurchases is also
required to be disclosed in an issuer's financial statements,
including in the statements of cash flows indicating the amount of
cash paid for repurchased securities and the statements of changes
in shareholders' equity indicating any reduction in securities
outstanding and additional paid-in capital for the securities
repurchased. If securities are repurchased for purposes other than
retirement, or if ultimate disposition has not yet been decided, the
amount and cost of the repurchased securities may be shown
separately on the balance sheets and statements of changes in
shareholders' equity as a deduction from the total of securities,
additional paid-in capital, and retained earnings.
\8\ See Adopting Release at 64963.
\9\ See Adopting Release at 64962.
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More specifically, Item 703 currently requires an issuer to
disclose in tabular format:
<bullet> The total number of shares (or units) purchased,
regardless of amount and regardless of whether made pursuant to a
publicly announced plan or program, by the issuer or any affiliated
purchaser during the relevant period, reported on a monthly basis and
by class, including footnote disclosure regarding the number of shares
purchased other than through a publicly announced plan or program and
the nature of the transaction;
<bullet> The average price paid per share (or unit);
<bullet> The total number of shares (or units) purchased as part of
a publicly announced repurchase plan or program; and
<bullet> The maximum number (or approximate dollar value) of shares
(or units) that may yet be purchased under the plans or programs.
Item 703 also requires footnote disclosure in the aggregate of the
principal terms of all publicly announced repurchase plans or programs,
including:
<bullet> The date each plan or program was announced;
<bullet> The dollar amount (or share or unit amount) approved;
<bullet> The expiration date (if any) of each plan or program;
<bullet> Each plan or program that has expired during the period
covered by the table; and
<bullet> Each plan or program the issuer has determined to
terminate prior to expiration, or under which the issuer does not
intend to make further purchases.
We recognize that there are a number of reasons that issuers
conduct share repurchases and that share repurchases can have a
positive or negative impact on the market for an issuer's securities.
The high dollar volume, nearly $700 billion in 2020, of recent share
repurchase activity has been accompanied by public interest in
corporate payouts in the form of share repurchases.\10\ Various studies
address motivations behind corporate payouts and the choice of the form
of payout (repurchases or dividends).\11\
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\10\ See Section IV.A.2, infra and note 60 and accompanying
text.
\11\ See Section IV.A., infra for a more detailed discussion of
the various studies.
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Some studies have found that issuers often use repurchases in a
manner aligned with shareholder value maximization, such as to offset
share dilution after new stock is issued, to facilitate stock- and
stock option-based employee compensation programs, to help signal the
issuer's view that its stock is undervalued, or because the issuer's
board has otherwise determined that a repurchase program is a prudent
use of the issuer's excess cash.\12\
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\12\ See Section IV.A.2, infra.
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Other observers, however, have expressed concerns about issuers'
uses of share repurchases. Some research has
[[Page 8445]]
shown that repurchases can serve as a form of real earnings management
(through decreasing the denominator of earnings-per-share (``EPS''))
and thus be subject to short-term earnings management objectives of an
executive seeking to meet or beat consensus forecasts.\13\ In addition,
because announcements of repurchases and actual repurchase trades can
also effect short-term upward price pressure, share price- or EPS-tied
compensation arrangements could incentivize executives to undertake
repurchases in an attempt to maximize their compensation.\14\ Several
commentators have highlighted what they viewed to be the opportunistic
and harmful use of issuer share repurchases by issuer insiders.\15\
Some of these commentators view issuer share repurchases as a tool to
raise the price of an issuer's stock in a way that allows insiders and
senior executives to extract value from the issuer instead of using the
funds to invest in the issuer and its employees.\16\ A further concern
raised by some commentators is the potential for share repurchases to
be used by issuers as a mechanism to inflate the compensation of their
executives in a manner that is not transparent to investors or the
market.\17\ In addition, a number of commenters recommended expanding
the disclosure required by Item 703 in response to the Commission's
request for comments regarding Item 703 in the Concept Release.\18\
Some commenters also supported increasing the frequency of reporting
share repurchases.\19\
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\13\ For evidence on the use of repurchases as a method of real
earnings management, see infra note 79. See also Rulemaking Petition
4-746 (June 25, 2019), Rulemaking Petition Requesting Repeal and
Reform of Rule 10b-18 to Address Manipulative Repurchase Programs
that Harm Workers, available at <a href="https://www.sec.gov/rules/petitions/2019/petn4-746.pdf">https://www.sec.gov/rules/petitions/2019/petn4-746.pdf</a>, at 4 (expressing concern that repurchases can be
used to inflate share price and EPS-linked executive compensation)
(``Rulemaking Petition 4-746'').
\14\ See, e.g., Chan, K., Ikenberry, D., Lee, I., & Wang. Y.,
Share Repurchases as a Potential Tool to Mislead Investors, 16 Corp.
Fin. 137 (2010) (``Chan et al. (2010)'') (finding in 1980-2000 data
that a limited number of managers may have used repurchases in a
misleading way as ``cheap talk''). For a discussion of the use of
repurchases to influence compensation tied to per-share measures,
see infra note 81.
\15\ See infra note 82; Jackson, Jr., R.J., Stock Buybacks and
Corporate Cashouts, Speech by Commissioner Jackson Before the Center
for American Progress (June 11, 2018), available at <a href="https://www.sec.gov/news/speech/speech-jackson-061118">https://www.sec.gov/news/speech/speech-jackson-061118</a> (``Jackson Speech'');
<a href="https://www.cnbc.com/2021/03/02/elizabeth-warren-rips-stock-buybacks-as-nothing-but-paper-manipulation.html">https://www.cnbc.com/2021/03/02/elizabeth-warren-rips-stock-buybacks-as-nothing-but-paper-manipulation.html</a> (``Warren article'')
(expressing Senator Warren's view that share repurchases increase
the price of an issuers shares through the issuer's purchase of its
securities on the market rather than investing in the issuer's
business); Palladino, L., Do Corporate Insiders Use Stock Buybacks
for Personal Gain?, 34(2) Int'l Rev of Applied Econ. 152-174 (2020)
(``Palladino (2020)'') (finding increased insider selling in
quarters where buybacks are occurring); and Palladino, L. &
Lazonick, W., Regulation Stock Buybacks: The $6.3 Trillion Question,
Roosevelt Institute Working Paper (May 2021), available at <a href="https://rooseveltinstitute.org/publications/regulating-stock-buybacks-the-6-3-trillion-question/">https://rooseveltinstitute.org/publications/regulating-stock-buybacks-the-6-3-trillion-question/</a> (``Regulation Stock Buybacks Article''). See
also Fried, J.M., Testimony of Jesse M. Fried on Stock Buybacks
before the U.S. House of Representatives Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets (Oct, 17, 2019)
available at SSRN: <a href="https://ssrn.com/abstract=3474175">https://ssrn.com/abstract=3474175</a> (``Fried
Testimony'').
\16\ See, e.g., Warren Article; and Lazonick, W., Clinton's
Proposals on Stock Buybacks Don't Go Far Enough, Harvard Business
Review (Aug. 11, 2015) available at <a href="https://hbr.org/2015/08/clintons-proposals-on-stock-buybacks-dontgo-far-enough">https://hbr.org/2015/08/clintons-proposals-on-stock-buybacks-dontgo-far-enough</a>.
\17\ See, e.g., Jackson Speech; Regulation Stock Buybacks
Article; and Fried Testimony. Fried asserted that executives may use
repurchases to enrich themselves at the expense of public investors
by: Conducting a share repurchase when the issuer's stock price is
lower than the ``stock's actual stock value,'' resulting in a value
transfer from selling shareholders to non-selling shareholders pro
rata; the manipulation of the stock price and earnings metrics in
compensation arrangements; or repurchase announcements made solely
to boost the stock price before sales by executives.
\18\ See, e.g., letters in response to the Concept Release from
SEC Investor Advisory Committee (Jun. 15, 2016); Council of
Institutional Investors (Jul. 8, 2016) (``CII''); W. Klein and T.
Amy (Jul. 19, 2016) (``Klein & Amy''); Domini Social Investments
(Jul. 21, 2016) (``Domini''); California State Teachers' Retirement
System (Jul. 21, 2016) (``CalSTRS''); American Federation of State,
County and Municipal Employees (Jul. 21, 2019) (``AFSCME''); AFL-CIO
(Jul. 21, 2016) (``AFL-CIO''); California Public Employees'
Retirement System (``CalPERS'') (Jul. 19, 2016); Better Markets,
Inc. (Jul. 21, 2016) (``Better Markets''); and Americans for
Financial Reform (Aug. 10, 2016) (``AFR''). Other commenters,
however, opposed expanding the disclosure required by Item 703. See,
e.g., letters in response to the Concept Release from U.S. Chamber
of Commerce (Jul. 20, 2016) (``Chamber''); FedEx Corporation (Jul.
21, 2016) (``FedEx''); Business Roundtable (Jul. 21, 2016);
Securities Industry and Financial Markets Association (Jul. 21,
2016) (``SIFMA''); Fenwick West LLP (Aug. 1, 2016) (``Fenwick'');
General Motors Company (Sept. 30, 2016) (``GM''); and Financial
Executives International (Oct.3, 2016) (``FEI'').
\19\ See, e.g., letters in response to the Concept Release from
Klein & Amy; and AFR. See also letter in response to the Concept
Release from CalPERS supporting disclosure on Form 8-K of
significant equity repurchases. Other commenters, however, supported
maintaining the current frequency of reporting share repurchases on
a quarterly basis. See, e.g., letters in response to the Concept
Release from Chamber; SIFMA; and Fenwick.
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We also received a rulemaking petition expressing general support
for the current regulatory regime for issuer share repurchases, but
recommending revisions to the Commission's executive compensation
disclosure requirements to require disclosure of whether issuer share
repurchases have affected the calculation of the repricing of any
options, stock appreciation rights, or option-like instruments.\20\
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\20\ See Rulemaking Petition 4-772 (Apr. 21, 2021), Request to
Amend Regulation S-K (17 CFR 229.402(d), instruction (7)), available
at <a href="https://www.sec.gov/rules/petitions/2021/petn4-772.pdf">https://www.sec.gov/rules/petitions/2021/petn4-772.pdf</a>
(recommending revisions to 17 CFR 229.402(d), instruction 7). We
believe that the additional information relating to share
repurchases that we are proposing would help meet the goals of the
rulemaking petition by better enabling investors to determine
whether issuer repurchases trigger higher payments to senior
executives under performance-based compensation plans, such as by
altering earnings per share calculations.
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In light of the growth of issuer share repurchase plans in recent
years and the concerns expressed by commentators, we believe investors
could benefit from improving the quality, relevance, and timeliness of
information related to issuer share repurchases. In particular, we are
concerned that, because issuers are repurchasing their own securities,
asymmetries may exist between issuers and affiliated purchasers and
investors with regard to information about the issuer and its future
prospects. This, in turn, could exacerbate some of the potential harms
associated with issuer repurchases. To help address these information
asymmetries, we are proposing a new disclosure form and additional
disclosure requirements about issuer repurchases.\21\
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\21\ In a separate release, we are proposing several rules and
form amendments to address potentially abusive practices associated
with 17 CFR 240.10b5-1 (``Rule 10b5-1'') trading arrangements,
grants of options and other equity instruments with similar features
and the gifting of securities. See Release No. 33-11013 Rule 10b5-1
and Insider Trading (Jan. 13, 2022) (``Rule 10b5-1 Proposing
Release'').
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The proposed amendments would require more detailed and more
frequent disclosure about issuer share repurchases, and require issuers
to present the disclosure using a structured data language, which could
allow investors to:
<bullet> Better understand the extent of an issuer's activity in
the market, including potential impacts on the issuer's share price;
<bullet> Better understand an issuer's motivation for its share
repurchases, and how it is executing its purchase plan; and
<bullet> Gain potential insight into any relationship between share
repurchases and executive compensation and stock sales.
The proposed amendments could also improve the ability of investors
to identify repurchases that are more likely to be driven by managerial
self-interest (e.g., increasing the share price prior to an insider's
sale, meeting a threshold in an executive compensation arrangement, or
meeting consensus earnings forecast) and thereby promote investor
protection.
II. Discussion of Proposed Amendments
We are proposing to modernize and improve the disclosure required
about
[[Page 8446]]
repurchases of an issuer's equity securities by:
<bullet> Requiring daily repurchase disclosure on a new Form SR,
which would be furnished to the Commission one business day after
execution of an issuer's share repurchase order;
<bullet> Amending Item 703 to require additional detail regarding
the structure of an issuer's repurchase program and its share
repurchases; and
<bullet> Requiring information disclosed pursuant to Item 703 of
Regulation S-K and pursuant to Form SR to be reported using a
structured data language (specifically, Inline eXtensible Business
Reporting Language or ``Inline XBRL'').
A. Proposed Form SR
We are proposing new Exchange Act Rule 13a-21 and Form SR that
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 Exchange Act Section 12.\22\ 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.\23\
The Form SR would require the following disclosure in tabular format,
by date, for each class or series of securities:
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\22\ 15 U.S.C. 781. Registered investment companies other than
registered closed-end funds are not required to provide the
repurchase disclosure under Item 703 (as implemented in Form N-CSR).
Accordingly, proposed Form SR also would not be filed by registered
investment companies other than registered closed-end funds. See
proposed rule 13a-21(b). Business development companies (``BDCs''),
which are not registered investment companies, provide the
repurchase disclosure of Item 703 on Forms 10-K and 10-Q rather than
Form N-CSR.
\23\ ``Execution'' has a commonly understood meaning consistent
with the Commission's explanation in Interpretation of Section
206(3) of the Investment Advisers Act of 1940, Release No. IA-1732,
(July 17, 1998) [63 FR 39505 (July 23, 1998)] that the ``ending
point of a transaction is when the actual exchange of securities and
payment occurs, which is known as `settlement.' The date of
execution (i.e., the trade date) marks an earlier point of a
securities transaction at which the parties have agreed to its terms
and are contractually obligated to settle the transaction.'' Release
No. IA-1732 at notes 13-14 and accompanying text (citing Radiation
Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972) with
the explanation that the ``court held that, for purposes of insider
trading liability under Rule 10b-5 under the Exchange Act, the time
of a `purchase or sale' of securities is determined by reference to
when the parties are obligated to perform the terms of the
transaction, not when final performance occurs.''). Similarly, in
the security-based swaps context, 17 CFR 240.15Fi-1(f) defines
``execution'' as ``the point at which the counterparties become
irrevocably bound to a transaction under applicable law.''
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(1) Identification of the class of securities purchased;
(2) The total number of shares (or units) purchased, including all
issuer repurchases whether or not made pursuant to publicly announced
plans or programs;
(3) The average price paid per share (or unit);
(4) The aggregate total number of shares (or units) purchased on
the open market;
(5) The aggregate total number of shares (or units) purchased in
reliance on the safe harbor in 17 CFR 240.10b-18 (``Rule 10b-18''); and
(6) The aggregate total number of shares (or units) purchased
pursuant to a plan that is intended to satisfy the affirmative defense
conditions of Rule 10b5-1(c).\24\
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\24\ The Commission adopted Rule 10b5-1 in 2000 to clarify the
meaning of ``manipulative or deceptive device[s] or contrivance[s]''
prohibited by Exchange Act Section 10(b) and Rule 10b-5 with respect
to trading on the basis of material nonpublic information. See
Selective Disclosure and Insider Trading, Release No. 33-7881 (Aug.
15, 2000) [65 FR 51716 (Aug. 24, 2000)]. Rule 10b5-1(c) established
an affirmative defense to Rule 10b-5 liability for insider trading
in circumstances where it is clear that the trading was not based on
material nonpublic information and the trade was pursuant to a
binding contract, an instruction to another person to execute the
trade for the instructing person's account, or a written plan.
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When adopting the Item 703 disclosure requirements, the Commission
stated its belief that information about the equity securities an
issuer has repurchased is important to investors.\25\ The Commission
also stated its belief that Item 703 would provide investors and the
marketplace with information regarding an issuer's repurchase activity
that would allow them to assess the impact of an issuer's share
repurchases on the issuer's stock price, similar to periodic disclosure
of issuer earnings and dividend payouts.\26\ While we continue to
believe that the existing Item 703 requirements provide useful
information,\27\ we believe that proposed Form SR could enhance
transparency and enable more timely investor review of issuer share
repurchases. Proposed Form SR would require issuer share repurchases to
be reported on a daily basis before the end of the first business day
following the day on which the repurchase transaction has been
executed. Investors could use this more detailed and timely disclosure
to monitor and evaluate issuer share repurchases, and their effects on
the market for the issuer's securities.
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\25\ See Adopting Release at 64962.
\26\ Id.
\27\ See, e.g., Bonaim[eacute], A., Mandatory Disclosure and
Firm Behavior: Evidence from Share Repurchases, 90 Acct. Rev. 1333
(2015) (``Bonaim[eacute] (2015)'') (stating that ``[a]nalysts and
investors alike are concerned with properly estimating repurchases
since actual repurchase activity is linked to future operating and
stock price performance'').
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The data currently required to be disclosed under Item 703 does not
provide daily detail about such repurchases. Information asymmetries
may exist between issuers and affiliated purchasers and investors,
particularly due to the timing of the current Item 703 disclosures.\28\
Because issuers are repurchasing their own securities, issuers and
affiliated purchasers will typically have significantly more, and more
detailed, information about the issuer and its future prospects.
Proposed Form SR could provide investors with additional insight into
the details of a share repurchase closer in time to the repurchase,
which may diminish any informational asymmetry due to the timing of
current Item 703 disclosure.
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\28\ One commentator emphasized the need to regulate
consistently economically equivalent practices. See Grullon, G. &
Ikenberry, D., What Do We Know About Stock Repurchases, J. App.
