Rule2023-09965
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
June 1, 2023
Effective
July 31, 2023
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting amendments to modernize and improve disclosure about repurchases of an issuer's equity securities that are registered under the Securities Exchange Act of 1934. The amendments require additional detail regarding the structure of an issuer's repurchase program and its share repurchases, require the filing of daily quantitative repurchase data either quarterly or semi-annually, and eliminate the requirement to file monthly repurchase data in an issuer's periodic reports. The amendments also revise and expand the existing periodic disclosure requirements about these repurchases. Finally, the amendments add new quarterly disclosure in certain periodic reports related to an issuer's adoption and termination of certain trading arrangements.
Full Text
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<title>Federal Register, Volume 88 Issue 105 (Thursday, June 1, 2023)</title>
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[Federal Register Volume 88, Number 105 (Thursday, June 1, 2023)]
[Rules and Regulations]
[Pages 36002-36063]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-09965]
[[Page 36001]]
Vol. 88
Thursday,
No. 105
June 1, 2023
Part II
Securities and Exchange Commission
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17 CFR Parts 229, 232, 240, et al.
Share Repurchase Disclosure Modernization; Final Rule
Federal Register / Vol. 88 , No. 105 / Thursday, June 1, 2023 / Rules
and Regulations
[[Page 36002]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 232, 240, 249, and 274
[Release Nos. 34-97424; IC-34906; File No. S7-21-21]
RIN 3235-AM94
Share Repurchase Disclosure Modernization
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to modernize and improve disclosure about
repurchases of an issuer's equity securities that are registered under
the Securities Exchange Act of 1934. The amendments require additional
detail regarding the structure of an issuer's repurchase program and
its share repurchases, require the filing of daily quantitative
repurchase data either quarterly or semi-annually, and eliminate the
requirement to file monthly repurchase data in an issuer's periodic
reports. The amendments also revise and expand the existing periodic
disclosure requirements about these repurchases. Finally, the
amendments add new quarterly disclosure in certain periodic reports
related to an issuer's adoption and termination of certain trading
arrangements.
DATES: This final rule is effective on July 31, 2023.
FOR FURTHER INFORMATION CONTACT: John Fieldsend, Special Counsel,
Office of Rulemaking, at (202) 551-3460, Division of Corporation
Finance; and, with respect to the application to investment companies,
Quinn Kane, 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 adopting amendments to the following
rules and forms:
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\1\ 15 U.S.C. 78a et seq.
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Commission reference CFR citation (17 CFR)
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Regulation S-K:
Items 10 through 1305.............. Sec. Sec. 229.10 through
229.1305.
Item 408........................... Sec. 229.408.
Item 601........................... Sec. 229.601.
Item 703........................... Sec. 229.703.
Regulation S-T:
Rules 10 through 903............... Sec. Sec. 232.10 through
232.903.
Rule 405........................... Sec. 232.405.
Securities Exchange Act of 1934
(``Exchange Act''): \1\
Rule 13a-21........................ Sec. 240.13a-21.
Form F-SR.......................... ...............................
Form 20-F.......................... Sec. 249.220f.
Form 10-Q.......................... Sec. 249.308a.
Form 10-K.......................... Sec. 249.310.
Form N-CSR......................... Sec. Sec. 249.331 and
274.128.
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Table of Contents
I. Introduction
A. Summary of the Proposed Amendments
B. Consideration of Comments
C. Summary of Final Amendments
II. Background
A. Share Repurchases
B. Purpose of the Amendments
III. Discussion of Final Amendments
A. Disclosure of Share Repurchases
1. Proposed Amendments
2. Comments on the Proposed Amendments
a. Comments on the Daily Share Repurchase Disclosure Requirement
b. Comments on Exemptions for Certain Issuers
c. Comments on Repurchases Intended To Satisfy Rule 10b5-1(c)
and Intended To Qualify for the Rule 10b-18 Safe Harbor
d. Comments Concerning Requests for Clarification
e. Other Comments
3. Final Amendments
B. Narrative Revisions to Item 703 of Regulation S-K, Form 20-F,
and Form N-CSR Additional Disclosure
1. Proposed Amendments
2. Comments on the Proposed Amendments
a. Comments on Objective or Rationale for Share Repurchases, and
Process or Criteria Used To Determine the Amount of Repurchases
b. Comments on Policies and Procedures Relating to Purchases and
Sales of the Issuer's Securities by Its Officers and Directors
During a Repurchase Program
c. Comments on Checkbox Requirement
3. Final Amendments
C. Clarifying Amendments
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
D. New Item 408(d)
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
E. Structured Data Requirement
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
F. Compliance Dates
IV. Other Matters
V. Economic Analysis
A. Baseline and Affected Parties
1. Affected Parties
2. Baseline
B. Benefits
1. General Benefits of the Disclosures
2. Additional Quantitative Repurchase Disclosure
3. Additional Qualitative Repurchase Disclosures
4. Inline XBRL
C. Costs
1. General Costs of the Disclosures
2. Additional Quantitative Repurchase Disclosure
3. Additional Qualitative Repurchase Disclosures
4. Inline XBRL
D. Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
1. Alternative Reporting Frequencies and Disclosure Granularity
2. Alternative Scope of the Disclosure
3. Exemptions for Certain Issuer Categories
4. Alternative Implementation Approaches
5. Structured Disclosure
6. Compliance Dates
VI. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Summary of Comment Letters
C. Summary of Collections of Information Requirements
[[Page 36003]]
1. Estimated Paperwork Burden for Daily Quantitative Share
Repurchase Disclosures
2. Estimated Paperwork Burdens of the Narrative Share Repurchase
Disclosures in Item 703 of Regulation S-K, Form 20-F, Form N-CSR,
and Form F-SR
3. Estimated Paperwork Burdens of New Item 408(d)
D. Incremental and Aggregate Burden and Cost Estimates
VII. Final Regulatory Flexibility Analysis
A. Need for, and Objectives of, the Final Amendments
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Amendments
D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
E. Agency Action to Minimize Effect on Small Entities
Statutory Authority
I. Introduction
A. Summary of the Proposed Amendments
On December 15, 2021,\2\ the Commission proposed amendments to the
disclosure requirements regarding purchases of classes of equity
securities registered under 15 U.S.C. 781 (``Exchange Act section 12'')
made by or on behalf of an issuer or any affiliated purchaser.\3\ The
proposal was intended to modernize and improve the disclosure currently
required by Item 703 of Regulation S-K, Item 16E of Form 20-F, and Item
14 of Form N-CSR about repurchases of an issuer's equity securities.\4\
Specifically the Commission proposed to:
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\2\ Share Repurchase Disclosure Modernization, Release No. 34-
93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 15, 2022)] (``Proposing
Release'').
\3\ 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 240.10b-18(a)(3). References
throughout this release to ``issuer repurchases'' include purchases
by an affiliated purchaser and purchases by any person acting on
behalf of the issuer or an affiliated purchaser.
\4\ Subsequent to the proposal, the Commission adopted changes
to Form N-CSR that, among other things, redesignated what had been
Item 9 of Form N-CSR to be Item 14. Tailored Shareholder Reports for
Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements, Release No. IC-34731 (Oct. 26,
2022) [87 FR 72758 (Nov. 25, 2022)]. This change became effective
January 24, 2023. Id.
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<bullet> Require quantitative 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> Amend Item 703 of Regulation S-K, Item 16E of Form 20-F,
and Item 14 of Form N-CSR to require additional detail regarding the
structure of an issuer's repurchase program and its share repurchases;
and
<bullet> Require that information disclosed pursuant to Item 703 of
Regulation S-K, Item 16E of Form 20-F, Item 14 of Form N-CSR, and Form
SR be reported using a structured data language (specifically, Inline
eXtensible Business Reporting Language or ``Inline XBRL'').
The Commission adopted Item 703 in 2003 \5\ to require disclosure
of any purchase, aggregated on a monthly basis, 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 Exchange Act
section 12. Currently, Item 703 share repurchase disclosure is required
in Form 10-Q for the issuer's first three fiscal quarters and in Form
10-K for the issuer's fourth fiscal quarter.\6\ The same disclosure is
required by Item 16E of Form 20-F on an annual basis for FPIs, and by
Item 14 of Form N-CSR on a semi-annual basis for registered closed-end
management investment companies that are exchange traded (``Listed
Closed-End Funds'').\7\ The disclosure requirements apply to both open
market and private transactions, and currently require an issuer to
disclose in tabular format:
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\5\ See Purchases of Certain Equity Securities by the Issuer and
Others, Release No. 33-8335 (Nov. 10, 2003) [68 FR 64952 (Nov. 17,
2003)] (``2003 Adopting Release''). 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\ 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, see ASC 230-10-45-1 to -2 and
ASC 230-10-45-15, and the statements of changes in shareholders'
equity indicating any reduction in securities outstanding, see ASC
505-30-5 to -10, and additional paid-in capital for the securities
repurchased. See ASC 505-10-50-2 and 17 CFR 210.3-04 (``Rule 3-04 of
Regulation S-X''). ASC 505-30-50 also requires footnote disclosure
of state law restrictions on the availability of retained earnings
for dividend payments as a result of these repurchases, if
applicable. 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. See ASC 505-30-
45-1.
\7\ 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. In addition
to the disclosures on Form N-CSR that provide detailed information
about Listed Closed-End Fund repurchases, Form N-CEN also requires
closed-end management investment companies to indicate whether they
engaged in a repurchase during the reporting period and, if so, for
what type of security. Item D.4 of Form N-CEN.
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<bullet> The total number of shares (or units) purchased,
regardless of amount and 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.
Footnote disclosure is also required 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.
B. Consideration of Comments
The Commission voted to issue the proposal at an open meeting on
December 15, 2021. The release was posted on the Commission website
that day, and comment letters were received beginning that same date.
The comment period for the Proposing Release was open for 45 days and
ended on April 1, 2022.\8\ The Commission has reopened the comment
period for the Proposing Release twice for different reasons. The first
reopening occurred because certain comments on the Proposing Release
were potentially affected by a
[[Page 36004]]
technological error in the Commission's internet comment form.\9\ The
First Reopening Release was published in the Federal Register on
October 18, 2022, and the comment period ended on November 1, 2022.\10\
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\8\ The public comments we received are available at <a href="https://www.sec.gov/comments/s7-21-21/s72121.htm">https://www.sec.gov/comments/s7-21-21/s72121.htm</a>. Unless otherwise
indicated, the comment letters cited herein are those received in
response to the Proposing Release. Two comment letters urged that
the comment period for this proposal, among others, be extended to
at least 60 days. See letter from United States Senator Pat Toomey
and United States Representative Patrick McHenry (Jan. 10, 2022).
Other commenters also asserted that the Commission provided
insufficient time for comment. See, e.g., letters from American
Securities Association (Apr. 1, 2022) (``ASA''), Association of the
Bar of the City of New York (Apr. 1, 2022) (``NYC Bar''), Brit
Stephens (Jan. 28, 2022) (``Stephens''), and U.S. Chamber of
Commerce (Feb. 23, 2022) (``Chamber I'').
\9\ Resubmission of Comments and Reopening of Comment Periods
for Several Rulemaking Releases Due to a Technological Error in
Receiving Certain Comments, Release No. 33-11117 (Oct. 7, 2022) [87
FR 63016 (Oct. 18, 2022)] (``First Reopening Release'').
\10\ A few commenters asserted that the comment period for the
reopened rulemakings was not sufficient and asked the Commission to
extend the comment period for those rulemakings. See, e.g., letters
from Attorneys General of the states of Montana et al. (Oct. 24,
2022) and U.S. Chamber of Commerce (Nov. 1, 2022) (``Chamber IV'').
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The second reopening occurred on December 7, 2022.\11\ The
Commission voted to reopen the comment period in connection with the
addition to the comment file of a staff memorandum analyzing the
potential economic effects of the new excise tax contained in the
Inflation Reduction Act of 2022 \12\ (``Inflation Reduction Act'') on
the proposed amendments. The Inflation Reduction Act was signed into
law after the Proposing Release was published. The Second Reopening
Release was published in the Federal Register on December 12, 2022, and
the comment period closed on January 11, 2023.\13\ We have considered
the potential effects of the excise tax and the additional comments
received \14\ and determined that no changes to the proposed amendments
are necessary as a result of the Inflation Reduction Act because we
believe any impact of the tax on repurchases will not meaningfully
affect the rationale for the amendments, as we describe in more detail
below.\15\
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\11\ Reopening of Comment Period for Share Repurchase Disclosure
Modernization, Release No. 34-96458 (Dec. 7, 2022) [87 FR 75975
(Dec. 12, 2022)] (``Second Reopening Release'').
\12\ See Public Law 117-169, 136 Stat. 1818 (2022).
\13\ The public comments we received in response to the First
Reopening Release and the Second Reopening Release are available at
the same location on the Commission's website as the other comment
letters addressing the Proposing Release at <a href="https://www.sec.gov/comments/s7-21-21/s72121.htm">https://www.sec.gov/comments/s7-21-21/s72121.htm</a>. See supra note 8. Some commenters
recommended that the Commission postpone adopting the final
amendments for additional analysis of future economic conditions and
the Inflation Reduction Act's impact on repurchases. See, e.g.,
letters from Professional Services Council (Jan. 11, 2023)
(``PSC''), U.S. Chamber of Commerce (Sept. 20, 2022) (``Chamber
III''), and U.S. Chamber of Commerce (Jan. 11, 2023) (``Chamber
V''). One of these commenters also stated that the comment period
for the Second Reopening Release was insufficient. See letter from
Chamber V.
\14\ See infra Section V.A.2.
\15\ See id. For similar reasons, we do not think it is
necessary to postpone adoption of the proposed amendments.
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We received over 170 unique comment letters on the Proposing
Release and over 3,200 form letters, which we discuss in context below.
We have considered all comments received since December 15, 2021, and
do not believe an additional extension of the comment period is
necessary.\16\
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\16\ Another comment letter raised concerns about the rulemaking
process at the agency more broadly. See letter from United States
Senator Thom Tillis (Nov. 4, 2022). The process followed in adopting
these amendments has complied with the Administrative Procedure Act,
5 U.S.C. 551 et seq., and other legal requirements.
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Additionally, in January 2022,\17\ the Commission proposed
amendments to 17 CFR 240.10b5-1 (``Rule 10b5-1''), which provides
affirmative defenses to allegations of trading on the basis of material
nonpublic information in insider trading cases. The Commission also
proposed new 17 CFR 229.408(a) (``Item 408(a) of Regulation S-K'') to
require disclosure of, among other matters, whether the issuer adopted,
modified, or terminated plans intended to meet Rule 10b5-1's conditions
for establishing an affirmative defense. In December 2022,\18\ the
Commission adopted many of the amendments that it proposed in the Rule
10b5-1 Proposing Release, but did not adopt the portion of proposed
Item 408(a) of Regulation S-K that pertains to the issuer's use of Rule
10b5-1 in response to commenters' recommendation that it be considered
in the context of this rulemaking.\19\
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\17\ Rule 10b5-1 and Insider Trading, Release No. 33-11013 (Jan.
13, 2022) [87 FR 8686 (Feb. 15, 2022)] (``Rule 10b5-1 Proposing
Release'').
\18\ Insider Trading Arrangements and Related Disclosure,
Release No. 33-11138 (Dec. 14, 2022) [87 FR 80362 (Dec. 29, 2022)]
(``Rule 10b5-1 Adopting Release'').
\19\ See, e.g., letters on the Rule 10b5-1 Proposing Release
from Cravath, Swaine & Moore LLP (Mar. 31, 2022) and Simpson Thacher
& Bartlett LLP (Mar. 31, 2022). We have considered the comment
letters received on the Item 408(a) disclosure proposal and discuss
them in the context of new Item 408(d) below. See infra Section
III.D.2.
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Finally, prior to either proposing release, in September 2021, the
Commission's Investor Advisory Committee (``IAC'') \20\ issued
recommendations regarding disclosure of Rule 10b5-1 plans, including
that the Commission ``establish meaningful guardrails around the
adoption, modification, and cancellation of Rule 10b5-1 trading
plans,'' by addressing certain gaps in the rule that allow corporate
insiders to unfairly exploit informational asymmetries.\21\
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\20\ The IAC was established in Apr. 2012 pursuant to section
911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
[Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (2010)] to advise
and make recommendations to the Commission on regulatory priorities,
the regulation of securities products, trading strategies, fee
structures, the effectiveness of disclosure, and initiatives to
protect investor interests and to promote investor confidence and
the integrity of the securities marketplace.
\21\ See IAC, Recommendations of the Investor Advisory Committee
Regarding Rule 10b5-1 Plans (Sept. 9, 2021) (``IAC
Recommendations''), available at <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf</a>.
The IAC also held a panel discussion regarding Rule 10b5-1 plans at
its June 10, 2021 meeting. See IAC, Meeting Minutes (June 10, 2021),
available at <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061021-minutes.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061021-minutes.pdf</a>. The IAC did not consider
issuer share repurchases in its deliberations on its
recommendations. See IAC Recommendations, at n. 1. However, in
response to the Commission's request for comment regarding Item 703
in the Commission's 2016 concept release regarding business and
financial disclosures required by Regulation S-K, see Business and
Financial Disclosure Required by Regulation S-K, Release No. 33-
10064 (Apr. 13, 2016) [81 FR 23915 (Apr. 22, 2016)], the IAC
recommended expanding the disclosure required by Item 703. See
letters in response to the Concept Release from SEC Investor
Advisory Committee (Jun. 15, 2016), available at <a href="https://www.sec.gov/comments/s7-06-16/s70616.htm">https://www.sec.gov/comments/s7-06-16/s70616.htm</a>.
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C. Summary of Final Amendments
Having considered all of the comments we received, we are adopting
the final amendments described in this release with some modifications
from the proposal in response to those comments. The final amendments
require the same additional detail regarding the structure of an
issuer's repurchase program and its daily share repurchases, as was
proposed. Further, as proposed, the final amendments require issuers to
tag the disclosure using Inline XBRL.
Although the final amendments require quantitative disclosure of
daily repurchase data, as proposed, the frequency and manner of the
disclosure is different from the proposal. Additionally, while we are
requiring issuers to disclose the total number of shares repurchased
pursuant to a plan that is intended to satisfy the affirmative defense
conditions of Rule 10b5-1(c), and the date that the plan was adopted or
terminated, and whether its repurchases were intended to qualify for
the 17 CFR 240.10b-18 (``Rule 10b-18'') non-exclusive safe harbor, as
proposed, the manner in which registrants provide this disclosure has
changed from the proposal. Further, as discussed in greater detail
below, the final amendments require:
<bullet> Corporate issuers that file on domestic forms to disclose
daily quantitative repurchase data at the end of every quarter in an
exhibit to their Form 10-Q and Form 10-K (for an issuer's fourth fiscal
quarter);
<bullet> Listed Closed-End Funds to disclose daily quantitative
repurchase data in their annual and semi-annual reports on Form N-CSR;
and
[[Page 36005]]
<bullet> Foreign private issuers (``FPIs'') \22\ reporting on the
FPI forms \23\ to disclose daily quantitative repurchase data at the
end of every quarter in the new Form F-SR,\24\ which will be due 45
days after the end of an FPI's fiscal quarter.
