SEC Proposes Accelerated and Enhanced Share Repurchase Reporting

On December 15, 2021 the U.S. Securities and Exchange Commission (SEC) announced that it had proposed rules that would enhance and expand existing reporting of share repurchases by companies. The most significant proposal would require companies to make daily reports of purchases of any class of securities registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act). The proposed rules would require companies to furnish Form SR reports before the end of the first business day following the day on which the share repurchase was executed. Form SR would require identifying the date, class and number of shares, and average price per share, among other things. The proposed rules would also enhance existing disclosure about companies’ purchases of their shares, including the objective or rationale for the share repurchases, information about any repurchases pursuant to a plan intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c)(1), and whether any repurchases had been made in reliance on the Rule 10b-18 safe harbor. The proposed rules would apply to domestic operating companies with a class of securities registered under Section 12 of the Exchange Act, including non-accelerated filers, smaller reporting companies and emerging growth companies. The proposed rules would also apply to foreign private issuers and certain registered closed-end funds.

What Companies Should Be Doing Now

The proposed rules will be subject to public comment for 45 days after publication in the Federal Register. Companies, market participants and others interested in the issues raised by the proposed rules, may wish to respond to the SEC’s solicitation of comments on the proposed rules.

The proposed rules would require furnishing Form SR reports not later than the next business day after execution of a purchase order. Depending on the company’s market activity, this could require submitting Form SR reports as often as every business day. Because the proposed rules are subject to public comment and the final rules, if adopted by the SEC, may be different from the proposed rules, it would be premature in most cases to modify existing policies and procedures, or adopt new policies and procedures. However, companies may wish to give initial consideration to questions about what controls and procedures might be necessary to address matters such as the following:

• What would be necessary to ensure that the company receives timely transaction information from the broker who executes the purchase? Which groups within the company should receive this information?
  
  
• Would new internal reporting structures be required to ensure that information about executed purchase orders is forwarded, on a timely basis, within the company to the group that will prepare and file Form SR reports, if not transmitted directly by the broker?
  
  
• How should Form SR reports be reviewed before the company submits the report, and by whom?
  
  
• Assuming that vendors of EDGAR filing software would add Form SR to the library of SEC documents that their software can format and submit to the SEC’s EDGAR system, would any staffing or training changes be required to ensure that the company could submit Form SR reports every business day, if required?

The proposed amendments to the existing share purchase disclosure requirements of Item 703 of Regulation S-K, which is required in Form 10-Q and Form 10-K reports, would require companies to disclose any policies and procedures relating to purchases and sales of the company’s securities by its officers and directors during a company repurchase program, including any restrictions on such transactions. Companies may wish to give initial consideration to whether any changes in these policies and procedures should be made.

To ensure that the company can take any action that the final rules may require, companies should watch for news that the SEC has adopted final rules, review these rules, including any changes from the proposed rules, and plan for compliance when the final rules become effective.

Companies Subject to the Proposed Rules

The proposed rules would apply to all domestic operating companies that have a class of securities registered under Section 12 of the Exchange Act. As proposed, the rules contain no exceptions for companies that are non-accelerated filers, smaller reporting companies or emerging growth companies under SEC rules. The proposed rules would also apply to foreign private issuers that file annual reports on Form 20-F and to certain registered closed-end funds that file reports on Form N-CSR.

New Form SR: Next Business Day Purchase Reporting

The most significant element of the proposed rules is new Rule 13a-21, which would require companies to report any purchases of the company’s equity securities on new Form SR for any single day by the company or an affiliated purchaser. The proposed rules would require companies to furnish Form SR before the end of the first business day following the day on which the company or an affiliated purchaser executes a purchase. Because each Form SR report covers only purchases made on a single day, a company that is executing purchases of its securities on a daily basis would be required to furnish Form SR reports on a daily basis.

Form SR would be furnished, not filed, so the disclosure would not be incorporated into the company’s Form S-3 or Form S-8 registration statements unless the company expressly incorporates that information, and would be subject to fewer liability provisions under the Exchange Act. Late filing of a Form SR report would not affect eligibility to use Form S-3.

The proposed rules would require companies to file amendments to disclose material errors or changes affecting the information in a previous Form SR report. Form SR would cover only shares of a class registered under Section 12 of the Exchange Act, which requires companies to register a class of securities if the class is listed on a national stock exchange (Section 12(b)) or if the company exceeds certain thresholds (Section 12(g)).

Related proposed amendments would require companies to tag the information in Form SR using Inline XBRL, as required by Regulation S-T and the EDGAR Filer Manual. This would facilitate expedited collection and analysis of information about company share repurchases.

The column headings for the tabular disclosure in Form SR are shown below. Form SR, as proposed, requires that the report must contain each of the columns in the table shown below. If there is no relevant information for a column, the company may appropriately mark the column (for example, “Not Applicable” or “None”) or leave it blank. Proposed Rule 13a-21 would permit a company to add additional columns as necessary to provide disclosure that is responsive to the requirements of the proposed rule.

