August 31, 2023

New CDIs on stock buybacks and foreign private issuers

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In May, the SEC adopted a proposal intended to modernize and improve disclosure regarding company stock repurchases. One fortunate aspect of the final rules—for domestic companies, that is—was that the new rule did away with the proposed new Form SR for reporting of daily repurchase data by domestic companies and, instead, moved to quarterly reporting of detailed quantitative information on daily repurchase activity, to be filed as exhibits to companies’ periodic reports. But that was not the case for foreign private issuers. The final rules require FPIs that report on FPI forms to disclose daily quantitative repurchase data at the end of every quarter on new Form F-SR, due 45 days after the end of the FPI’s fiscal quarter. Some commenters on the proposal had suggested exempting FPIs that already make repurchase disclosure under home-country rules, but the SEC elected not to do so in light of its view that the detailed disclosure would be beneficial for all investors in companies that conduct repurchases. The SEC noted, however, that, if an FPI’s home country disclosures furnished on Form 6-K satisfy the Form F-SR requirements, it can incorporate those disclosures by reference into its Form F-SR. (See this PubCo post.)

Now, Corp Fin has issued three new CDIs, summarized below, related to new Form F-SR addressing reporting in the absence of repurchases and reporting for the final fiscal quarter.

SideBar

At the open meeting to consider adoption of the final rules, SEC Commissioner Mark Uyeda contended that the rule essentially upended the historical treatment of FPIs. In his dissenting statement, he contended that, while the rulemaking was about repurchase disclosure, “in the future, these amendments may be remembered as the beginning of the end for the Commission’s approach to foreign private issuers.” For 55 years, he observed, FPIs have been able to report under a separate regime that largely bends to their home country rules. However, the new repurchase disclosure rules “will require FPIs to make quarterly filings to report share repurchases regardless of their home country’s disclosure requirements. This change fundamentally upends the Commission’s long-standing and bipartisan approach of largely deferring to the disclosures made by FPIs pursuant to their home country reporting requirements. Given the significance of this shift in regulatory philosophy, the Commission should have undertaken a separate rulemaking on the issue, instead of including this change as part of a rulemaking focused on share repurchase disclosure.” This approach sends a message to our foreign partners that the SEC “will sacrifice principles of mutual recognition and international comity to impose its own views on the rest of the world. This approach may ultimately harm U.S. investors and companies,” through, among other things, higher prices and lower returns.

In addition, he contended that the final rules “fail to recognize important differences between FPIs and domestic companies.” The SEC justified the need for daily repurchase data as a way to enable investors to determine if repurchases were motivated by a desire to increase executive comp or achieve accounting targets. But FPIs “are neither subject to Section 16 of the Exchange Act nor extensive executive compensation disclosure. Thus, it will be nearly impossible for FPI investors to use the daily data to determine whether repurchases were motivated by executive compensation reasons.” In addition, FPIs are not required to report their financial results quarterly; as a result, quarterly disclosure of repurchase activity may not be “aligned with its disclosure of financial results, [and] investors will be hard pressed to use the repurchase data to assess whether the FPI was attempting to reach an accounting target.” (See this PubCo post.)

Form F-SR

Question 113.01 In this CDI, the staff advises that Form F-SR is not required to be filed if, during the covered fiscal quarter, neither the FPI nor any affiliated purchaser repurchased any of its equity securities registered under Exchange Act Section 12. However, the staff points out that “there is no de minimis exception to the Form F-SR filing requirement; even the repurchase of a very small number of equity securities would trigger a Form F-SR filing.”

Question 113.02 So long as the FPI or affiliated purchaser did not conduct any repurchases that would trigger the requirement to file a Form F-SR, no Form F-SR is required to be filed “solely to check the box under ‘Registrant Purchases of Equity Securities’ section of Form F-SR for the covered purchases or sales of securities by a director or member of senior management who would be identified pursuant to Item 1 of Form 20-F.”

Question 113.03 Unlike domestic issuers that may report repurchase activity on exhibits attached to periodic reports, FPIs are “not permitted to wait to report repurchases during the final quarter of the fiscal year in the Form 20-F for that fiscal year.” Rather, if the FPI or affiliated purchaser engaged in repurchases during the final quarter of the fiscal year, “then a Form F-SR would be required for that final quarter and must be filed within 45 days after the end of the quarter.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.