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\22\ ``Foreign private issuer'' is defined in 17 CFR 230.405
(``Securities Act Rule 405'') and 240.3b-4 as any foreign issuer
other than a foreign government except for an issuer meeting the
following conditions as of the last business day of its most
recently completed second fiscal quarter: (1) More than 50 percent
of the issuer's outstanding voting securities are directly or
indirectly held of record by residents of the United States; and (2)
Any of the following: (i) The majority of the executive officers or
directors are United States citizens or residents; (ii) More than 50
percent of the assets of the issuer are located in the United
States; or (iii) The business of the issuer is administered
principally in the United States.
\23\ The Commission has adopted a series of forms exclusively
available to FPIs, including the ``F-'' series registration
statements and Forms 20-F and 6-K disclosure forms for annual and
current reports, respectively. These forms have been designed with
reference to international disclosure standards, both in scope and
timing requirements for filing. Although FPIs may voluntarily choose
to register and report using domestic forms, most do not do so.
Unless otherwise specified, all references to FPIs assume they are
not filing on the domestic forms.
\24\ Only FPIs may file their share repurchase disclosures on
the new form, so we are designating the new form as ``Form F-SR''
instead of ``Form SR'' to make it clear that this form is filed only
by FPIs.
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As proposed, the final amendments require an issuer to include a
checkbox above its tabular disclosures indicating whether certain
officers and directors purchased or sold shares or other units of the
class of the issuer's equity securities that are the subject of an
issuer share repurchase plan or program before or after the
announcement of an issuer repurchase plan or program. In a change from
the proposal, we have revised the checkbox requirement so that an
issuer must check the box if the triggering trades occur within four
business days before or after the repurchase announcement, rather than
the ten business days we proposed. For domestic corporate issuers and
Listed Closed-End Funds, this checkbox requirement applies to any
officer or director subject to the 15 U.S.C. 78p(a) (``Exchange Act
section 16(a)'') reporting requirements. In another change from the
proposal, for FPIs, this requirement applies to any director and member
of senior management who would be identified pursuant to Item 1 of Form
20-F, regardless of whether the FPI is reporting on the forms
exclusively available to FPIs or on the domestic forms.\25\ In a
further change from the proposal, the daily quantitative repurchase
data required by the final amendments will be treated as filed in Form
10-Q, Form 10-K, Form N-CSR, and Form F-SR, instead of furnished.
Further, the final amendments eliminate the current requirements in
Item 703 of Regulation S-K, Item 16E of Form 20-F, and Item 14 of Form
N-CSR to disclose monthly repurchase data in periodic reports.
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\25\ See infra note 322 and accompanying text.
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We are also adopting, with some modifications from the proposal,
amendments relating to the revision and expansion of the disclosure
requirements in Item 703, Form 20-F, and Form N-CSR. Specifically, the
final amendments require an issuer to disclose:
<bullet> The objectives or rationales for its share repurchases and
the process or criteria used to determine the amount of repurchases;
and
<bullet> Any policies and procedures relating to purchases and
sales of the issuer's securities during a repurchase program by its
officers and directors, including any restriction on such transactions.
We are also adopting new Item 408(d), which requires quarterly
disclosure in periodic reports on Forms 10-Q and 10-K (for the issuer's
fourth fiscal quarter) about an issuer's adoption and termination of
Rule 10b5-1 trading arrangements. This information will also be
reported using Inline XBRL.
II. Background
A. Share Repurchases
As the Commission noted in the Proposing Release, issuers may
repurchase their shares through, among other means, open market
purchases, tender offers, privately negotiated transactions, and
accelerated share repurchases (``ASRs''). 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. 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.
There are a number of reasons why issuers conduct share
repurchases, and share repurchases can have a positive or negative
impact on the market for an issuer's securities. The high dollar
volume, nearly $950 billion in 2021, of recent share repurchase
activity has been accompanied by public interest in corporate payouts
in the form of share repurchases.\26\ Existing studies, including a
review by Commission staff in 2020,\27\ have considered the rationales
and effects of repurchases. As our staff concluded, repurchases are
often employed in a manner that may be aligned with shareholder value
maximization. Together with dividends, repurchases provide an avenue
for returning capital to investors, which may be efficient if the
issuer has cash it cannot efficiently deploy. Such returns of capital
may also send signals to investors that managers are operating the
issuer efficiently rather than retaining excess cash for potentially
suboptimal use.
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\26\ See Section V.A.2, infra.
\27\ See Response to Congress: Negative Net Equity Issuance
(Dec. 23, 2020) (``2020 Staff Study''), 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>. 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.
---------------------------------------------------------------------------
Repurchases also have some unique features that are not easily
replicated through dividend payments, such as potential tax advantages
for some investors, repurchases' greater perceived flexibility, their
potential to provide liquidity or price support when an issuer faces
downward price pressure, and their effect on the amount of the issuer's
shares outstanding (which may in turn mitigate dilutive effects of
other share issuances or favorably adjust an issuer's leverage
ratio).\28\ Importantly, and as we discuss further below, because
investors understand that repurchases reflect managers' judgment about
whether current prices accurately reflect the issuer's fundamental
value, and consume cash that could otherwise be used for other
purposes, repurchases can provide a relatively credible signal of the
issuer's view that its stock is undervalued.\29\ However, as noted in
the Proposing Release,\30\ and by several commenters,\31\ share
repurchases may be at least partially motivated by factors other than
long-term value maximization.
---------------------------------------------------------------------------
\28\ See Bonaim[eacute], A.A. & Kahle, K.M., Share Repurchases,
in Handbook of Corporate Finance (B. Espen Eckbo ed., forthcoming
2023) (``Bonaim[eacute] and Kahle (2023)'') and Farre-Mensa, J.,
Michaely, R., & Schmalz, M. Payout Policy, 6 Ann. Rev. Fin. Econ. 75
(2014) (``Farre-Mensa et al. (2014)'').
\29\ See Bonaim[eacute] and Kahle (2023), supra note 28. For
more detailed discussion of this literature, see infra Section
V.A.2. and infra notes 402-403 and accompanying text.
\30\ See Proposing Release, supra note 2, at 8444-8446.
\31\ See, e.g., letters from Professor Alex Edmans (May 9, 2022)
(``Prof. Edmans'') and Professor Robert J. Jackson, Jr., Dr. Edwin
Hu, and Dr. Jonathon Zytnick (Jun. 27, 2022) (``Prof. Jackson, Dr.
Hu, and Dr. Zytnick'').
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[[Page 36006]]
At present, because issuers are not required to report daily
repurchase transactions or provide additional qualitative disclosures
about those transactions, it can be difficult to determine whether
repurchase timing may have been motivated, at least in part, by factors
other than long-term value maximization. For example, issuer
repurchases may be influenced, in part, by a desire to achieve certain
accounting metrics or for other potentially suboptimal reasons.\32\
Some research has found that issuers that would have narrowly missed an
earnings per share (``EPS'') target were more likely to have engaged in
repurchases,\33\ which through their mechanical effect of decreasing
the denominator of that measure help such issuers to meet their target.
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\32\ See Graham J.R., Harvey, C.R. & Rajgopal, S., The Economic
Implications of Corporate Financial Reporting, 40 J. Acct. & Econ. 3
(2005) (reporting that about 12 percent of surveyed executives would
use repurchases to meet an earnings forecast); see also Rulemaking
Petition 4-746, Rulemaking Petition Requesting Repeal and Reform of
Rule 10b-18 to Address Manipulative Repurchase Programs that Harm
Workers, at 4 (June 25, 2019), 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> (citing research that repurchases
can be used to inflate share price and EPS-linked executive
compensation) (``Rulemaking Petition 4-746''). The 2020 Staff Study
found that, while a majority of the issuers included in the study
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, approximately 18 percent of repurchasing issuers made
compensatory awards based in part on EPS. See 2020 Staff Study,
supra note 27. Other studies have considered repurchasing issuers
that employed EPS or similar measures for other internal
evaluations, such as promotion or retention, see Bennett, B. et al.,
Compensation Goals and Firm Performance, 124 J. Fin. Econ. 307, 310,
325 (2017) (reporting that executives who just miss performance
thresholds are less likely to be retained), and for the purposes of
creditors or outside analysts, see Kurt, A. C., Managing EPS and
Signaling Undervaluation as a Motivation for Repurchases: The Case
of Accelerated Share Repurchases, 17 Rev. Acct. & Fin. 453 (2018)
(noting that executives manage EPS in order to satisfy creditors and
suppliers, among other reasons) (``Kurt''). For additional academic
research on the use of repurchases as a method of real earnings
management, see infra notes 416-420 and accompanying text.
\33\ See Almeida, H., Fos, V., & Kronlund, M., The Real Effects
of Share Repurchases, 119 J. Fin. Econ. 168 (2016) (``Almeida et al.
(2016)'') and Hribar, P., Jenkins, N., & Johnson, W.B., Stock
Repurchases as an Earnings Management Device, 41 J. Acct. & Econ. 3
(2006) (``Hribar et al. (2006)'').
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The fact that repurchases can significantly impact executive
compensation for some issuers may also affect how managers choose to
employ repurchases. Like all investors, executives who receive equity-
linked compensation stand to benefit from repurchases that improve
their employer's long-term stock price, but in some cases executives
may realize additional gains unavailable to other investors because of
trading by executives or the structure of compensation to those
executives. Some studies have found personal trading by insiders close
in time to predictable changes in share price caused by repurchases or
repurchase-plan announcements, such as concentrated sales in the period
immediately following the issuer's repurchase.\34\ Issuers may also
adjust the timing of their repurchases or repurchase announcements to
increase the returns on insider equity sales.\35\ In these cases, by
timing their sales to closely follow issuer purchases, executives can
benefit in ways that confer a personal benefit to executives without
necessarily increasing the value of the firm.\36\ Thus, equity-based or
EPS-tied compensation arrangements could potentially be one factor that
may influence some executives' decisions to undertake repurchases.\37\
Shareholders may not have sufficient information about all of these
possible purposes and impacts of issuer repurchases.
---------------------------------------------------------------------------
\34\ See 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''); Ben-Raphael,
A., Oded, J., & Wohl, A., Do Firms Buy Their Stock at Bargain
Prices? Evidence from Actual Stock Repurchase Disclosures, 18 Rev.
Fin. 1299 (2014); Edmans, A., Fang, V.W., & Huang, A. H., The Long-
Term Consequences of Short-Term Incentives, 60 J. Acct. Res. 1007,
1024 (2022) (``Edmans et al. (2022)''); Moore, D., Strategic
Repurchases and Equity Sales: Evidence from Vesting Schedules, 146
J. Banking & Fin. 106717 (2023) (``Moore''); Wang, Z., Yin, Q.E., &
Yu, L., Real Effects of Share Repurchases Legalization on Corporate
Behaviors, 140 J. Fin. Econ. 197 (2021); see also 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 insider
sales decline ahead of repurchases). One commenter provided us with
economic analysis by Professors Lewis and White disputing the
findings from Commissioner Jackson's Speech. See letter from U.S.
Chamber of Commerce (Apr.1, 2022) (``Chamber II''). But see letter
from Prof. Jackson, Dr. Hu, and Dr. Zytnick in response (asserting
that Lewis and White's analysis of the Jackson data confirms, rather
than undermines, the Jackson conclusion).
\35\ See Edmans et al. (2022), supra note 34; see also Edmans,
A., Goncalves-Pinto, L., Groen-Xu, M., & Wang, Y., Strategic News
Releases in Equity Vesting Months, 31 Rev. Fin. Stud. 4099 (2018)
(``Edmans et al. (2018)'') (reporting that firms disproportionately
release positive news items, including buyback announcements, in
months when CEO equity vests) and Moore, supra note 34.
\36\ See Edmans et al. (2022), supra note 34; see also Moore,
supra note 34, at 2 (reporting that author's findings are
``consistent with managers strategically using share repurchases to
personally benefit from the positive effects of repurchasing on the
stock price'').
\37\ Edmans et al. (2022), supra note 34, at 1010, 1034 (noting
their findings ``are consistent with the CEO announcing repurchases
to falsely signal undervaluation to the market to improve the
conditions for his equity sales''); see also Kurt, supra note 32
(finding evidence that ``managerial incentives--securing bonuses and
maintaining reputations by avoiding EPS misses--potentially lie
behind the opportunistic use'' of some share repurchases). For a
further discussion of the use of repurchases to potentially
influence compensation tied to per-share measures, see infra note
422.
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Some commenters who opposed the proposed amendments questioned the
premise that stock repurchases are deliberately used to enhance
executive compensation or otherwise benefit insiders looking to sell
their shares.\38\ One of these commenters stated that ``[c]oncerns
about companies' using share repurchases to impact earnings per share
(`EPS') or executive compensation are unfounded and ignore existing
protections,'' and pointed to recent academic work that, in the
commenter's view, undermines the premise that executives undertake
repurchases to boost their compensation.\39\ To the extent that
opposing commenters interpret this research to mean that opportunism or
self-interest cannot be a significant motivating factor for share
repurchases, we disagree with their assessment of the underlying
evidence.\40\ In this regard,
[[Page 36007]]
we share the assessment of other commenters who argued that the
research cited by opposing commenters does not undermine the
proposition that personal benefit may be a factor in determining
whether to undertake a share repurchase.\41\
---------------------------------------------------------------------------
\38\ See letters from Chamber II and Craig M. Lewis, Professor
of Law and Joseph T. White, Assistant Professor of Finance,
Vanderbilt University (Oct. 7, 2022) (``Profs. Lewis and White'').
\39\ See letter from Profs. Lewis and White. Among other
research, Profs. Lewis and White cite Guest, N., Kothari, S.P., &
Venkat, P., Share Repurchases on Trial: Large-Sample Evidence on
Share Price Performance, Executive Compensation, and Corporate
Investment, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4149796">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4149796</a>, at 16 (Jan. 2023) (``Guest et al.'')
(asserting that the study's findings that repurchases do not distort
prices ``helps rule out [the] possibility'' that insiders can ``sell
a portion of their shares at prices that are inflated due to a
buyback'') and PWC, Share Repurchases, Executive Pay and Investment,
BEIS Research Paper Number 2019/11, <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/817978/share-repurchases-executive-pay-investment.pdf">https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/817978/share-repurchases-executive-pay-investment.pdf</a> (finding that in the U.K. there is no or only weak
evidence that repurchases are used to achieve EPS targets).
\40\ For example, with respect to Guest et al., supra note 39,
as the authors of the study report, large repurchasers enjoy
superior returns in the quarter after repurchase, id. at 15, but
perform similarly to non-repurchasers in the following year, id. at
16. This may be consistent with short-term gains from EPS or other
manipulation that are dissipated as more complete information
becomes available to the market, as the researchers appear to
acknowledge in a footnote, see id. at 16 n.19. Such changes in value
would create opportunities for executives to profit from trades
close in time to repurchases. In addition, the authors focus only on
behavior of the largest or most frequent repurchasers, and market-
wide correlations estimated based on those issuers are not
necessarily probative of the behavior of the issuers who stand to
benefit most from small changes in EPS. We are thus more persuaded
by the studies that do find opportunities for executives to profit
from repurchases. See supra note 34. Similarly, with respect to the
PWC study, supra note 39, we note that the U.K. has required next-
day reporting of repurchases since 1981, which may discourage
issuers from attempting to manipulate accounting metrics with
repurchases, because daily data would reveal instances where
repurchases were undertaken at a time when it was obvious to
management they would otherwise miss an EPS target.
The opposing commenters also point to research suggesting that
insider sales following a repurchase or repurchase announcement are
due to coincidences of the corporate calendar (i.e., repurchases
occurring near in time to the expiration of blackout periods), not
deliberate efforts by insiders to benefit from repurchase activity.
See letter from Chamber II (citing Dittmann, I., Lu, A. Y.,
Obernberger, S., & Zheng, J. The Corporate Calendar and the Timing
of Share Repurchases and Equity Compensation, Working paper (2022)
(``Dittmann et al. (2022)''). But as another commenter observed:
``it does not matter if the equity sales are `mechanical' due to
occurring after the end of a blackout period, or `voluntary'. If the
CEO knows that she will be able to sell equity, due to the blackout
period ending, this may still influence her buyback decision.'' See
letter from Prof. Edmans.
\41\ See letters from Prof. Jackson, Dr. Hu, and Dr. Zytnick and
Prof. Edmans.
---------------------------------------------------------------------------
Moreover, we believe opposing commenters have misconstrued the
nature of the concern the proposed amendments sought to address. As
explained below, it is not necessary to find that opportunism drives
the timing of most issuer share repurchases to conclude that it is
appropriate for investors to have more useful information about such
repurchases. Indeed, as the author of several of the studies cited by
these commenters observed, personal benefit may not be ``the only, or
even most important, factor (as the terms `manipulation' or
`opportunism' would suggest) but it may be a consideration. Thus, one
does not need to believe that share buybacks are used for
manipulation--a high hurdle--to find merit in the SEC's proposal.''
\42\ While this commenter specifically referenced the proposal to
require disclosure of any policies and procedures relating to purchases
and sales of the issuer's securities by its officers and directors, we
believe all of the quantitative and qualitative disclosure requirements
that we are adopting in this release together will serve to alert
investors to the possibility of repurchases being motivated, at least
in part, by goals unconnected to increasing shareholders value or
signaling the issuer's view that its stock is undervalued.\43\
---------------------------------------------------------------------------
\42\ See letter from Prof. Edmans.
\43\ See id.
---------------------------------------------------------------------------
Currently, investors cannot readily determine the purposes behind
any given share repurchase, and this uncertainty may have adverse
effects on investors and markets. When managers may personally benefit
from repurchases or their timing, it is not as evident, for example,
that a repurchase is intended to distribute excess cash or signal
management's views about the issuer's fundamental value, rather than to
benefit the manager personally. Similarly, if issuers may adjust the
volume or timing of repurchases to reach certain accounting targets or
for other reasons that are not intended to signal management's views
about the firm's value or to return excess cash, such as protecting the
issuer's reputation or managing relationships with customers or
suppliers, some of which may even run counter to the interest of
shareholders, the signal sent by all repurchases is muddied. This
market failure may make it more difficult for investors to value a
company or identify when an issuer's use of cash is well-managed,
reducing investor confidence and market liquidity.\44\
---------------------------------------------------------------------------
\44\ We discuss in more detail the market failures addressed by
the amendments in the Economic Analysis section, below. See infra
Section V.B.1.
---------------------------------------------------------------------------
The additional disclosures that we are adopting, including of daily
quantitative repurchase data, will provide investors with enhanced
information to assess the purposes and effects of repurchases,
including whether those repurchases may have been taken for reasons
that may not increase an issuer's value. At the same time, we are
mindful that any enhanced disclosure requirements will come at a cost
for issuers, and ultimately shareholders, and should be appropriately
tailored to address their intended aims. For those reasons, as
discussed more fully below, we have made certain changes to the final
amendments to help limit the compliance burden on issuers while still
providing investors with the information they need to better assess the
efficiency of, and motives behind, issuer repurchases.
