No Next-Business-Day Reporting Requirement

On May 3, 2023, the Securities and Exchange Commission (SEC) approved final rules governing disclosure of repurchases of issuers' equity securities that are registered under the Securities Exchange Act of 1934 (Exchange Act). In a significant and welcomed change from the proposed rules, and in response to a number of comment letters, including one from our firm, the final rules do not require reporting of repurchases within one business day, but rather will require issuers to report daily repurchase activity on a quarterly basis in an exhibit to their periodic filings (or on a new Form F-SR for foreign private issuers (FPIs)). The final rules will also require enhanced qualitative disclosure on issuer repurchases and quarterly disclosure about an issuer’s adoption and termination of Rule 10b5-1 trading arrangements.

The rules are effective 60 days after publication in the Federal Register. Issuers (other than FPIs) will be required to comply with the new requirements in their Exchange Act periodic reports on Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.¹

Background

Despite legitimate corporate motivations for stock repurchases (e.g., returning capital to investors, mitigating the dilutive effect of other share issuances), the SEC has noted that there are also concerns about the practice, such as information asymmetries between issuers and investors and that companies may engage in share repurchases in a way that may be advantageous to corporate insiders. In adopting the final rules, the SEC stated that “the purpose of these amendments is to improve the information investors receive to better assess the efficiency of, and motives behind, the issuer repurchase.”

Under current rules, an issuer repurchasing its own equity securities registered under Exchange Act Section 12 is required to report these repurchases per month on a quarterly basis in their Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.² There is no requirement to disclose whether these repurchases are made pursuant to Exchange Act Rule 10b5-1 trading plans.

The required disclosure includes, among other things, the total number of shares repurchased per month in the quarter, the average price at which the shares were repurchased, whether they were part of a previously announced repurchase plan, and the remaining number of shares that may be repurchased under previously announced plans. The disclosure must be accompanied by certain footnoted information regarding the issuer’s repurchase plans (both announced and not announced).

Quarterly Disclosure of Daily Repurchase Information

As noted above, the SEC’s proposed rules would have required reporting repurchases on a new Form SR within one business day following the day on which the issuer executes a share repurchase, as discussed in our prior client alert.

The final rules significantly deviate from the proposed rules in terms of timing and do not require a new Form SR to report repurchases within one day. Instead, the final rules require that domestic issuers include an exhibit³ to their Form 10-Q and Form 10-K (for the fourth quarter) that details issuer repurchases on a daily basis during the quarter. The format of this exhibit, as set forth in new Item 601(b)(26) of Regulation S-K, is included as an Appendix to this client alert. FPIs that file FPI forms will be required to provide the information on a new Form F-SR within 45 days of the end of the quarter (including the fourth quarter), and listed closed-end funds will include the information in their Form N-CSR on a semi-annual basis.

The final rules require the following information in the exhibit in tabular format, by date and aggregated on a daily basis, with respect to repurchases in the quarter:

• Execution date
• Class of shares (or units) purchased
• Total number of shares (or units) purchased (including for that purpose all issuer repurchases, whether or not under publicly announced plans or programs)
• Average price paid per share (or unit)
• Total number of shares (or units) purchased as part of publicly announced plans or programs
• Aggregate maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the publicly announced plans or programs
• Total number of shares (or units) purchased in open market transactions
• Total number of shares (or units) purchased in reliance on the safe harbor in Exchange Act Rule 10b-18
• Total number of shares (or units) purchased under a Rule 10b5-1 plan (including, by footnote, the date any Rule 10b5-1 plan was adopted or terminated (including most modifications))

In addition, the issuer will be required to check a box before the tabular disclosure of repurchases if any of the issuer's Section 16 officers and directors purchased or sold shares (or units) within four business days before or after the announcement of the issuer's repurchase plan. In determining whether or not it is required to check this box, the issuer may rely (unless it knows or has reason to believe that a form was filed inappropriately or should have been filed but was not) on a review of Forms 3, 4, and 5, and any amendments thereto, and any written representations from the reporting person that no Form 5 is required (which representation the issuer must maintain in its records for two years, making a copy available to the SEC or its staff upon request).⁴

In another departure from the proposed rules, the share repurchase data will be “filed” rather than “furnished,” meaning that the issuer will be subject to Exchange Act Section 18 liability for this disclosure, and this information will be deemed to be incorporated by reference into filings under the Securities Act of 1933 (Securities Act), which will be subject to Securities Act Section 11 liability.