Corp. Fin. 13 (2000) at 48 (referring to the requirement that a Form
4 Statement of Changes of Beneficial Ownership of Securities (17 CFR
249.104) be filed before the end of the second business day
following the day on which a transaction resulting in a change in
beneficial ownership has been executed). See also Fried Testimony
(proposing a two-day disclosure rule, but suggesting that even more
frequent disclosure would be preferable).
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Generally, there are legitimate business reasons for issuers to
repurchase securities; nevertheless, incentives also exist for issuers
to engage in opportunistic share repurchases. For example, as noted
above, some commentators have asserted that issuer repurchases could
potentially be used to increase share prices in order to enhance
executive compensation and insider stock value.\29\ The share price
increase that often occurs in connection with an issuer share
repurchase plan may raise certain financial ratios, such as EPS, that
are often used as executive compensation targets.\30\ Proposed Form SR,
when combined with other information available about the issuer, could
provide investors with additional insight into such possible behavior.
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\29\ See supra notes 16 and 17.
\30\ Id. See also notes 80, 81, and 83, infra.
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We are therefore proposing that Form SR include daily disclosure of
the total number of shares purchased, class of securities, and the
average price paid per share (or unit) \31\ as well as the aggregate
total number of shares
[[Page 8447]]
purchased on the open market, the aggregate total number of shares
purchased in reliance on the safe harbor in Rule 10b-18,\32\ and the
aggregate total number of shares purchased pursuant to a plan that is
intended to satisfy the affirmative defense conditions of Rule 10b5-
1(c), to enhance the repurchase information that would be available to
investors. Requiring disclosure of the number of shares purchased on
the open market would provide a clearer indication of the scale of the
issuer's activity in the market for each day that repurchases are made.
Requiring disclosure of the number of shares purchased in reliance on
the non-exclusive safe harbor in Rule 10b-18 \33\ and pursuant to a
plan that is intended to satisfy the affirmative defense conditions of
Rule 10b5-1(c) could also enable investors to better understand how an
issuer has structured its repurchase activity.
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\31\ The total number of shares purchased, class of securities,
and the average price paid per share (or unit) correspond to
information that is currently disclosed pursuant to Item 703.
\32\ The proposed disclosure would not provide a defense to
manipulative conduct for purchases that are not in fact eligible to
rely on the safe harbor.
\33\ Rule 10b-18, which was adopted in 1982 and amended in 2003,
provides a voluntary, non-exclusive ``safe harbor'' from liability
for manipulation under Sections 9(a)(2) and 10(b) of the Exchange
Act, and Rule 10b-5, when an issuer or its affiliated purchaser bids
for or purchases shares of the issuer's common stock in accordance
with the Rule 10b-18's manner, timing, price, and volume conditions.
See Adopting Release. See also Purchases of Certain Equity
Securities by the Issuer and Others; Adoption of Safe Harbor,
Release No. 34-19244 (Nov. 17, 1982), [47 FR 53333 (Nov. 26, 1982)].
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We are proposing to require issuers to furnish Form SR no later
than one business day after execution of the issuer's share repurchase
transaction order. The proposed daily detail would provide more
granular information to investors that could enable them to better
evaluate the market for the issuer's securities and the actions of the
issuer's insiders. For example, when combined with existing executive
compensation, Section 16 (15 U.S.C. 78p), and financial statement
disclosures, the proposed Form SR disclosures may improve the ability
of investors to identify issuer repurchases potentially driven by
managerial self-interest, such as seeking to increase the share price
prior to an insider sale \34\ or to change the value of an option or
other form of executive compensation.\35\
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\34\ See note 80 infra and accompanying discussion.
\35\ See note 79 infra and accompanying discussion. In this
regard, we note that share price- or earnings per share-tied
compensation arrangements could incentivize executives to undertake
repurchases, in an attempt to maximize their compensation.
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The proposed requirement to furnish the daily detail in Form SR on
the Commission's Electronic Data Gathering, Analysis, and Retrieval
(``EDGAR'') system no later than one business day after execution of
the share repurchase order could help alleviate information asymmetries
and promote more informed investment decisions. Under the current
rules, Item 703 disclosure about share repurchases is required in an
issuer's periodic reports.\36\ As noted above, some have expressed
concern about the timeliness of this disclosure and the asymmetry of
information available to the market while issuers are conducting share
repurchase programs.\37\ While existing Item 703 disclosure provides
investors and market participants with a general understanding of
issuer share repurchases over time, the disclosure relates to
repurchases made several weeks or months earlier, resulting in a delay
in such information being relayed to investors and absorbed by the
market. This delay could contribute to an information asymmetry between
the issuer and investors.
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\36\ For domestic issuers, this disclosure is required
quarterly. However, for registered closed-end funds the disclosure
is made semi-annually and for foreign private issuers is included in
their annual reports. See supra note 8 and accompanying text.
\37\ See discussion in Section I.
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Several commenters on the Concept Release asked the Commission to
require disclosure closer in time to share repurchases.\38\ We
additionally note that the disclosure deadlines for share repurchases
in several foreign jurisdictions are shorter than in the U.S. For
example, the Financial Conduct Authority in the United Kingdom and the
Australian Securities Exchange provide listing standards requiring
certain issuers to disclose share repurchases on the next business
day.\39\ In addition, to the extent a foreign private issuer files
public reports pursuant to its home country requirements with respect
to share repurchases, some of these issuers file those reports on 17
CFR 249.306 (``Form 6-K'') where the issuer deems those reports
material to investors.
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\38\ See, e.g., letters in response to the Concept Release from
Klein & Amy (recommending Form 8-K disclosure); CalPERS
(recommending Form 8-K disclosure of significant repurchases in line
with other significant corporate events); and AFR (recommending
disclosure at the time the repurchase occurs because that is the
time that any price manipulation would be occurring). But see, e.g.,
letters in response to the Concept Release from Chamber; FedEx;
SIFMA; Fenwick; GM; FEI (supporting the current frequency of share
repurchases).
\39\ See, e.g., Australian Securities Exchange Listing Rule 3.8A
requiring listed issuers to file a notification disclosing
acquisitions before the commencement of trading on the business day
after any day on which shares are bought back; and Financial Conduct
Authority (United Kingdom) Listing Rule 12.4.6R requiring certain
issuers to file a notification disclosing acquisitions no later than
7:30 a.m. on the business day following the day that the purchase
occurred. See also Ontario Securities Commission (Canada) National
Instrument 55-104 requiring certain issuers to file an insider
trading report disclosing acquisition within 10 days of the end of
the month.
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While we are proposing that issuers provide this new daily detail
disclosure one business day after execution of a share repurchase
order, we recognize that the repurchases may not finally settle until
two business days after the transaction.\40\ However, we believe that
issuers generally have access to details regarding their purchase
orders that have been executed and that these executed orders typically
are confirmed and accurately cleared and settled.\41\ The proposed
amendments would require an issuer to disclose material errors or
changes to information previously reported on an amended Form SR. We
believe that this provision would allow for timely and accurate
disclosure the day after execution of the share repurchase order, with
the ability to make corrections, if needed, in amended filings.
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\40\ See 17 CFR 240.10b-10.
\41\ See supra note 23.
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We are proposing to require issuers to furnish, rather than file,
Form SR. As a result, issuers would not be subject to liability under
Section 18 of the Exchange Act for the disclosure in the form, and the
information would not be deemed incorporated by reference into filings
under the Securities Act and thus would not be subject to liability
under Section 11 of the Securities Act, unless the issuer expressly
incorporated such information.\42\ We believe that deeming the
information provided on Form SR to be furnished rather than filed would
alleviate some of the concerns about requiring this disclosure within a
shorter timeframe without undermining the transparency objectives of
the proposed disclosures.
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\42\ In addition, by requiring the Form SR to be furnished, a
late submission of the form would not affect eligibility to use Form
S-3 or to file a short-form registration statement under General
Instruction A.2 of Form N-2. General Instruction I.A.3(b) to Form S-
3 requires that all reports required to be filed with the Commission
during the preceding 12 months have been filed; the same
requirements apply under General Instruction A.2 of Form N-2.
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Request for Comment
1. Should we adopt new Form SR to require daily repurchase
disclosure, as proposed? Would less frequent disclosure of daily share
repurchases (e.g., weekly, monthly, or quarterly disclosure) provide
sufficiently timely information about issuer repurchases? Would less
detailed disclosure (e.g., aggregated disclosure of repurchases on a
weekly or monthly basis, rather than
[[Page 8448]]
daily), that is furnished more frequently than under current Item 703,
provide sufficiently useful disclosure? Instead of adopting Form SR,
should we amend Form 8-K or another existing form to require daily
repurchase disclosure?
2. Should we instead require an issuer to disclose its share
repurchase program and continue to report actual share repurchases on a
periodic basis? If so, should we require the issuer to disclose its
planned share repurchases at least 30 days prior to the first
repurchase transaction? Would a different disclosure deadline be more
appropriate? Should the disclosure specify the amount of securities
that may be purchased or any additional information? How would the
burden of complying with such requirements compare with the burdens of
complying with proposed Form SR? In reporting actual share repurchases
under this approach, should we require the periodic disclosure to be
broken out on a monthly basis, as currently required under Item 703 of
Regulation S-K, Item 16E of Form 20-F, and Item 9 of Form N-CSR, or
should we expand the disclosure to require a breakout of repurchase
activity on a more frequent basis?
3. Should we amend issuers' exhibit filing requirements to require
issuers to provide daily, weekly, or biweekly repurchase disclosure in
an exhibit to the issuer's periodic reports? If so, should such an
exhibit requirement be in lieu of or in addition to reporting on Form
SR?
4. Should we require disclosure of executed share repurchase orders
on Form SR, as proposed? Are there concerns that executed orders may
fail to settle and that issuers would not be able to accurately
disclose the shares purchased on the next business day? How frequently
do executed orders fail to clear and settle? Should we base the
requirement on something other than order execution? For example,
should we require issuers to furnish Form SR within one business day
after the order clears and settles and the issuer receives trade
confirmation?
5. Should we require an issuer to furnish disclosure on Form SR
within one business day of execution of a share repurchase order, as
proposed? Would issuers have sufficient time to prepare and furnish
such disclosure? If not, how long should an issuer have to furnish Form
SR? How would a longer time period to furnish Form SR impact the costs
associated with preparing the disclosures and the benefits to investors
of more timely disclosure? Would a longer period compared to the
proposal (e.g., two days, five days, ten days or more) still provide
timely information about issuer repurchases? Would the proposed
deadline for furnishing Form SR negatively impact issuers' ability to
effectively conduct share repurchases, such as by increasing the price
issuers may have to pay to repurchase their securities?
6. As discussed above, proposed Form SR would require daily
reporting of the total number of shares repurchased, the average price
paid per share, issuer share repurchases on the open market, shares
purchased in reliance on the safe harbor in Rule 10b-18, and shares
purchased pursuant to a plan that is intended to satisfy the
affirmative defense conditions of Rule 10b5-1(c). Should we adopt these
Form SR disclosure requirements, as proposed? Should we eliminate or
modify any of these requirements? Should we add any disclosure
requirements to Form SR, such as disclosure of the highest and lowest
price paid per share for open market purchases or any other
information?
7. Should we require issuers to furnish an amended Form SR to
correct material changes to transactions previously reported on Form
SR, as proposed? Alternatively, should we require all corrections to be
made on an amended Form SR, regardless of materiality?
8. We have proposed that foreign private issuers would have the
same Form SR filing obligations as domestic issuers. Should we exempt
all foreign private issuers from the requirement to file a Form SR or
provide different requirements? We note that some foreign private
issuers are required to provide daily detailed disclosure in their home
jurisdictions. To the extent these issuers file public reports pursuant
to their home country requirements with respect to share repurchases,
some also file those reports under Form 6-K where the issuer deems
those reports material to investors. Should we exempt these foreign
private issuers from the Form SR requirement?
9. Should we exempt or provide different requirements for
registered closed-end funds from the Form SR requirements? Those funds
already provide share repurchase disclosure less frequently than most
other issuers subject to the disclosure requirement in that they
disclose the information semi-annually rather than quarterly. Would
less frequent disclosure continue to be appropriate for these issuers
or, conversely, would investors benefit from the more frequent
disclosure on Form SR? Alternatively, because the proposal would only
apply to issuers with securities registered pursuant to Section 12 of
the Exchange Act, it would only apply to those registered closed-end
funds with securities that trade on an exchange. Should we expand the
scope of covered registered closed-end funds to more closely match the
scope of corporate issuers subject to repurchase disclosure
requirements by applying the requirements to registered closed-end
funds that would be subject to Section 12(g) of the Exchange Act but
for Section 12(g)(2)(B) (15 U.S.C. 78l(g)(2)(B)), which exempts them
from the requirement to register their securities under that section
unless they are listed on an exchange?
10. We have observed that smaller issuers generally conduct fewer
issuer share repurchases, but that smaller issuers tend to trade in
less liquid markets where share repurchases may have more pronounced
impacts. Should we consider an exemption from the proposed Form SR
reporting requirement for non-accelerated filers, smaller reporting
companies, or emerging growth companies?
11. Should we provide a de minimis exception to the Form SR
reporting requirement for share repurchases that are below a certain
level? Should any such threshold be based on a dollar threshold, share
number, a percentage of public float, or another metric? If so, what
level would be appropriate and why?
12. Should we require that Form SR be furnished, as proposed?
Alternatively, should we require the form to be filed? Should a late or
missing Form SR filing affect an issuer's Form S-3 eligibility or
eligibility to file a short-form registration statement on Form N-2?
Alternatively, would extending the timeframe for providing Form SR
(e.g., to one day after settlement, or two or more business days after
order execution) alleviate concerns such that we should require the
Form SR to be filed rather than furnished? As proposed, Form SR would
be furnished to the Commission, but the Item 703 disclosure would be
filed as part of the periodic report. Should repurchase information in
the Form SR be subject to different liability than disclosure in issuer
periodic reports?
B. Proposed Revisions to Item 703, Form 20-F, and Form N-CSR
We are proposing to revise and expand the disclosure requirements
in Item 703, Form 20-F, and Form N-CSR to work in conjunction with
proposed Form SR to provide investors with more detailed and timely
information they can use to evaluate issuer share repurchases.
[[Page 8449]]
1. Additional Disclosure
We are proposing to revise Item 703, with corresponding changes to
Form 20-F and Form N-CSR, to require additional disclosure about an
issuer's share repurchases. Specifically, we propose to require an
issuer to disclose:
<bullet> The objective or rationale for its share repurchases and
process or criteria used to determine the amount of repurchases;
<bullet> 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;
<bullet> Whether it made its repurchases pursuant to a plan that is
intended to satisfy the affirmative defense conditions of Rule 10b5-
1(c), and if so, the date that the plan was adopted or terminated; and
<bullet> Whether purchases were made in reliance on the Rule 10b-18
non-exclusive safe harbor. We are additionally proposing to require
that issuers disclose if any of their officers or directors subject to
the reporting requirements under Section 16(a) of the Exchange Act (15
U.S.C. 78p(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 an issuer purchase plan or program by checking a box
before the tabular disclosure of issuer purchases of equity securities.
In response to the Commission's request for comments regarding Item
703 in the Concept Release, many commenters recommended expanding the
disclosure required by Item 703.\43\ Some of these commenters
specifically supported requiring disclosure of the objective or
rationale for repurchases.\44\ As noted above, other commentators have
expressed concern that issuer share repurchases may be used to inflate
executive compensation and cash out executives' securities.\45\
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\43\ See, e.g., letters in response to the Concept Release from
CII; Domini; CalSTRS; AFSCME; AFL-CIO; CalPERS; and Better Markets.
Other commenters, however, opposed expanding the disclosure required
by Item 703. See, e.g., letters in response to the Concept Release
from Chamber; FedEx; Business Roundtable (Jul. 21, 2016); SIFMA;
Fenwick; GM; and FEI.
\44\ See, e.g., letters in response to the Concept Release from
Klein & Amy; Domini; CalSTRS; AFL-CIO; CalPERS (indicating that more
detailed disclosure of the issuer's share repurchase plan would
enable analysis in light of the short and long-term ramifications of
the repurchase).
\45\ See discussion in Section I.
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Based on these comments and concerns, we are proposing additional
disclosure requirements intended to improve investor access to
information regarding the rationale and objectives of any issuer
repurchase plan. In addition, the proposed disclosure regarding whether
the plan is expected to be in reliance on the Rule 10b-18 safe harbor
or pursuant to a Rule 10b5-1 plan, as well as disclosures regarding any
policies and procedures (including any restrictions) relating to
purchases and sales imposed on officers and directors during a
repurchase plan, should allow investors to better understand how an
issuer has structured its repurchase plan and whether it has taken
steps to prevent officers and directors from potentially benefiting
from issuer repurchases in a manner that is not available to regular
investors. Similarly, the proposed checkbox will obviate the need for
investors to review Section 16(a) filings close in time to any
announcement of an issuer purchase plan or program to see if any
officer or director reporting pursuant to Section 16(a) of the Exchange
Act has 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 close in time to the announcement. Together
with the additional daily level detail that we are proposing to require
on Form SR, we believe this additional information would help investors
to assess whether the issuer or its insiders are potentially engaged in
self-interested or otherwise inefficient repurchases and thereby help
mitigate some of the potential harms associated with issuer
repurchases.
Request for Comment
13. Many issuers voluntarily choose to announce their share
repurchase plans or programs publicly. Item 703 currently requires
disclosure of the date each plan or program was announced if the issuer
did publicly announce it. Should we clarify what constitutes an
announcement for purposes of the disclosure requirement? For example,
should the announcement have to have been made in a Form 8-K, another
existing form, or press release? Should we require all open market
share repurchase plans to be publicly announced?