B. Purpose of the Amendments
As we have just described, issuers repurchase shares for multiple
reasons. In many cases, share repurchases may represent an efficient
use of the issuer's capital, such as when returning money to
shareholders exceeds other possible internal investments of
capital.\45\ However, some uses of share repurchases may not be
efficient, such as repurchases conducted to increase management
compensation or to affect various accounting metrics, in either case
when those actions do not increase the value of the firm.\46\
---------------------------------------------------------------------------
\45\ See supra notes 27-29 and accompanying text.
\46\ See supra notes 30-33 and accompanying text.
---------------------------------------------------------------------------
Current repurchase disclosure requirements, which do not require
the issuer to provide quantitative daily repurchase information or
state the objectives or rationales for its repurchases and are reported
in the aggregate at the monthly level, provide investors with
insufficient insight into the efficiency, purposes, and impacts of an
issuer's share repurchases. This frustrates the ability of investors to
separate out and assess the different motivations and impacts of share
repurchases. We have determined that additional disclosures are needed
to remedy these market failures.
Given common frictions on voluntary reporting of this information,
including the strong possibility of significant divergences in the
interests of managers and other investors, we believe mandatory
disclosures are necessary to overcome these informational asymmetries
between issuers and their managers on the one hand and investors on the
other. The additional qualitative disclosures we are adopting will
provide investors with additional information about the structure of an
issuer's repurchase program and its share repurchases that will enable
them to better understand how and why those repurchases are conducted.
The qualitative disclosures, when combined with the daily repurchase
activity disclosure, will allow investors to draw clearer and more
informed conclusions about the purposes and effects of share
repurchases.
The current reporting regime, in which investors receive
information only about the monthly aggregate repurchases of issuers,
fails to provide enough detail for investors to draw informed
conclusions about the purposes and effects of many repurchases. In
contrast, the amendments we are adopting will provide investors with
data about the daily repurchase activity of an issuer and additional
qualitative disclosures that investors can combine with other
disclosures, such as the timing of compensatory awards or executive
equity transactions, to observe whether a given repurchase was apt to
affect executive compensation. Data on daily transactions and the
additional qualitative disclosures would also reveal patterns in which
repurchases were undertaken at times or under conditions that were
likely to affect imminent accounting metrics, or prior
[[Page 36008]]
to the release of material nonpublic information by the issuer.
Investment advisers may use this data in assisting investors in
assessing the purposes and effects of share repurchases.
Requiring that issuers provide disclosures of daily share
repurchases as well as qualitative data will better enable investors to
assess the efficiency, purposes, and impacts of share repurchases.
These disclosures will allow investors to better evaluate whether a
share repurchase was intended to increase the value of the firm or
represented an inefficient deployment of capital, such as by either
providing additional compensation to management or impacting accounting
metrics in ways that were not intended to increase overall firm value.
Disclosures of daily repurchase data and qualitative disclosures may
indicate that management may have timed share repurchases in order to
meet certain earnings goals or targets, to support insiders' trading
positions or to otherwise increase insider compensation. Enhancing the
ability of investors to assess the efficiency, purposes, and impacts of
issuer repurchases would benefit investors and could improve market
efficiency and capital formation.
Accordingly, the purpose of these amendments is to improve the
information investors receive to better assess the efficiency of, and
motives behind, an issuer repurchase. In proposing to amend Item 703,
the Commission expressed the view that enhanced disclosure about share
repurchases would allow investors to ``[b]etter understand an issuer's
motivation for its share repurchase.'' \47\ In this way, the proposed
amendments aimed to assist investors in distinguishing between share
repurchases intended to increase shareholder value or signal the
issuer's view that its stock is undervalued and those that instead were
at least, in part, ``potentially motivated by short-term attempts to
boost the share price'' or to achieve other inefficient objectives.\48\
In the case where repurchases may increase the value of managers'
compensation, for instance, one commenter stated that ``[enhanced]
disclosure is useful because it alerts the market to the possibility of
buybacks being at least partially influenced by the CEO's equity
sales.'' \49\ We agree and, with the benefit of the comments received
on the proposed amendments, continue to believe that an investor's
ability to assess the impact of a given repurchase depends in part on
having the information necessary to evaluate the purposes for which the
repurchase was undertaken.
---------------------------------------------------------------------------
\47\ Proposing Release, supra note 2, at 8445.
\48\ Proposing Release, supra note 2, at 8446 and 8457.
\49\ See letter from Prof. Edmans.
---------------------------------------------------------------------------
We understand that issuers may employ open-market stock repurchases
to credibly signal to investors the issuer's view of the stock's
fundamental value.\50\ The possibility that repurchases may be, in
part, motivated by goals unconnected to the issuer's fundamental value,
such as the manager's compensation or reputation or achieving
accounting metrics required by creditors or expected by analysts, would
reduce the credibility of such signals, even among issuers whose
repurchases are solely intended to signal management's view of the
issuer's value. Similarly, due to asymmetries in information between
the issuer and investors, investors cannot typically observe directly
whether a repurchase represented an efficient use of excess cash aimed
at increasing the issuer's value. Thus, the possibility that some
repurchases are motivated by reasons other than shareholder value
maximization complicates investor efforts to make this determination
absent additional information not currently required to be disclosed.
---------------------------------------------------------------------------
\50\ See, e.g., Asquith, P. & Mullins, Jr. D.W., Signaling with
Dividends, Stock Repurchases, and Equity Issues, 15 Fin. Mgmt. 27,
33-34 (1986).
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Further, as we noted in the Proposing Release,\51\ and as described
above, there is evidence from which investors could reasonably conclude
that some repurchases are at least in part motivated by goals such as
executive compensation or achieving certain accounting targets. Thus,
as the Commission stated, ``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.'' \52\ Accordingly, we believe that investors should have
sufficient information about how issuers conduct repurchases to make
informed judgments about the likely purposes and effects of the
repurchases, including whether such repurchases provide credible
information about the value of the issuer.
---------------------------------------------------------------------------
\51\ See Proposing Release, supra note 2, at 8444-8445.
\52\ Proposing Release, supra note 2, at 8455.
---------------------------------------------------------------------------
We acknowledge that many, perhaps even most, share repurchases are
not undertaken solely or primarily to benefit managers or to achieve
targets, such as those based on EPS. Indeed, as commenters noted,
Commission staff have previously assessed that it is ``unlikely'' that
a ``majority'' of repurchases are so motivated, and instead that
``most'' repurchases are consistent with shareholder value
maximization.\53\
---------------------------------------------------------------------------
\53\ See, e.g., letters from Cato Institute (Apr. 1, 2022)
(``Cato''), Chamber II, Maryland State Bar Association (Apr. 5,
2022) (``Maryland Bar''), and National Association of Manufacturers
(Mar. 31, 2022) (``NAM'').
---------------------------------------------------------------------------
That fact, however, does not aid investors who are attempting to
assess the efficiency of, and information conveyed by, any given
repurchase by a particular issuer.\54\ Given the opportunity for
repurchases to affect executive compensation or help an issuer to
achieve certain accounting measures, as well as the evidence that some
repurchases do so, investors cannot currently be certain that any given
repurchase in fact conveys information about the issuer's fundamental
value. Thus, as the Commission explained in the Proposing Release,
additional disclosures would, for example, ``help investors gauge
whether . . . repurchases may be motivated by price support for
insiders' sales of their securities, rather than conveying a true
signal of undervaluation.'' \55\ In this regard, we agree with the
observations of a commenter who compared this rationale to disclosure
requirements for potentially self-interested financial advisors where
disclosure allows a client to ``take into account the possibility of a
conflict.'' \56\
---------------------------------------------------------------------------
\54\ See, e.g., letters from Better Markets (Apr. 1, 2022)
(``Better Markets I'') (noting that ``disclosures will help
investors identify `opportunistic' share repurchases designed
primarily to benefit management, not the company'') and Council of
Institutional Investors (Mar. 31, 2022) (``CII'') (stating the
amendments ``could strengthen the market's ability to assign premia
to companies that make capital allocation decisions optimizing the
company's long-term performance and assign discounts to companies
that do not'').
\55\ Proposing Release, supra note 2, at 8457.
\56\ See letter from Prof. Edmans (stating that this is similar
to how financial advisors must disclose the commission on products
that they are offering to their clients, such that, although the
product pays the highest commission to the advisor, it is also in
the best interest of the client, so there is no conflict, but the
disclosure is useful to allow the client to take into account ``the
possibility of'' a conflict).
---------------------------------------------------------------------------
Further, even efficient repurchases have the potential to
negatively affect investor confidence. As we have described previously,
we are concerned that, in some cases, issuers may repurchase their
stock while the relevant decision makers are aware of material
nonpublic information.\57\ Because issuers are repurchasing their
[[Page 36009]]
own securities, asymmetries may exist between issuers and investors
with regard to information about the issuer and its future prospects.
Investors may be more reluctant to trade in the presence of such
informational asymmetries.\58\
---------------------------------------------------------------------------
\57\ See Rule 10b5-1 Adopting Release, supra note 18, at 80362-
80363 and 80372.
\58\ One commenter suggests that issuers undertake voluntary
arrangements that limit their ability to repurchase at a time the
relevant decision maker is aware of material nonpublic information,
and therefore that the threat of such trading should not serve as a
basis for the amendments. See letter from Securities Industry and
Financial Markets (Apr. 1, 2022) (``SIFMA II''). Other academic
research suggests, however, that some issuers conduct repurchases at
times they are likely to be aware of material nonpublic information
and earn average returns on their trades that are not achieved by
other traders. See Bonaim[eacute], A.A., Harford, J., & Moore, D.,
Payout Policy Tradeoffs and the Rise of 10b5-1 Preset Repurchase
Plans, 66 Mgmt. Sci. 2291 (2020) (reporting that one-third of
disclosed issuer 10b5-1 plans begin trading within one day of
adoption) (``Bonaim[eacute] et al. (2020)'').
---------------------------------------------------------------------------
In light of these concerns, the concerns expressed by
commenters,\59\ and our expectation that the volume of share
repurchases will continue to be significant, we are persuaded that
investors would benefit from additional and more detailed quantitative
and qualitative information related to issuer share repurchases. Such
disclosures would help investors evaluate the purposes, impacts, and
efficiency of share repurchases. Additional information regarding an
issuer's repurchase activity may reveal, for instance, whether those
repurchases likely affected managers' compensation.
---------------------------------------------------------------------------
\59\ See, e.g., letters from Amy Lewis (Dec. 15, 2021)
(``Lewis''); California Public Employees' Retirement System (Mar.
30, 2022) (``CalPERS''), CFA Institute (Apr. 6, 2022) (``CFA
Institute''), CII, and Form Letter A.
---------------------------------------------------------------------------
The daily quantitative repurchase data we are requiring will assist
investors in understanding the purposes and effects of repurchases. For
example, these data will help investors to identify repurchases
undertaken close in time to the date on which an accounting measure,
such as EPS, is likely to trigger other effects. In many cases,
repurchase data aggregated at the monthly level would not be
sufficiently detailed to shed light on these patterns. Similarly, daily
data may allow investors to determine whether an executive may have
sold equity during a month in which there was heavy repurchase
activity, and data aggregated at the monthly level leave it unclear
whether the sales preceded or followed the bulk of the repurchases.
We recognize that these data will not by themselves establish that
a repurchase was undertaken for any particular purpose. As a result,
the final amendments also require issuers to provide investors with
more detailed qualitative information that they could use to evaluate
issuer share repurchases in conjunction with the daily quantitative
repurchase data. We believe that the quantitative and qualitative
information will work together to help investors to identify
repurchases in which efforts to affect compensation or accounting
measures may have played a larger role, and help to credibly identify
repurchases where such goals were unlikely to have played a significant
role.
Detailed reporting could also reveal instances in which an issuer
made large repurchases in advance of announcing material nonpublic
information or allow investors to more readily observe instances in
which share repurchases may have been timed to allow trading while the
issuer was aware of material nonpublic information or to benefit from
other asymmetries. Investors could consider this information in making
future investment decisions with respect to a given issuer. In many
instances, reporting of repurchase activity in aggregate monthly
amounts, as required by our current requirements, may not be precise
enough to reveal patterns in repurchases. Again, we also believe that
qualitative information regarding an issuer's purposes for and policies
regarding repurchases will further aid investors in understanding these
daily quantitative data, and in using them to assess the efficiency of,
and motivations for a repurchase.
The amendments require more detailed quantitative and qualitative
disclosure about issuer share repurchases, and require issuers to
present the disclosure using a structured data language. We believe
that the final amendments will promote investor protection by allowing
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 has structured and is executing its purchase
plan; and
<bullet> Gain potential insight into any relationship between share
repurchases and executive compensation and stock sales.
III. Discussion of Final Amendments
A. Disclosure of Share Repurchases
1. Proposed Amendments
The Commission proposed new Exchange Act Rule 13a-21 and new Form
SR, which would require issuers, including FPIs and certain Listed
Closed-End Funds, to report any daily 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 are registered pursuant to
Exchange Act section 12.\60\ The issuer would be required to furnish
the daily detail in Form SR on the Commission's Electronic Data
Gathering, Analysis, and Retrieval (``EDGAR'') system before the end of
the first business day following the day on which the issuer executes a
share repurchase. The Form SR would require the following disclosure in
tabular format, by date, for each class or series of securities:
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\60\ Currently, registered investment companies other than
Listed Closed-End Funds are not required to provide the repurchase
disclosure under Item 703 of Regulation S-K as implemented in Form
N-CSR. Accordingly, proposed Form SR also would not be filed by
registered investment companies other than Listed Closed-End Funds.
Business development companies, 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.
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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 Rule 10b-18 non-exclusive safe harbor; \61\ and
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\61\ Rule 10b-18 provides issuers with a safe harbor from
liability for manipulation under 15 U.S.C. 78i(a)(2) (``Exchange Act
section 9(a)(2)'') and 15 U.S.C. 78j(b) (``Exchange Act section
10(b)'') when they repurchase their common stock in the market in
accordance with the rule's manner, timing, price, and volume
conditions. 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.
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(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).\62\
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\62\ 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.
---------------------------------------------------------------------------
The proposed amendments would also require an issuer to disclose
material errors or changes to
[[Page 36010]]
information previously reported on an amended Form SR, which the
Commission indicated 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. Additionally, the
Commission proposed to require issuers to furnish, rather than file,
Form SR. As a result, issuers would not be subject to liability under
15 U.S.C. 78r (``Exchange Act section 18'') 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 15 U.S.C. 77k (``Securities Act section 11''), unless
the issuer expressly incorporated such information.\63\
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\63\ 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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2. Comments on the Proposed Amendments
a. Comments on the Daily Share Repurchase Disclosure Requirement
Although there was substantial opposition to the proposal,\64\
several commenters generally supported the proposed daily repurchase
disclosure.\65\ Some of the commenters that supported the proposed
amendments asserted that they would reduce information asymmetries
between issuers and investors,\66\ which would result in ``greater
confidence that they can find accurate, comprehensive information about
a security and the broader investment field.'' \67\ Other commenters
stated that daily disclosure of share repurchases would increase
transparency.\68\
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\64\ See, e.g., letters from American Bar Association, Federal
Regulation of Securities Committee (Apr. 13, 2022) (``ABA
Committee''); American Council of Life Insurers (Feb. 22, 2022)
(``ACLI''); ASA; Bank Policy Institute & American Bankers
Association (Apr. 1, 2022) (``BPI & Amer. Bankers Assoc.''); Cato;
Chamber II; Chevron Corporation (Mar. 31, 2022) (``Chevron'');
Coalition of Business Trades (Apr. 1, 2022) (``Coalition'');
Cravath, Swaine & Moore LLP (Mar. 31, 2022) (``Cravath''); Davis
Polk & Wardwell LLP (Mar. 28, 2022) (``Davis Polk''); DLA Piper LLP
(Apr. 1, 2022) (``DLA Piper''); Dow Inc. (Apr. 1, 2022) (``Dow'');
FedEx Corporation (Apr. 1, 2022) (``FedEx''); Fenwick & West LLP
(Mar. 31, 2022) (``Fenwick''); Guzman & Company (Mar. 28, 2022)
(``Guzman''); Home Depot, Inc. (Apr. 1, 2022) (``Home Depot''); HP
Inc. (Apr. 1, 2022) (``HP''); Institute for Portfolio Alternatives
(Mar. 28, 2022) (``IPA''); International Bancshares Corporation
(Apr. 1, 2022) (``IBC''); Jones Day (Mar. 31, 2022) (``Jones Day'');
Keith Paul Bishop, former California Commissioner of Corporations
(Apr. 6, 2022) (``Bishop''); Maryland Bar; NAM; Norfolk Southern
Corporation (Mar. 31, 2022) (``Norfolk Southern''); NYSE Group, Inc.
(Apr. 1, 2022) (``NYSE''); Paul, Weiss, Rifkind, Wharton & Garrison
LLP (Apr. 1, 2022) (``Paul Weiss''); Pennsylvania Chamber of
Business and Industry (Apr. 1, 2022) (``PA Chamber''); PNC Financial
Services Group (Mar. 30, 2022) (``PNC''); Profs. Lewis and White;
PSC; Quest Diagnostics (Apr. 1, 2022) (``Quest''); Shearman &
Sterling LLP (Apr. 1, 2022) (``Shearman''); SIFMA II; Simpson
Thacher & Bartlett LLP (Mar. 31, 2022) (``Simpson Thacher'');
Society for Corporate Governance (Apr. 1, 2022) (``SCG''); Sullivan
& Cromwell (Apr. 1, 2022) (``Sullivan''); T. Rowe Price (Mar. 30,
2022) (``T. Rowe Price''); Virtu Financial (Mar. 29, 2022)
(``Virtu''); Vistra Corp. (Apr. 1, 2022) (``Vistra''); and Wilson
Sonsini Goodrich & Rosati (Apr. 18, 2022) (``Wilson Sonsini'').
\65\ See, e.g., letters from Alex Hanson-Michelson (Oct. 18,
2022) (``Hanson-Michelson''); Americans for Financial Reform
Education Fund et al. (Apr. 1, 2022) (``AFREF et al.''); Amy (Oct.
23, 2022) (``Amy''); Anonymous (Oct. 29, 2022) (``Anonymous V'');
Anonymous (Oct. 30, 2022) (``Anonymous VI''); Anonymous, Retail
Investor (Dec. 26, 2022) (``Anonymous VII''); Arun R. (Oct. 8, 2022)
(``Arun''); Better Markets I; Better Markets (Jan. 11, 2023);
BrilLiquid LLC (Apr. 1, 2022) (``BrilLiquid''); CalPERS; Calvin
Satterfield (Jan. 13, 2023) (``Satterfield''); CFA Institute; CII;
David B. (Oct. 9, 2022) (``David''); David Jaggard (Oct. 13, 2022)
(``Jaggard''); Richard L. Hecht, Adubon Consulting Group (Jan. 27,
2022) (``Hecht''); International Corporate Governance Network (Mar.