Additional Disclosure in Periodic Reports

Continuing disclosure from existing rules. Due to the new quarterly table of daily repurchases, the final rules eliminate the current quarterly (or annual for FPIs) table of monthly repurchases. However, the final rules do not eliminate the current disclosure requirements under Item 703 of Regulation S-K to disclose the number of shares (or units) purchased other than through a publicly announced plan or program and the nature of the transaction (e.g., open-market transactions, tender offers, put options, or other transactions), and certain disclosures for publicly announced repurchase plans or programs. The current disclosure is required in a footnote to the table, but under the final rules will now be in the main text of the response to disclosure required under Item 703.

New narrative disclosure regarding objective/rationale for repurchases and restrictions on director/officer sales. Under the final rules, the SEC expanded the requirements for narrative disclosures of repurchases in Item 703 of Regulation S-K, Form 20-F, and Form N-CSR to require an issuer to include the following additional disclosures:

• The issuer's objectives or rationales for repurchasing its shares and the process or criteria it uses to determine the number of shares to be repurchased
• Any restrictions that the issuer imposes on its Section 16 officers or directors with respect to trading in issuer securities during a repurchase program
• Any other policies or procedures that the issuer has relating to insiders trading during a repurchase program

New issuer Rule 10b5-1 trading plan disclosure. Under the final rules, the SEC added new Item 408(d) of Regulation S-K, which will require quarterly disclosure in periodic reports on Forms 10-Q and 10-K about an issuer’s adoption and termination of Rule 10b5-1 trading arrangements, including:

• Whether the issuer adopted or terminated a Rule 10b5-1 plan or arrangement, and a description of the material terms of plan (other than price), such as the date adopted or terminated
• The duration of the Rule 10b5-1 trading arrangement
• The aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 trading arrangement

Note that Exchange Act Rule 10b5-1(c)(1)(iv) provides that any modification or change to the amount, price, or timing of the purchase or sale of the securities underlying the Rule 10b5-1 plan is a termination of such plan, and the adoption of a new plan.

Recognizing that there could be some overlap in disclosure with Item 703 of Regulation S-K, the SEC added a note to Item 408(d)(1) that if the disclosure provided pursuant to Item 703 of Regulation S-K contains disclosures that would satisfy the requirements of Item 408(d)(1), then a cross-reference to that disclosure will satisfy the requirements of Item 408(d)(1) of Regulation S-K.

Similar to quarterly disclosures of Section 16 officer and director trading arrangements under Item 408(a) of Regulation S-K, these quarterly disclosure requirements will not be required to be made by FPIs.

Inline XBRL

The new rules require issuers to tag the information disclosed under the final rules in Inline XBRL. The SEC maintains that such reporting will ease comparisons of repurchase activity among issuers and allow investors easier access to statistics and aggregations relating to repurchases.

Applicability

Purchases made by or on behalf of issuers or any “affiliated purchaser” (as defined under Exchange Act Rule 10b-18(a)(3)) of securities registered under Exchange Act Section 12 are subject to the new rules, including purchases by FPIs and certain registered closed-end funds.

Effective Date and Compliance Date

The final rules will be effective 60 days after they are published in the Federal Register. Domestic issuers will be required to comply with the new rules on Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.

FPIs will be required to comply with the new rules beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024. The Form 20-F narrative disclosure (and tagging) that relates to the Form F-SR filings will be required beginning in the first Form 20-F after their first Form F-SR has been filed.