14. We have proposed requiring issuers to indicate via the proposed
checkbox if any officer or director reporting pursuant to Section 16(a)
of the Exchange Act purchased or sold the issuer's equity securities
that are the subject of an issuer share repurchase plan or program
within 10 business days before or after any announcement of an issuer
purchase plan or program. How would investors use this information?
Would the proposed requirement discourage issuers from publicly
announcing plans or programs? Is there other information in combination
with, or instead of, this disclosure that could notify investors and
help them process information regarding officer and director
transactions made close in time to the issuer's share repurchase plan
announcement? If an issuer doesn't publicly announce its repurchase
plan, should the issuer be required to check the box if there are
officer or director transactions within a certain time from the
initiation of the repurchase plan or program (for example, within 10
business days of initiation)?
15. Is a 10-business-day period before or after the announcement an
appropriate window for the proposed indication about officer and
director transactions? Would a shorter or longer period provide more
appropriate notice to investors and cover a sufficient time period
where an insider may be most likely to trade in relation to the
issuer's announcement of a share repurchase plan? Should we add a
proposed checkbox to Form SR, in lieu of or in addition to Item 703,
Form 20-F, and Form N-CSR?
16. Issuers would need to rely on representations from, or Section
16 reports filed by, their officers and directors to indicate whether
any officer or director has purchased or sold the issuer's securities
in the relevant time period. Should we provide guidance about the
issuer's scope of inquiry and explain what an issuer may rely on for
purposes of complying with the checkbox requirement?
17. Should we require issuers to describe the objective or
rationale for their share repurchases and process or criteria used to
determine the amount of repurchases, as proposed? How would investors
use this information? Should we also require information regarding how
share repurchases are financed or their anticipated or actual impact on
leverage ratios or the cost of capital? Should we ask issuers to
disclose if they specifically considered other uses for the funds being
used for the share repurchase? Is there additional disclosure regarding
the reasons for, or expected effects of a share repurchase plan that
should be required? Would this proposed requirement result in
boilerplate disclosure?
18. Proposed Item 703 and proposed Form SR would require issuers to
disclose whether repurchases were made pursuant to a plan that is
intended to satisfy the affirmative defense conditions of Rule 10b5-
1(c). Does the proposal require an appropriate level of
[[Page 8450]]
detail regarding Rule 10b5-1 plans? Should this disclosure additionally
contemplate repurchases made pursuant to ``other pre-arranged trading
plans'' that issuers may seek to rely on in lieu of Rule 10b5-1 plans?
How should we define ``other pre-arranged trading plans'' in this
circumstance? How would investors use information regarding these
plans?
19. Proposed Item 703, and proposed Form SR would require
disclosure of whether shares were purchased in reliance on the safe
harbor in Rule 10b-18. How would investors use this information? Is the
use of the term ``purchased in reliance on the safe harbor''
sufficiently clear?
20. How would investors use the proposed disclosure regarding 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? Should we require
disclosure of broader policies and procedures related to a repurchase
program, for example, how material nonpublic information is controlled
for or potential impacts, if any, on executive compensation metrics? Is
there additional information about repurchase plans and trading by
insiders that we should require to be disclosed?
21. In this release, we are proposing amendments to require an
issuer to disclose whether it repurchased its securities pursuant to a
Rule 10b5-1 plan, and if so, the date that such a plan was adopted or
terminated. We also are proposing amendments to Item 703 to require
disclosure of any policies and procedures the issuer has established
relating to purchases and sales of its securities by its officers and
directors, including any restriction on such transactions. In a
separate release described in note 21 above, we are proposing new Item
408 under Regulation S-K and corresponding amendments to Forms 10-Q and
10-K to require: (1) Quarterly disclosure of the use of Rule 10b5-1 and
other trading arrangements by a registrant, and its directors and
officers, for the trading of the issuer's securities; and (2) annual
disclosure of an issuer's insider trading policies and procedures. If
the Commission adopts both the proposed Item 703 and Item 408
amendments, are there opportunities to streamline or simplify
overlapping disclosure requirements that may apply to an issuer's
repurchase plan? If so, which provisions should we eliminate or how
should we modify the proposed disclosure requirements?
22. As proposed, disclosure of issuer share repurchases would be
required on a daily basis on Form SR. In addition, Item 703 would
continue to require monthly summary disclosure of share repurchases
that would be similar to, but not the same as, Form SR tabular
disclosure. What are the costs and benefits of providing this
disclosure as proposed? Do these different sets of share repurchase
disclosures provide distinctly valuable information for investors and
market participants? Should there instead be more alignment between
Item 703 and Form SR tabular data? Alternatively, should we adopt a
subset of the proposed disclosures, such as:
<bullet> Only Form SR;
<bullet> Form SR and Item 703 and Forms 20-F and N-CSR, amended as
proposed, but without monthly data;
<bullet> No Form SR, but Item 703 and Forms 20-F and N-CSR, amended
as proposed and including daily, weekly, or bi-weekly repurchase
disclosure; or
<bullet> No Form SR, but Item 703 and Forms 20-F and N-CSR, amended
as proposed, with an exhibit providing daily detail about share
repurchases made during the period covered by the report?
23. We have not proposed exemptions or different requirements from
the proposed revisions to Item 703, Form 20-F, and Form N-CSR for
foreign private issuers, registered closed-end funds, non-accelerated
filers, smaller reporting companies, or emerging growth companies.
Should we exempt or provide different requirements from some or all of
the proposed amendments for these or other classes of issuers?
2. Clarifying Amendments
In addition to the proposed amendments described above, we are
proposing clarifying amendments to Item 703, Form 20-F, and Form N-CSR
to simplify application of the rules and remove unnecessary
instructions. Specifically, we are proposing:
<bullet> To relocate guidance in the Instruction 1 to paragraph
(b)(1) about information to appear in the table and disclosure to
appear in a footnote to the table to paragraph (b)(1) to a new
paragraph (c);
<bullet> To consistently refer to ``issuer'' instead of
``company''; \46\
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\46\ In Form N-CSR only we would continue to refer to
``registrants'' rather than ``issuer'' or ``company'' for
consistency with other provisions in Form N-CSR.
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<bullet> To remove Instruction 1 and 2 in the Instructions to
paragraphs (b)(3) and (b)(4) and effectuate those instruction by adding
``aggregate'' to total number of shares for all plans or programs
publicly announced in paragraph (b)(3) in lieu of Instruction 1 and
adding proposed paragraph (c) to replace Instruction 2;
<bullet> To delete the Instruction to the affected requirements as
they are clear that all purchases, including those that do not satisfy
the conditions of Rule 10b-18, are included.
Request for Comment
24. Do the changes we are proposing simplify and clarify Item 703
and the corresponding provisions in Forms 20-F and N-CSR? Are there
other changes we should consider to clarify the share repurchase
disclosure requirements?
C. Structured Data Requirement
We are proposing to require issuers to tag information disclosed
pursuant to Item 703 of Regulation S-K, Item 16E of Form 20-F, Item 9
of Form N-CSR, and Form SR in a structured, machine-readable data
language. Specifically, we are proposing to require issuers to tag the
disclosures in Inline XBRL in accordance with Rule 405 of Regulation S-
T and the EDGAR Filer Manual.\47\ The proposed requirements would
include detail tagging of quantitative amounts disclosed within the
tabular disclosures in each of the aforementioned forms, as well as
block text tagging and detail tagging of narrative and quantitative
information disclosed in the footnotes to the tables required by Item
703 of Regulation S-K, Item 16E of Form 20-F, and Item 9 of Form N-CSR.
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\47\ This tagging requirement would be implemented by including
cross-references to Rule 405 of Regulation S-T in each of the
repurchase disclosure provisions, and by revising Rule 405(b) of
Regulation S-T to include the proposed repurchase disclosures.
Pursuant to Rule 301 of Regulation S-T the EDGAR Filer Manual is
incorporated by reference into the Commission's rules. In
conjunction with the EDGAR Filer Manual, Regulation S-T governs the
electronic submission of documents filed with the Commission. Rule
405 of Regulation S-T specifically governs the scope and manner of
disclosure tagging requirements for operating companies and
investment companies, including the requirement in Rule 405(a)(3) to
use Inline XBRL as the specific structured data language to use for
tagging the disclosures.
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In 2009, the Commission adopted rules requiring operating companies
to submit the information from the financial statements (including
footnotes and schedules thereto) included in certain registration
statements and periodic and current reports in a structured, machine-
readable data language using eXtensible Business Reporting Language
(``XBRL'').\48\ In 2018, the Commission
[[Page 8451]]
adopted modifications to these requirements by requiring issuers to use
Inline XBRL, which is both machine-readable and human-readable, to
reduce the time and effort associated with preparing XBRL filings and
improve the quality and usability of XBRL data for investors.\49\ In
2020, the Commission adopted Inline XBRL requirements for registered
closed-end funds and business development companies that will be
effective no later than February 2023.\50\
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\48\ Interactive Data to Improve Financial Reporting, Release
No. 33-9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)] (``2009
Financial Statement Information Adopting Release'') (requiring
submission of an Interactive Data File to the Commission in exhibits
to such reports); see also Release No. 33-9002A (Apr. 1, 2009) [74
FR 15666 (Apr. 7, 2009)].
\49\ Inline XBRL Filing of Tagged Data, Release No. 33-10514
(June 28, 2018) [83 FR 40846, 40847 (Aug. 16, 2018)]. Inline XBRL
allows filers to embed XBRL data directly into an HTML document,
eliminating the need to tag a copy of the information in a separate
XBRL exhibit. Id. at 40851.
\50\ Securities Offering Reform for Closed-End Investment
Companies, Release No. 33-10771 (Apr. 8, 2020) [85 FR 33290 (Jun. 1,
2020) at 33318].
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Requiring Inline XBRL tagging of the repurchase disclosures would
benefit investors by making the disclosures more readily available and
easily accessible to investors, market participants, and others for
aggregation, comparison, filtering, and other analysis, as compared to
requiring a non-machine readable data language such as ASCII or HTML.
This would enable automated extraction and analysis of granular data on
actual repurchases, allowing investors and other market participants to
more efficiently perform large-scale analysis and comparison of
repurchases across issuers and time periods, including comparing
repurchases to information on executive's compensation. At the same
time, we do not expect the incremental compliance burden associated
with tagging the additional information to be unduly burdensome,
because issuers subject to the proposed tagging requirements are or in
the near future will be subject to similar Inline XBRL requirements in
other Commission filings.\51\
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\51\ See supra notes 50 and 51. Inline XBRL requirements for
registered closed-end funds and business development companies will
take effect beginning August 1, 2022 (for seasoned issuers) and
February 1, 2023 (for all other issuers). See id. If the proposed
Inline XBRL requirements are adopted in the interim, they will not
apply to registered closed-end funds and business development
companies prior to the aforementioned effectiveness dates.
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Request for Comment
25. Should we require issuers to include block text tagging of
narrative disclosures, as well as detail tagging of quantitative
amounts disclosed within the narrative and tabular disclosure required
by Item 703 of Regulation S-K, Item 16E of Form 20-F, Item 9 of Form N-
CSR, and Form SR in Inline XBRL, as proposed? Are there any changes we
should make to promote accurate and consistent tagging? If so, what
changes should we make?
26. Should we modify the scope of the repurchase disclosures
required to be tagged? For example, should we only require tagging of
the quantitative repurchase disclosures?
27. Should we require issuers to use a different structured data
language to tag repurchase disclosures? If so, what structured data
language should we require? Should we leave the structured data
language undefined?
28. We have not proposed exemptions or different requirements from
the proposed structured data requirement for foreign private issuers,
registered closed-end funds, non-accelerated filers, smaller reporting
companies, or emerging growth companies. Should we exempt or provide
different requirements from some or all of the proposed amendments for
these or other classes of issuers?
III. General Request for Comment
The Commission requests comment on the rule and form amendments
proposed in this release, whether any changes to our rules or forms are
necessary or appropriate to implement the objectives of our proposed
rule and form amendments, and other matters that might affect the
proposals contained in this release.
IV. Economic Analysis
We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 3(f) of the Exchange Act \52\ and Section 2(c)
of the Investment Company Act of 1940 (``Investment Company Act'') \53\
require us, when engaging in rulemaking, to consider or determine
whether an action is necessary or appropriate in (or, with respect to
the Investment Company Act, consistent with) the public interest, and
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation. In
addition, Section 23(a)(2) of the Exchange Act requires the Commission
to consider the effects on competition of any rules the Commission
adopts under the Exchange Act and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\54\
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\52\ 15 U.S.C. 78c(f).
\53\ 15 U.S.C. 80a-2(c).
\54\ 15 U.S.C. 78w(a)(2).
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We have considered the economic effects of the proposed amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be quantified.
Consequently, while we have, wherever possible, attempted to quantify
the economic effects expected from this proposal, much of the
discussion remains qualitative in nature. Where we are unable to
quantify the economic effects of the proposed amendments, we provide a
qualitative assessment of the potential effects and encourage
commenters to provide data and information that would help quantify the
benefits, costs, and the potential impacts of the proposed amendments
on efficiency, competition, and capital formation.
As discussed in greater detail in Section II above, the Commission
is proposing to require disclosure of repurchases, on a daily basis, on
a new form. The proposed daily disclosure, which would be required to
be structured using Inline XBRL, would include the number of shares
repurchased by an issuer, the average price per share paid, the number
of shares repurchased on the open market, the number of shares
repurchased in reliance on the Rule 10b-18 non-exclusive safe harbor,
and the number of shares repurchased pursuant to a Rule 10b5-1 plan.
The Commission is also proposing to require, on Forms 10-Q, 10-K,
20-F, and N-CSR, additional disclosure about the issuer's repurchase
program and practices, including the objective or rationale for the
share repurchases, the structure of an issuer's repurchase program, and
whether purchases were made pursuant to a plan that is intended to
satisfy the affirmative defense conditions of Rule 10b5-1(c), or in
reliance on the Rule 10b-18 non-exclusive safe harbor. Further, the
Commission is proposing to require disclosure of 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 restrictions on such transactions. The Commission is also proposing
to require an issuer to indicate whether any officer or director
reporting pursuant to Section 16(a) of the Exchange Act 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 issuer's
[[Page 8452]]
announcement of such repurchase plan or program.
We request comment on this economic analysis from all interested
parties. With regard to any comments, we note that such comments are of
greatest assistance to our rulemaking initiative if accompanied by
supporting data and analysis of the issues addressed in those comments.
A. Baseline and Affected Parties
1. Affected Parties
Repurchase disclosures are currently required by Item 703 of
Regulation S-K (on Forms 10-Q and 10-K), Item 16E of Form 20-F, and
Item 9 of Form N-CSR (for registered closed-end funds). The disclosure
is required with respect to 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. Based on staff
analysis of EDGAR filings for 2020, the proposed amendments would
affect the same categories of filers, including approximately 5,900
filers of Forms 10-Q and 10-K and approximately 700 filers of Form 20-F
with a class of securities registered under Section 12. In addition,
based on staff analysis of Morningstar Direct data for 2020,
approximately 500 registered closed-end funds are expected to be
affected by the proposed amendments to Form N-CSR. We lack the data to
estimate the number of affected ``affiliated purchasers.''
Among the filers described above, filers that conduct repurchases
today are most likely to be affected by the proposed amendments.\55\
Based on data from Compustat and EDGAR filings for fiscal year 2020, we
estimate that approximately 3,300 operating companies that conducted
repurchases during fiscal year 2020 would be affected by the amendments
(among them, approximately 250 Form 20-F filers).\56\ In addition,
based on staff analysis of Form N-CEN filings for 2020, approximately
100 registered closed-end funds conducted repurchases.\57\ Based on
these estimates, most of the affected issuers are operating companies
that file periodic reports on domestic forms.
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\55\ Filers with no repurchases today could be affected by the
proposed amendments to the extent they were planning future
repurchases and such plans were affected by the costs of the
additional disclosure requirements.
\56\ As a caveat, a complete estimate of the number of affected
filers is limited by data coverage. A source of data commonly used
in existing studies, Standard & Poor's Compustat, has limited
coverage of small and unlisted registrants and Form 20-F filers.
Therefore, we supplement data from Compustat with structured data
from financial statement disclosures in EDGAR filings (with the
caveat that variation in filer use of tags to characterize their
repurchases may result in some data noise).
\57\ Based upon a staff review, we expect approximately 20% of
registered closed-end funds to be affected by the proposal engage in
share repurchases, as compared to approximately half of operating
companies.
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Shareholders and prospective investors would also be affected by
the proposed amendments to the extent that they receive additional and
more timely insight into an issuer's repurchase activity. Financial
intermediaries that execute repurchases at the issuer's instruction
would also be affected by the proposed amendments to the extent that
they have to prepare the information necessary for an issuer's
responsive disclosure, and indirectly, to the extent that the
amendments affect the incidence of repurchases and thus demand for
financial intermediaries' services in connection with executing
repurchases. To the extent that the proposed requirement to disclose
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, results in
more issuers establishing such policies and procedures or imposing such
restrictions, officers and directors would also be affected by the
proposed amendments. We lack data to assess how many of these parties
will be affected.