31, 2022) (``ICGN''); James Lutes (Jan. 10, 2023) (``Lutes''); James
Mahr (Oct. 8, 2022) (``Mahr''); Joe Hernandez (Oct. 30, 2022)
(``Hernandez''); Joseph Krugel (Oct. 30, 2022) (``Krugel''); Kayden
Fox (Oct. 8, 2022) (``Fox''); Lewis; Marc Pentacoff (Dec. 23, 2021)
(``Pentacoff''); Mike Kerr (Aug. 16, 2022) (``Kerr''); North
American Securities Administrators Association, Inc. (Apr. 1, 2022)
(``NASAA''); National Employment Law Project (Apr. 1, 2022)
(``NELP''); Oxfam America (Apr. 1, 2022) (``Oxfam''); Professor
Lenore Palladino, UMass Amherst (Mar. 30, 2022) (``Prof.
Palladino''); Prof. Jackson, Dr. Hu, and Dr. Zytnick; Public Citizen
(Apr. 1, 2022) (``Public Citizen''); Roosevelt Institute (Mar. 31,
2022) (``Roosevelt''); Stephen, Consultant (Dec. 29, 2022)
(``Stephen''); Stephane Mans (Jan. 12, 2023) (``Mans''); U.S.
Senators Marco Rubio and Tammy Baldwin (Apr. 1, 2022) (``Senators
Rubio & Baldwin''). Additionally, Form Letter A supported the
proposal.
\66\ See, e.g., letters from CFA Institute and Lewis.
\67\ See letter from Lewis.
\68\ See, e.g., letters from Amy, Anonymous V, Anonymous VI,
Anonymous VII, Andrew (Dec. 26, 2022), Arun, CalPERS, David, D.L.
(Jan. 11, 2023), Fox, Hanson-Michelson, Hernandez, Jaggard, Kerr,
Krugel, Lutes, Mahr, Mans, Satterfield, and Stephen.
---------------------------------------------------------------------------
Some commenters asserted that issuers would be able to comply with
the proposed requirement to provide daily repurchase disclosure one
business day after execution of an issuer's share repurchase order
because issuers already comply with these types of strict deadlines in
other markets, and section 16 insiders must report their purchases and
sales within two business days.\69\ Other commenters suggested that the
costs of the proposed amendments would be minimal,\70\ with one
commenter noting that, at most, the proposed amendments would be ``a
minor incremental administrative burden.'' \71\ Some commenters
indicated that the proposed amendments would enable the Commission to
determine issuers' compliance with the Rule 10b-18 safe harbor.\72\ One
form comment letter asserted that such daily disclosure would reduce
the amount of time that insiders know of a repurchase while other
investors remain ignorant and ``give the Commission the tools to
enforce existing laws.'' \73\
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\69\ See, e.g., letters from CalPERS and ICGN.
\70\ See e.g., letters from Better Markets I, CFA Institute, and
Prof. Palladino (stating that the costs of daily reporting ``should
be minimal given the well-established regular reporting of other
financial metrics to the Commission, and the fact that companies are
already reporting aggregate stock buybacks data, which must be
determined from micro-level data'').
\71\ See letter from CFA Institute.
\72\ See, e.g., letters from NELP, Prof. Palladino, and
Roosevelt. These commenters were generally concerned about issuers
manipulating the market for their securities through buybacks
executed not in accordance with the Rule 10b-18 safe harbor.
\73\ See letter from Form Letter A.
---------------------------------------------------------------------------
Many commenters opposed the proposal due to the proposed
requirement that issuers provide daily repurchase disclosure one
business day after execution of an issuer's share repurchase order.\74\
Some of these commenters indicated that existing disclosure rules
require near real-time trading information only in situations involving
changes in corporate control or trading by insiders,\75\ and share
repurchase activity does not carry the same signaling value as those
situations.\76\ Other commenters asserted that the justification for
the one business day requirement is not
[[Page 36011]]
evident.\77\ A number of commenters asserted that the proposed
amendments would increase costs without a corresponding benefit.\78\
Some commenters suggested that daily repurchase disclosures could cause
investors to misinterpret an issuer's day-to-day changes in trading
activity,\79\ which could result in unjustified stock price volatility
\80\ or the disruption of confidential merger or acquisition
discussions.\81\ Additionally, although some commenters suggested that
investors might use daily disclosure data to identify the issuer's
trading strategies,\82\ other commenters observed that a move to
periodic reporting should substantially mitigate any such concern.\83\
---------------------------------------------------------------------------
\74\ See, e.g., letters from ACCO Brands Corporation (Mar. 30,
2022) (``ACCO''), ACLI, ASA, Bishop, BPI & Amer. Bankers Assoc.,
Business Roundtable (Apr. 1, 2022) (``Business Roundtable''), Cato,
Chamber II, Chamber III, Chevron, Coalition, Cravath, Davis Polk,
DLA Piper, Dow, Ed Armstrong (Dec. 28, 2021) (``Armstrong''), Empire
State Reality Trust (Mar. 29, 2022) (``Empire''), FedEx, Guzman,
Hecht, Home Depot, HP, IBC, Jones Day, Kirkland & Ellis LLP (Apr. 1,
2022) (``Kirkland Ellis''), Maryland Bar, NAM, Norfolk Southern, NYC
Bar, NYSE, PA Chamber, Paul Weiss, Pay Governance (Jan. 24, 2022)
(``Pay Governance''), PNC, Profs. Lewis and White, Quest, SCG,
Shearman, SIFMA II, Simpson Thacher, Stephens, Stuart Kaswell, Esq.
(Mar. 18, 2022) (``Kaswell''), Sullivan, T. Rowe Price, Virtu,
Vistra, and Wilson Sonsini. One of these commenters stated that,
because investors only see earnings quarterly, management's attempt
to use repurchases to affect their pay would only been detected
quarterly, and daily disclosures would not help. See letter from
Profs. Lewis and White.
\75\ See, e.g., letters from Davis Polk (stating that ``only in
cases involving potential changes in corporate control--where the
information called for by Schedule 13D is plainly necessary to allow
investors to make informed investment decisions--and in cases
involving trading by officers, directors and ten percent
shareholders, whose trading may signal changes in insider sentiment
and corporate prospects unknown to the public market'') and T. Rowe
Price.
\76\ See letter from Davis Polk.
\77\ See letters from Chamber II, NAM, and T. Rowe Price.
\78\ See, e.g., letters from Armstrong, BPI & Amer. Bankers
Assoc., Business Roundtable, Cato, Chamber II, Coalition, Davis
Polk, DLA Piper, Dow, Guzman, Maryland Bar, Profs. Lewis and White,
Quest, SCG, T. Rowe Price, and Vistra. For example, commenters
claimed that daily disclosure could boost share price, resulting in
higher repurchase costs; push issuers to revise or abandon share
repurchase plans; cause issuers to substitute ASRs for daily
repurchases, which would increase costs and limit flexibility;
discourage stock-based compensation; deter potential capital
allocation decisions; burden personnel; and incentivize the use of
larger financial firms over smaller ones. See, e.g., letters from
Coalition, Davis Polk, DLA Piper, Guzman, Maryland Bar, Profs. Lewis
and White, Quest, SCG, T. Rowe Price, and Vistra.
\79\ See, e.g., letters from Business Roundtable, Davis Polk,
Dow, FedEx, Home Depot, Kaswell, Profs. Lewis and White, NAM, PNC,
Quest, Shearman, SIFMA II, Simpson Thacher, T. Rowe Price, Wilson
Sonsini, and Vistra. For example, some of the commenters noted that
a benign halt in purchases could be misinterpreted as a signal that
the issuer has material nonpublic information or that the issuer has
lost confidence in the value of its stock. See, e.g., letters from
Business Roundtable, Davis Polk, Dow, Home Depot, NAM, Profs. Lewis
and White, Quest, SCG, Simpson Thacher, T. Rowe Price, and Vistra.
One commenter noted that misinterpretation risks are heightened for
financial services companies because a halt in their share
repurchases could be due to supervisory action by the Federal
Reserve or other regulators, but the issuer may be barred from
disclosing such action. See letter from PNC.
\80\ See, e.g., letters from Cravath, Davis Polk, Profs. Lewis
and White, and SCG.
\81\ See, e.g., letters from Davis Polk, PNC, SIFMA II, and
Sullivan.
\82\ See letters from Home Depot and PNC.
\83\ See letters from Cravath and Davis Polk.
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Several commenters claimed that daily disclosures would result in
an overload of information \84\ that would be too disaggregated for
retail investors to easily parse.\85\ Commenters also expressed the
view that hedge funds and other professional traders would leverage
daily repurchase information to exploit arbitrage opportunities \86\
and actually increase information asymmetry.\87\ Some commenters
asserted that we have failed to identify a ``market failure'' that
would justify additional disclosures and expressed the view that
information asymmetry is advantageous to markets because it
incentivizes some market actors to expend resources developing
information that would be relevant to an issuer's share price.\88\
---------------------------------------------------------------------------
\84\ See, e.g., letters from Dow, Kirkland Ellis, NYSE, SCG, and
Vistra.
\85\ See, e.g., letters from ACLI, Armstrong, ASA, Chevron,
Cravath, Dow, Guzman, Hecht, Home Depot, Jones Day, NYSE, PNC,
Profs. Lewis and White, Quest, SCG, Shearman, SIFMA II, and Simpson
Thacher.
\86\ See, e.g., letters from ACCO, Armstrong, ASA, BPI & Amer.
Bankers Assoc., Business Roundtable, Cato, Chevron, Coalition,
Cravath, Davis Polk, DLA Piper, Dow, Empire, FedEx, Guzman, Home
Depot, HP, IBC, Jones Day, NAM, NYC Bar, Norfolk Southern, PA
Chamber, Paul Weiss, PNC, Profs. Lewis and White, Quest, Shearman,
SIFMA II, SCG, Simpson Thacher, Stephens, Sullivan, T. Rowe Price,
Vistra, and Wilson Sonsini. One commenter noted that sophisticated
investors already use their superior technology and resources, which
are not available to ordinary investors, to identify trading
opportunities and earn positive returns by processing the high-
frequency information available on Form 4. See letter from Profs.
Lewis and White.
\87\ See, e.g., letters from NYSE and Profs. Lewis and White.
\88\ See, e.g., letters from Chamber II and Profs. Lewis and
White.
---------------------------------------------------------------------------
Several commenters asserted that the proposed daily repurchase
disclosures on Form SR may encourage issuers to act inefficiently to
mitigate the negative consequences of daily disclosure.\89\ Commenters
suggested that issuers may shift from more conservative daily dollar
cost averaging strategies to the more costly practice of effecting
larger repurchases on fewer days to avoid triggering speculation,
continue daily repurchases when it does not make financial sense to do
so, or limit their average daily trading volume to try to ensure that
sophisticated investors viewed the daily trades as immaterial, even if
a larger volume would be more beneficial to shareholders.\90\ One
commenter suggested that share repurchase disclosures are unnecessary
because, even if managers benefit from repurchases through an increased
share price, such an increase also benefits other existing
shareholders.\91\
---------------------------------------------------------------------------
\89\ See, e.g., letters from Chevron, Davis Polk, DLA Piper,
Profs. Lewis and White, SIFMA II, and Sullivan.
\90\ See, e.g., letters from ACCO, Armstrong, ASA, BPI & Amer.
Bankers Assoc., Business Roundtable, Cato, Chevron, Coalition,
Cravath, Davis Polk, DLA Piper, Dow, Empire, FedEx, Guzman, Home
Depot, HP, IBC, Jones Day, NAM, NYC Bar, Norfolk Southern, PA
Chamber, Paul Weiss, PNC, Quest, Shearman, SIFMA II, SCG, Simpson
Thacher, Stephens, Sullivan, T. Rowe Price, Vistra, and Wilson
Sonsini.
\91\ See letter from Maryland Bar.
---------------------------------------------------------------------------
Some commenters asserted that share repurchase information is not
meaningful to investors because investors have never asked for detailed
share repurchase information.\92\ One commenter stated that the
proposed amendments would interfere with a corporation's state law
duties by discouraging and deterring companies from undertaking
repurchases that they otherwise judge to be in shareholders'
interest.\93\ Another commenter asserted that the proposed amendments
would violate the First Amendment because the proposed amendments ``do[
] not acknowledge the compelled-speech burdens that come with a next-
day reporting regime.'' \94\
---------------------------------------------------------------------------
\92\ See, e.g., letters from ACCO and Norfolk Southern. See also
letter from Profs. Lewis and White (stating that daily repurchase
data is generally immaterial to investors and that many issuers
already disclose completion or cancellation of open market
repurchase programs if they believe it is material).
\93\ See letter from Cato.
\94\ See letter from Chamber III.
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A number of commenters disputed the proposal's assertion that the
use of share repurchases may help some insiders achieve performance
targets.\95\ Several of these commenters \96\ cited the 2020 Staff
Study \97\ for support, particularly the study's statement that ``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.'' \98\ On the other hand, one commenter \99\
asserted that the proposal did not go far enough to address executive
compensation concerns and urged that the Commission revise Instruction
7 to 17 CFR 229.402(d) (``Item 402(d) of Regulation S-K'') to require
issuers to
[[Page 36012]]
disclose whether their repurchase plans triggered additional
compensation.
---------------------------------------------------------------------------
\95\ See, e.g., letters from Bishop, Cato, Chamber II,
Coalition, Maryland Bar, PA Chamber, Pay Governance, Profs. Lewis
and White, SCG, T. Rowe Price, Virtu, and Vistra. But see letter
from Kaswell (stating that the proposal does not go far enough to
address executive compensation concerns and urged that issuers be
required to disclose whether their repurchase plans triggered
additional compensation). Additionally, commenters stated that the
proposal does not reflect the reality that many compensation plans
adjust for repurchases management could not use share repurchases to
inflate earnings because doing so would be thwarted by an issuer's
compensation committee and/or its investors. See, e.g., letters from
Chamber II and Profs. Lewis and White.
\96\ See, e.g., letters from Bishop, Cato, Chamber II,
Coalition, Profs. Lewis and White, T. Rowe Price, Virtu, and Vistra.
\97\ See 2020 Staff Study, supra note 27. See also infra note
383 and accompanying text.
\98\ Id. at 42. Another commenter cited its own study showing
that total shareholder return and capital expenditure growth are
higher for companies with larger buybacks than for companies with
smaller buybacks and concluded that EPS-based incentive plans do not
encourage short-term gains at the expense of long-term performance.
See letter from Pay Governance.
\99\ See letter from Kaswell.
---------------------------------------------------------------------------
One commenter asserted that the amendments are contrary to the
Commission's prior statement to ``minimize the market impact of the
issuer's repurchases, thereby allowing the market to establish a
security's price based on independent market forces without undue
influence by the issuer.'' \100\ Several commenters asked the
Commission to adopt alternative methods and deadlines for issuers to
provide share repurchase disclosures. Some of these commenters
suggested that issuers should make their share repurchase disclosures
on Form 8-K if the repurchases exceed specified volume thresholds,\101\
such as one \102\ or two \103\ percent of the issuer's total
outstanding shares, or some other threshold.\104\ Other commenters
suggested extending the Form SR filing deadline to two days,\105\ ten
days,\106\ or one month after the trade,\107\ or one day after
settlement.\108\ A number of commenters recommended scaling back the
proposal by changing the deadline for the share repurchase disclosure
and the period that the disclosure would encompass.\109\ Commenters
suggested the following deadlines and periods:
---------------------------------------------------------------------------
\100\ See letter from Chamber II (quoting 2003 Adopting Release,
supra note 5, at 64953).
\101\ See, e.g., letters from ABA Committee, DLA Piper, Maryland
Bar, NYC Bar, NYSE, and Sullivan.
\102\ See, e.g., letters from ABA Committee, DLA Piper, NYSE,
Maryland Bar, and Sullivan.
\103\ See letter from Simpson Thacher.
\104\ See letter from FedEx (suggesting that the amendments
replace the share repurchase disclosure on proposed Form SR with
disclosure on Form 8-K, but did not specify the trigger at which the
Form 8-K would be required).
\105\ See, e.g., letters from CII and Philip Forbini (Jan. 11,
2023).
\106\ See letter from Jones Day.
\107\ See id.
\108\ See letter from NASAA.
\109\ See, e.g., letters from Anthem Advisors LLC (Dec. 19,
2022) (``Anthem Advisors''); Armstrong; BrilLiquid; Chamber II;
Cravath; DLA Piper; Guzman; Hecht; Home Depot; HP; Jones Day;
Charles Morris, Greenhouse Funds LLP (Dec. 16, 2021) (``Morris'');
NAM; Pentacoff; Quest; SCG; SIFMA II; Simpson Thacher; and Stephens.
Additionally, one commenter stated that, if the final amendments
include Listed Closed-End Funds, those funds should only be required
to provide daily information semi-annually in their Form N-CSR. See
letter from Investment Company Institute (Apr. 1, 2022) (``ICI I'').
---------------------------------------------------------------------------
<bullet> Quarterly reporting of daily data; \110\
---------------------------------------------------------------------------
\110\ See letter from Jones Day (stating that the amendments
could achieve the same goals through quarterly disclosure of daily
data).
---------------------------------------------------------------------------
<bullet> Quarterly or monthly reporting of daily data; \111\
---------------------------------------------------------------------------
\111\ See letter from Anthem Advisors (stating that requiring
daily disclosures in a single monthly or quarterly report listing
all transactions during the preceding period would be preferable
because it would more easily accessed in EDGAR and more easily
understood).
---------------------------------------------------------------------------
<bullet> Quarterly reporting of biweekly data or limited daily
information; \112\
---------------------------------------------------------------------------
\112\ See letter from Home Depot (recommending, as an
alternative, supplementing current Item 703 disclosure with a list
of dates on which repurchases were made, without the daily volume).
---------------------------------------------------------------------------
<bullet> Monthly reporting of daily data; \113\
---------------------------------------------------------------------------
\113\ See letter from Cravath (stating that monthly disclosure
of daily data would strike a better balance between the benefits of
the information and the negatives of abuse, noise, and the need to
correct failed trades).
---------------------------------------------------------------------------
<bullet> Monthly reporting of biweekly data; \114\
---------------------------------------------------------------------------
\114\ See letter from Home Depot (offering this frequency and
period as an alternative to its prior recommendation of quarterly
reporting of biweekly data).
---------------------------------------------------------------------------
<bullet> Monthly reporting of monthly data; \115\ and
---------------------------------------------------------------------------
\115\ See, e.g., letters from Armstrong, Chamber II, DLA Piper,
Guzman, HP, Morris, NAM, Quest, SCG, SIFMA II, Simpson Thacher, and
Stephens.
---------------------------------------------------------------------------
<bullet> Weekly reporting of weekly data.\116\
---------------------------------------------------------------------------
\116\ See, e.g., letters from BrilLiquid, Guzman, Hecht, and
Pentacoff.
