Feb 15 -- The Securities and Exchange Commission is proposing amendments to modernize and improve disclosure about repurchases of an issuer's equity securities that are registered under the Securities Exchange Act of 1934. Specifically, the proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments would also enhance the existing periodic disclosure requirements about these purchases. Comments should be received on or before April 1, 2022.
We are proposing changes to the requirements for disclosure of purchases of equity securities made by or on behalf of an issuer or any affiliated purchaser. Issuers may repurchase their shares through, among other means, open market purchases, tender offers, private negotiated transactions, and accelerated share repurchases. Issuers typically disclose repurchase plans or programs at the time that the share repurchases are authorized by the board of directors. Most share repurchases are executed over time through open market purchases through such share repurchase plans or programs. Issuers are not required to, and typically do not, disclose the specific dates on which they will execute trades pursuant to an announced repurchase plan or program. Investors and other market participants normally do not become aware of an issuer's actual share repurchase-related trading activity until they are reported in an issuer's periodic reports, long after the trades have been executed.
The proposed amendments are intended to improve the quality, relevance, and timeliness of information related to issuer share repurchases. This proposal results from an ongoing, comprehensive evaluation of our disclosure requirements. As part of this evaluation, in April 2016, the Commission issued a Concept Release on the business and financial disclosure required by Regulation S-K, including disclosure pursuant to Item 703.
The Commission adopted Item 703 in 2003 to require disclosure on a quarterly basis of any purchase made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer's equity securities registered under Section 12 of the Exchange Act. The disclosure requirement applies to both open market and private transactions. When it adopted Item 703, the Commission noted that an issuer's stock price often increases following an issuer's public announcement of a repurchase plan or program and that some issuers publicly announce repurchase programs, but do not actually purchase any securities or purchase only a small portion of the announced amount. 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.
Currently, Item 703 share repurchase disclosure is required in Form 10-Q (17 CFR 249.308a) for the issuer's first three fiscal quarters and in Form 10-K (17 CFR 249.310) for the issuer's fourth quarter. The same disclosure is required in Form 20-F on an annual basis for foreign private issuers and in Form N-CSR on a semi-annual basis for certain closed-end funds. In particular, Item 9 of Form N-CSR implements the requirements of Item 703 for certain registered closed-end investment management companies (“registered closed-end funds”), varying from Item 703 only to account for the different reporting period covered by Form N-CSR. Similarly, Item 16E of Form 20-F applies the Item 703 requirements to foreign private issuers. 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.
More specifically, Item 703 currently requires an issuer to disclose in tabular format:
The total number of shares (or units) purchased, regardless of amount and regardless of whether made pursuant to a publicly announced plan or program, by the issuer or any affiliated purchaser during the relevant period, reported on a monthly basis and by class, including footnote disclosure regarding the number of shares purchased other than through a publicly announced plan or program and the nature of the transaction;
The average price paid per share (or unit);
The total number of shares (or units) purchased as part of a publicly announced repurchase plan or program; and
The maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs.
Item 703 also requires footnote disclosure in the aggregate of the principal terms of all publicly announced repurchase plans or programs, including:
The date each plan or program was announced;
The dollar amount (or share or unit amount) approved;
The expiration date (if any) of each plan or program;
Each plan or program that has expired during the period covered by the table; and
Each plan or program the issuer has determined to terminate prior to expiration, or under which the issuer does not intend to make further purchases.
We recognize that there are a number of reasons that issuers conduct share repurchases and that share repurchases can have a positive or negative impact on the market for an issuer's securities. The high dollar volume, nearly $700 billion in 2020, of recent share repurchase activity has been accompanied by public interest in corporate payouts in the form of share repurchases. Various studies address motivations behind corporate payouts and the choice of the form of payout (repurchases or dividends).
Some studies have found that issuers often use repurchases in a manner aligned with shareholder value maximization, such as to offset share dilution after new stock is issued, to facilitate stock- and stock option-based employee compensation programs, to help signal the issuer's view that its stock is undervalued, or because the issuer's board has otherwise determined that a repurchase program is a prudent use of the issuer's excess cash.
Other observers, however, have expressed concerns about issuers' uses of share repurchases. Some research has shown that repurchases can serve as a form of real earnings management (through decreasing the denominator of earnings-per-share (“EPS”)) and thus be subject to short-term earnings management objectives of an executive seeking to meet or beat consensus forecasts. In addition, because announcements of repurchases and actual repurchase trades can also effect short-term upward price pressure, share price- or EPS-tied compensation arrangements could incentivize executives to undertake repurchases in an attempt to maximize their compensation. Several commentators have highlighted what they viewed to be the opportunistic and harmful use of issuer share repurchases by issuer insiders. Some of these commentators view issuer share repurchases as a tool to raise the price of an issuer's stock in a way that allows insiders and senior executives to extract value from the issuer instead of using the funds to invest in the issuer and its employees. A further concern raised by some commentators is the potential for share repurchases to be used by issuers as a mechanism to inflate the compensation of their executives in a manner that is not transparent to investors or the market. In addition, a number of commenters recommended expanding the disclosure required by Item 703 in response to the Commission's request for comments regarding Item 703 in the Concept Release. Some commenters also supported increasing the frequency of reporting share repurchases.
We also received a rulemaking petition expressing general support for the current regulatory regime for issuer share repurchases, but recommending revisions to the Commission's executive compensation disclosure requirements to require disclosure of whether issuer share repurchases have affected the calculation of the repricing of any options, stock appreciation rights, or option-like instruments.
In light of the growth of issuer share repurchase plans in recent years and the concerns expressed by commentators, we believe investors could benefit from improving the quality, relevance, and timeliness of information related to issuer share repurchases. In particular, we are concerned that, because issuers are repurchasing their own securities, asymmetries may exist between issuers and affiliated purchasers and investors with regard to information about the issuer and its future prospects. This, in turn, could exacerbate some of the potential harms associated with issuer repurchases. To help address these information asymmetries, we are proposing a new disclosure form and additional disclosure requirements about issuer repurchases.
The proposed amendments would require more detailed and more frequent disclosure about issuer share repurchases, and require issuers to present the disclosure using a structured data language, which could allow investors to:
Better understand the extent of an issuer's activity in the market, including potential impacts on the issuer's share price;
Better understand an issuer's motivation for its share repurchases, and how it is executing its purchase plan; and
Gain potential insight into any relationship between share repurchases and executive compensation and stock sales.
The proposed amendments could also improve the ability of investors to identify repurchases that are more likely to be driven by managerial self-interest ( e.g., increasing the share price prior to an insider's sale, meeting a threshold in an executive compensation arrangement, or meeting consensus earnings forecast) and thereby promote investor protection.
We are proposing to modernize and improve the disclosure required about repurchases of an issuer's equity securities by:
Requiring daily repurchase disclosure on a new Form SR, which would be furnished to the Commission one business day after execution of an issuer's share repurchase order;
Amending Item 703 to require additional detail regarding the structure of an issuer's repurchase program and its share repurchases; and
Requiring information disclosed pursuant to Item 703 of Regulation S-K and pursuant to Form SR to be reported using a structured data language (specifically, Inline eXtensible Business Reporting Language or “Inline XBRL”).
FR notice (30 pages): https://www.federalregister.gov/d/2022-01068