2. Baseline
Corporate payout decisions have been extensively studied for
decades.\58\ In recent years the high dollar volume of repurchase
activity has renewed interest in corporate payouts in the form of share
repurchases. During 2020, share repurchases accounted for approximately
$670 billion.\59\ Aggregate repurchases have grown significantly over
the past four decades, but the increase relative to aggregate market
capitalization has been significantly more modest due to the
accompanying growth in aggregate market
[[Page 8453]]
capitalization; in addition, aggregate repurchases, both in absolute
terms and relative to aggregate market capitalization, have exhibited
considerable cyclical fluctuations (increasing during economic booms
and declining during recessions).\60\ Dividends fluctuate less than
repurchases, consistent with dividends being viewed by the market as a
commitment to regularly return cash to shareholders.\61\ As a result,
managers may endeavor to keep dividend payments stable, mainly avoiding
dividend cuts, justifying the market's interpretation.\62\ Firms that
exclusively pay dividends are increasingly rare whereas the proportion
of firms that regularly conduct repurchases has increased over time,
consistent with repurchases being a partial substitute for
dividends.\63\
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\58\ For a more detailed discussion of the data and research on
repurchases and other payouts, see SEC Staff Response to Congress:
Negative Net Equity Issuance, December 2020, available at <a href="https://www.sec.gov/files/negative-net-equity-issuance-dec-2020.pdf">https://www.sec.gov/files/negative-net-equity-issuance-dec-2020.pdf</a> (``2020
Staff Study''); and Farre-Mensa, J., Michaely, R., & Schmalz, M.
Payout Policy, 6 Ann. Rev. of Fin. Econ. 75 (2014) (``Farre-Mensa et
al. (2014)''). Staff reports, statistics, and other staff documents
(including those cited herein) represent the views of Commission
staff and are not a rule, regulation, or statement of the
Commission. The Commission has neither approved nor disapproved the
content of these documents and, like all staff statements, they have
no legal force or effect, do not alter or amend applicable law, and
create no new or additional obligations for any person. The
Commission has expressed no view regarding the analysis, findings,
or conclusions contained therein. The focus of the 2020 Staff Study
was determined by the directive of Congress in its Joint Explanatory
Statement accompanying the Financial Services and General Government
Appropriations Act, which directed the staff to study the recent
growth of negative net equity issuances with respect to non-
financial issuers, including the history and effects of those
issuers repurchasing their own securities, and the effects of those
repurchases on investment, corporate leverage, and economic growth.
The study provided data and statistics on share repurchases across
different types of companies and time periods, as well as an
extensive discussion of related evidence in existing research, which
offers insight into the existing market baseline. For example, the
study discusses the evidence on the favorable market reaction to
repurchase announcements. Among its findings, the study notes that
``[r]epurchases are an increasingly common way firms distribute cash
to shareholders. There are several possible reasons firms conduct
repurchases; some support efficient investment and for some the
connection is less clear. The analysis below suggests that firms are
more likely to conduct repurchases when they have excess cash and
when they would benefit from increased reliance on debt financing.''
The study further notes that ``the data is consistent with firms
using repurchases to maintain optimal levels of cash holdings and to
minimize their cost of capital'' and that ``reasons for repurchases
where the connection to efficient investment is less clear are
unlikely to motivate the majority of repurchases since stock prices
typically increase in response to repurchase announcements,
suggesting that, at least on average, repurchases are viewed as
having a positive effect on firm value.'' In discussing one of the
criticisms of share repurchases, the study notes ``that insider
sales may be timed to coincide with repurchase announcements. If
insiders time sales to coincide with repurchase announcements and
any resulting increase in stock price, executives may be
incentivized to recommend repurchase programs to further their own
gain.'' However, the study notes, it is ``difficult to ascertain the
motivations underlying insider sales.'' As a caveat, existing
studies referenced in this release, including the 2020 Staff Study,
are necessarily constrained by existing disclosure limitations. The
low frequency and the unstructured nature of existing Item 703 data
on repurchase activity limit the ability of existing studies to
gauge the extent of information asymmetry between issuers and
investors associated with the execution of repurchase programs and
its economic effects. Existing disclosure has also limited the
ability of existing studies to draw a causal connection between
managerial incentives and day-to-day execution of repurchase
programs as well as quantify its economic effects. Further, while
public attention has focused on the aggregate trends in repurchases,
the attribution of aggregate trends to specific drivers of
repurchases is complicated due to the presence of confounding
factors that cannot be readily isolated in existing data. The
discussed data limitations should be considered in evaluating
existing studies of the motivations of repurchases. Additional
caveats, where applicable, are referenced in the discussion of
individual strands of research and evidence on repurchases below.
\59\ Based on staff analysis of Standard & Poor's Compustat data
related to share repurchases conducted during fiscal year 2020 by
issuers listed on U.S. exchanges. This represented a significant
decline from approximately $1 trillion in share repurchases during
fiscal year 2019, in line with the effects of the COVID-19 crisis.
The sample for this estimate is defined more broadly than in the
2020 Staff Study (adding financial and U.S.-listed foreign issuers
with Compustat data), resulting in larger aggregate totals.
\60\ See, e.g., Campello M., Graham J., & Harvey, C., The Real
Effects of Financial Constraints: Evidence from a Financial Crisis,
97 J. Fin. Econ. 470 (2010); Dittmar, A. & Dittmar, R., The Timing
of Financing Decisions: An Examination of the Correlation in
Financing Waves, 90 J. Fin. Econ. 59 (2008) (``Dittmar and Dittmar
(2008)''); Floyd, E., Li, N., & Skinner, D., Payout Policy through
the Financial Crisis: The Growth of Repurchases and the Resilience
of Dividends, 118 J. Fin. Econ 299 (2015). See also 2020 Staff Study
(observing that growth in aggregate repurchases has fluctuated over
the past several decades, as demonstrated by a large decline and
rebound following the financial crisis, and also observing that
share repurchases net of equity issuances as a percentage of
aggregate market capitalization of public companies have remained
relatively stable over the past decade, within the longer trend of
modest percentage growth over the last forty years).
\61\ See, e.g., Brealey, R., Myers, S., & Allen, F., Principles
of Corporate Finance (12th ed. 2017). Issuers generally announce
dividend policies, and markets react strongly to increases and
reductions in dividends. See, e.g., Healy, P. & Palepu, K., Earnings
Information Conveyed by Dividend Initiations and Omissions, 21 J.
Fin. Econ. 149 (1988). Market reactions to initiations and omissions
are even more pronounced. See Michaely, R., Thaler, R., & Womack,
K., Price Reactions to Dividend Initiations and Omissions:
Overreaction or Drift?, 50 J. Fin. 573 (1995); Lee, B.S. & Mauck,
N., Dividend Initiations, Increases and Idiosyncratic Volatility, 40
J. Corp. Fin. 47 (2016). These studies indicate that decreases in
buybacks do not elicit the same negative market reaction as dividend
decreases.
\62\ For example, one survey of 384 CFOs and executives suggests
that the ability to avoid reducing dividends was the top
consideration of managers when determining dividend policy. See
Brav, A., Graham, J., Harvey, C., & Michaely, R., Payout Policy in
the 21st Century, 77 J. Fin. Econ. 483 (2005) (``Brav et al.
(2005)'').
\63\ See 2020 Staff Study. The partial substitution between
dividends and repurchases has also been documented in academic
studies. See, e.g., Skinner, D., The Evolving Relation between
Earnings, Dividends and Stock Repurchases, 87 J. Fin. Econ. 582
(2008); Grullon, G. & Michaely, R., Dividends, Share Repurchases,
and the Substitution Hypothesis, 57 J. Fin. 1649 (2002).
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Information about recent repurchases is expected to be valuable to
investors. Various studies argue that an issuer conducts repurchases
when it believes its securities to be undervalued.\64\ Corporate
insiders likely have a superior understanding of their business and
industry. Academic research has suggested managers can use increases in
distributions, such as new repurchase programs, to signal their view
that the stock is undervalued and is expected to increase in the
future.\65\ Several empirical studies show that on average share prices
increase after actual share repurchases, suggesting that information
about recent repurchases could be useful in predicting the trend of
future share prices, above and beyond other market factors (while some
other studies do not find this result).\66\ A related explanation for
repurchases is that they are an effort to provide price support by
supplying liquidity when selling pressure is high; thus, share prices
would be lower during an issuer's repurchases and higher
afterwards.\67\ In all of these scenarios, actual repurchases would
precede a rise in the share price. Timely disclosure about recent
actual repurchases can thus contain valuable information about the
future movement of the share price that is not revealed to the market
otherwise, and a lack of timely disclosure could contribute to
information asymmetries between investors and issuers/insiders. The
benefit of the information contained in a disclosure of recent
repurchase activity would be lower to the extent that large issuer
repurchases already have a price impact, resulting in price discovery
and indirect revelation of information to the market, even in the
absence of daily disclosure. Nevertheless, to the extent that an
issuer's purchases incorporate insiders' future outlook on the firm,
they could be informative to investors (complementing the information
in Form 4 filings). The value of information on recent repurchases is
not subsumed by the information content of announcements of repurchase
programs. In the data, this is supported by the evidence of share price
trends after actual repurchases.\68\ Importantly, after a repurchase
announcement--which is voluntary for an issuer to make--an issuer
retains considerable discretion on when to implement any repurchases
and how much to repurchase at any point in time. Because, similar to
information on individual insider trades, such information is likely to
have a short-term component, its timely disclosure is expected to be
relevant for
[[Page 8454]]
investors. Existing disclosures provide a significantly delayed,
aggregated insight into the execution of announced repurchases. Thus, a
large part of the information content of the day-to-day timing of
issuer repurchases with regard to short-term share price movements may
become obsolete and potentially obscured by aggregation by the time the
disclosure is made under existing requirements.\69\
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\64\ See Farre-Mensa et al. (2014).
\65\ For analysis of signaling with repurchases, see, e.g.,
Vermaelen, T., Common Stock Repurchases and Market Signaling: An
Empirical Study, 9(2) J. Fin. Econ. 139 (1981); Vermaelen, T.,
Repurchase Tender Offers, Signaling, and Managerial Incentives, 19
J. Fin. & Quantitative Analysis 163 (1984); Constantinides, G. &
Grundy, B., Optimal Investment with Stock Repurchase and Financing
as Signals, 2 Rev. Fin. Stud. 445 (1989); Hausch, D. & Seward, J.,
Signaling with Dividends and Share Repurchases: A Choice Between
Deterministic and Stochastic Cash Disbursement, 6 Rev. Fin. Stud.
121 (1993); McNally, W., Open Market Stock Repurchase Signaling,
28(2) Fin. Mgmt. 55 (1999). In some studies, authors find that
repurchases send a stronger signal than dividends. See, e.g., Ofer,
A. & Thakor, A., A Theory of Stock Price Responses to Alternative
Corporate Cash Disbursement Methods: Stock Repurchases and
Dividends, 42 J. Fin. 365 (1987); Persons, J., Heterogeneous
Shareholders and Signaling with Share Repurchases, 3(3) J. Corp.
Fin. 221-249 (1997).
\66\ See, e.g., Dittmar, A. & Field, L. C., Can managers time
the market? Evidence using repurchase price data, 115(2) J. Fin.
Econ. 261-282 (2015) (``Dittmar and Field (2015)''); Ben-Rephael,
A., Oded, J., & Wohl, A., Do Firms Buy Their Stock at Bargain
Prices? Evidence From Actual Stock Repurchase Disclosures, 18 Rev.
Fin. 1299 (2014) (``Ben-Rephael et al. (2014)''); Chan, K.,
Ikenberry, D., & Lee, I., Do Managers Time the Market? Evidence from
Open-Market Share Repurchases, 31(9) J. of Banking & Fin. 2673-2694
(2007); Cook, D., Krigman, L., & Leach, J.C., On the Timing and
Execution of Open Market Repurchases, 17(2) Rev. of Fin. Studies,
463-498 (2004) (``Cook et al. (2004)'') (finding that larger firms
in the sample perform better than smaller firms in timing the price
at which repurchases are executed). However, other studies do not
find evidence that repurchases are driven by market timing. See,
e.g., Obernberger, S., The Timing of Actual Share Repurchases,
Working paper (2014) (concluding that contrarian trading rather than
market timing ability explains the observed relation between returns
and actual share repurchases); Dittmar and Dittmar (2008);
Bonaim[eacute], A., Hankins, K., & Jordan, B., The Cost of Financial
Flexibility: Evidence From Share Repurchases, 38 J. Corp. Fin., 345-
362 (2016) (finding that ``actual repurchase investments
underperform hypothetical investments that mechanically smooth
repurchase dollars through time by approximately two percentage
points per year on average''). The differences in the conclusions
may be due to differences in empirical methodology and sample
period. Because these studies utilize presently available, monthly
data, their conclusions may be noisy and may not map fully to the
effects associated with daily repurchase activity. As a general
caveat, any working papers cited here have generally not undergone
peer review and may be subject to revision. Studies focused on
returns following share repurchase announcements also find positive
returns. See, e.g., Evgeniou, T., Junqu[eacute] de Fortuny, E.,
Nassuphis, N., & Vermaelen, T., Volatility and the Buyback Anomaly,
49 J. Corp. Fin., 32-53 (2018); Bargeron, L., Kulchania, M., &
Thomas, S., The Timing and Source of Long-Run Returns Following
Repurchases, 52 J. Fin. & Quantitative Analysis 491 (2017); Peyer,
U., & Vermaelen, T., The Nature And Persistence of Buyback
Anomalies, 22 Rev. Fin. Stud. 1693 (2009). But see Fu, F. & Huang,
S., The Persistence of Long-Run Abnormal Returns Following Stock
Repurchases and Offerings, 62 Mgmt. Science 964 (2016) (documenting
disappearance of long-run, post-repurchase abnormal returns during
2003-2012).
\67\ See, e.g., Liu, H. & Swanson, E., Is Price Support a Motive
for Increasing Share Repurchases?, 38 J. Corp. Fin. 77 (2016) (``Liu
and Swanson (2016)'').
\68\ The price effects of actual repurchases discussed above are
additional to any price effects of repurchase announcements. Because
repurchase announcements precede actual repurchases, the
announcement effect is already incorporated into the baseline share
price, against which the price effects of actual repurchases are
analyzed.
\69\ Under existing requirements, while the delay in reporting
can be relatively short, for example, when a repurchase is conducted
at the end of a first, second, or third fiscal quarter, by a
domestic large accelerated filer, in all cases disclosure will lag
actual repurchases by weeks or months and is aggregated on a monthly
basis.
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Various studies address motivations behind corporate payouts and
the choice of the form of payout (repurchases or dividends).\70\ In a
number of instances, the use of repurchases can be efficient and
aligned with shareholder value maximization. Sometimes issuers that
have excess cash do not have profitable investment opportunities. In
such instances, distributing the cash through dividends or repurchases
can alleviate concerns that managers will spend the cash in sub-optimal
ways, such as empire-building acquisitions.\71\ Survey evidence
supports this theory, with the second most cited reason for conducting
a repurchase being the ``lack of good investment opportunities.'' \72\
By returning excess cash to shareholders, repurchases free up that
capital to be reinvested into businesses that lack the capital to
pursue value-creating investment opportunities. Stock price reactions
to announcements of new repurchase programs are higher for cash-rich
issuers, which may be consistent with the creation of value when
managers remove their discretion over how to invest excess cash and
provide that cash to investors to redeploy as they see fit.\73\ Issuers
may choose repurchases if the excess free cash flow stems from a one-
time windfall, or if they value financial flexibility and wish to avoid
a costly, long-term commitment to higher dividends.\74\ For instance,
firms that favor repurchases tend to have more volatile cash flows than
dividend-paying firms.\75\ Issuers with excess free cash flow may also
choose repurchases over dividends as the method of payout because
repurchases are more tax-efficient for shareholders.\76\ Finally,
repurchases may also be used to adjust an issuer's leverage upward, as
part of adjustment towards the target capital structure, or as part of
a market timing approach to capital structure.\77\
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\70\ For a more detailed summary of the related studies, see
2020 Staff Study and Farre-Mensa et al. (2014).
\71\ See Jensen, M., Agency Costs of Free Cash Flow, Corporate
Finance, and Takeovers, 76 Am. Econ. Rev. 323 (1986).
\72\ See Brav et. al. (2005).
\73\ See Grullon, G. & Michaely, R., The Information Content of
Share Repurchase Programs, 59 J. Fin. 651-680 (2004).
\74\ See, e.g., Guay, W. & Harford, J., The Cash-Flow Permanence
and Information Content of Dividend Increases versus Repurchases,
57(3) J. Fin. Econ. 385-415 (2000); Jagannathan, M., Stephens, C., &
Weisbach, M., Financial Flexibility and the Choice between Dividends
and Stock Repurchases, 57(3) J. Fin. Econ. 355-384 (2000). See also
supra notes 62-63 and accompanying text.
\75\ See Hoberg, G. & Prabhala, N., Disappearing Dividends,
Catering, and Risk, 22 Rev. Fin. Stud. 79 (2009) (showing that
riskier firms are less likely to pay dividends).
\76\ See, e.g., Feng, L., Pukthuanthong, K., Thiengtham, D.,
Turtle, H. J., & Walker, T. J., The Effects of Cash, Debt, and
Insiders on Open Market Share Repurchases, 25(1) J. App. Corp. Fin.
55-63 (2013). The tax advantage of repurchases has been attenuated
but not eliminated after the 2003 dividend tax cut. Outside of tax-
exempt/tax-deferred accounts, all shareholders are subject to taxes
on dividends for the year the dividend was paid. In the case of
repurchases, only selling shareholders are subject to taxes on
capital gains (the remaining shareholders do not pay taxes until
they sell their shares).
\77\ See, generally, Baker, M. & Wurgler, J., Market Timing and
Capital Structure, 57 J. Fin. 1 (2002). Some other evidence suggests
that firms tend to repurchase stock and issue debt when the cost of
debt falls relative to the cost of equity. See Ma, Y., Nonfinancial
Firms as Cross[hyphen]Market Arbitrageurs, 74 J. Fin. 3041 (2019).