---------------------------------------------------------------------------
Moreover, one commenter supported the proposal to allow Form SR to
be furnished to the Commission instead of filed, stating that
``inadvertently submitting incorrect data'' on the form should not
``automatically open the door'' to private litigation, particularly
section 11 claims,\117\ and another commenter suggested that the final
amendments include a safe harbor permitting issuers to correct Form SR
errors without liability within four business days of the end of the
calendar month in which corrections are identified.\118\ Some
commenters asked the Commission to provide more specificity around the
materiality standard governing amendments to Form SR, and recommended
either a three or five percent misstatement threshold.\119\ One
commenter disagreed with any materiality threshold, stating that such a
threshold would be more confusing than beneficial.\120\
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\117\ See letter from NASAA.
\118\ See letter from Cravath.
\119\ See, e.g., letters from Hecht and NASAA.
\120\ See letter from ICGN.
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b. Comments on Exemptions for Certain Issuers
Several commenters discussed whether the Commission should exempt
certain categories of issuers from the amendments.\121\ Commenters were
split between their support for,\122\ and opposition to,\123\ exempting
FPIs from the proposed quantitative daily disclosure requirements. The
commenters that supported an exemption were generally concerned that
requiring FPIs to file Form SR would deviate from the Commission's
historic practice of deferring to an FPI's home country disclosure
requirements, and some claimed that applying the proposed amendments to
FPIs would subject them to multiple, differing disclosure regimes.\124\
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\121\ See, e.g., letters from ABA Committee, ACCO, Alternative &
Direct Investment Securities Association (Mar. 31, 2022)
(``ADISA''), Better Markets I, BPI & Amer. Bankers Assoc.,
BrilLiquid, Canadian Bankers Association (Mar. 31, 2022) (``CBA''),
CFA Institute, CII, Cravath, Hecht, IBC, ICGN, ICI I, Nareit (Mar.
31, 2022) (``Nareit''), NYC Bar, NYSE, Profs. Lewis and White,
Roosevelt, SIFMA II, Sullivan, Teachers Insurance and Annuity
Association of America (Apr. 1, 2022) (``TIAA''), TotalEnergies SE
(Apr. 1, 2022) (``TotalEnergies''), and Vereniging Effecten
Uitgevende Ondernemingen (Mar. 30, 2022) (``VEUO''). Additionally,
one commenter recommended exempting from the amendments repurchases
of an issuer's preferred stock. See letter from Vicki Owen (Jan. 19,
2023).
\122\ See, e.g., letters from ABA Committee, CBA, Cravath, NYC
Bar, NYSE, SIFMA II, Sullivan, TotalEnergies, and VEUO.
\123\ See, e.g., letters from Better Markets I, BrilLiquid, CFA
Institute, CII, Hecht, ICGN, and Roosevelt.
\124\ See, e.g., letters from SIFMA II, TotalEnergies, and VEUO.
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One commenter asserted that applying the amendments to FPIs would
discourage foreign companies from listing on U.S. exchanges.\125\ Other
commenters requested that the Commission clarify that the final
amendments would not apply to Multijurisdictional Disclosure System
(``MJDS'') filers.\126\ Some commenters recommended that, at a minimum,
FPIs that are required to provide share repurchase information in their
home country disclosures, and include that information in their filings
on Form 6-K, should be exempt from the proposed quantitative daily
disclosure amendments.\127\ Some of these commenters indicated that
FPIs should not be required to disclose the total number of shares
repurchased in their home countries in reliance on the safe harbor in
Rule 10b-18 nor the total number of shares purchased pursuant to a plan
that is intended to satisfy the affirmative defense conditions of Rule
10b5-1(c) because that information is not likely to provide any
meaningful information to U.S. investors.\128\
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\125\ See letter from NYC Bar.
\126\ See, e.g., letters from ABA Committee, BCE Inc. (Mar. 30,
2022), CBA, Jones Day, and Sullivan.
\127\ See, e.g., letters from SIFMA II, Sullivan, and VEUO.
\128\ See, e.g., letters from SIFMA II and VEUO.
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Most commenters that discussed the issue asserted that the final
amendments should not provide an exemption to smaller issuers.\129\
Nonetheless, one of these commenters recommended that, if the
Commission adopts a next-day reporting requirement, it should provide
smaller reporting companies
[[Page 36013]]
(``SRCs'') \130\ with additional time to furnish their Form SR.\131\
Another commenter suggested that smaller companies should have
simplified reporting requirements, such that they not be required to
provide their Form SR as frequently as other issuers.\132\ One
commenter recommended that SRCs' repurchase reporting threshold be
based on a five percent volume trigger.\133\ Other commenters, however,
asserted that applying the amendments to smaller issuers would be
onerous and unnecessary \134\ and would place an increased burden \135\
on those issuers.
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\129\ See, e.g., letters from ABA Committee, Better Markets I,
BrilLiquid, CFA Institute, Cravath, ICGN, and Hecht.
\130\ ``Smaller reporting company'' is defined in Securities Act
Rule 405 and 17 CFR 240.12b-2 as an issuer that is not an investment
company, an asset-backed issuer (as defined in 17 CFR 229.1101), or
a majority-owned subsidiary of a parent that is not an SRC and that:
(1) Had a public float of less than $250 million; or (2) had annual
revenues of less than $100 million and either: (a) no public float;
or (b) a public float of less than $700 million.
\131\ See letter from Cravath.
\132\ See letter from Hecht.
\133\ See letter from ABA Committee (explaining that ``[s]etting
the Form 8-K threshold at 5% of the total shares outstanding would
be consistent with how SRCs are treated with respect to disclosures
under current Item 3.02 for dilutive issuances in private
transactions,'' and that ``this accommodation would not result in a
meaningful loss of information to investors'').
\134\ See letter from ACCO.
\135\ See letter from Profs. Lewis and White.
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Additionally, one commenter recommended exempting issuers without
an established market for their securities because, in its view,
investors receive little informational value from this disclosure and
there is minimal risk of opportunistic repurchases in such cases.\136\
Another commenter recommended exempting publicly traded government
contractor companies.\137\ A few commenters suggested exempting
regulated banking institutions from the proposed amendments because
those issuers are already required to disclose their regulatory capital
requirements and capital planning process, so the repurchase
information in the proposed amendments would not be necessary for
investors.\138\ One of these commenters acknowledged that the
information required by banking regulators ``does not directly align
with the share-repurchase-specific disclosure the SEC is proposing to
require,'' though the commenter also asserted that such information
``nevertheless provides investors with insights into firms' capital
planning processes and actions.'' \139\
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\136\ See letter from Publix Super Markets, Inc. (Jan. 10, 2023)
(``Publix''). The commenter also notes that the Inflation Reduction
Act exempts such companies from the excise tax and, therefore,
asserts that a similar exemption should apply here.
\137\ See letter from PSC. The commenter stated that that the
proposed daily reporting requirements would increase costs and offer
no identifiable benefit to publicly traded government contractor
companies because those firms are able to do business only with the
government, so their costs must be covered by their government
customers. As a result, adding the daily disclosure requirements to
these firms would make them less competitive and force them out of
the public markets.
\138\ See, e.g., letters from BPI & Amer. Bankers Assoc. and
IBC.
\139\ See letter from BPI & Amer. Bankers Assoc.
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Some commenters asserted that Listed Closed-End Funds \140\ should
be exempt from the proposed quantitative daily disclosure amendments
because, given the way the funds are structured, they believe that the
concerns motivating the proposal are absent. Other commenters disagreed
and asserted that Listed Closed-End Funds should be subject to the
final rule.\141\ In response to a request for comment about whether to
exempt, among other issuers, Listed Closed-End Funds from the
structured data requirement, one commenter suggested that there is a
link between having a lower public float and the likelihood of market
manipulation.\142\ Another commenter stated that many Listed Closed-End
Funds repurchase shares when the market price is below net asset value
(``NAV'') and/or to increase NAV for remaining shareholders, and that
given the close relationship between share purchases and NAV, it is
arguably more important for Listed Closed-End Funds to disclose
information regarding their planned and actual repurchase
activity.\143\ Other commenters indicated that the proposed amendments
should exempt trades associated with Rule 10b5-1 plans \144\ and
purchases made in reliance on the Rule 10b-18 safe harbor.\145\
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\140\ See, e.g., letters from ICI I and TIAA (suggesting that,
because executive compensation is generally not tied to share price
among closed-end funds, these issuers generally have little or no
incentive to misuse share repurchases). See also letter from
Investment Company Institute (Jan. 11, 2023) (asserting that,
because the Inflation Reduction Act exempted Listed Closed-End
Funds, the final amendments should do so too). Some commenters
suggested that the Commission should also exempt ``non-listed
funds'' from the proposed amendments. See letters from ADISA and
IPA. Both the proposed and final amendments, however, would only
apply to Listed Closed-End Funds.
\141\ See letters from CFA Institute, XBRL US (Mar. 31, 2022)
(``XBRL US''), BrilLiquid, Hecht, and ICGN.
\142\ See letter from XBRL US.
\143\ See letter from CFA Institute.
\144\ See letter from PNC.
\145\ See, e.g., letters from HP and SCG.
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c. Comments on Repurchases Intended To Satisfy Rule 10b5-1(c) and
Intended To Qualify for the Rule 10b-18 Safe Harbor
Some commenters generally supported the requirements to disclose
whether repurchases were made pursuant to a Rule 10b5-1(c) plan, as
proposed.\146\ One commenter recommended requiring additional
disclosure regarding an issuer's Rule 10b5-1(c) plan, including
information on adoption, modification, suspension, or termination of
the plan; the maximum number of shares planned for sale under the plan;
and any suspensions or terminations of a planned repurchase pursuant to
such a plan.\147\ Some commenters supported the proposed disclosures
related to the Rule 10b-18 safe harbor, but recommended that the
Commission go farther by repealing Rule 10b-18 and replacing it with
bright-line limits.\148\ Another commenter generally supported the
proposed Rules 10b5-1(c) and 10b-18 disclosures, but indicated that
they should not be applied to FPIs.\149\
---------------------------------------------------------------------------
\146\ See, e.g., letters from CFA Institute, CII, and SIFMA II.
\147\ See letter from CFA Institute.
\148\ See, e.g., letters from AFREF et al.; CFA Institute; CII;
Oxfam; Prof. Palladino; and William Lazonick & Ken Jacobson,
Academic-Industry Research Network (Apr. 1, 2022) (``Lazonick &
Jacobson'').
\149\ See letter from SIFMA II.
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Other commenters opposed generally the requirements to disclose
repurchases intended to satisfy Rule 10b5-1(c) and intended to qualify
for the Rule 10b-18 safe harbor.\150\ One commenter disagreed
specifically with proposed Item 703(c)(2)(iii) and (c)(3)(v), which
would require disclosure of the terminations of Rule 10b5-1 trading
plans, or determinations not to make further purchases under a plan,
because that could lead to unfounded speculation about mergers and
acquisitions or other activities.\151\ Another commenter asserted that
requiring disclosure as to whether share repurchases were made in
reliance on the Rule 10b-18 safe harbor could cause a negative
inference against any issuer not relying on the safe harbor.\152\
---------------------------------------------------------------------------
\150\ See, e.g., letters from Cravath, Dow, Maryland Bar, and
Sullivan.
\151\ See letter from Sullivan.
\152\ See letter from Maryland Bar.
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d. Comments Concerning Requests for Clarification
Some commenters asked the Commission to clarify certain aspects of
the proposed quantitative daily disclosures on Form SR.\153\ One of
these commenters asked the Commission to provide a more precise
definition of ``share repurchase program'' because the term is not
currently ``a legal term of
[[Page 36014]]
art,'' so different issuers may use the term differently.\154\ Other
commenters claimed that the proposed amendments were ambiguous as to
when a transaction would be considered ``executed,'' particularly in
the context of ASRs.\155\ One commenter recommended that the Commission
define the terms, ``business day'' and ``before the end,'' used in the
proposed amendments establishing the Form SR deadline.\156\ Another
commenter requested that the final amendments clarify whether withhold-
to-cover shares would be encompassed by the rule and recommended that
they not be included under any final rule.\157\ Some commenters claimed
that an end of next business day deadline would prejudice issuers on
the west coast,\158\ with one of the commenters pointing out that
``those making filings on Form 4 \159\ are provided not only with two
business days to report insider transactions that are significantly
less frequent than those which would be reported under Form SR, but
such filers are given until 10 p.m. Eastern Time to file.'' \160\
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\153\ See, e.g., letters from Chamber II, Bishop, Cravath, DLA
Piper, FedEx, HudsonWest LLC (Mar. 31, 2022) (``HudsonWest''),
Simpson Thacher, Thomas Nash (Oct. 12, 2022) (``Nash''), and Wilson
Sonsini.
\154\ See letter from Cravath. The commenter suggested that
share repurchase program be defined as ``cash purchases by issuers
in the market for their own account and not for the purpose of
immediately delivering those shares to a third party in satisfaction
of a pre-existing obligation.'' Further, the commenter provided
certain items that should fall outside the definition, including:
(1) arrangements to acquire shares in the market to deliver to
shareholders participating in dividend reinvestment plans, to
employees participating in employee share purchase programs, or to
401(k) or other retirement accounts in satisfaction of ``stock
match'' commitments; (2) arrangements to facilitate the operation of
employee equity incentive plans; (3) self-tender offers; (4) net
share settlement and other transactions where a holder forfeits an
entitlement to an issuer's shares (e.g., in connection with an
option, or upon separation); and (5) cash settlement of transactions
that reference an issuer's shares, such as derivative transactions.
\155\ See, e.g., letters from Chamber II, Cravath, DLA Piper,
FedEx, HudsonWest, Simpson Thacher, and Wilson Sonsini.
\156\ See letter from Bishop.
\157\ See letter from Nash.
\158\ See, e.g., letters from Chevron and HP.
\159\ 17 CFR 249.104.
\160\ See letter from HP.
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e. Other Comments
A number of commenters asked the Commission to adopt additional
Form SR disclosure requirements that the Commission did not propose,
including the number of shares outstanding following the reported
transaction,\161\ the number of shares remaining to be purchased
pursuant to the current repurchase plan,\162\ and the highest and
lowest price paid per share.\163\ A form letter submitted by many
commenters recommended replacing the Rule 10b-18 safe harbor with a
bright-line rule and making stock repurchases beyond the bright-line
rule unlawful.\164\ The commenters also suggested a prohibition on
trading by insiders during repurchase announcements and executions of
repurchase trades within at least ten days of these events.
---------------------------------------------------------------------------
\161\ See, e.g., letters from AFREF et al. and Pentacoff.
\162\ See letter from CFA Institute.
\163\ See letter from AFREF et al.
\164\ See letter from Form Letter A.
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A few commenters suggested alternatives for the proposed Form SR
disclosures, such as requiring the information to be disclosed as part
of Item 703 of Regulation S-K,\165\ or providing interpretive guidance
to elicit the disclosure instead of revising the Commission's
rules.\166\ Some commenters recommended that, instead of the proposed
quantitative daily share repurchase disclosures, the Commission should
require disclosure about the effect of share repurchases on executive
compensation reported under 17 CFR 229.402 (Item 402 of Regulation S-
K).\167\ One commenter asserted that the effect of share repurchases on
executive compensation pertains to an issuer's corporate governance and
should be resolved by shareholders instead of the Commission.\168\
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\165\ See letter from SIFMA II.
\166\ See letter from Profs. Lewis and White.
\167\ See, e.g., letters from Maryland Bar and Profs. Lewis and
White.
\168\ See letter from PA Chamber.
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With respect to the proposed requirement that Form SR disclose the
total number of shares purchased in reliance on Rule 10b-18, some
commenters suggested that issuers should only be required to disclose
whether a purchase ``was intended to comply'' with that safe harbor due
to interpretive legal questions and the speed at which market
quotations of stock prices can change.\169\ Some commenters asked the
Commission to include a phase-in period of nine to 12 months for any
final amendments that the Commission may adopt.\170\
---------------------------------------------------------------------------
\169\ See, e.g., letters from SIFMA II and Sullivan.
\170\ See, e.g., SIFMA II, Sullivan, and Wilson Sonsini.
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3. Final Amendments
We continue to believe that disclosure of issuers' total
repurchases made each day would benefit investors and markets. The
final amendments require the same additional detail regarding an
issuer's daily repurchase activity, as proposed. Moreover, to make this
information readily available for analysis, the final amendments
require that the share repurchase information that is disclosed be
reported using Inline XBRL, also as proposed.
However, although the final amendments require daily repurchase
disclosure, as proposed, the final amendments require a different
deadline and manner of disclosure. In response to commenters'
objections, the final amendments do not require issuers to provide
their daily repurchase disclosure one business day after execution of
their share repurchase order.\171\ Rather, in a change from the
proposal, the final amendments require:
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\171\ As discussed above, see supra Section III.A.2.d., a number
of commenters requested that we clarify certain aspects of the
proposed amendments. See, e.g., letters from Chamber II, Bishop,
Cravath, DLA Piper, FedEx, HudsonWest, Nash, Simpson Thacher, and
Wilson Sonsini. As a result of the changes from the proposed
amendments to the final amendments, most of these requests are no
longer applicable. Those clarification requests still applicable for
the final amendments are addressed in the appropriate places in this
release.
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<bullet> Corporate issuers that file on domestic forms to disclose
the total repurchases made each day for the quarter in an exhibit to
their Form 10-Q and Form 10-K (for their fourth fiscal quarter);
<bullet> Listed Closed-End Funds to disclose daily quantitative
repurchase data in their semi-annual and annual reports on Form N-CSR;
and
<bullet> FPIs reporting on the FPI forms to disclose daily
quantitative repurchase data at the end of every quarter in new Form F-
SR,\172\ which will be due 45 days after the end of each of the
issuer's fiscal quarters.\173\
---------------------------------------------------------------------------
\172\ See supra note 24.
\173\ The final amendments adopt new Rule 13a-21, as proposed,
which requires applicable FPIs to file a Form F-SR.
---------------------------------------------------------------------------
After considering the comments, we believe that providing the same
detail as was proposed but on a less frequent basis would avoid many of
the costs that commenters noted while still providing important
disclosures that address the informational deficiencies in current
reporting that we have identified. Accordingly, the final amendments
require issuers to disclose their daily quantitative share repurchase
information periodically in quarterly or semi-annual reports
(``periodic reporting'') instead of requiring issuers to disclose it on
a daily basis, as proposed.
Although periodic reporting of daily quantitative data will provide
less frequent repurchase disclosures to investors than would daily
reporting of that data, periodic reporting will still provide investors
with most of the benefits that daily reporting would offer, but at a
lower cost to issuers. In fact, the costs to issuers may be only
incremental because issuers are already reporting share repurchases by
month in their
[[Page 36015]]
periodic reports. Investors will be able to use the granular daily
quantitative data to evaluate an issuer's repurchases in more detail,
including in the context of other point-in-time disclosures, such as
executive compensation and financial statement disclosures.
