Key Takeaways

• The Securities and Exchange Commission (SEC) proposed amendments to Item 703 of Regulation S-K under the Securities Exchange Act of 1934 (the Exchange Act) and a new Form SR to expand the disclosure of issuer repurchases of registered equity securities to provide greater transparency for investors.
• The amendments to Item 703 would require additional details in connection with quarterly disclosures, including the objective or rationale for share repurchases and the process or criteria for determining the amount of repurchases.
• Form SR would impose daily disclosure obligations on issuers that repurchase shares, with the filing due by the end of the next business day following the transaction.

Overview

On Dec. 15, 2021, the SEC proposed amendments to the disclosure requirements regarding purchases of equity securities made by or on behalf of an issuer or any affiliated purchaser. Issuers may repurchase their shares through various transactions, including open market purchases, tender offers, private negotiated transactions and accelerated share repurchases, and these activities are typically only disclosed at the time they are authorized by the board of directors and in the required periodic report long after they are completed.

Although share repurchases offer issuers an opportunity for shareholder value maximization, such as to offset dilution from stock compensation and other issuances, to help signal the issuer’s view that its stock is undervalued, or as an efficient use of the issuer’s excess cash, the SEC believes that greater transparency is needed to address opportunistic and harmful use of issuer share repurchases by issuer insiders. For example, repurchases can be used for earnings management (by decreasing the denominator of the earnings-per-share (EPS) calculation) to meet or beat consensus forecasts or to achieve EPS-tied compensation arrangements. Further, asymmetries with regard to information about repurchases between insiders and investors may provide insiders with a trading advantage. The proposed amendments seek to eliminate the information gap and opportunity for abuse by improving the quality, relevance and timeliness of information related to issuer share repurchases.

Proposed Amendment – Item 703 Periodic Disclosure Requirements

Currently, an issuer has the obligation under Item 703 of Regulation S-K to disclose in annual reports on Form 10-K and quarterly reports on Form 10-Q (as well as annually in reports on Form 20-F and Form N-CSR) the following information for share repurchases occurring during each month of the last quarter covered by the report:

• The total number of shares purchased during the month;
• The average price paid per share;
• The total number of shares purchased under a publicly announced repurchase plan or program; and
• The maximum number or approximate dollar value of shares that may yet be purchased under the plan or program.

The proposed amendments expand these requirements to also require issuers to disclose:

• The objective or rationale for its share repurchases and process or criteria used to determine the amount of repurchases;
• 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;
• Whether it made its repurchases pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and if so, the date that the plan was adopted or terminated;
• Whether purchases were made in reliance on the Rule 10b-18 nonexclusive safe harbor; and
• Whether any of its officers or directors subject to Section 16 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 10 business days before or after the announcement of an issuer purchase plan or program.

Proposed Form SR – Daily Disclosure Requirements

The proposed amendments expand the current disclosure requirements to also add timely reporting on a new Form SR, which must be furnished to the SEC within one business day after the execution of the share repurchase. Because the information is required to be furnished, rather than filed, issuers would not be subject to liability under Section 18 of the Exchange Act for the disclosure, and the information would not be deemed incorporated by reference into filings under the Securities Act of 1933 (the Securities Act) and subject to liability under Section 11 of the Securities Act, unless the issuer expressly incorporated such information. The Form SR would require the disclosure of:

• The total number of shares (or units) purchased, whether or not made pursuant to publicly announced plans or programs;
• The average price paid per share (or unit);
• The aggregate total number of shares (or units) purchased on the open market;
• The aggregate total number of shares (or units) purchased in reliance on the safe harbor in Rule 10b-18; and
• 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).

Proposed Amendment – Tagging with Inline XBRL

The proposed amendments would also require issuers to tag all disclosure information required in both the daily and periodic disclosures using Inline eXtensible Business Reporting Language (XBRL) to improve the quality and usability of the data for investors.

The full release containing the proposed amendments and the SEC’s analysis can be found here: https://www.sec.gov/rules/proposed/2021/34-93783.pdf.

Authorship credit: Janet A. Spreen and Macy T. Munz