See also Hovakimian, A., Role of Target Leverage in Security Issues
and Repurchases, 77(4) J. Bus. 1041-1072 (2004) (finding that
``equity issues and repurchases do not offset the accumulated
deviation from the target and they are timed to market
conditions'').
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Some commentators and studies have noted that opportunistic insider
behavior and agency conflicts, rather than firm value maximization, can
motivate repurchases. In particular, repurchases can serve as a form of
real earnings management (through decreasing the denominator of EPS)
and thus be subject to short-term earnings management objectives of an
executive seeking to meet or beat consensus forecasts.\78\
Announcements of repurchases and actual repurchase trades can also
affect short-term upward price pressure.\79\ Share price- or EPS-tied
compensation arrangements can thus incentivize executives to undertake
repurchases, in an attempt to maximize their compensation,\80\ even if
such
[[Page 8455]]
repurchases are not optimal from the shareholder value maximization
perspective. Another instance of potentially inefficient repurchase
behavior, which could have a negative effect on investors, involves
insider incentives to raise the share price prior to insider sales.\81\
Conversely, some studies note that insider purchases of stock in
conjunction with a repurchase announcement may strengthen the
credibility of the repurchase signal.\82\ CFOs report considering the
price of the stock when deciding whether to repurchase stock.\83\
Further, academic studies have found that firms conduct repurchases
when stock prices are low.\84\ This trading, however, does not appear
to degrade market quality, with several studies finding improved
liquidity during repurchase programs.\85\
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\78\ For evidence on the use of repurchases as a method of real
earnings management, see, e.g., Burnett, B., Cripe, B., Martin, G.,
& McAllister, B., Audit Quality and the Trade-Off Between Accretive
Stock Repurchases and Accrual-Based Earnings Management, 87 Acct.
Rev. 1861 (2012). CFO survey responses indicate that increasing EPS
is an important factor affecting share repurchase decisions
according to Brav et. al. (2005). Investors may take this into
account when evaluating EPS. For example, Hribar, P., Jenkins, N., &
Johnson, W. B., Stock Repurchases as an Earnings Management Device,
41 J. Acct. & Econ. 3 (2006), find that the market discounts EPS
announcements in situations in which EPS would have been shy of
analyst expectations but for share repurchases (and where
repurchases are disclosed along with quarterly earnings). Kurt
(2018) studies the use of accelerated share repurchases (ASRs) for
real earnings management and concludes investors ``are not fooled''
by managers' use of ASRs as an earnings management device. See Kurt,
Ahmet C., Managing EPS and Signaling Undervaluation as a Motivation
for Repurchases: The Case of Accelerated Share Repurchases, 17(4)
Rev. Acct. & Fin. 453-481. Nevertheless, earnings management-
motivated repurchases can have negative real effects on the issuer
and its shareholders. For example, one recent study finds that
repurchases used to push EPS above analyst expectations are
accompanied by a 10% decrease in capital expenditures and a 3%
decrease in research and development. See, e.g., Almeida, H., Fos,
V., & Kronlund, M., The Real Effects of Share Repurchases, 119(1) J.
Fin. Econ., 168-185 (2016) (``Almeida et al. (2016)''). Note that
these findings do not necessarily generalize to repurchases at
issuers outside the range of EPS approaching the earnings target, or
to repurchases unrelated to EPS manipulation. A 2016 McKinsey & Co.
report states that share repurchases do not improve shareholder
returns simply by increasing EPS because, under certain conditions,
there may have been more preferable uses for those funds such as
debt reduction and reinvestment in the firm. See also, e.g.,
Ezekoye, O., Koller, T., & Mittal, A., How Share Repurchases Boost
Earnings without Improving Returns, McKinsey, April 29, 2016,
available at <a href="https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-share-repurchases-boost-earnings-without-improving-returns">https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-share-repurchases-boost-earnings-without-improving-returns</a>.
\79\ With respect to actual share repurchases, a recent study
shows that price support provided by actual share repurchases
improves price efficiency, even when manipulation concerns might be
highest, such as those that occur prior to insider sales. Busch, B.
& Obernberger, S., Actual Share Repurchases, Price Efficiency, and
The Information Content Of Stock Prices, 30 Rev. Fin. Stud. 324
(2017) (``Busch and Obernberger (2017)''). With respect to share
repurchase announcements, some have suggested that managers may take
advantage of positive stock price reactions to non-binding
repurchase announcements and use disingenuous repurchase
announcements to manipulate share prices. See Chan et. al. (2010)
(finding in 1980-2000 data that a limited number of managers may
have used repurchases in a misleading way as ``cheap talk''). Such
``cheap talk'' may result in lower announcement returns. See, e.g.,
Alice Bonaim[eacute], Repurchases, Reputation, and Returns, 47 J.
Fin. & Quantitative Analysis 469 (2012) (``Bonaim[eacute] (2012)'');
Bonaim[eacute] (2015). Some studies argue that ``cheap-talk''
repurchase announcements may correct mispricing by attracting
additional market scrutiny. See Almazan, A., Banerji, S., & De
Motta, A., Attracting Attention: Cheap Managerial Talk and Costly
Market Monitoring, 63 J. Fin. 1399 (2008); Bhattacharya, U. &
Jacobsen, S., The Share Repurchase Announcement Puzzle: Theory and
Evidence, 20 Rev. Fin. 725 (2016).
\80\ As an important caveat, the incentives would be weaker to
the extent executive compensation plans and board committees that
address executive compensation account for how repurchases would
affect compensation targets and the value of incentive-based
compensation. For evidence on the use of repurchases to influence
compensation tied to per-share measures, see, e.g., Cheng, Y.,
Harford, J., & Zhang, T., Bonus-Driven Repurchases, 50 J. Fin. &
Quantitative Analysis 447 (2015) (``Cheng et al. (2015)'') (finding
that ``when a CEO's bonus is directly tied to earnings per share
(EPS), his company is more likely to conduct a buyback,'' with the
effect being ``especially pronounced when a company's EPS is right
below the threshold for a bonus award,'' that ``[s]hare repurchasing
increases the probability the CEO receives a bonus and the magnitude
of that bonus, but only when bonus pay is EPS based,'' and further
finding that ``[b]onus-driven repurchasing firms do not exhibit
positive long-run abnormal returns''); Kim, S. & Ng, J., Executive
Bonus Contract Characteristics and Share Repurchases, 93 Acct. Rev.
289 (2018) (finding that ``managers are more (less) likely to
repurchase shares and spend more (less) on repurchases when as-if
EPS just misses (exceeds) the bonus threshold (maximum) EPS level,''
and that ``[m]anagers making bonus-motivated repurchases do so at a
higher cost''). A different study documented a link between EPS
targets and repurchases but did not find evidence of a negative
effects on shareholders: Young, S. & Yang, J., Stock Repurchases and
Executive Compensation Contract Design: The Role of Earnings Per
Share Performance Conditions, 86 Acct. Rev. 703-733 (2011) (finding
``a strong positive association between repurchases and EPS-
contingent compensation arrangements'' but also finding ``net
benefits to shareholders from this association'' (including ``larger
increases in total payouts'', a more pronounced ``positive
association between repurchases and cash performance'' in the
presence of surplus cash; greater likelihood of undervalued firms
``signal[ing] mispricing through a repurchase,'' and ``lower
abnormal accruals'') and ``no evidence that EPS-driven repurchases
impose costs on share-holders in the form of investment myopia'')
Further, a different study examined the real cost of EPS-motivated
repurchases outside the context of compensation. See Almeida et al.
(2016) (finding that ``[t]he probability of share repurchases that
increase earnings per share (EPS) is sharply higher for firms that
would have just missed the EPS forecast in the absence of the
repurchase, when compared with firms that `just beat' the EPS
forecast'' and that ``EPS-motivated repurchases are associated with
reductions in employment and investment, and a decrease in cash
holdings'' and concluding that ``managers are willing to trade off
investments and employment for stock repurchases that allow them to
meet analyst EPS forecasts''). See also Rulemaking Petition 4-746.
But see 2020 Staff Study (finding that, based on a review of
compensation disclosures in proxy statements for a sample of 50
firms that repurchased the most stock in 2018 and 2019, ``82% of the
firms reviewed either did not have EPS-linked compensation targets
or had EPS targets but their board considered the impact of
repurchases when determining whether performance targets were met or
in setting the targets''); Fields, R., Buybacks and the Board:
Director Perspectives on the Share Repurchase Revolution, Sept. 20,
2016, available at <a href="https://corpgov.law.harvard.edu/2016/09/20/buybacks-and-the-board-director-perspectives-on-the-share-repurchase-revolution/">https://corpgov.law.harvard.edu/2016/09/20/buybacks-and-the-board-director-perspectives-on-the-share-repurchase-revolution/</a> (concluding, based on interviews of ``44
directors serving on the boards of 95 publicly traded US companies
with an aggregate market capitalization of $2.7 trillion'' that
``most directors said that their companies are aware of the
relationship between buyback programs and compensation and that they
make deliberate, informed choices to ensure that they reward
executives for desired behavior rather than for financial
manipulation of share prices. Anticipated buyback effects on EPS are
usually factored into EPS targets, they say, and unanticipated
effects can be adjusted out.'').
\81\ See, e.g., Chan et. al. (2010). See also Bonaim[eacute], A.
A. & Ryngaert, M. D., Insider Trading and Share Repurchases: Do
Insiders and Firms Trade in the Same Direction?, 22 J. Corp. Fin.
35-53 (2013) (``Bonaim[eacute] and Ryngaert (2013)'') (finding that
repurchases that coincide with net insider selling may be related to
price support and/or reasons related to option exercises); Cziraki,
P., Lyandres, E., & Michaely, R., What Do Insiders Know? Evidence
from Insider Trading Around Share Repurchases and SEOs, 66 J. Corp.
Fin. 101544 (2021) (``Cziraki et al. (2021)'') (finding that
``[h]igher insider net buying is associated with better post-event
operating performance, a reduction in undervaluation, and, for
repurchases, lower post-event cost of capital. Insider trading also
predicts announcement returns and long-term abnormal returns
following events.'' They conclude their results suggest ``insider
trades before corporate events [repurchases and SEOs] contain
information about changes both in fundamentals and in investor
sentiment''); Palladino (2020) (finding increased insider selling in
quarters where buybacks are occurring); Ahmed, W., Insider Trading
Around Open Market Share Repurchase Announcements, Working paper,
University of Warwick (2017) (finding that ``insiders take advantage
of higher post-[repurchase] announcement price and sell more
heavily'', and that such selling is predictive of lower long-term
returns). See also Rulemaking Petition 4-746, at 5 and note 17
(expressing concern and citing evidence of repurchases used to
increase share prices at the time when insiders sell shares). See
also, generally, Edmans, A., Goncalves-Pinto, L., Groen-Xu, M., &
Wang, Y., Strategic News Releases in Equity Vesting Months, 31(11)
Rev. Fin. Stud., 4099-4141 (2018) (finding that ``CEOs release 20%
more discretionary news items in months in which they are expected
to sell equity, predicted using scheduled vesting months'' and that
``[t]he increase arises for positive news, but not neutral or
negative news, nor nondiscretionary news'' and concluding that
``[n]ews in vesting months generates a temporary increase in stock
prices and market liquidity, which the CEO exploits by cashing out
shortly afterwards''; as an important caveat, while the study
includes buybacks among announcements, and based on other evidence,
they are generally viewed as positive announcements, the study does
not provide specific results for buybacks); Edmans, A., Fang, V., &
Huang, A., The Long-Term Consequences of Short-Term Incentives, J.
Acct. Res., forthcoming (2021) (finding that ``[v]esting equity is
positively associated with the probability of a firm repurchasing
shares'' but that ``it is also associated with more negative long-
term returns over the 2-3 years following repurchases'' and that
``CEOs sell their own stock shortly after using company money to buy
the firm's stock, also inconsistent with repurchases being motivated
by undervaluation''). But see, e.g., Liu and Swanson (2016) (finding
that ``[c]orporate insiders do not sell from personal stock holdings
during the price support quarter.''); see also Busch and Obernberger
(2017) (concluding, with respect to actual share repurchases, that
price support provided by repurchases improves price efficiency,
even when manipulation concerns might be highest, such as those that
occur prior to insider sales). In the case of repurchase
announcements, where such announcements coincide with earnings
announcements, because issuers generally prohibit insiders from
trading in the period leading up to earnings announcements as part
of blackout periods, insider sales activity after the repurchase
announcement may be the result of pent-up liquidity demand.
\82\ Announcement returns are positively related to past insider
purchases, especially for firms that are priced less efficiently.
See, e.g., Dittmar & Field (2015) (finding that ``repurchasing firms
with relatively high net insider buying have significantly lower
relative repurchase prices'' and concluding that firms with more net
insider buying repurchase undervalued stock); Babenko, I.,
Tserlukevich, Y., & Vedrashko, A., The Credibility of Open Market
Share Repurchase Signaling, J. Fin. & Quantitative Analysis 1059-
1088 (2012).; Bonaim[eacute] and Ryngaert (2013) (finding that net
insider buying reinforces the undervaluation signal conveyed by
repurchases while net insider selling weakens it); Cziraki et al.
(2021) (showing that ``pre-event insider trading contains
information regarding future changes in the cost of capital for
repurchasing firms''). Setting aside the signaling theory, purchases
by insiders during an issuer's repurchases if such insiders are in
possession of material nonpublic information may represent unlawful
insider trading that may harm other market participants. Similar to
insiders, issuers that purchase their securities while in possession
of material nonpublic information may be subject to Rule 10b-5
liability.
\83\ Brav et. al. (2005).
\84\ See, e.g., Dittmar and Field (2015); Ben-Rephael et al.
(2014). See also infra note 67.
\85\ See, e.g., Busch and Obernberger (2017); Cook et al.
(2004); Hillert, A., Maug, E., & Obernberger, S., Stock Repurchases
and Liquidity, 119(1) J. Fin. Econ. 186-209 (2016).
---------------------------------------------------------------------------
Presently, information about repurchases, aggregated at the monthly
level, is provided in periodic reports (quarterly for most filers).
While issuers may voluntarily announce future repurchase plans
(typically on Form 8-K), they are not required to do so, nor are they
required to provide timely updates to investors about incremental
progress under the previously announced repurchase program. Generally,
a lack of transparency, comprehensive disclosure, and timely
information about repurchases may contribute to information asymmetries
and thus make it harder for investors to value an issuer's securities
and make informed investment decisions.
Although some issuers announce details of their repurchase programs
on a voluntary basis, issuers are not required to do so, or to disclose
reasons for their repurchases. Further, issuers are not required to
disclose whether they allow insiders to trade during repurchases. Thus,
it can be difficult for investors to determine whether the undertaken
repurchases were efficient and aligned with shareholder value
maximization, or were at least in part driven by self-interested
behavior of corporate insiders rather than shareholder interest. The
last significant change to repurchase reporting was adopted in 2003,
when the Commission required domestic filers to present
[[Page 8456]]
monthly data on actual repurchases on a quarterly basis in Form 10-Q or
10-K (registered closed-end funds, on a semi-annual basis in Form N-
CSR, and Form 20-F filers, on an annual basis in Form 20-F). One study
examined the consequences of this change and found that ``[f]irms
announce significantly fewer and slightly smaller open market
repurchase plans in the enhanced disclosure environment,'' however,
``completion rates (the amount of stock repurchased as a percentage of
the announced amount) significantly increase.'' \86\ The study further
states that ``[m]ore conservative announcement strategies and more
aggressive completion rates are consistent with a decline in false
signaling . . . open market repurchase announcements are viewed as more
credible, on average, in the enhanced disclosure environment.'' \87\
However, as the study notes, ``[a]s with any analysis based on a
regulatory change affecting all firms simultaneously, other
unobservable, macroeconomic trends could have affected repurchase
behavior.'' \88\
---------------------------------------------------------------------------
\86\ See Bonaim[eacute] (2015).
\87\ Id.
\88\ Id.
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A number of foreign jurisdictions require repurchase disclosure of
greater frequency and timeliness, relative to current U.S.
requirements. Studies have examined the resulting higher-frequency data
on repurchase program and how repurchase trades affect investors and
markets. Studies based on data from France and Hong Kong, which require
repurchase disclosures at the beginning of the following month and
following day, respectively, found that repurchases reduced market
liquidity in periods in which repurchases took place but not in
response to the disclosures.\89\ These findings are consistent with
potential adverse selection when a large informed trader (the
repurchasing issuer) is in the market but do not suggest a negative
impact from increased disclosure frequency. Other studies of
disclosures required in Greece, which requires repurchase disclosures
within seven days, and Hong Kong document that cumulative abnormal
returns following disclosures of actual share repurchases are greatest
for smaller firms as well as firms with higher book-to-market ratios.
These are consistent with the studies finding that repurchase
announcements may correct market undervaluation and do so especially
for smaller firms, which may be subject to greater information
asymmetry.\90\
---------------------------------------------------------------------------
\89\ See Ginglinger, E. & Hamon, J., Actual Share Repurchases,
Timing, and Liquidity, 31 J. Banking & Fin. 915-938 (2007), for a
study of France; and Brockman, P. & Chung, D., Managerial Timing and
Corporate Liquidity: Evidence from Actual Share Repurchases, 61 J.
Fin. Econ. 417-448 (2001), for a study of Hong Kong. While the
authors do not examine empirically the effects of different
reporting frequencies, they compare their findings with those from a
foreign regime with a different reporting frequency and extrapolate
that ``[t]he similarity of our results to the results for the Hong
Kong market indicates that the choice of whether to require firms to
disclose repurchases one day versus one month after execution does
not affect the impact of share repurchases on liquidity''; while the
study further concludes that this suggests ``that there are limited
benefits from requiring greater post-trade transparency of share
repurchases,'' the conclusion that greater disclosure of repurchases
would have limited benefits, in our view, does not follow from the
similarity of the effects of repurchases on liquidity in the two
countries referenced in the study. As a further caveat, there are
potentially significant comparability issues in evaluating data from
different jurisdictions, which have varying legal and market
conditions for repurchases.