While this periodic reporting will, in most cases, result in daily
quantitative repurchase data that are available to investors later than
was proposed, investors may well find the disclosure more meaningful
when considered as part of the overall pattern of the issuer's
repurchases, because they will be able to evaluate the efficiency of
the share repurchases based on when the issuer repurchased its shares
and the issuer's stated reasons for doing so. Moreover, this periodic,
rather than daily, reporting should mitigate any concerns raised by
commenters about the potential misinterpretation of an issuer's day-to-
day changes in trading activity \174\ that could cause unjustified
stock price volatility \175\ or disrupt confidential merger or
acquisition discussions.\176\ Additionally, while some commenters
expressed concern that investors might use daily quantitative
disclosure data to gain insight into or identify the issuer's trading
strategies,\177\ as other commenters observed, the move to periodic
reporting should substantially mitigate any such concern.\178\
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\174\ See, e.g., letters from Business Roundtable, Davis Polk,
Dow, FedEx, Home Depot, Kaswell, Profs. Lewis and White, NAM, PNC,
Quest, Shearman, SIFMA II, Simpson Thacher, T. Rowe Price, Wilson
Sonsini, and Vistra.
\175\ See, e.g., letters from Cravath, Davis Polk, Profs. Lewis
and White, and SCG.
\176\ See, e.g., letters from Davis Polk, PNC, SIFMA II, and
Sullivan.
\177\ See, e.g., letters from Home Depot and PNC.
\178\ See, e.g., letters from Cravath and Davis Polk.
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We acknowledge, as a commenter observed, that periodic reporting
will provide information to the market more slowly than the two-
business day maximum delay associated with insider reporting of changes
in beneficial ownership on Form 4.\179\ While both issuer and insider
trades may reflect managers' views of an issuer's value, we recognize
that the much greater frequency of issuer trades pursuant to repurchase
plans relative to trades by individual insiders likely would result in
considerably more frequent reporting by issuers, and thus in greater
costs than those incurred by insiders reporting their transactions on
Form 4. In addition, because of this greater frequency of trading,
there would be a greater risk (as compared to insider transactions)
that daily reporting would allow other market participants to trade
strategically in response to issuer disclosures and greater potential
harm to investors as a result. Further, we believe that even with
periodic reporting investors will still be able to use periodic
reporting of daily repurchases to identify potentially opportunistic
behavior, and that issuers will take into account that likelihood when
determining their trading behavior.
---------------------------------------------------------------------------
\179\ See letter from Roosevelt (asserting that the Commission
should adopt daily reporting ``for similar reasons that Form 4
requires daily disclosure'').
---------------------------------------------------------------------------
The final amendments require daily share repurchase disclosure on a
quarterly basis in Forms 10-Q and 10-K (for the issuer's fourth fiscal
quarter) for corporate issuers reporting on domestic forms and on a
semi-annual basis in Form N-CSR for Listed Closed-End Funds.
Quantitative share repurchase disclosures, aggregated on a monthly
basis, are already required in those forms.\180\ The final amendments
require the disclosure of additional detail with respect to the
already-reported share repurchases. Therefore, investors should be
familiar with looking to these filings for repurchase information.
Moreover, this change should lessen the burden for issuers compared
with the proposal because they are accustomed to providing repurchase
information in these periodic filings. As one commenter noted, it would
be useful for the issuer's transactions to be disclosed in periodic
reports for ``the ease of use and access to information for those who
access EDGAR using the SEC website.'' \181\
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\180\ Due to the new daily quantitative repurchase disclosure
requirements, we are eliminating the current requirement to provide
quantitative share repurchase disclosures on a monthly basis because
it would be redundant. See infra note 218 and accompanying text.
\181\ See letter from Anthem Advisors.
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Listed Closed-End Funds will be required to provide their daily
share repurchase disclosures on Form N-CSR on a semi-annual basis. Like
Forms 10-Q and 10-K, Form N-CSR currently requires the disclosure of
quantitative share repurchase disclosures on a semi-annual basis so
investors should likewise be familiar with looking in this filing for
repurchase information. We are subjecting Listed Closed-End Funds to
the final amendments because, although not all of the motivations for
corporate issuer share repurchases apply to them due to differences in
the business model and organizational structure of a fund as compared
to a corporate issuer, investors in Listed Closed-End Funds also will
benefit from the opportunity to evaluate the purposes, impacts, and
efficiency of share repurchases and to understand the impact of such
activity on the value of their investments. As one commenter observed
in opposing an exemption for Listed Closed-End Funds, this interest may
be particularly strong given the close relationship between share
repurchases and NAV, which the commenter believed made it arguably more
important for Listed Closed-End Funds to disclose quantitative and
qualitative information regarding planned and actual repurchases.\182\
Relatedly, absent the additional information required by the final
amendments--including daily quantitative repurchase data--it would be
difficult for investors in Listed Closed-End Funds to distinguish
between price movements that are attributable to repurchase activity as
opposed to other market activity impacting share price.\183\ Further,
as noted by another commenter, disclosure may be of particular
importance for issuers with lower floats, such as Listed Closed-End
Funds, because such issuers may face a greater likelihood that
repurchases will have a significant effect on share price.\184\
---------------------------------------------------------------------------
\182\ See Letter from CFA Institute.
\183\ See Proposing Release, supra note 2, at 8460-8461.
\184\ See letter from XBRL US.
---------------------------------------------------------------------------
The final amendments will require FPIs that report using the FPI
forms to provide disclosure of daily repurchase data on new Form F-SR,
which is to be filed with the Commission quarterly. The Form F-SR will
be due 45 days after the end of the FPI's fiscal quarter to be
consistent with the latest deadline for a quarterly report on Form 10-
Q.\185\ FPIs that report on the FPI forms do not have a quarterly
reporting obligation under the Exchange Act and generally provide
repurchase disclosure only in their annual report on Form 20-F. Our
reasons for adopting quarterly reporting of daily repurchases for FPIs
reporting on the FPI forms are the same as for corporate issuers
reporting on domestic forms.\186\ In addition, similar to the
[[Page 36016]]
amendments we are adopting to our domestic forms, we are eliminating
the requirement in Form 20-F to provide quantitative share repurchase
disclosures on a monthly basis.\187\
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\185\ We are requiring a deadline for the Form F-SR of 45 days
after the end of the fiscal quarter for all four quarters, including
the final quarter of the fiscal year. While domestic corporate
filers receive additional time to file a Form 10-K following the
final quarter of their fiscal year, relative to the time for other
quarterly filings, this extended period is due to the additional
materials that must be included in the Form 10-K. Since no such
difference would exist for the fourth-quarter Form F-SR, we are
requiring a uniform filing deadline after each quarter.
\186\ See letter from CII (stating that issuers that file on
domestic forms and FPIs that file on the FPI forms should be subject
to the same filing obligations). In addition, because FPIs are more
similar to corporate issuers filing on domestic forms than Listed
Closed-End Funds, we are keeping the disclosure frequency consistent
with such corporate issuers. Similarly, we do not believe that semi-
annual reporting of daily repurchase information would be
appropriate for FPIs that do not file on domestic forms for the same
reasons. Therefore, we believe that corporate issuers that file on
domestic forms and FPIs that file on the FPI forms should be subject
to the same filing obligations.
\187\ Form F-SR contains an instruction stating that the
information reported on the form relates to the issuer's securities
in ordinary share form, whether the issuer has repurchased the
shares itself or depositary receipts that represent the shares.
---------------------------------------------------------------------------
When it adopted the Item 703 disclosure requirements in 2003, the
Commission stated that it expected the Item 703 disclosures to provide
investors and the marketplace with important 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.\188\
Disclosure of a monthly aggregation of repurchases, however, does not
always allow investors to assess whether, for example, the bulk of an
issuer's repurchases were made in advance of a specific date, such as
the date on which incentive targets for compensatory awards are
measured or the day material nonpublic information is released to the
public.
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\188\ See 2003 Adopting Release, supra note 5, at 64962. We
disagree with the commenter who asserted that ``the Commission's
analysis . . . does not sufficiently explain its apparent reversal
of the prior position that the appropriate way to promote
efficiency, competition, and capital formation is to `minimize the
market impact of the issuer's repurchases, thereby allowing the
market to establish a security's price based on independent market
forces without undue influence by the issuer' '' and that this is
not accomplished by ``highlighting them in daily disclosures.'' See
letter from Chamber II. In 2003, the Commission stated that ``Rule
10b-18's safe harbor conditions are designed to minimize the market
impact of the issuer's repurchases.'' See 2003 Adopting Release,
supra note 5. This statement was not in reference to the monthly
repurchase disclosures the Commission adopted at the same time in
Item 703, which the Commission stated were ``intended to enhance the
transparency of issuer repurchases.'' Id. As noted throughout this
release, the amendments we are adopting are similarly intended to
enhance the transparency of issuer repurchases.
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The Commission proposed additional share repurchase disclosures to
provide investors with further insight into the details of an issuer's
share repurchases, which when combined with other information available
about the issuer, could diminish informational asymmetry, enhance
transparency, and enable investors to undertake a more thorough
assessment of issuer share repurchases.\189\ Investors could use this
more detailed disclosure to monitor and evaluate issuer share
repurchases and their effects on the market for the issuer's
securities.
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\189\ See Proposing Release, supra note 2, at 8446.
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In some circumstances, such as when repurchases may affect the
value of compensatory awards to executives or the amount for which
executives can sell such awards, issuers may have incentives to engage
in share repurchases for reasons other than to increase or signal the
issuer's fundamental value. In addition, issuers are repurchasing their
own securities, so they will typically have significantly more, as well
as more detailed, information about the issuer and its future
prospects. Thus, as we have described above, investors will benefit
from having additional disclosures that will enable them to evaluate
the efficiency of share repurchases or determine a pattern of when
repurchases could be timed to affect compensation or to benefit from
material nonpublic information, among other possible uses of daily
repurchase data, thereby increasing investor confidence.
We disagree with commenters who asserted that we have not
identified a ``market failure'' that would justify the additional
disclosures.\190\ In particular, these commenters asserted that there
is no market failure because information asymmetry is advantageous to
markets in that it incentivizes some market actors to expend resources
developing information that would be relevant to an issuer's share
price.\191\ We disagree with these arguments. As the sources cited by
the commenters themselves point out, informational asymmetries are not
necessary to incentivize the production of information.\192\ In the
case of repurchases, relevant information about stock repurchases is
often nonpublic, and thus not typically discoverable by third parties,
including investors, who would benefit from the additional information
conveyed by daily repurchase disclosures. We discuss in more detail the
market failures addressed by the amendments in the Economic Analysis
section, below.\193\
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\190\ See, e.g., letters from Chamber II and Profs. Lewis and
White.
\191\ Id.
\192\ See Grossman, S.J. & Stiglitz, J.E., On the Impossibility
of Informationally Efficient Markets, 70 Am. Econ. Rev. 393, 404
(1980) (noting that there is also an incentive to acquire
information if ``no one is informed'').
\193\ See infra Section V.B.1.
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One commenter also asserted that no amendments were necessary
because investors can already glean all necessary information from
existing filings, such as through quarterly filings, mandatory
disclosures of material new repurchase plans, or potential voluntary
disclosures of data issuers deem material to investors.\194\ For
example, the commenter noted that investors can likely infer instances
when repurchases have helped an issuer hit an EPS target because
quarterly filings will reveal aggregate repurchases over the quarter as
well as earnings.\195\
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\194\ See letter from Profs. Lewis and White.
\195\ Id.
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While we agree these kinds of informed conclusions based on
existing quarterly data are possible, existing disclosures are
inadequate to provide investors with the information needed to fully
understand the actual impact of a repurchase. Data on daily purchases
are more informative, and so will enable more accurate assessments of
the motives for repurchases. For example, repurchases conducted in the
days immediately before the end of a fiscal quarter, at a time when the
issuer's managers are very likely to know that the issuer will miss an
EPS target, would suggest that the repurchase likely does not fully
signal the issuer's fundamental value, in a way that would not be the
case if such repurchases were conducted in an equal amount each day of
the quarter. Monthly aggregates also are unlikely to consistently
reveal whether repurchases occurred before or after award grants or
trades by executives, which could similarly signal that the repurchase
was, in part, motivated by purposes other than shareholder value.\196\
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\196\ For this reason, we also disagree with the commenter
suggestion that we could have replaced disclosure of daily
repurchase data with a requirement that the issuer discuss the
impact repurchases may have had on managers' ability to reach
earnings per share targets in its Compensation Discussion and
Analysis (``CD&A'') required pursuant to 17 CFR 229.402(b) (Item
402(b) of Regulation S-K). See id. Such a discussion would not allow
investors to identify which repurchases may have been affected by
managers' incentives, and would not account for other avenues
through which repurchases may affect compensation, such as by
increasing stock prices shortly before a manager sells equity.
Finally, this approach would also fail to identify instances in
which issuers or their managers are driven by other concerns, such
as internal EPS targets that do not affect compensation but instead
affect reputation, retention, or relationships with creditors.
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One commenter suggested that the amendments are not needed when the
issuer's trades would qualify for a safe harbor provision of Rule 10b5-
1.\197\ Instead, we think that the concerns that justify disclosure
apply fully in that setting. An issuer's use of a Rule 10b5-1 trading
plan would not, for example, affect executives' ability to time trades
[[Page 36017]]
to profit from repurchases. In addition, because there is no required
cooling-off period for issuers, there is an increased risk that an
issuer could adopt and then begin trading under a Rule 10b5-1 trading
plan at a time when it may be aware of material nonpublic
information.\198\ Thus, additional disclosure (including whether the
repurchase was intended to qualify for the affirmative defense under
Rule 10b5-1) is necessary for investors to evaluate the efficiency and
impacts of a repurchase.\199\
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\197\ See letter from Cravath.
\198\ See Rule 10b5-1 Adopting Release, supra note 18, at 80369.
In the Rule 10b5-1 Adopting Release, the Commission did not adopt a
cooling-off period for issuers, stating that ``further consideration
of potential application of a cooling-off period to the issuer is
warranted.'' Id. at 80371-80372. Please see the discussion of new
Item 408(d), infra Section III.D.
\199\ For similar reasons, we disagree with the commenters who
stated that compliance with Rule 10b-18 would make the proposed
daily repurchase disclosures unnecessary. See letters from HP and
SCG. As we discuss below in this section, whether a trade is
intended to qualify for the non-exclusive safe harbor of Rule 10b-18
may help investors to understand the efficiency of a given
repurchase. In addition, the fact that a repurchase is intended to
qualify for the safe harbor does not significantly affect an
executive's ability to time a personal trade to profit from a
repurchase.
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We also disagree with the commenter who asserted that to the extent
managers benefit from repurchases through an increased share price,
this increase also benefits other existing shareholders, and so no
disclosure is needed.\200\ Because managers can benefit from
controlling the timing or volume of repurchases, it is more difficult
for investors to interpret the extent to which repurchases increase or
signal the issuer's fundamental value. Similarly, issuers may take
actions to improve the returns on repurchases, such as real earnings
management or repurchases while aware of material nonpublic
information, that may benefit some existing shareholders, but at the
potential expense of long-term liquidity and investor confidence.\201\
Thus, notwithstanding that there may be some investors who benefit in
these scenarios, daily repurchase disclosure is necessary to protect
all investors and the efficient operation of securities markets because
daily data, in combination with other data, would allow investors to
infer when repurchases may have been timed to benefit managers or
otherwise at the expense of some investors.
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\200\ See letter from Maryland Bar.
\201\ See, e.g., Cooper, L.A., Downes, J.F., and Rao R.P., Short
term real earnings management prior to stock repurchases, 50 Rev.
Quant. Fin. & Acct. 95 (2018) (reporting that managers use inventory
and discretionary expenses, among other items, to manipulate
reported earnings in advance of repurchases).
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For similar reasons, we disagree with that commenter's request that
we limit new disclosures to discussion about the effects of repurchases
on an executive's compensation.\202\ While such discussion might be
generally informative about whether an issuer's repurchases may have
been affected by managerial incentives, it would not reveal which
particular repurchases were so affected, and would not address issuer
efforts to achieve particular accounting targets for reasons unrelated
to executive compensation, such as promotion, retention, or creditor
preferences.
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\202\ See letter from Maryland Bar.
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Further, we disagree with the suggestion by some commenters that we
abandon or delay the amendments because of the recently-enacted tax on
certain share repurchases,\203\ because we expect that the tax will not
meaningfully affect the rationales for the final amendments. As we
describe in more detail below,\204\ we acknowledge that it is possible
that the new one percent tax on some repurchases will reduce annual
repurchases from their current volume of roughly $950 billion,\205\
although some indications are to the contrary.\206\ While any reduction
in repurchase activity would potentially diminish the costs and
benefits of the final amendments, given the vast volume of current
repurchases, we believe that that there will continue to be a
compelling need for enhanced disclosure related to these transactions.
Notwithstanding a commenter's suggestion that the tax would deter
``opportunistic'' buybacks,\207\ to the extent that there are
repurchases for which managerial self-interest plays some role, we do
not expect the tax to have a significant effect on the intended
benefits of the final amendments.\208\
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\203\ See, e.g., letters from Chamber III, Chamber V, and PSC.
\204\ See infra Section V.A.2.
\205\ See Section V.A.2 infra and note 384 and accompanying
text.
\206\ See Williams-Alvarez, J., The 1% Stock-Buyback Tax Hasn't
Slowed Repurchases. A Proposed 4% Tax Might, Wall St. Journal, Mar.
2, 2023 and Avi-Yonah, R.S., A Different Tax on Stock Buybacks,
<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4301215">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4301215</a> (Dec.
13, 2022) (``[A] 1% tax on buybacks is unlikely to reduce
buybacks.'').
\207\ See letter from Chamber III.
\208\ See Moore, supra note 34 (reporting that managerial
benefit from repurchases is not sensitive to the cost of
repurchasing).
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Although a number of commenters asserted that daily reporting of
daily data would generally result in an overload of information for
investors,\209\ our adoption of periodic reporting should significantly
reduce these concerns, as some commenters noted.\210\ In any event, we
disagree that information about issuers' daily trading will overload
investors.\211\ Rather than overloading investors with superfluous
data, the information required by the final amendments will provide
them with additional insight into the precise timing of repurchases
that they can use to evaluate the efficiency of and motives for the
issuer's share repurchases in a way that is not possible to do with the
current requirement to disclose monthly data.
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\209\ See, e.g., letters from Dow, Kirkland Ellis, NYSE, SCG,
and Vistra.
\210\ See, e.g., letters from Anthem Advisors, Cravath, and
Jones Day.
\211\ See letter from Roosevelt (stating that the daily
repurchase disclosures would not create an overabundance of
information for investors).
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We also disagree with commenters who asserted that more detailed
information would harm smaller retail investors by making the
information too disaggregated to easily parse.\212\ The daily data will
be required to be tagged using Inline XBRL, so these investors and
other market participants will be able to collate that daily data to
another level of detail to suit their level of sophistication. In some
instances, monthly data fail to reveal key details about repurchase
activity, such as whether repurchases occur before or after release of
material nonpublic information.