Next Steps

Issuers should consider what changes in their processes and policies may be necessary or advisable in view of the new disclosure requirements for repurchases. In particular, issuers should:

• Review and confirm the objectives and rationales for each repurchase plan or program. In the adopting release, the SEC stated that it expects issuers to provide the new narrative disclosure, including the objectives and rationales for each repurchase plan or program, “without relying on boilerplate disclosure[.]” The SEC also stated that it had “received several helpful suggestions from commenters” for avoiding boilerplate disclosure, including that, in the context of discussing the objectives and rationales, “issuers could discuss the factors driving the repurchase, including whether their stock is undervalued, prospective internal growth opportunities are economically viable, or the valuation for potential targets is attractive.” Issuers should carefully review and confirm the reasons for conducting each of their stock repurchase plans or programs. When disclosure becomes required, issuers should review and update their quarterly disclosures as needed, based on the repurchases made during the applicable quarter.
• Consider the potential for increased scrutiny of insider transactions made during the execution of issuer repurchase plans or programs resulting from the new disclosure requirements. Once the new rules are effective, issuers will need to disclose whether officers and directors transacted in the same class of the issuer’s equity securities in the four business days before and after announcement of a repurchase program. If required to disclose any insider transactions in the four business days before or after the announcement of a repurchase plan, issuers may want to consider whether any additional disclosure may be helpful to provide context relating to the insider transactions (e.g., that the insider transactions were made pursuant to Rule 10b5-1 plans). In addition, issuers will need to disclose any restrictions that they impose on their insiders with respect to trading in issuer securities during a repurchase program. While insider transactions during the execution of issuer repurchase plans should not be viewed as inherently problematic and, in any case, are often made pursuant to Rule 10b5-1 plans, they may nevertheless be subject to increased scrutiny by investors, the press, and other market observers, particularly when viewed in hindsight.
• Review current practices relating to repurchase plans and programs in light of the new required disclosure. Under amended Item 703, issuers will be required to disclose, among other things, the process or criteria they use to determine the number of shares to be repurchased. In addition, under recently amended Item 408(b) of Regulation S-K, issuers will be required to disclose any insider trading policies and procedures governing transactions of the issuer’s securities by the issuer itself (in addition to officers, directors, and employees). In light of the new disclosure requirements in Item 703, which will be effective for calendar-year issuers in the fiscal 2023 Form 10-K, and in Item 408(b), which will be effective for calendar-year issuers in the fiscal 2024 Form 10-K, issuers should review their existing practices relating to their repurchase plans and programs.
• Reassess reporting systems and disclosure controls and procedures surrounding repurchases, both internally and with the issuer’s broker. Issuers should review their current reporting systems and disclosure controls and procedures, and evaluate what revisions are needed (if any) to track and report repurchase information on a daily basis, and to comply with the enhanced disclosure requirements under amended Item 703 of Regulation S-K. Both the issuer’s internal treasury department and the external broker conducting repurchases should be involved in this reassessment.

For more information on these rules or any related matter, please contact any member of the firm's public company representation practice.

Appendix

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 (15 U.S.C. 78p(a)), or for foreign private issuers as defined by Rule 3b-4(c) (§ 240.3b-4(c) of this chapter), any director or member of senior management who would be identified pursuant to Item 1 of Form 20-F (§ 249.220f of this chapter), 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 plan or program within four (4) 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.

[1] FPIs will be required to comply with the new disclosure and tagging requirements beginning with the Form F-SR that covers the first full fiscal quarter that begins on or after April 1, 2024. The Form F-SR is due 45 days after the end of an FPI’s fiscal quarter. The Form 20-F narrative disclosure (and tagging) that relates to the Form F-SR filings will be required beginning in the first Form 20-F after their first Form F-SR has been filed.

[2] See Item 703 of Regulation S-K. FPIs are required to report their repurchases per month on an annual basis under Item 16E of Form 20-F.

[3] These disclosures will be required in an exhibit to the Form 10-Q or Form 10-K rather than in the body of the report (as is currently required for quarterly reporting of monthly repurchases under Item 703 of Regulation S-K). The SEC opted to require this new disclosure in an exhibit, recognizing “that certain issuers could conduct a number of daily repurchases every quarter, which may result in lengthy additional disclosures in a filing.” Therefore, “[t]o 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.”

[4] FPIs are exempt from Exchange Act Section 16 reporting. Therefore, for FPIs, this disclosure and the written representation would relate to directors and senior management who would be identified pursuant to Item 1 of Form 20-F.