\90\ See Zhang, H., Share Price Performance Following Actual
Share Repurchases, 29 J. Banking & Fin. 1887-1901 (2005), for a
study of Hong Kong, and Drousia, A., Episcopos, A., & Leledakis, G.,
74 Q. Rev. Econ. and Fin. 267-277 (2019), for a study of Greece. See
also Bratli, D. & Rehman, O., The Price Impact and Timing of Actual
Share Repurchases in Norway, Thesis (2016) (examining Norwegian data
on daily repurchases and finding a small but positive price impact
of such repurchases).
---------------------------------------------------------------------------
While we could not find studies analyzing empirically how the
introduction of more frequent disclosure affected buybacks in foreign
countries, we also were not able to find evidence that such disclosure
requirements adversely affected shareholder value or market
participants. The broad application of a disclosure requirement to
issuers in a given jurisdiction makes it hard to formulate an empirical
setting, such as a quasi-natural experiment, that effectively addresses
the question of how the introduction of the disclosure affected
buybacks and issuers that undertake them. Moreover, there are
potentially significant differences between jurisdictions with respect
to other repurchase regulations, market structure, taxation,
composition of the subset of issuers that undertake repurchases, and
the subset of investors in such issuers, complicating cross-country
comparisons or extrapolation from international studies to the U.S.
setting.
In Sections IV.B and IV.C below we evaluate the anticipated costs
and benefits of the final rule and the anticipated effects of the final
rule on efficiency, competition, and capital formation.
B. Benefits
The proposed disclosure could benefit investors (including existing
shareholders contemplating a sale or purchasing more securities) by
enabling them to value the issuer's securities more accurately,
resulting in better informed investment decisions.\91\ Specifically,
the proposed daily disclosure of repurchases (compared to the existing
Form 10-Q and 10-K quarterly disclosure of monthly repurchase activity,
the semi-annual disclosure on Form N-CSR, and the annual disclosure on
Form 20-F) could reveal time-sensitive information about the issuer's
evolving outlook on its future share price to investors in a much
timelier manner.\92\ To the extent issuers' repurchase decisions tend
to predict future price changes,\93\ information about the timing of
recent repurchases could be valuable to investors' decisions to buy and
sell the issuer's securities. These benefits would be more modest to
the extent that many issuers already make public announcements of
repurchase plans, which alleviate some information asymmetries, and
there is evidence that investors on aggregate draw accurate inferences
about the likely program completion rate \94\ (although they cannot
gauge the timing of specific repurchase trades). The benefits would
further be more modest to the extent that large issuer repurchases
already have price impact in the absence of a daily disclosure. The
disclosure could be of greater benefit to market participants that do
not have the sophistication to uncover large repurchases from other
trading data. Further, the benefits of repurchase disclosure may be
lower if issuers restructure their repurchases in a manner intended to
minimize the information content and associated front-running costs of
the daily disclosure (see Section IV.C below) in response to the
proposed disclosure requirement.
---------------------------------------------------------------------------
\91\ See supra notes 66-68 and preceding, accompanying, and
following text.
\92\ Timelier disclosure of repurchases was supported by several
commenters on the 2016 concept release. See, e.g., letters in
response to the Concept Release from Klein & Amy (supporting
reporting of all repurchases on Form 8-K with no de minimis
threshold); CalPERS (recommending reporting of significant
repurchases on Form 8-K); AFR (recommending that share repurchases
should be disclosed at the time that the repurchase occurs). But see
letters in response to the Concept Release from SIFMA (arguing that
more frequent reporting would not provide any material information
to justify the increased cost to registrants and might prejudice a
registrant's execution of share repurchases). See also Letters from
Chamber; FedEx; Fenwick; GM; and FEI (generally supporting the
existing, quarterly frequency of repurchase reporting required in
Item 703).
\93\ See supra note 67.
\94\ See supra note 78.
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In addition, the proposed periodic disclosure of the reasons for,
and the structure of, the issuer's repurchase
[[Page 8457]]
program could improve the ability of investors to assess the optimality
of the issuer's repurchase policy. The benefits of the information
about the rationale for repurchases could be limited in cases where
issuers already provide such disclosures in voluntary repurchase
program announcements, or if investors are able to infer the purpose of
repurchases from other public information.\95\ The benefits of the
information about the rationale for repurchases could be limited if
such disclosure is boilerplate and provides relatively little
specificity to investors.\96\
---------------------------------------------------------------------------
\95\ See, e.g., Bonaim[eacute] (2012) (tabulating, in Table 3,
evidence on the stated motive of the announced repurchase program
and program completion rates). The paper finds that ``[f]ew stated
motives for repurchases affect completion rates. Firms that mention
undervaluation or general corporate purposes in their announcements
have significantly lower completion rates, while firms that mention
extending a prior plan or having a strong cash position have
significantly higher completion rates on average. With the above
exceptions, completion rates depend more on what issuers are doing
(implied motives) than on what they are saying (stated motives).''
As a caveat, data obtained from a voluntary regime may not fully
generalize to the mandatory disclosure of the rationale for
repurchases under the proposed amendments.
\96\ In other contexts, see, e.g., Cazier, R., McMullin, J., &
Treu, J., Are Lengthy and Boilerplate Risk Factor Disclosures
Inadequate? An Examination of Judicial and Regulatory Assessments of
Risk Factor Language, 96(4) Acct. Rev. 131-155 (2021) (finding that
risk factor disclosures often remain ``excessively long and
boilerplate'', ``lengthier and more boilerplate risk factor
disclosures are less likely to be considered inadequate under
judicial and regulatory review,'' and ``when risk factor language is
assessed as adequate in judicial review, industry peers borrow that
language more frequently, and that judicial assessments of risk
factor disclosures prompt industry peers to lengthen their risk
factor disclosures.''). But see Nelson, K. & Pritchard, A. C.,
Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of
Risk Factors, 13(2) J. Empirical Legal Stud. 266-297 (2016) (finding
that ``[f]irms subject to greater litigation risk disclose more risk
factors, update the language more from year to year, and use more
readable language than firms with lower litigation risk,'' and while
``[t]hese differences in the quality of disclosure are pronounced in
the voluntary disclosure regime, [they] converge following the SEC
mandate as low-risk firms improved the quality of their risk factor
disclosures.''); Campbell, J., Chen, H., Dhaliwal, D., Lu, H., &
Steele, L. B., The Information Content of Mandatory Risk Factor
Disclosures in Corporate Filings, 19 Rev. Acct. Stud. 396-455 (2014)
(finding that ``firms facing greater risk disclose more risk factors
. . . managers provide risk factor disclosures that meaningfully
reflect the risks they face . . . [and that] the information
conveyed by risk factor disclosures is reflected in systematic risk,
idiosyncratic risk, information asymmetry, and firm value'').
---------------------------------------------------------------------------
In some cases, incentives for value-destroying or opportunistic
repurchases may exist, as discussed in detail in Section IV.A.2 above.
To the extent that some repurchases are inefficient, the additional
transparency about repurchases under the proposed amendments could
reduce such opportunistic uses of buybacks. The daily disclosure of
repurchases, combined with other existing disclosures (e.g., dates and
terms of compensation awards, dates of insider trades, dates and
details of earnings announcements and earnings forecasts), could
improve the ability of investors to identify those instances of
repurchases that may be driven by managerial self-interest (e.g.,
increasing the share price prior to an insider's sale, meeting a
threshold in the compensation arrangement, or meeting/beating the
consensus earnings forecast). Such market scrutiny could mitigate
agency conflicts associated with repurchases and thereby enhance firm
value, benefiting shareholders. Further, the proposed additional
disclosure could make it easier for investors to timely identify
repurchase announcements potentially motivated by short-term attempts
to boost the share price (including cases where issuers announce
repurchase programs but do not follow through), to the extent that
daily information provides a more complete and timely picture than the
monthly information presently reported on a quarterly (or for some
filers, less frequent) basis.
The use of a structured data language (specifically, Inline XBRL)
for the repurchase disclosures under the proposed amendments would
enable automated extraction of granular data on issuers' repurchase
programs and actual repurchases, which could allow investors,
information intermediaries, and other market participants to
efficiently perform large-scale analyses and comparisons of repurchases
across issuers and time periods. Structured data on repurchases could
also be efficiently combined with other information available in a
structured data language in corporate filings (e.g., information on
insider sales and purchases of securities) and with market data
contained in external machine-readable databases (e.g., information on
daily share prices and trading volume). The use of a structured data
language could also enable considerably faster analysis of the
disclosed data by investors and other market participants. The use of a
new form for the daily disclosure of repurchase information could on
the margin benefit investors manually reviewing repurchase filings of
an individual issuer or a handful of issuers, relative to the reporting
of such daily disclosure on an existing form (such as Form 8-K), by
making the repurchase information relatively more salient and easier to
find among an issuer's filings. However, in cases where investors
extract structured data underlying the disclosure, the use of a new
form versus adding structured data to an existing form is unlikely to
have a meaningful effect.
The proposed requirements to disclose 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, as well as the proposed disclosure of
whether any officer or director reporting pursuant to Section 16(a) of
the Exchange Act purchased or sold shares or other units of the class
of the issuer's securities that is the subject of an issuer share
repurchase plan or program within 10 business days before or after the
issuer's announcement of an issuer purchase plan or program, could also
benefit investors. This information could help investors better
interpret repurchase program announcements and disclosures of actual
repurchase activity in formulating projections of an issuer's future
share price. As one example, a lack of restrictions on insider selling
during repurchases, alongside historical disclosures of insider
selling, could help investors gauge whether a future repurchase
announcement, or actual repurchases, may be motivated by price support
for insiders' sales of their securities, rather than conveying a true
signal of undervaluation or efficiently disbursing excess cash.\97\ The
magnitude of these benefits may be more limited to the extent that past
insider selling activity, disclosed on beneficial ownership filings,
around past repurchases, could be sufficiently representative of future
insider selling behavior in such circumstances, even in the absence of
a disclosure of restrictions. The magnitude of these benefits of
reduced information asymmetry may further be limited to the extent that
the existing repurchase and disclosure practices already sufficiently
provide for price efficiency.\98\ Besides providing information to
investors, and thus enabling better informed investment decisions, the
proposed disclosure requirements might also significantly affect the
underlying behavior of insiders and issuers by drawing scrutiny of
investors and market participants to insider selling during
repurchases, potentially disincentivizing announcements of repurchases
and actual repurchases
[[Page 8458]]
motivated by price support for insider selling, to the extent such
activity exists, instead of shareholder value maximization.\99\ The
benefits of the disclosure of whether any officer or director has
purchased or sold securities of the issuer around the repurchase
announcement may be small to the extent the investors can obtain the
same information from existing Section 16 beneficial ownership
disclosures and public announcements of repurchases.
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\97\ See supra note 80.
\98\ For example, one recent study shows that price support
provided by actual share repurchases contributes to improved price
efficiency, even when manipulation concerns might be highest, such
as those that occur prior to insider sales. See Busch and
Obernberger (2017).
\99\ Studies have found evidence that changes in mandatory
disclosure affect behavior. See, e.g., Chuk, E. C., Economic
Consequences of Mandated Accounting Disclosures: Evidence from
Pension Accounting Standards, 88(2) Acct. Rev. 395-427 (2013);
Bonaim[eacute] (2015).
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We expect the proposed amendments to have positive effects on
efficiency and capital formation. In particular, any decrease in the
information asymmetry between issuers and investors about the value of
an issuer's securities as a result of the disclosure could lead to more
informationally efficient prices, and more efficient capital allocation
in investor portfolios. Decreased information asymmetries between
investors and issuers as a result of the enhanced disclosure under the
proposed amendments could also incrementally facilitate capital
formation and reduce the cost of capital.\100\ It is difficult to
determine the incremental contribution of the proposed amendments and
thus the magnitude of this potential benefit.
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\100\ See, e.g., Easley, E. & O'Hara, M., Information and the
Cost of Capital, 59(4) J. Fin. 1553-1583 (2005); Botosan, C.,
Disclosure and the Cost of Capital: What Do We Know?, 36 Acct. &
Bus. Research 31-40 (2006) (stating that ``[t]he overriding
conclusion of existing theoretical and empirical research is that
greater disclosure reduces cost of capital''); Lambert, R., Leuz,
C., & Verrecchia, R., Accounting Information, Disclosure, and the
Cost of Capital, 45(2) J. Acct. Research 385-420 (2007) (showing, in
a conceptual framework, that ``increasing the quality of mandated
disclosures should in general move the cost of capital closer to the
risk-free rate'' and ``generally reduce the cost of capital for each
firm in the economy'' and further noting that ``the benefits of
mandatory disclosures are likely to differ across firms.'');
Accelerated Filer and Large Accelerated Filer Definitions, Rel. No.
34-88365 (Mar. 12, 2020) [85 FR 17178 (Mar. 26, 2020)], at 17215,
note 477.
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C. Costs
The proposed disclosure would impose costs on issuers (and
therefore existing shareholders). Such costs would include direct
(compliance-related) costs to compile and report daily repurchase data,
as well as to provide additional disclosure, such as a description of
the rationale and structure of the repurchase program (including
reliance on Rule 10b-18 and pursuant to a plan that is intended to
satisfy the affirmative defense conditions of Rule 10b5-1(c)).\101\ The
aggregate direct costs of compliance would be potentially significant
and would be largest for issuers that repurchase more frequently and
thus have to provide more disclosures. The direct costs of compliance
with the daily disclosure requirement on Form SR could be partly
alleviated by the provision that such disclosure would be furnished,
rather than filed, which could result in an incrementally smaller legal
cost of the new disclosure.\102\ It is difficult to quantify how
significantly the proposed timing of the daily disclosure requirement
with respect to the timing of trade settlement (i.e., daily disclosure
within one day of trade execution, which would be prior to the
settlement of the trade, as opposed to after trade settlement) would
affect direct compliance costs. As proposed, issuers would have one
business day from the trade execution to report repurchases. Thus,
issuers would likely have fairly complete data based on trades that
have been executed, although the disclosure would be required in most
cases before trades have settled (since settlement typically occurs two
business days after the trade execution). Where material changes occur
after settlement, issuers would incur a cost to file an amended Form
SR. In addition, issuers that do not presently gather and aggregate
repurchase information on a daily basis, outside of the financial
reporting cycle, would incur costs to implement such systems and
processes.
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\101\ See Section V for a detailed description of the estimated
burden of the proposed disclosure requirements for purposes of the
Paperwork Reduction Act.
\102\ See, e.g., Pay Ratio Disclosure, Rel. No. 33-9877 (Aug. 5,
2015) [80 FR 50103 (Aug. 18, 2015)], at 50177; Interactive Data to
Improve Financial Reporting, Rel. No. 33-9002 (Jan. 30, 2009) [74 FR
6775 (Feb. 10, 2009], at 6794; and Selective Disclosure and Insider
Trading, Rel. No. 33-7881 (Aug. 15, 2000) [65 FR 51715 (Aug. 24,
2020)], at 51723.
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The proposed requirement to report the additional quantitative
repurchase disclosure on a new form will impose costs. Issuers will
likely incur an initial upfront cost to train counsel or retain an
outside service provider to assist with the preparation of the new
form. On an ongoing basis, holding the scope of the disclosure and
affected filers unchanged, we expect the direct costs of filing the
data on a new form to be very similar to the direct costs of filing the
data on an existing form (such as Form 8-K).
The proposed requirement to use a structured data language for
reporting the repurchase disclosure will impose incremental compliance
costs on issuers. Such costs are expected to be modest as issuers
affected by the amendments (including small and foreign filers) already
are required to, or would be required to (in the case of certain
closed-end funds--no later than February 2023 \103\), use Inline XBRL
to comply with other disclosure obligations. Moreover, the scope of the
disclosure proposed to be reported using a structured data language is
limited and would thus likely require a relatively simple taxonomy of
additional tags, minimizing initial and ongoing costs of complying with
the proposed tagging requirement.
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\103\ See supra note 51 and accompanying text.
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The proposed qualitative disclosure requirements would also result
in compliance costs for issuers. While issuers are likely to have most
of the additional information readily available, these disclosures
would require additional time of counsel and/or management to
characterize the rationale for the repurchase program, and the
program's structure, in the periodic report. The proposed requirement
to disclose whether any Section 16 officer or director purchased or
sold securities in the 10 business day before or after a repurchase
announcement would involve costs associated with collecting information
from Section 16 reporting officers and directors, in reliance on their
Section 16 filings and/or representations about their trading activity.