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\212\ See, e.g., letters from ACLI, Armstrong, ASA, Chevron,
Cravath, Dow, Guzman, Hecht, Home Depot, Jones Day, NYSE, PNC,
Profs. Lewis and White, Quest, SCG, Shearman, SIFMA II, and Simpson
Thacher.
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Furthermore, greater transparency ultimately benefits all
investors. For example, newly available data may incentivize
intermediaries, such as investment advisers, to develop the capacity to
analyze the data and provide their analysis to retail or other
clients.\213\ Additionally, to the extent that some traders may have
greater capacity to quickly analyze information about daily
repurchases,\214\ our adoption of periodic reporting should mitigate
any such advantage by allowing for fewer arbitrage opportunities.
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\213\ Cf. letter from Profs. Lewis and White (arguing that
information asymmetry incentivizes market actors to acquire
information for use by others).
\214\ See, e.g., letters from ACCO, Armstrong, ASA, BPI & Amer.
Bankers Assoc., Business Roundtable, Cato, Chevron, Coalition,
Cravath, Davis Polk, DLA Piper, Dow, Empire, FedEx, Guzman, Home
Depot, HP, IBC, Jones Day, NAM, NYC Bar, Norfolk Southern, PA
Chamber, Paul Weiss, PNC, Profs. Lewis and White, Quest, Shearman,
SIFMA II, SCG, Simpson Thacher, Stephens, Sullivan, T. Rowe Price,
Vistra, and Wilson Sonsini.
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Relatedly, some commenters raised concerns that daily disclosures
would result in disclosure of information that is not material to
investors,\215\ or asked
[[Page 36018]]
the Commission to include a materiality standard in the final
amendments.\216\ We considered, but rejected, suggestions by these
commenters to require disclosure only of material daily repurchases,
such as repurchases that in the daily aggregate represent one percent
or more of the issuer's outstanding shares. As we have explained, we
believe that in many cases it is not only the amount, but also the
timing of, repurchases that makes them informative to investors.
Assessments of materiality for every repurchase conducted by the issuer
would add significant costs. Further, limiting disclosures to a volume
threshold, such as relatively large aggregate daily purchases, whether
a set one percent figure or otherwise, could encourage issuers that
prefer to avoid disclosure to inefficiently divide their planned
transactions over multiple days or weeks, as pointed out by one
commenter.\217\
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\215\ See letter from Profs. Lewis and White.
\216\ See, e.g., letters from Hecht and NASAA.
\217\ See letter from SIFMA II (stating that issuers may limit
their average daily trading volume to try to ensure that
sophisticated investors view the daily trades as immaterial, even if
a larger volume would be more beneficial to shareholders).
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We recognize that certain issuers could conduct a number of daily
repurchases every quarter, which may result in lengthy additional
disclosures in a filing. To address this concern, the final amendments
require corporate issuers that report on Forms 10-Q and 10-K to file
daily reporting data as an exhibit to their periodic reports instead of
in the body of those reports. Listed Closed-End Funds will be required
to provide their daily repurchase data in the body of Form N-CSR and
FPIs that report on the FPI forms will be required to provide their
daily repurchase data in the body of Form F-SR. Form N-CSR contains
information on a range of specific topics (such as a fund's code of
ethics or, in this case, repurchases) such that providing share
repurchase disclosures in the body of the form presents fewer
readability concerns. On the other hand, Form F-SR will be used
exclusively to report daily repurchase data, so there is no concern
that the daily repurchase data will obscure other disclosures in that
form.
In another change from the proposal, the final amendments will
require the daily repurchase data to be filed instead of furnished.
Because daily repurchase data will be provided on a quarterly or semi-
annual basis, depending on the status of the issuer, the liability
concerns that may have been raised by a requirement to file daily
repurchase data within the proposed one business day timeframe are
alleviated. The issuer will have more time to obtain, verify, and
compile the disclosure compared to the proposal. As a result, we find
it appropriate for issuers to be subject to Exchange Act section 18
liability for the new repurchase disclosure, as they are currently for
filings under Item 703 of Regulation S-K, and the information will be
deemed incorporated by reference into filings under the Securities Act,
which will be subject to Securities Act section 11 liability.
Additionally, the final amendments eliminate the requirement in
current Item 703(a) of Regulation S-K that issuers disclose their
monthly quantitative repurchase data in their periodic reports.\218\
Presently, Item 703 requires corporate issuers reporting on domestic
forms to provide monthly quantitative repurchase data on a quarterly
basis in their Form 10-Qs and Form 10-Ks (for the issuer's fourth
fiscal quarter), Item 16E of Form 20-F requires FPIs to provide monthly
repurchase data in their annual reports on Form 20-F, and Item 14 of
Form N-CSR requires Listed Closed-End Funds to provide monthly
repurchase data in their semi-annual reports on Form N-CSR. In light of
the new requirements to disclose daily repurchase data, we no longer
believe this information is necessary. To the extent that investors,
market participants, and others are interested in monthly repurchase
data, they will be able to collate that data themselves, including by
using Inline XBRL.
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\218\ Additionally, the final amendments move much of disclosure
in current Item 703(b) to new Item 703(a) and new Item 601(b)(26).
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Consistent with the proposal, the final amendments do not include
any exemptions.\219\ We have not exempted any category of issuer
because disclosure of daily repurchase data benefits all investors in
issuers that conduct repurchases.\220\ Additionally, to the extent that
certain issuers, such as SRCs, have relatively high information
asymmetries, disclosure about their repurchases may be more informative
to investors. Moreover, although some issuers may provide similar
information to other regulators, requiring all issuers to comply with
the final amendments facilitates investor access because the
information will be disclosed in a common location. In the case of
financial institutions, while one commenter asserted that capital
regulations by other regulators would prevent the institutions from
engaging in opportunistic repurchases,\221\ we are not aware of any
specific regulations that would prevent executives at those
institutions from profiting from repurchases, or that would limit
repurchases at times the institution's managers are aware of material
nonpublic information. We do not believe that any general insights into
an issuer's capital planning that financial-institution regulations
might offer will provide the level of detail investors would receive
from disclosure of daily trade data and specific qualitative discussion
of repurchase policies.
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\219\ MJDS filers currently do not provide repurchase disclosure
analogous to Item 703 (for filers on the domestic forms) or Item 16E
for foreign private issuers that report using Form 20-F. Consistent
with that approach, we are not imposing the amended repurchase
disclosure requirements on Canadian issuers that file using the MJDS
because those issuers are subject to a separate reporting regime.
Under the MJDS, eligible Canadian issuers may satisfy certain
securities registration and reporting requirements of the Commission
by providing disclosure documents prepared in accordance with the
requirements of Canadian securities regulatory authorities. See
Multijurisdictional Disclosure and Modifications to the Current
Registration and Reporting System for Canadian Issuers, Release No.
33-6902 (Jun. 21, 1991) [56 FR 30036 (July 1, 1991] (``MJDS
Release'').
\220\ As noted above, several commenters recommended that we
exempt issuers conducting repurchases with respect to securities
that are not traded on an exchange from the daily repurchase
disclosures. See letters from Nareit and Publix. However, as
discussed in Section V.D.3, such an exemption would deprive
investors in these issuers of the informational benefits of the
final amendments, which might be relatively more consequential for
investors in issuers with a thin trading market or without a trading
market that lack the price discovery from active trading. In
addition, we note that these issuers are already required to provide
share repurchase disclosures under existing Item 703.
\221\ See letter from BPI & Amer. Bankers Assoc.
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Moreover, the commenter suggested that the final amendments would
encourage dividend distributions instead of share repurchases as the
preferred mechanism for returning capital to shareholders, which would
tend to undermine banks' fiscal soundness and, the commenter suggests,
be inconsistent with Federal Reserve policies, because dividends
represent a more binding commitment of future resources.\222\ As with
other issuers, we do not believe the amendments significantly affect
the relative appeal of repurchases for financial institutions, and even
if so, are also aware that financial institutions may have other
alternatives to traditional dividends, such as special dividends, that
may not raise the same concerns with respect to the commitment of
future resources.
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\222\ See id.
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In addition, our adoption of quarterly disclosures mitigates some
of the concerns of commenters seeking an exemption for various issuer
categories,\223\ which discussed the
[[Page 36019]]
burden of the proposed requirement to provide daily repurchase data one
business day after execution of the issuer's share repurchase order.
The final amendments do not require issuers to provide daily repurchase
data the day after execution. As a result, we expect the change from
the proposal to require quarterly reporting (or semi-annual reporting
for Listed Closed-End Funds) to substantially alleviate commenters'
cost concerns for all issuer categories.\224\
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\223\ See letters from ABA Committee, ACCO, ADISA, Better
Markets I, BPI & Amer. Bankers Assoc., BrilLiquid, CBA, CFA
Institute, CII, Cravath, Hecht, IBC, ICGN, ICI I, Nareit, NYC Bar,
NYSE, Profs. Lewis and White, Roosevelt, SIFMA II, Sullivan, TIAA,
TotalEnergies, and VEUO.
\224\ See, e.g., letters from ICI I (stating that, in the event
the Commission determines to apply the proposal to Listed Closed-End
Funds, it should ``exclude them from the Form SR reporting
requirements and, instead, require funds to provide the daily
information less frequently in their Form N-CSR'' because of ``the
unique characteristics of funds, including their status as pass-
through investment vehicles with disclosed NAVs that promptly
reflect the effects of share repurchases, and the diminished
concerns that fund insiders will misuse share repurchases for their
own self-interest'') and Roosevelt (stating generally that ``it is
likely that these foreign issuers are already disclosing this
information in other jurisdictions, so would not incur compliance
costs'').
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Additionally, we note that some commenters asked the Commission
specifically to exempt FPIs that are required to provide share
repurchase information in their home country disclosures and furnish
that information on Form 6-K.\225\ Consistent with our requirements
generally,\226\ if an FPI's home country disclosures furnished on a
Form 6-K satisfy the Form F-SR requirements, it can incorporate by
reference its Form 6-K disclosures into its Form F-SR. Therefore, we do
not believe such an exemption is necessary. FPIs that already disclose
daily data in another jurisdiction will experience only incremental
burdens in reporting those transactions. While these data may already
be available to some investors, making them accessible to all
investors, at the same frequency as for corporate issuers that file on
domestic forms, will allow investors to receive the same information
for FPIs as they receive for corporate issuers that file on domestic
forms, regardless of the form FPIs choose to use.\227\ To the extent
that these disclosures may benefit an issuer's competitors, placing FPI
filing obligations on the same tempo as corporate issuers that file on
domestic forms will also help to level competition between FPIs and
those issuers.
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\225\ See, e.g., letters from SIFMA II, Sullivan, and VEUO.
\226\ See 17 CFR 240.12b-23.
\227\ One commenter asserted that EU regulations with respect to
insider trading and market manipulation reduce the need for
additional disclosure with respect to repurchases. See letter from
VEUO. We disagree with this suggestion for essentially the same
reasons we disagree with commenters who made similar arguments
regarding Rules 10b5-1 and 10b-18.
---------------------------------------------------------------------------
Other commenters requested that FPIs not be required to disclose
the total number of shares repurchased in their home countries in
reliance on the safe harbor in Rule 10b-18 nor the total number of
shares purchased pursuant to a plan that is intended to satisfy the
affirmative defense conditions of Rule 10b5-1(c).\228\ We believe,
however, that these disclosures help investors to understand the
purposes for a repurchase. The final amendments, therefore, include
those disclosure requirements. To the extent that issuers do not rely
on the safe harbor or affirmative defense for trades conducted outside
the United States, any disclosure obligation on FPIs will be minimal.
If such issuers are concerned about any negative inferences, they may
include additional disclosure explaining why they chose not to rely on
such safe harbor or affirmative defense.
---------------------------------------------------------------------------
\228\ See, e.g., letters from SIFMA II and VEUO.
---------------------------------------------------------------------------
We are revising the proposed requirement to disclose whether
purchases were ``made in reliance on'' the Rule 10b-18 non-exclusive
safe in response to commenters' concerns that issuers are only able to
indicate their intent to comply with the safe harbor. The final rule
will therefore require disclosure of purchases that were ``intended to
qualify for'' the safe harbor.\229\
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\229\ See, e.g., letters from SIFMA II and Sullivan. We note the
commenters suggested that we adopt the phrase ``intended to comply
with'' the safe harbor, but we believe it is more clear to require
that issuers disclose whether trades were ``intended to qualify
for'' the safe harbor.
---------------------------------------------------------------------------
We have also modified the manner in which issuers will report
certain information relating to Rules 10b-18 and 10b5-1. Proposed Form
SR would have required issuers to disclose, in a table, the total
number of shares purchased daily in reliance on Rule 10b-18 or intended
to qualify for the affirmative defense provisions of Rule 10b5-1(c).
The proposed amendments to Item 703, Form 20-F, and Form N-CSR would
have similarly required issuers to disclose, by footnote to their
monthly repurchase table or the narrative accompanying the table, the
number of shares purchased in reliance on Rule 10b-18 and the number
intended to qualify for the affirmative defense provisions of Rule
10b5-1(c) (and if so, the date(s) the plan was adopted or terminated).
The final amendments require issuers to disclose, in tabular form,
the number of shares purchased daily in reliance on Rule 10b-18 or
intended to qualify for the affirmative defense provisions of Rule
10b5-1(c), as proposed. In a change from the proposal, the final
amendments also require issuers to disclose, by footnote to the daily
repurchase table, the date any plan that is intended to satisfy the
affirmative defense conditions of Rule 10b5-1(c) for the shares was
adopted or terminated. The proposed amendments would have required this
information in the narrative disclosures accompanying the monthly
repurchase table required by Item 703, Form 20-F, and Form N-CSR. After
changing the frequency that issuers must provide their daily
quantitative share repurchase disclosure from one business day after
execution, as proposed, to quarterly or semi-annually in the final
amendments, and deleting the monthly repurchase table from Item 703,
Form 20-F, and Form N-CSR, we believe that requiring this Rule 10b-18
and Rule 10b5-1(c) information in both the table and the narrative
discussion would be duplicative. Requiring this information with the
table would be more efficient for issuers and easier to understand for
investors.
Contrary to some commenters, we believe that whether an issuer
intended to make use of Rule 10b-18 or Rule 10b5-1 in conducting its
repurchases provides useful information to investors. The disclosure as
to whether purchases were intended to qualify for the Rule 10b-18 non-
exclusive safe harbor or the affirmative defense under Rule 10b5-1
provides investors with deeper insight into how an issuer has
structured and designed its repurchase program. The disclosure with
respect to Rule 10b-18 allows investors to gauge whether the given
repurchase program is designed to ``minimize the market impact of the
issuer's repurchases, thereby allowing the market to establish a
security's price based on independent forces.'' \230\ Further, this
disclosure could provide a more informed understanding of how many
shares may yet be purchased under the timing and volume parameters of
Rule 10b-18, reducing information asymmetries for current and
prospective shareholders. In these ways, the disclosure will allow
investors to better evaluate the efficiency and impacts of a
repurchase. While some commenters indicated that as a matter of
practice repurchase programs are designed to meet both the Rule 10b-18
and Rule 10b5-1 safe harbors,\231\ issuers are not required to do so.
Additionally, with disclosure of whether an issuer intended to satisfy
the affirmative defense under Rule 10b5-1,
[[Page 36020]]
investors can more readily determine whether the issuer's managers took
steps to mitigate the possibility of conducting a repurchase while in
possession of material nonpublic information.
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\230\ 2003 Adopting Release, supra note 5, at 64953.
\231\ See, e.g., letters from HP and Simpson Thacher.
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Moreover, we are cognizant of the concern shared by some commenters
that the required Rule 10b5-1(c) and Rule 10b-18 disclosures could lead
to unfounded speculation or cause negative inferences.\232\ Rule 10b-18
specifically disclaims any negative inference from an issuer's choice
not to make use of the safe harbor, and Rule 10b5-1 is similarly
described as an ``affirmative defense.'' Therefore, we believe that any
unwarranted inferences from disclosure that an issuer did or did not
use such safe harbor or defense would be limited. We believe the
required disclosures achieve a proper balance between that concern and
the need of investors for additional information concerning an issuer's
share repurchases.
---------------------------------------------------------------------------
\232\ See, e.g., letters from Maryland Bar and Sullivan.
---------------------------------------------------------------------------
We note that one commenter suggested that the final amendments
should include additional disclosures regarding an issuer's Rule 10b5-
1(c) plan, such as information on adoption, modification, suspension,
or termination of the plan; the maximum number of shares planned for
sale under the plan; and any suspensions or terminations of a planned
repurchase pursuant to such a plan.\233\ We have not included these
additional required disclosures relating to Rule 10b5-1(c) because we
believe the required information, together with existing obligations of
issuers to disclose material changes to their share repurchase plans
whether under Rule 10b5-1 or otherwise, is sufficient to inform
investors about an issuer's repurchases. The required disclosures
achieve an appropriate balance between the concerns expressed by
commenters and the need of investors for additional information
concerning an issuer's share repurchases. As discussed above in this
section, if any of the additional disclosures suggested by the
commenter or other additional disclosures are material and necessary to
make other repurchase disclosures not misleading under the
circumstances, the issuer must provide those disclosures.\234\
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\233\ See letter from CFA Institute.
\234\ See 17 CFR 240.12b-20 (``Rule 12b-20'').
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Further, we note that some commenters recommended that we repeal
Rule 10b-18 and replace it with bright-line limits,\235\ and that we
not apply the proposed Rule 10b5-1(c) and Rule 10b-18 disclosures to
FPIs.\236\ Repealing and replacing Rule 10b-18 is beyond the scope of
this rulemaking. Consistent with our reasoning for not allowing an
exemption for certain issuers relating to the daily quantitative
repurchase disclosures, we do not believe the final amendments should
exempt FPIs from the Rule 10b5-1(c) and Rule 10b-18 disclosures. These
disclosures benefit all investors in issuers that conduct repurchases.
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\235\ See, e.g., letters from AFREF et al., CFA Institute, CII,
Lazonick & Jacobson, Oxfam, and Prof. Palladino.
\236\ See letter from SIFMA II.
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One commenter expressed the view that the proposed amendments would
interfere with state law.\237\ The commenter asserted that the
Commission's purpose in proposing the amendments was to deter share
repurchases generally, which would ``regulate boardroom decisions over
which the Commission has no authority.'' The final amendments do not
regulate repurchases or board consideration of them, nor are they
intended to deter share repurchases. While it is possible that the
amendments could result in some reduction in issuer repurchases,\238\
we do not expect these additional disclosure requirements to have a
significant deterrent effect on these transactions overall. In any
case, the purpose of the final amendments is to provide shareholders
with additional data about the timing and other details of the issuer's
repurchases to allow them to make more informed investment and voting
decisions, consistent with our authority under the Exchange Act.
---------------------------------------------------------------------------
\237\ See letter from Cato.
\238\ See infra Section V.A.2.