[Form SR]
ISSUER PURCHASES OF EQUITY SECURITIES

Date

(a) Class of Shares

(b) Total Number of Shares Purchased

(c) Average Price Paid per Share

(d) Total Number of Shares Purchased on the Open Market

(e) Total Number of Shares Purchased in Reliance on the Safe Harbor in Rule 10b-18

(f) Total Number of Shares Purchased Pursuant to a Plan that is Intended to Satisfy the Affirmative Defense Conditions of Rule 10b5-1(c)

Affiliated Purchaser

The disclosure requirements of proposed Rule 13a-21 and Form SR and existing Item 703 of Regulation S-K and the proposed amendment to Item 703 apply to purchases by the company and “affiliated purchasers,” as defined in Rule 10b-18(a)(3), which defines an affiliated purchaser as follows:

• A person acting, directly or indirectly, in concert with the company for the purpose of acquiring the company’s securities; or
  
  
• An affiliate who, directly or indirectly, controls the company’s purchases of its securities, whose purchases are controlled by the company, or whose purchases are under common control with those of the company.

Rule 10b-18(a)(3) provides that “affiliated purchaser” shall not include a broker, dealer, or other person solely by reason of the broker, dealer, or other person effecting Rule 10b-18 purchases on behalf of the company or for its account, and shall not include an officer or director of the company solely by reason of that officer or director’s participation in the decision to authorize Rule 10b-18 purchases by or on behalf of the company.

Guidance issued by the SEC Division of Trading and Markets states the Division’s view that after an acquiror and a target company have signed a merger agreement, the target company would be considered an “affiliated purchaser” of the acquiror with respect to purchases of the acquiror’s securities.

Amendments to Expand Existing Item 703 Share Purchase Disclosure Requirements

Item 703 of Regulation S-K has required disclosure of purchases of a company’s securities of a class registered under Section 12 of the Exchange Act by a company and its affiliated purchasers since 2003. The disclosure requirements of Item 703 include a table that shows certain information about purchases by the company and affiliated purchasers on a month-by-month and aggregate basis during the three months covered by a Form 10-Q report or the final three months of the year covered by a Form 10-K report.

In response to increased use of company share repurchase plans and concerns expressed by commentators, the proposed rules would amend Item 703 to provide more information on matters such as the company’s rationale for share purchases, how purchases are being executed, the extent of the company’s market activity and potential impacts on the company’s share prices, and potential relationships between share purchases and executive compensation and stock sales.

To this end, the most notable proposed amendments to Item 703 include the following new disclosures:

• The number of shares purchased in reliance on the safe harbor in Rule 10b-18;
  
  
• The number of shares purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), including the date(s) the plan was adopted or terminated; and
  
  
• Any policies and procedures relating to purchases and sales of the company’s securities by its officers and directors during a repurchase program, including any restrictions on such transactions.

In addition, the amendments would require a new check box before the share purchase table to indicate whether any officer or director who is subject to the reporting requirements of Exchange Act Section 16(a) has purchased or sold shares or other units of a class of the company’s equity securities that is the subject of a company share repurchase plan or program within ten business days before or after the company’s announcement of a repurchase plan or program.

The proposed amendments to Item 703 would require the following disclosure in the narrative that accompanies the Item 703 table or in a footnote to the table:

• The objective or rationale for each repurchase plan or program and the process or criteria used to determine the amount of repurchases;
  
  
• The number of shares purchased:
  • Other than through a publicly announced plan or program, and if so, the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the company’s obligations upon exercise of outstanding put options issued by the company, or other transactions);
  • In reliance on the safe harbor in Rule 10b-18; and
  • Pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and if so, the date(s) the plan was adopted or terminated.
    
    
• For publicly announced repurchase plans or programs:
  
  • 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 company has determined to terminate prior to expiration, or under which the company does not intend to make further purchases.
    
    
• Any policies and procedures relating to purchases and sales of the company’s securities by its officers and directors during a repurchase program, including any restrictions on such transactions.
  
  As amended by the proposed rules, the Item 703 table would include the following check box and related text and the column heads shown below for each month and for the three months covered by a Form 10-Q report or each of the three months and the final three months of the fiscal year covered by a Form 10-K report.

[Form 10-Q/Form 10-K]
ISSUER PURCHASES OF EQUITY SECURITIES

Use the checkbox to indicate if any officer or director reporting pursuant to Section 16(a) of the Exchange Act purchased or sold shares or other units of the class of the issuer’s equity securities that is the subject of an issuer share repurchase plan or program within ten (10) business days before or after the issuer’s announcement of such repurchase plan or program. □

Period

(a) Total Number of Shares (or Units) Purchased

(b) Average Price Paid per Share (or Unit)

(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

As with Form SR, the proposed rules would require companies to tag the information in the Item 703 disclosure using Inline XBRL, which would permit expedited collection and analysis of information about company share purchases.