The proposed requirements would also impose indirect costs. A key
indirect cost of daily disclosure (proposed to be required one business
day after the repurchase trade is executed) is that it may cause the
stock price to rise more than it would absent such disclosure, making
additional purchases more costly. These costs would be borne by the
issuer and therefore its shareholders, but would be mitigated for
shareholders selling part of their position. The reason that disclosure
might have this effect is it could reveal the issuer's plans to
repurchase additional stock to outside investors (to the extent
repurchases are taking place over multiple days), as well as the
issuer's positive outlook on the stock price (to the extent that
participants infer this is a motivation for the repurchase).\104\ This
cost to issuers
[[Page 8459]]
would be a wealth transfer to other market participants, which would
have otherwise been less informed about the issuer's outlook on its
future share price. The magnitude of such costs would vary across
issuers and could evolve if issuers restructure their repurchase
programs in an effort to minimize the price impact associated with the
proposed disclosure requirement. For example, issuers that conduct open
market repurchases over multiple days on a highly predictable periodic
schedule (such as under a Rule 10b5-1 or a similar trading plan, or
that conduct recurring trades outside of a trading plan) may face a
higher cost of this type. Conversely, issuers that conduct open market
repurchases over a period of only a couple of days, or over a longer
period of time but at highly irregular intervals, or in irregular
amounts (e.g., a series of smaller repurchases followed by a large
repurchase day), may see lower costs of this type from the proposed
disclosure requirement. However, issuers that bunch large repurchases
into a compressed time period would likely experience greater price
impact from large trades, and issuers that rely on the Rule 10b-18 safe
harbor would also be limited by the safe harbor's provisions in the
volume of daily repurchase activity. Further, issuers that conduct one-
time repurchases outside the open market (such as in a privately
negotiated transaction, as an accelerated share repurchase, or as a
tender offer) may be less subject to these costs because the trade
would be required to be reported after it is executed, and it would
typically be executed at once. To the extent that repurchases convey
information even in the absence of disclosure, if issuers were to limit
repurchases due to cost, price efficiency may be reduced. To the extent
that repurchases add liquidity in the absence of disclosure, limiting
repurchases might also reduce liquidity.
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\104\ This cost could be more pronounced for repurchases under a
Rule 10b5-1(c) plan to the extent that such repurchases exhibit a
greater degree of periodicity and occur over a period of time,
enabling market participants to predict future repurchases to a
greater extent based on historical daily data. To the extent that
more timely disclosure enables some other investors to purchase
securities before the issuer completes the repurchase program, thus
potentially at a lower price than they would have otherwise, those
other investors may benefit from being able to front-run the
issuer's trades.
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Another potential indirect cost of the proposed disclosure is the
risk of sharing sensitive information with competitors. It is unlikely
that the rationale behind repurchases would reveal such proprietary
information, above and beyond other disclosures about the business and
financial condition of the issuer. Thus, we expect such costs to be
relatively modest.
A further indirect cost of the proposed disclosure is the
possibility of the proposed disclosure requirements leading issuers to
deviate from an optimal payout policy (resulting in a negative effect
on efficiency). For example, the described costs of the proposed
disclosure might discourage some issuers from repurchases that would
otherwise be optimal for shareholder value (e.g., as a more flexible
and tax-efficient method of payout compared to dividends). Issuers
might instead overweigh dividends or reduce overall corporate payouts
and inefficiently retain excess cash within the firm. Further, if the
costs of the proposed disclosure requirements cause issuers to decrease
overall payouts, even if issuers lack positive-net present value
investment opportunities, it would limit the ability of investors to
efficiently reallocate cash to other, higher-net present value
investment opportunities, potentially resulting in inefficiencies in
the aggregate allocation of capital across issuers.
The described direct and indirect costs of the proposed disclosure
for the affected issuers would decrease shareholder value and would
thus be passed on to the issuer's existing shareholders (that do not
sell securities during the repurchase).
The proposed disclosure requirements could also affect financial
intermediaries involved in executing repurchases on behalf of issuers.
Such intermediaries are likely to incur additional costs of
consolidating information about repurchase trades on a daily basis for
the issuer. Such information should be relatively readily available,
thus direct costs could be incremental. Financial intermediaries may
also incur indirect costs of the proposed requirements. Specifically,
to the extent the proposed disclosure requirements lead to a decrease
in repurchases, financial intermediaries may see a decrease in orders,
resulting in lower revenue.
Some of the proposed disclosure requirements may also impose costs
on corporate insiders. In particular, the requirement that issuers
publicly disclose whether they have policies and procedures related to
purchases and sales by officers and directors during repurchases, as
well as the proposed disclosure of whether any officer or director
reporting pursuant to Section 16(a) of the Exchange Act 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 issuer's
announcement of such repurchase plan or program, could cause issuers to
increasingly adopt such restrictions in anticipation of the market
scrutiny following such disclosure. The incremental costs of the
requirement to disclose whether any officer or director reporting
pursuant to Section 16(a) of the Exchange Act purchased or sold
securities around the repurchase announcement may be small to the
extent the investors can already obtain the same information from
beneficial ownership disclosures and public announcements of
repurchases. Any restrictions an issuer imposes on officer and director
trading could limit the ability of corporate insiders to purchase or
sell securities at issuers that conduct repurchases periodically over
an extended period of times (such as open market repurchases under a
multi-quarter program, or a Rule 10b5-1 plan). To the extent any new
such restrictions limit insider sales, they could significantly
decrease the liquidity of insiders' holdings of an issuer's securities,
including securities obtained from equity-based executive compensation
(which may in turn potentially lead insiders to attempt to reduce their
equity exposure and negotiate more cash compensation, or negotiate
larger compensation to compensate for the decreased liquidity). To the
extent that the proposed requirement to disclose whether any officer or
director has purchased or sold securities around the repurchase
announcements leads some companies whose officers or directors trade
securities within the specified period to forgo making a repurchase
announcement to limit market scrutiny, the amount of information
available to investors about companies' forward-looking repurchase
plans could decrease.
To the extent that the proposed requirements affect small filers to
a greater extent than large filers, they could result in adverse
effects on competition. The fixed component of the legal costs of
preparing the disclosure could be one contributing factor. The lower
liquidity of smaller issuers' securities,\105\ which could exacerbate
the price impact of the proposed disclosure, could be another
[[Page 8460]]
factor contributing to the disproportionate effects of the disclosure
on smaller filers. The latter effect could be mitigated by the lower
incidence, and the lower average level (relative to issuer size), of
repurchases among small issuers.\106\
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\105\ See, e.g., Amihud, Y. & Mendelson, H., Liquidity and Stock
Returns, 42(3) Fin. Analysts J. 43-48 (1986) (noting that ``[t]he
stocks of small firms suffer from market `thinness,' which impairs
their liquidity''.); Duarte, H., and Young, L., Why is PIN priced?,
91(2) J. Fin. Econ. 119-138 (2009) (in Table 6, showing that larger
firm size is correlated with higher liquidity based on different
measures); Collver, C., A Characterization of Market Quality for
Small Capitalization US Equities, September 2014, available at
<a href="https://www.sec.gov/files/marketstructure/research/small_cap_liquidity.pdf">https://www.sec.gov/files/marketstructure/research/small_cap_liquidity.pdf</a> (2014) (finding that ``[s]mall cap stocks
had larger quoted and effective spreads and traded much lower
volumes than mid cap stocks'' and that ``[l]iquidity improved with
market capitalization'').
\106\ See, e.g., Dittmar, A., Why Do Firms Repurchase Stock,
73(3) J. Business 331-355 (2000) (finding that ``large firms are the
dominant repurchasers''); Cheng et al. (2015) (showing in Table 2
that repurchasing firms are significantly larger than
nonrepurchasing firms); Jiang, Z., Kim, K. A., Lie, E., and Yang,
S., Share Repurchases, Catering, and Dividend Substitution, 21 J.
Corp. Fin., 36-50 (2013) (showing in Table 5 that firm size is
positively related to the fraction of outstanding share purchase by
firms on a monthly basis).
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D. Reasonable Alternatives
We could propose to increase the frequency of repurchase disclosure
compared to existing Item 703, but implement a lower frequency compared
to the proposal (e.g., monthly or weekly disclosure), instead of
requiring daily disclosure. Compared to the proposal, requiring less
frequent reporting would provide investors with less timely information
about daily issuer purchases. Compared to the baseline, such an
alternative would still benefit investors by enabling them to perform
more timely and in-depth retrospective evaluation of an issuer's
repurchase activity, independently or in conjunction with other
disclosures (e.g., financial condition, risk factors, other corporate
events, executive compensation, governance, and insider ownership
disclosures) and gauge the extent to which recent repurchases,
conducted at the specific point in time, were likely to be aligned with
shareholder value maximization (as opposed to potential insider self-
interest or other reasons), potentially informing future investment
decisions. However, such benefits would be smaller than the benefits of
the daily disclosure under the proposal, to the extent that information
about actual repurchase is of a time-sensitive nature. In turn, while
weekly or monthly reporting would increase issuer costs compared to the
baseline, the additional cost is likely to be less significant than the
cost of the daily disclosure under the proposal (particularly, with
respect to the indirect costs considered in Section IV.C above).
We could also propose a different timing requirement for the
reporting of daily repurchases (e.g., more or fewer days after the
repurchase). We are proposing that issuers report a daily summary of
repurchase transactions within one business day following the trade. As
two alternatives, we could require reporting within one business day
after settlement (which typically occurs within two days following the
trade), or allow issuers up to four business days to report on daily
repurchases (consistent with the typical requirement for a Form 8-K).
Generally, a longer time lag for filing the repurchase form would
provide investors with less timely information about issuer purchases.
In turn, it would also decrease costs for issuers described above
compared to the proposal. In particular, the alternative of requiring
daily reporting within one business day of the settlement could provide
relatively timely information to investors, but it could also decrease
costs for issuers and financial intermediaries that may lack final
repurchase information until after settlement (to the extent that such
costs are not already alleviated by the furnished, rather than filed,
nature of the daily disclosure).
We could modify the scope of the proposed disclosure, for instance,
omitting information about the use of Rule 10b-18 and/or Rule 10b5-1 in
the proposed quantitative disclosure, or about any policies and
procedures relating to purchases and sales of the issuer's securities
by officers and directors during repurchases, including any
restrictions on such transactions. Compared to the proposal, narrowing
the scope of the required disclosure would reduce the costs to issuers
that use these provisions to execute repurchases. However, this
alternative would also provide less information to investors and result
in greater information asymmetry, compared to the proposal. The effects
of the alternative of omitting Rule 10b5-1 repurchase disclosures
compared to the proposal could be partly mitigated if the Commission
adopts additional disclosure requirements for insider and issuer Rule
10b5-1 plans under new Item 408 of Regulation S-K, which the Commission
is proposing in a separate release.\107\
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\107\ See Rule 10b5-1 Proposing Release.
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As another alternative, we could preserve the existing frequency of
repurchase disclosure but require greater granularity of the disclosure
(e.g., including daily detail in Forms 10-Q, 10-K, 20-F, and N-CSR).
This would allow the investors to retrospectively evaluate the
optimality of repurchases at a granular level. However, compared to the
proposal, less frequent reporting would provide investors with
significantly less timely information about issuer purchases and thus
the outlook on its future share price, resulting in less information
asymmetry resolution. In turn, less frequent disclosure would also
decrease the costs for issuers compared to the proposal.
We could provide exemptions from all, or some of the proposed
disclosure requirements for smaller filers. As another alternative, we
could provide a de minimis exemption to issuers whose repurchases are
below a certain threshold. These alternatives could reduce the
aggregate costs of the rule but also reduce the information available
to investors, compared to the proposal. The economic effects of the
alternative of excluding small filers are uncertain to the extent that
the effects of the proposed disclosure on small filers are somewhat
ambiguous. On the one hand, smaller issuers are more likely to be
affected by the costs of additional disclosure, all else equal (holding
constant the disclosure burden). On the other hand, smaller issuers are
less likely to have repurchases,\108\ which would limit the incremental
burden of additional reporting under the proposed amendments for each
small filer. Further, to the extent that small filers have relatively
high information asymmetries because of lower analyst and institutional
coverage, disclosure about their repurchases may be relatively more
informative to investors.
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\108\ See supra note 107 and accompanying text.
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As another alternative, we could provide exemptions or different
requirements for foreign private issuers and/or registered closed-end
funds. These alternatives would eliminate or reduce the costs for the
affected issuers but also reduce the information benefits for investors
in these issuers, compared to the proposal. For example, registered
closed-end funds, in general, repurchase their shares less frequently
than corporate issuers,\109\ and not all of the motivations for
corporate issuer share repurchases will apply to registered closed-end
funds because of differences in the business model and organizational
structure of a fund as compared to an operating company. Abuses can
nevertheless occur when a registered closed-end fund engages in
repurchases of its shares, including attempts to create an appearance
that the value of the shares was steady or rising in an effort to
influence the market to aid in the distribution of new shares or to
manipulate the market value of securities involved in exchanges. A lack
of disclosure would make it more difficult for investors to determine
the extent to which the share price was being driven by such actions
[[Page 8461]]
of the fund's management.\110\ Thus, we believe that investors would
benefit from receiving timely details about a fund's repurchase
activity so they can make an informed decision as to whether they
believe the fund's share price has been influenced by this repurchase
activity, which is difficult to do using the semi-annual reports on
Form N-CSR. Exempting or providing different requirements for foreign
private issuers may place them at a relative competitive advantage to
domestic issuers. Further, it would reduce the amount of information
available to investors, potentially reducing their ability to make
informed investment decisions, compared to the proposal. The aggregate
effects of these alternatives may be incremental as such issuers engage
in relatively few repurchases as seen in Section IV.A.1 above.
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\109\ See supra note 35.
\110\ See, e.g., Investment Trusts and Investment Companies, pt.
3, H.R. Doc. No. 279, 76th Cong., 1st Sess. (1939) and Division of
Investment Management, Protecting Investors: A Half Century of
Investment Company Regulation (1992), available at <a href="https://www.sec.gov/divisions/investment/guidance/icreg50-92.pdf">https://www.sec.gov/divisions/investment/guidance/icreg50-92.pdf</a>.
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We could modify some of the elements of implementation of the
proposed disclosure requirements. For example, we could propose an
additional requirement that a summary of daily disclosures be filed as
an exhibit to the periodic report. This alternative could slightly
decrease investor costs of retrieving and consolidating daily
information from Form SR, compared to the proposal (because the
consolidation of daily disclosures into a time series for the periodic
report could require small, but not zero effort, particularly for
investors that are not performing large-scale automated extraction of
data on multiple issuers but are reviewing repurchase disclosure for
one or a handful of issuers). This alternative also would impose
incremental costs on filers, compared to the proposal (because the
aggregation of such information from prior daily filings for an exhibit
to a periodic report is likely to have a small, but not zero cost). As
an alternative, we could require the daily disclosure to be reported on
Form 8-K (and subject issuers that do not typically report on this
form, such as registered closed-end funds, to this requirement) or
another existing form rather than on the new form, as proposed. This
alternative could incrementally lower the initial transition cost for
filers, compared to the proposal. At the same time, this alternative
could make it incrementally harder for investors to parse out the daily
repurchase disclosure from other current events, compared to the
proposed use of a dedicated form. For filers that would be subject to
the daily disclosure requirement under this alternative, this
alternative is unlikely to impact ongoing disclosure costs, or benefits
for investors, relative to the proposal. We are retaining the existing
requirement to provide monthly breakdowns of repurchase activity in
periodic reports. As an alternative, we could remove this requirement,
and let it be superseded by the new daily disclosures. The costs and
benefits of this alternative compared to the proposal are likely to be
fairly incremental because aggregation of daily disclosures into a
monthly breakdown is likely to be low-cost for filers, and of
relatively little incremental importance to investors. Removing this
information under this alternative could on the margin increase
information costs for the subset of investors that only seek monthly
information about repurchases and would in that case have to newly
aggregate daily information from Form SR to reproduce the monthly
figures.
As another alternative, we could scale the structured disclosure
requirements compared to the proposal, for instance, by not requiring
that the footnote disclosure in periodic reports, or the narrative
disclosure of buybacks, be structured. These alternatives could
incrementally increase the cost of the extraction and analysis of
additional information about the structure and purpose of repurchase
programs, compared to the proposal. At the same time, the incremental
cost savings for issuers, compared to the proposal, would likely be
modest since affected filers already tag various other disclosures in
their filings with the Commission.\111\
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\111\ See 17 CFR 232.405(b) (setting forth structured disclosure
requirements for, inter alia, operating companies and closed-end
management investment companies).
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Request for Comment
29. Do investors currently have sufficient information about
issuers' repurchases to make an informed assessment of such repurchases
and their effects on the future share price? In what areas, if any, is
existing disclosure lacking such that it is limiting investor ability
to make informed investment decisions? Would the proposed disclosure
decrease any such information gaps?
30. Is existing disclosure about repurchases sufficient to enable
investors to assess whether the issuer or its insiders are engaged in
self-interested or otherwise inefficient repurchases? Is such
inefficient repurchase behavior common today? Would the proposed
amendments sufficiently address any disclosure gaps? Would the proposed
amendments decrease the likelihood of inefficient repurchase decisions?
31. How would investors benefit from the proposed new disclosure of
daily repurchases? Would investors benefit from the proposed
requirement to disclose additional detail about the number of shares
repurchased on the open market, the number of shares repurchased in
reliance on the safe harbor in Rule 10b-18, and the number of shares
repurchased pursuant to a plan intended to satisfy the affirmative
defense conditions of Rule 10b5-1(c)? Would investors benefit from a
more streamlined disclosure, including some but not all of the proposed
columns, or including only the total number of shares repurchased on a
daily basis?
32. How would the proposed requirement to disclose daily
repurchases affect issuers? What costs could issuers incur as a result
of the proposed daily disclosures? Are issuers likely to incur front-
running costs? How would the proposed timing of the new daily
disclosures (one business day after the trade) affect issuers? In what
ways could the proposed disclosure requirements be modified to mitigate
costs to issuers?
33. Would investors benefit from alternative disclosure and
reporting frequencies? For example, would the disclosure remain
beneficial to investors if the daily repurchase filing were allowed to
be made with a longer time lag, such as one or more business days after
settlement? Alternatively, would reporting a summary of daily
repurchase activity on a weekly, monthly, or quarterly basis provide
valuable information to investors? Further, would reporting repurchase
activity on a weekly or monthly basis still be beneficial to investors?