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Another commenter asserted that the proposed amendments' daily
disclosure requirements would violate the First Amendment.\239\ The
commenter claimed that the Commission failed to explain why monthly
disclosures would not be adequate and did not acknowledge the
compelled-speech burdens that come with a next-day reporting regime.
The commenter also noted that the proposed amendments' ``unjustified
insistence on next-day reporting'' were not ``adequately tailored'' to
the governmental interests at stake and to reduce instances of
compelled speech.
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\239\ See letter from Chamber III.
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We disagree with the commenter's assertion that the proposed
amendments would violate the First Amendment. As we have explained
earlier in this section, periodic disclosure of daily repurchases
provide a level of detail that will allow investors to assess the
efficiency of, and motives for, those transactions. Additionally, daily
repurchase disclosure allows investors to monitor and evaluate the
issuer's share repurchases and their effects on the market for the
issuer's securities. This disclosure is thus factual in nature and
advances important interests as discussed throughout this release.
Further, after considering comments, the final amendments require
periodic reporting of an issuer's daily repurchases, as opposed to
daily reporting of an issuer's daily repurchases, which greatly
mitigates the associated burdens.
Finally, we note that a number of commenters asked the Commission
to clarify certain terms, times, and transactions, including more
precisely defining ``share repurchase program,'' \240\ ``executed,''
\241\ ``business day,'' \242\ ``before the end;'' \243\ addressing
whether issuers operating in time zones other than Eastern Time would
be given additional time to file their Form SR; \244\ and clarifying
whether the proposal would encompass withhold-to-cover shares.\245\
Because the final amendments do not require issuers to provide their
daily quantitative repurchase disclosures one business day after
execution of their share repurchase order, there is no longer a need
for many of these requested clarifications.
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\240\ See letter from Cravath.
\241\ See letters from Chamber II, Cravath, DLA Piper, FedEx,
HudsonWest, Simpson Thacher, and Wilson Sonsini.
\242\ See letter from Bishop.
\243\ See id.
\244\ See letters from Chevron and HP.
\245\ See letter from Nash.
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We do not believe it is necessary to make any further
clarifications based on the other comments received. The main
difference between the current Item 703 quantitative repurchase
disclosures and the quantitative repurchase disclosures in the final
amendments is that issuers are required to aggregate their share
repurchases on a daily basis instead of on a monthly basis. Therefore,
the terms, times, and transactions used for, and applicable to, the
current Item 703 disclosure requirements should be applied to the final
amendments.\246\
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\246\ For example, as we discussed in the Proposing Release, the
Commission uses a commonly understood meaning of the term
``execution,'' which will not change based on the final amendments.
See Proposing Release, supra note 2, at n. 23. We are not adopting
the suggestion of one commenter to instead require reporting based
on the settlement date rather than the execution date, see letter
from NASAA, because the commenter's concerns about the execution
date were tied closely to potential errors that might arise under an
execution-date regime with daily filing. Because we are adopting
quarterly reporting, we think the commenter's concerns about the
execution date will be greatly lessened, consistent with our
experience with Item 703.
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[[Page 36021]]
B. Narrative Revisions to Item 703 of Regulation S-K, Form 20-F, and
Form N-CSR Additional Disclosure
1. Proposed Amendments
The Commission proposed to revise and expand the disclosure
requirements in Item 703 of Regulation S-K, Form 20-F, and Form N-CSR
to work in conjunction with proposed Form SR to provide investors with
more detailed and qualitative information that they could use to
evaluate issuer share repurchases. Specifically, the proposal would
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 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.
Additionally, the Commission proposed to require that issuers
disclose if any of their officers or directors subject to the reporting
requirements under Exchange Act section 16(a) purchased or sold shares
or other units of the class of the issuer's equity securities that is
the subject of an issuer share repurchase plan or program within ten
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.
2. Comments on the Proposed Amendments
a. Comments on Objective or Rationale for Share Repurchases, and
Process or Criteria Used To Determine the Amount of Repurchases
A number of commenters supported the proposal to require an issuer
to disclose its objective or rationale for its share repurchases, and
the process or criteria used to determine the amount of
repurchases.\247\ However, most commenters who discussed this proposal
opposed it.\248\ These commenters expressed concern that the required
disclosure could divulge competitive or sensitive information that
would be harmful to the issuer,\249\ or result in boilerplate
disclosure that would not prove meaningful to investors.\250\
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\247\ See, e.g., letters from CalPERS, CFA Institute, CII, ICGN,
Prof. Palladino, NASAA, Public Citizen, Roosevelt, and Senators
Rubio & Baldwin.
\248\ See, e.g., letters from BPI & Amer. Bankers Assoc.,
Chamber II, Coalition, Cravath, Dow, Jones Day, Kirkland Ellis,
Morris, NAM, PNC, Profs. Lewis and White, SCG, Shearman, SIFMA II,
Sullivan, and Vistra.
\249\ See, e.g., letters from BPI & Amer. Bankers Assoc., PNC,
Profs. Lewis and White, Shearman, SIFMA II, and SCG.
\250\ See, e.g., letters from Chamber II, Coalition, Cravath,
Jones Day, Morris, NAM, and Sullivan.
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Other commenters objected to the proposal on the basis that the
disclosures could be misleading because they would show only a small
part of a company's overall liquidity and capital allocation
policies.\251\ These commenters suggested that any required objective
or rationale disclosures concerning an issuer's share repurchase plans
should be included within a filing's Management's Discussion and
Analysis of Financial Condition and Results of Operations (``MD&A'')
section, so that the disclosures can be evaluated within the larger
context of liquidity and capital allocation. Other commenters suggested
that the final amendments should not require the disclosure of all
share repurchase plans, but only those that are material to the
issuer.\252\ Another commenter asserted that the disclosures would
violate the First Amendment because they would require issuers to
provide disclosure other than ``purely factual, uncontroversial
information'' \253\ and would force the issuer to speak when doing so
would be unduly burdensome.\254\
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\251\ See, e.g., letters from ABA Committee, Dow, Profs. Lewis
and White, Quest, and Shearman. One of these commenters noted that
issuers often include a discussion of repurchase activity in their
MD&A section. See letter from Quest.
\252\ See, e.g., letters from Cravath and Profs. Lewis and
White.
\253\ See letter from Chamber III (citing NIFLA v. Becerra, 138
S. Ct. 2361, 2372 (2018)).
\254\ See letter from Chamber III (citing Am. Meat Inst. v.
USDA, 760 F.3d 18, 34 (D.C. Cir. 2014)).
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In contrast, other commenters suggested that the Commission require
more disclosure than was proposed.\255\ A few of these commenters
recommended that issuers be required to announce all of their share
repurchase plans \256\ in a standardized format \257\ or on Form 8-
K.\258\ A number of commenters stated that the final amendments should
require issuers to disclose the manner in which they are funding their
share repurchases \259\ out of the concern that some issuers may borrow
funds to finance those transactions.\260\ One commenter asserted that
the final amendments should require a five-year lookback to compare the
average price per repurchased share against the price per share
received pursuant to new issuances and stock compensation plans.\261\
Some commenters recommended disclosure about the impact of share
repurchases on performance targets,\262\ and other commenters suggested
that we adopt amendments requiring issuers to disclose whether they
considered other uses for the funds being used for the share
repurchases.\263\
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\255\ See, e.g., letters from AFREF et al., Better Markets I,
BrilLiquid, CalPERS, CFA Institute, Form Letter A, ICGN, Prof.
Palladino, Roosevelt, and Senators Rubio & Baldwin.
\256\ See, e.g., letters from BrilLiquid, CalPERS, CFA
Institute, ICGN, and Prof. Palladino.
\257\ See letter from CalPERS.
\258\ See, e.g., letters from BrilLiquid and ICGN.
\259\ See, e.g., letters from AFREF et al., Better Markets I,
CalPERS, CFA Institute, Form Letter A, Prof. Palladino, Roosevelt,
and Senators Rubio & Baldwin.
\260\ See, e.g., letters from AFREF et al., CalPERS, CFA
Institute, Form Letter A, Prof. Palladino, and Senators Rubio &
Baldwin.
\261\ See letter from CFA Institute.
\262\ See, e.g., letters from CFA Institute and CII.
\263\ See, e.g., letters from CFA Institute and Form Letter A.
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b. Comments on Policies and Procedures Relating to Purchases and Sales
of the Issuer's Securities by Its Officers and Directors During a
Repurchase Program
A number of commenters supported the proposal to require issuers 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.\264\ Some commenters recommended that the Commission
adopt a more comprehensive requirement than was proposed.\265\ A few of
these commenters asked the Commission to prohibit corporate insider
trading before, during, and after buyback announcements and
execution.\266\ One commenter recommended requiring disclosure of any
directors, officers, and ten percent
[[Page 36022]]
shareholders who purchased or sold shares within ten days of an
issuer's buyback program announcement.\267\
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\264\ See, e.g., letters from CII and CFA Institute.
\265\ See, e.g., letters from AFREF et al., Better Markets I,
CII, Oxfam, Prof. Palladino, and Public Citizen.
\266\ See, e.g., letters from AFREF et al., Better Markets I,
Oxfam, Prof. Palladino, and Public Citizen.
\267\ See letter from CII.
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A few commenters, however, opposed this proposal.\268\ One of these
commenters \269\ suggested that this information would be more
appropriate in 17 CFR 229.407 (``Item 407 of Regulation S-K''), which
contains disclosure requirements regarding corporate governance.
Another commenter asserted that the proposed disclosure could create
the erroneous expectation that an issuer must have such policies and
procedures when it may not have them.\270\ One commenter suggested that
this requirement would effectively ban such insider sales.\271\
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\268\ See, e.g., letters from ABA Committee and PNC.
\269\ See letter from ABA Committee.
\270\ See letter from PNC.
\271\ See letter from Maryland Bar.
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c. Comments on Checkbox Requirement
Several commenters supported the proposed requirement for issuers
to disclose if any of their officers or directors subject to the
reporting requirements under 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 ten 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.\272\ Several of these commenters specifically supported
including the ten business-day period.\273\ One commenter noted that
the proposal ``would allow investors to more fully understand how
officer and director stock purchase and sale activities interrelate
with an issuer's share repurchase program.'' \274\ Another commenter
stated that the checkbox ``would allow investors to determine whether
corporate insiders are potentially benefiting unfairly from knowledge
asymmetry by, for example, purchasing shares ahead of an issuer's
repurchase plan announcement, knowing that share prices usually rise
with such an announcement.'' \275\
---------------------------------------------------------------------------
\272\ See, e.g., letters from Better Markets I, CFA Institute,
Hecht, and ICGN. One of these commenters suggested expanding the
checkbox period to 30 days before and after adoption of a repurchase
plan because ``[i]nsiders will know well before the announcement
that the company is considering a stock repurchase program.'' See
letter from Hecht.
\273\ See, e.g., letters from Better Markets I, CFA Institute,
and ICGN. See also letter from Hecht (supporting a 30-day period).
\274\ See letter from CFA Institute.
\275\ See letter from Better Markets I.
---------------------------------------------------------------------------
Other commenters, however, opposed the proposal.\276\ Most of the
commenters opposed to the proposal indicated that the proposed checkbox
requirement would be unnecessary \277\ because it would be duplicative
of the required disclosures in Exchange Act section 16,\278\ and
because trading on material nonpublic information is already
prohibited.\279\ Similarly, one commenter stated that insider
transactions occurring after a repurchase plan announcement should be
excluded from the checkbox requirement because the information is
already public.\280\ Another commenter stated that, if Form SR is
adopted, the data from that form should suffice.\281\ One commenter
asserted it opposed the proposal because insiders do not have access to
any particular repurchase information that would give them a trading
advantage.\282\ Some commenters noted that FPIs would be effectively
excluded from the checkbox requirement because they are exempt from
Exchange Act section 16 reporting.\283\
---------------------------------------------------------------------------
\276\ See, e.g., letters from ABA Committee, BrilLiquid, Chamber
II, Cravath, DLA Piper, HP, Quest, and Simpson Thacher.
\277\ See, e.g., letters from ABA Committee, BrilLiquid, Chamber
II, Cravath, DLA Piper, Quest, and Simpson Thacher.
\278\ See, e.g., letters from ABA Committee, DLA Piper, and
Simpson Thacher.
\279\ See letter from Quest.
\280\ See letter from DLA Piper.
\281\ See letter from Cravath.
\282\ See letter from HP.
\283\ See, e.g., letters from CBA and Cravath.
---------------------------------------------------------------------------
Several commenters expressed concern about the potential for
misinterpretations as a result of the checkbox.\284\ One commenter
claimed that the checkbox requirement could incorrectly imply that
trading outside the checkbox window is always permissible.\285\ Another
commenter stated that the checkbox could cause investors to assume
incorrectly that the issuer engaged in inappropriate behavior.\286\
Some commenters indicated that the checkbox requirement could give the
incorrect impression that insiders were trading securities as a result
of the issuer's repurchase announcement instead of for other reasons,
such as long-established Rule 10b5-1(c) plans \287\ or automatic sales
to fund tax withholding on share vesting.\288\
---------------------------------------------------------------------------
\284\ See, e.g., letters from ABA Committee, Chamber II,
Cravath, Quest, and Vistra.
\285\ See letter from Cravath.
\286\ See letter from Chamber II (stating that ``any positive
correlation between share repurchases and insider selling is likely
driven by blackout periods and not opportunistic insider trading
around repurchases.'' But see letter from Prof. Jackson, Dr. Hu, and
Dr. Zytnick (refuting that commenter's analysis by providing their
own analysis showing that, even after controlling for blackout
periods, insider sales are significantly higher during
repurchases.).
\287\ See, e.g., letters from Cravath, DLA Piper, and PNC.
\288\ See letter from PNC.
---------------------------------------------------------------------------
Some commenters asserted that Rule 10b5-1(c) plan transactions or
automatic sales to fund tax withholding on share vesting should be
excluded from the checkbox requirement.\289\ One commenter asked that
the Commission state that ``officers and directors trading in a
company's securities at the same time that the company is buying back
its own securities is not in violation [of] any rule or otherwise
harmful.'' \290\ Another commenter stated that insider purchases or
sales should be included in the checkbox requirement only if an
issuer's repurchase plan is publicly announced and implemented.\291\ A
different commenter recommended that the Commission permit issuers to
include context for the checkbox so that trading activities are not
misconstrued.\292\
---------------------------------------------------------------------------
\289\ See, e.g., letters from Cravath, DLA Piper, and PNC.
\290\ See letter from Quest.
\291\ See letter from Cravath (``We also do not believe that a
checkbox requirement is appropriate in the context of repurchase
plans that are not publicly announced.'').
\292\ See letter from ABA Committee.
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Finally, one commenter asked the Commission to clarify how the
checkbox would apply to issuers with multiple classes of stock, each
with its own repurchase plan; whether announcing the increase of an
existing share repurchase plan would constitute the announcement of a
new repurchase plan for purposes of the requirement; and whether an
issuer may rely on Forms 3,\293\ 4,\294\ and 5 \295\ filed with the
Commission to determine whether it should check the box.\296\
---------------------------------------------------------------------------
\293\ 17 CFR 249.103.
\294\ 17 CFR 249.104.
\295\ 17 CFR 249.105.
\296\ See letter from ABA Committee.
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3. Final Amendments
We are adopting final amendments relating to the revision and
expansion of the disclosure requirements in Item 703 of Regulation S-K,
Form 20-F, and Form N-CSR, with some modifications from the proposal in
response to comments received. Consistent with the proposed amendments,
these final amendments work in conjunction with the new periodic
quantitative repurchase disclosures to provide investors with more
detailed information to evaluate an issuer's share repurchases. We
continue to believe that these disclosures will help investors evaluate
whether the issuer is engaged
[[Page 36023]]
in efficient repurchases. Specifically, the final amendments require an
issuer to disclose:
<bullet> The objectives or rationales for each repurchase plan or
program and process or criteria used to determine the amount of
repurchases; \297\
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\297\ In a clarifying change from the proposal, the final
amendments will require disclosure of the ``objectives or
rationales'' rather than the ``objective or rationale'' for each
repurchase plan or program to make clear that the disclosure is not
limited to one objective or rationale if an issuer has more than
one.
---------------------------------------------------------------------------
<bullet> Any policies and procedures relating to purchases and
sales of its securities by its officers and directors during a
repurchase program, including any restriction on such transactions; and
<bullet> Whether any of its directors and officers subject to the
reporting requirements under Exchange Act section 16(a) (for domestic
corporate issuers and Listed Closed-End Funds), or directors or senior
management that would be identified pursuant to Item 1 of Form 20-F
(for FPIs, whether filing on the forms exclusively available to FPIs or
on the domestic forms) purchased or sold shares or other units of the
class of the issuer's equity securities that are registered pursuant to
section 12 of the Exchange Act and subject of a publicly announced
repurchase plan or program within four business days before or after
the issuer's announcement of such repurchase plan or program or the
announcement of an increase of an existing share repurchase plan or
program by checking a box before the tabular disclosure of issuer
purchases of equity securities.\298\
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\298\ As noted above, while we are not adopting the proposed
requirement to provide narrative disclosure under Item 703 regarding
trades intended to qualify for the non-exclusive safe harbor of
Rules 10b-18 or the affirmative defense under Rule 10b5-1(c), we are
requiring substantially the same information be disclosed in tabular
fashion in other registrant filings. See supra notes 229-230 and
accompanying text.
---------------------------------------------------------------------------
Additionally, the final amendments require disclosure of the number
of shares (or units) purchased other than through a publicly announced
plan or program, and the nature of the transaction (e.g., whether the
purchases were made in open-market transactions, tender offers, in
satisfaction of the issuer's obligations upon exercise of outstanding
put options issued by the issuer, or other transactions), and certain
disclosures for 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.
This same information is already required to be disclosed in our
current rules. In current Item 703, this information is required in a
footnote to the monthly quantitative share repurchase disclosure table.
The final amendments do not change the substance of these requirements.
The only change is that the final amendments change the form of the
requirements from an instruction to the main text of Item 703 and no
longer require the disclosure to be part of a footnote to the monthly
table, as the monthly table will no longer exist. Instead this
disclosure will be required in the main text of the narrative
discussion. We note that some commenters suggested that the final
amendments should include a number of additional, more prescriptive
disclosure requirements relating to the new narrative requirements that
are being added to Item 703, Form 20-F, and Form N-CSR.\299\ The
disclosure we are adopting will provide the information necessary for
investors to evaluate the efficiency of issuer repurchases and their
impact on the market, and we do not believe that the particular
individual disclosures suggested by commenters are needed. To the
extent further material information is necessary to make such
disclosures not misleading, the issuer will be required to provide that
information under existing Rule 12b-20.\300\
---------------------------------------------------------------------------
\299\ Some commenters suggested particular additional
disclosures such as a five-year lookback, see letter from CFA
Institute, the impact of share repurchases on performance targets,
see letters from CFA Institute and CII, or alternative uses for the
share repurchase funds, see letter from CFA Institute and Form
Letter A.
\300\ See Rule 12b-20 (``In addition to the information
expressly required to be included in a statement or report, there
shall be added such further material information, if any
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