On May 3, 2023, the U.S. Securities and Exchange Commission (SEC), by a vote of 3-2, adopted amendments to modernize the disclosure requirements relating to issuers’ repurchases of their equity securities that are registered under Section 12 of the Securities Exchange Act of 1934, as amended (Exchange Act). The amendments are intended to “improve disclosure and provide investors with enhanced information to assess the purposes and effects of share repurchases.”
Significantly, the final rules do not include the proposed requirement that issuers furnish daily repurchase data to the SEC within one business day after the execution of an issuer’s share repurchase order; instead, the final rules require daily share repurchase information to be reported on either a quarterly or semiannual basis.
Tabular Quarterly or Semiannual Disclosure of Repurchase Activity
Depending on the type of issuer, the amended rules require the issuer to provide daily repurchase activity in tabular form on either a quarterly or semiannual basis. Domestic corporate issuers will be required to disclose the total repurchases made each day for the quarter in a new Exhibit 26 to their Forms 10-Q and Forms 10-K (for the fourth fiscal quarter). Listed closed-end funds will be required to disclose daily quantitative repurchase data in their semiannual and annual reports on Form N-CSR. Foreign private issuers (FPIs) will be required to disclose daily quantitative repurchase data at the end of every quarter on a new Form F-SR, which will be due 45 days after the end of FPIs’ fiscal quarters.
Specifically, issuers must provide in a table the following aggregated information regarding their repurchase activities for each day:
- The class of shares (or units).
- The average price paid per share (or unit), which must be reported in U.S. dollars and exclude brokerage commissions and other costs of execution.
- The total number of shares (or units) purchased, including the total number of shares (or units) purchased as part of a publicly announced plan.
- The aggregate maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under a publicly announced plan.
- The total number of shares (or units) purchased on the open market.
- The total number of shares (or units) purchased that are intended to qualify for the safe harbor in Exchange Act Rule 10b-18.
- The total number of shares (or units) purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).
Issuers must disclose, by footnote to the table, the adoption or termination date for any plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) covering the shares or units disclosed in the last bullet point above.
The amended rules also require issuers to include a checkbox that precedes the tabular disclosure indicating whether certain officers and directors purchased or sold shares or units that are the subject of an issuer share repurchase plan or program within four business days before or after the announcement of that plan or program. For domestic corporate issuers and listed closed-end funds, the checkbox requirement applies to Section 16 officers or directors. For FPIs, the checkbox requirement applies to any director and member of senior management who would be identified pursuant to Item 1 of Form 20-F.
Narrative Revisions to Item 703 of Regulation S-K, Form 20-F and Form N-CSR Additional Disclosure
The amendments expand the requirements for narrative disclosures of issuer repurchases in Item 703 of Regulation S-K, Form 20-F and Form N-CSR to work in conjunction with the new periodic quantitative repurchase disclosures. Specifically, amendments require an issuer to provide the following information in narrative form with respect to the issuer’s repurchases disclosed in the table discussed above:
- The objectives or rationales for its repurchases and the process or criteria used to determine the amount of repurchases.
- The number of shares (or units) purchased other than through a publicly announced plan or program, and the nature of the transaction (for instance, whether the purchases were made in open-market transactions, tender offers or other transactions).
- 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 of each plan or program;
- each plan or program that has expired during the period covered by the table in new Exhibit 26; 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.
- Any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.
In the adopting release for the new rules, the SEC notes that certain of the information required by amended Item 703(a) is already required to be disclosed in a footnote to the monthly quantitative share repurchase table, which discloses the total number of shares purchased, the average price paid per share, the total number of shares purchased pursuant to a publicly announced repurchase plan and the maximum amount of shares that may yet be purchased under the plan. The amendments do not change the substance of the current requirements, only the form, by moving the disclosure from a footnote to the monthly table, which will no longer exist under amended Item 703, to the main text of the narrative discussion.
New Item 408(d) of Regulation S-K
New Item 408(d) of Regulation S-K requires quarterly disclosure in periodic reports on Forms 10-Q and Forms 10-K (for the fourth fiscal quarter) about an issuer’s adoption and termination of a Rule 10b5-1 plan. Specifically, new Item 408(d) requires an issuer to provide a description of the material terms of the Rule 10b5-1 trading arrangement, such as (i) the date on which the issuer adopted or terminated the Rule 10b5-1 trading arrangement, (ii) the duration of the Rule 10b5-1 trading arrangement and (iii) the aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 trading arrangement.
XBRL Tagging Required
The new share repurchase disclosures must be tagged using Inline XBRL. In addition, the new disclosures will be deemed filed, rather than furnished, with the SEC.
Affected Issuers
The new rules apply to all issuers, regardless of filing status, including smaller reporting companies and emerging growth companies. In response to the proposed rules, commentators suggested that smaller reporting companies should benefit from (i) more time to furnish the daily repurchase information, (ii) reporting thresholds that would exempt a smaller reporting company from disclosing the daily repurchase information unless it hit a certain threshold, or (iii) simplifying the disclosure requirements for smaller reporting companies so they would not be required to disclose the information as frequently as other reporting companies. Ultimately, the SEC decided not to include any exemptions to the final rules with respect to smaller reporting companies or emerging growth companies.
Compliance Dates
Domestic corporate issuers will be required to comply with the new disclosure and tagging requirements in the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023, which means a domestic issuer with a calendar fiscal year will need to begin complying with these newly adopted rules in its Form 10-K for the fiscal year ending December 31, 2023. Listed closed-end funds will be required to comply with the new disclosure and tagging requirements beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024. FPIs will be required to comply with the new disclosure and tagging requirements in new Form F-SR beginning with the first full fiscal quarter that begins on or after April 1, 2024.
Reactions
The adopted final rules should come as somewhat of a relief for most issuers that are engaged in share repurchase activity, as the amended rules significantly differ from what was originally proposed by the SEC in December 2021. For instance, the proposed rules would have required issuers to disclose quantitative daily repurchase data on a new Form SR, which would have been required to be furnished to the SEC within one business day after the execution of an issuer’s share repurchase order. However, the final rules, as noted above, require daily share repurchase information to be reported on either a quarterly or semiannual basis, which should alleviate some of the administrative burden on issuers that frequently engage in share repurchase activity by removing the time, effort and expense that would have come with daily filings.
Next Steps
Until the required disclosure and tagging dates, issuers should maintain the status quo and continue to file their required quarterly, semiannual and annual reports without the new disclosure requirements. In the meantime, issuers should begin to prepare for these new requirements, including drafting the narrative disclosures, establishing internal controls regarding the collection of daily share repurchase data, implementing policies and systems concerning officer and director trading during the days surrounding the announcement of a repurchase place or any material amendment to a repurchase plan, and monitoring the SEC’s website for any additional guidance on the new rules.
For additional guidance on the information in this alert, please contact any of the authors, any member of McGuireWoods’ securities and capital markets team or your primary McGuireWoods contact.
McGuireWoods’ securities and capital markets team assists private and public companies in capital raising efforts through private and public offerings, and also assists public companies with their reporting obligations under the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, Section 16 reports and DEF 14A (proxy statements), as well as with Regulation FD and Regulation G compliance. Team members prepare insider trading policies, develop training programs and assist with other aspects of securities transactions engaged in by company officers, directors and significant security holders, including 10b5-1 plans and Rule 144 compliance.