Would the described alternatives result in a smaller increase in
disclosure costs for issuers? Which alternative reporting frequency
would be most beneficial in the case of foreign private issuers that
presently report repurchases on an annual basis on Form 20-F and
registered closed-end funds that presently report repurchases on a
semi-annual basis on Form N-CSR?
34. How would investors benefit from the proposed qualitative
disclosure requirements, including the rationale for, and the structure
of, an issuer's repurchase program? Would investors benefit from the
proposed new disclosure of any policies and procedures relating to
purchases or sales
[[Page 8462]]
of an issuer's securities by officers and directors during the pendency
of a share repurchase plan or program? How would investors benefit from
the proposed new checkbox disclosure of whether any officer or director
reporting pursuant to Section 16(a) of the Exchange Act has 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 issuer's
announcement of such repurchase plan or program? What are the
anticipated costs of those requirements for issuers? In what ways could
those requirements be streamlined to decrease costs to issuers, while
still providing valuable information to investors? Would shareholders
be disadvantaged by the disclosures, as proposed, and attendant costs?
35. Would investors benefit from different qualitative disclosure
requirements? If so, which ones? What would be the costs of such
alternatives for issuers?
36. Would investors benefit from the proposed requirement to use a
structured data language for the repurchase disclosures? What would be
the costs of the proposed requirement to issuers? Should we consider
alternative structured disclosure requirements for repurchase
disclosure, and what would be their benefits and costs?
37. Would investors benefit from an additional requirement to
compile the daily repurchase information in an exhibit to periodic
reports, in addition to reporting this information on new Form SR? What
would be the costs of such an alternative to issuers?
38. Would investors benefit from keeping the existing monthly
disclosure in the body of the periodic report, in addition to the
reporting of daily data on a new form? Would issuers realize cost
savings if we eliminated the current Item 703 requirement to provide a
monthly breakdown of repurchase activity?
39. What are the costs and benefits of requiring the reporting of
daily data on new Form SR, as opposed to on Form 8-K or another
existing form?
40. Would the proposed disclosure requirements have
disproportionate effects on certain categories of issuers? How could
such effects be mitigated? Should we exempt some issuers-for example,
smaller reporting companies, issuers with few repurchases, registered
closed-end funds, foreign private issuers-from all or some of the
proposed requirements? What would be the effects of such exemptions on
investors' ability to make informed investment decisions?
V. Paperwork Reduction Act
A. Summary of the Collection of Information
Certain provisions of our rules and forms that would be affected by
the proposed amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\112\ The Commission is submitting the proposed amendments to
the Office of Management and Budget (``OMB'') for review in accordance
with the PRA.\113\ The hours and costs associated with preparing and
filing the forms constitute reporting and cost burdens imposed by each
collection of information. An agency may not conduct or sponsor, and a
person is not required to comply with, a collection of information
unless it displays a currently valid OMB control number. Compliance
with the information collections is mandatory. Responses to the
information collections are not kept confidential and there is no
mandatory retention period for the information disclosed. The titles
for the affected collections of information are:
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\112\ See 44 U.S.C. 3501 et seq.
\113\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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<bullet> ``Form 10-K'' (OMB Control No. 3235-0063);
<bullet> ``Form 10-Q'' (OMB Control No. 3235-0070);
<bullet> ``Form 20-F'' (OMB Control No. 3235-0288);
<bullet> ``Form N-CSR'' (OMB Control No. 3235-0570); and
<bullet> ``Form SR'' (a proposed new collection of information).
We adopted the existing forms pursuant to the Exchange Act and
Investment Company Act and are proposing the new form pursuant to the
Exchange Act. The forms set forth the disclosure requirements for
periodic reports filed by issuers to help investors make informed
investment and voting decisions. A description of the proposed
amendments, including the need for the information and its proposed
use, as well as a description of the likely respondents, can be found
in Section II above, and a discussion of the economic effects of the
proposed amendments can be found in Section IV above.
B. Summary of the Estimated Burdens of the Proposed Amendments on the
Collections of Information
1. Estimated Paperwork Burden for Proposed Form SR
The following table summarizes the estimated paperwork burden
associated with proposed new Form SR that affected issuers of equity
securities registered under Section 12 of the Exchange Act would use to
disclose a repurchase of their equity shares.
PRA Table 1--Estimated Paperwork Burden of Proposed Form
------------------------------------------------------------------------
Brief explanation
Affected form Estimated burden of estimated
burden
------------------------------------------------------------------------
New Form SR..................... A new burden of This burden is the
1.5 hours for estimated effect
each Form SR. of compiling the
data elements,
tagging the data
using Inline
XBRL, and
preparing and
submitting the
Form SR.
------------------------------------------------------------------------
We estimate a burden of approximately 1.5 hours for each Form SR.
The burden includes the effect of compiling the six required data
elements for each date that the form is required, tagging the data
using Inline XBRL, and preparing and submitting the Form SR. Our
proposed 1.5 hour estimate is for the average burden over the first
three years of reporting. We acknowledge that preparation of Form SR
may initially entail a higher burden as issuers get accustomed to
collecting data for, and preparing the new form, but we believe that
the burden would be reduced with subsequent filings.
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\114\ See supra notes 56-57 and surrounding text.
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Based on data from Compustat and EDGAR filings for fiscal year
2020,\114\ we estimate that approximately 3,400 issuers that conducted
share repurchases during fiscal year 2020 would be affected by the
proposed new Form SR requirement (among them, approximately 250 foreign
private issuers who reported share repurchases on Form 20-F and 100
registered closed-end funds who reported share repurchases on Form N-
CSR). We additionally note that most issuers that conduct share
repurchases do so over a
[[Page 8463]]
period of time, rather than by making a single purchase or a few
isolated purchases during the year. We conservatively estimate that
issuers conducting share repurchases would purchase shares one day a
week for the entire year, resulting in 52 Form SR filings per year.
Based on the staff's findings relating to the number of issuers
conducting share repurchases and the estimate of the frequency of
repurchases, we estimate 176,800 Form SR filings per year.
2. Estimated Paperwork Burdens of the Proposed Amendments to Periodic
Reports
The following table summarizes the estimated paperwork burdens
associated with the proposed amendments to the affected forms filed by
issuers of equity securities registered under Section 12 of the
Exchange Act.
PRA Table 2--Estimated Paperwork Burden of Proposed Amendments to
Periodic Reports
------------------------------------------------------------------------
Amendments to Reg. S-K Item 703,
Form 20-F and Form N-CSR, Reg. S- Estimated burden Brief explanation
T Rule 405 and Proposed New increase of estimated
Exchange Act Rule 13a-21 burden increase
------------------------------------------------------------------------
<bullet> Require additional An increase of 3 This increase is
disclosure regarding the burden hours for the estimated
structure of an issuer's each of the effect on the
repurchase program and its affected forms: affected forms by
share repurchases;. Form 10-K, Form the proposed
<bullet> Require new checkbox to 10-Q, Form 20-F amendments to
indicate if any of the issuer's and Form N-CSR. include
officers or directors subject additional share
to the reporting requirements repurchase
under Section 16(a) of the disclosures,
Exchange Act purchased or sold clarify the
shares or other units of the rules, and
class of the issuer's equity require the use
securities that is the subject of structured
of an issuer share repurchase data for this
plan or program within 10 information.
business days before or after
the announcement of an issuer
purchase plan or program; and.
<bullet> Require information to
be reported using a structured
data language.
------------------------------------------------------------------------
Considering the various revisions outlined in Sections II.B, II.C.
and II.D. above, we estimate that proposed new Rule 13a-21, Item 703 of
Regulation S-K, Item 16E of Form 20-F, Item 9 of Form N-CSR, and Rule
405 of Regulation S-T (interactive data file submission requirements)
would increase the paperwork burden for filings on the affected forms
that include share repurchase disclosure. However, not all filings on
the affected forms include these disclosures because they are provided
only when an issuer conducts share repurchases that trigger the
disclosure requirement. Therefore, to estimate the increase in overall
paperwork burden from the proposed amendments, we first estimated the
number of filings that include share repurchase information. As
indicated in paragraph B.1 of this section, we estimate that
approximately 3,300 operating companies (among them, approximately 250
foreign private issuers filing on Form 20-F) and approximately 100
registered closed-end funds during fiscal year 2020 would be affected
by the amendments. Based on the staff's findings, the table below sets
forth our estimates of the number of filings on these forms that
included share repurchase disclosure. We used this data to extrapolate
the effect of these changes on the paperwork burden for the listed
periodic reports.\115\
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\115\ The OMB PRA filing inventories represent a three-year
average. Averages may not align with the actual number of filings in
any given year.
PRA Table 3--Estimated Number of Affected Filings
------------------------------------------------------------------------
Number of
Current annual filings that
Form responses in include share
PRA inventory repurchase
disclosure
------------------------------------------------------------------------
10-K.................................. 8,292 3,050
10-Q.................................. 22,925 9,150
20-F.................................. 729 250
N-CSR................................. 6,898 200
------------------------------------------------------------------------
C. Incremental and Aggregate Burden and Cost Estimates
Below we estimate the incremental and aggregate changes in
paperwork burden as a result of the proposed amendments. These
estimates represent the average burden for all issuers, both large and
small. In deriving our estimates, we recognize that the burdens will
likely vary among individual issuers. The proposed amendments would
create a new required collection of information and change the burden
per response of existing collections of information, if adopted.
We calculated the burden estimates by adding the estimated
additional burden to the existing estimated responses and multiplying
the estimated number of responses by the estimated average amount of
time it would take an issuer to prepare and review disclosure required
under the proposed amendments. For purposes of the PRA, the burden is
to be allocated between internal burden hours and outside professional
costs. PRA Table 4 below sets forth the percentage estimates we
typically use for the burden allocation for each collection of
information and the estimated burden allocation for the proposed new
collection of information. We also estimate that the average cost of
retaining outside professionals is $400 per hour.\116\
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\116\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This estimate is
based on consultations with several issuers, law firms, and other
persons who regularly assist issuers in preparing and filing reports
with the Commission.
PRA Table 4--Estimated Burden Allocation for the Affected Collections of
Information
------------------------------------------------------------------------
Outside
Collection of information Internal professionals
(%) (%)
------------------------------------------------------------------------
Forms 10-K, 10-Q, N-CSR, SR.................. 75 25
Form 20-F.................................... 25 75
------------------------------------------------------------------------
PRA Table 5 below illustrates the incremental change to the total
annual compliance burden of affected forms, in hours and in costs, as a
result of the proposed amendments' estimated effect on the paperwork
burden per response.
[[Page 8464]]
PRA Table 5--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
estimated Burden hour Change in Change in professional Change in
Collection of Information affected increase per burden hours Change in company hours hours professional
responses response costs
(A) \a\ (B) (C) = (A) x (D) = (C) x 0.75 or (E) = (C) x 0.25 or (F) = (E) x
(B) 0.25 0.75 $400
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................. 3,050 3 9,150 6862.5 2,287.5 $915,000
10-Q................................. 9,150 3 27,450 20,587.5 6,862.5 2,745,000
20-F................................. 250 3 750 187.5 562.5 225,000
N-CSR................................ 200 3 600 450 150 60,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
The following tables summarize the requested paperwork burden,
including the estimated total reporting burdens and costs, under the
proposed amendments.
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\117\ For purposes of the PRA, the requested change in burden
hours (column H) is rounded to the nearest whole number.
PRA Table 6--Requested Paperwork Burden Under the Proposed Amendments \117\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Requested change in burden
---------------------------------------------------------------------------------------------------------------------------------
Form Current Current Number of Change in Change in
annual burden Current cost affected company professional Annual Burden hours Cost burden
responses hours burden responses hours costs responses
(A) (B) (C) (D) (E) (F) (G) (H) = (B) + (E) (I) = (C) + (F)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K..................................................... 8,292 14,188,040 $1,893,793,119 3,050 6,862.5 $915,000 8,292 14,194,903 $1,894,708,119
Form 10-Q..................................................... 22,925 3,182,333 421,490,754 9,150 29,587.5 2,745,000 22,925 3,211,921 424,235,754
Form 20-F..................................................... 729 479,261 576,824,025 250 187.5 225,000 729 479,449 577,049,025
Form N-CSR.................................................... 6,898 181,167 5,199,584 200 450 60,000 6,898 181,617 5,259,584
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PRA Table 7 summarizes the requested paperwork burden for the new
Form SR collection of information, including the estimated total
reporting burdens and costs, under the proposed amendments as described
in Section II.A. For purposes of the PRA, we estimate that new Form SR
will entail a 1.5 hour compliance burden per response with 176,800
annual responses.
PRA Table 7--Requested Paperwork Burden for the New Collection of Information
----------------------------------------------------------------------------------------------------------------
Requested paperwork burden
--------------------------------------------------------------------
Collection of information Annual
responses Burden hours Cost burden
(A) (A) x 1.5 x (0.75) (A) x 1.5 x (0.25) x $400
----------------------------------------------------------------------------------------------------------------
Form SR.................................... 176,800 189,900 $26,520,000
----------------------------------------------------------------------------------------------------------------
Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
<bullet> Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility;
<bullet> Evaluate the accuracy of our assumptions and estimates of
the frequency with which issuers conduct issuer share repurchases and
of the initial and ongoing burden of the proposed collection of
information;
<bullet> Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
<bullet> Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
<bullet> Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to Vanessa A. Countryman,
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549, with reference to File No. S7-21-21. Requests for
materials submitted to OMB by the Commission with regard to the
collection of information requirements should be in writing, refer to
File No. S7-21-21 and be submitted to the U.S. Securities and Exchange
Commission, Office of FOIA Services,
[[Page 8465]]
100 F Street NE, Washington, DC 20549. OMB is required to make a
decision concerning the collection of information requirements between
30 and 60 days after publication of the proposed amendments.
Consequently, a comment to OMB is best assured of having its full
effect if the OMB receives it within 30 days of publication.
VI. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\118\ the Commission must advise OMB as to
whether the proposed amendments constitute a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results,
or is likely to result, in:
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\118\ 138 Public Law 104-121, Title II, 110 Stat. 857 (1996).
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<bullet> An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
<bullet> A major increase in costs or prices for consumers or
individual industries; or
<bullet> Significant adverse effects on competition, investment or
innovation.
We request comment on whether the proposed amendments would be a
``major rule'' for purposes of SBREFA. We solicit comment and empirical
data on: (a) The potential effect on the U.S. economy on an annual
basis; (b) any potential increase in costs or prices for consumers or
individual industries; and (c) any potential effect on competition,
investment or innovation. Commenters are requested to provide empirical
data and other factual support for their views to the extent possible.
VII. Initial Regulatory Flexibility Analysis
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (``RFA'') \119\ requires the agency to prepare and make
available for public comment an Initial Regulatory Flexibility Analysis
(``IRFA'') that will describe the impact of the proposed rule on small
entities.\120\ This IRFA has been prepared in accordance with the
Regulatory Flexibility Act. It relates to proposed amendments or
additions to the rules and forms described in Section II above.
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\119\ 5 U.S.C. 601 et seq.
\120\ 5 U.S.C. 603(a).
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A. Reasons for, and Objectives of, the Proposed Action
The proposed amendments are intended to modernize and improve
disclosure about repurchases of an issuer's equity securities that are
registered under Section 12 of the Exchange Act. Specifically, the
proposed amendments would require an issuer to (i) provide more timely
disclosure on a new Form SR regarding purchases of its Section 12
registered equity securities for each day that it, or an affiliated
purchaser, makes a share repurchase; (ii) provide additional periodic
disclosures about these purchases; and (iii) tag the required
information using Inline XBRL. The reasons for, and objectives of, the
proposed amendments are discussed in more detail in Section II above.
B. Legal Basis
The amendments contained in this release are being proposed under
the authority set forth in the Exchange Act, particularly, Sections 12,
13, 15, and 23(a) thereof; and the Investment Company Act, particularly
Sections 8, 23, 24(a), 30, 31, and 38.
C. Small Entities Subject to the Proposed Rules
The proposed amendments would affect some issuers that are small
entities. The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small governmental jurisdiction.'' \121\
For purposes of the RFA, under 17 CFR 230.157 and 17 CFR 240.0-10(a),
an issuer, other than an investment company, is a ``small business'' or
``small organization'' if it had total assets of $5 million or less on
the last day of its most recent fiscal year and is engaged or proposing
to engage in an offering of securities not exceeding $5 million. We
estimate that there are approximately 717 issuers with a class of
securities registered under Section 12 of the Exchange Act that file
with the Commission, other than investment companies, that may be
considered small entities and are potentially subject to the proposed
amendments.\122\ For purposes of Commission rulemaking in connection
with the RFA, an investment company (including a BDC) is a small entity
if, together with other investment companies in the same group of
related investment companies, it has net assets of $50 million or less
as of the end of its most recent fiscal year.\123\ Commission staff
estimates that approximately 23 registered closed-end funds and 9 BDCs
are small entities.\124\
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\121\ 5 U.S.C. 601(6).
\122\ This estimate is based on staff analysis of issuers,
excluding co-registrants, subsidiaries, or asset-backed securities,
with EDGAR filings of Form 10-K and 20-F, or amendments thereto,
filed during the calendar year of January 1, 2020, to December 31,
2020 or filed by September 1, 2021 that, if timely filed by the
applicable deadline, would have been filed between January 1 and
December 31, 2020. Analysis is based on data from XBRL filings,
Compustat, Ives Group Audit Analytics, and manual review of filings
submitted to the Commission.
\123\ See 17 CFR 270.0-10(a).
\124\ This estimate is derived from an analysis of data obtained
from Morningstar Direct as well as data reported to the Commission
for the period ending June 2021.
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D. Projected Reporting, Recordkeeping and Other Compliance Requirements
If adop
[…truncated; see source link]Indexed from Federal Register on February 15, 2022.
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