SEC Requires Increased Share Repurchase Disclosure
On May 3, 2023, the SEC amended the disclosure requirements pertaining to issuer share repurchases. In the adopting release, the SEC noted that, although issuers often conduct share repurchases in a manner aligned with shareholder value maximization, such repurchases may be at least partially motivated by other factors, including a desire to achieve certain financial targets, to increase the compensation of executives who receive equity-linked compensation, and/or to increase the returns on insider equity sales. The amendments will require issuers to provide more granular detail about their share repurchases in order to allow shareholders to better evaluate these possible purposes and impacts.
Current Disclosure Requirements
Regulation S-K Item 703 (Item 703) requires disclosure of purchases of shares or other units of any class of an issuer’s equity securities registered under Section 12 of the Securities Exchange Act of 1934, aggregated on a monthly basis, made by or on behalf of such issuer or any affiliated purchaser.1Item 703 disclosure is currently required in Form 10-Q for an issuer’s first three fiscal quarters and in Form 10-K for an issuer’s fourth quarter. The same disclosure is required in Form 20-F on an annual basis for foreign private issuers (FPIs) and in Form N-CSR on a semi-annual basis for registered closed-end management investment companies that are exchange traded (Listed Closed-End Funds).
New Disclosure of Daily Share Repurchases
The SEC initially proposed to require daily reporting of repurchases within one business day after each trade. The final rule does not include that requirement, but instead requires quarterly (semi-annual in the case of Listed Closed-End Funds) filings that present information on a daily basis.
The amendments will require the following disclosures in tabular format (in Inline XBRL) for each date on which a purchase of shares (or units) is executed by or on behalf of an issuer or any affiliated purchaser: (1) the execution date; (2) identification of the class of securities purchased; (3) the total number of shares (or units) purchased, whether or not made pursuant to publicly-announced plans or programs; (4) the average price paid per share (or unit), reported in U.S. dollars and excluding costs of execution; (5) the total number of shares (or units) purchased as part of publicly-announced repurchase plans or programs; (6) the aggregate maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the publicly-announced repurchase plans or programs; (7) the total number of shares (or units) purchased on the open market; (8) the total number of shares (or units) purchased that are intended to qualify for the Rule 10b-18 safe harbor; and (9) the total number of shares (or units) purchased pursuant to a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). Issuers must also disclose, by footnote to the daily repurchase table, the date any plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) was adopted or terminated.
Issuers will also be required to disclose (via a check box above the daily repurchase table) if any officers or directors subject to Exchange Act Section 16(a) (for domestic issuers and Listed Closed-End Funds) or directors or senior management that would be identified pursuant to Item 1 of Form 20-F (for FPIs) purchased or sold shares (or units) of a registered class of the issuer’s equity securities that are subject to a publicly-announced repurchase plan or program within four business days before or after the announcement of such repurchase plan or program or the announcement of an increase of an existing share repurchase plan or program.
The daily repurchase data will be treated as “filed” in Form 10-Q, Form 10-K, Form N-CSR, and Form F-SR, instead of “furnished.”2
Timing of Daily Repurchase Disclosures
Issuers that file on domestic forms will be required to disclose their daily repurchase data at the end of every quarter in an exhibit to their Forms 10-Q and 10-K (for the fourth fiscal quarter). Listed Closed-End Funds will be required to disclose such data in their annual and semi-annual reports on Form N-CSR, and FPIs that report on FPI forms will be required to disclose such data at the end of every quarter on new Form F-SR, which will be due 45 days after the end of an FPI’s fiscal quarter.3
The amendments eliminate the current requirements in Item 703, Item 16E of Form 20-F, and Item 14 of Form N-CSR to disclose monthly repurchase data in periodic reports.
Expanded Periodic Disclosures
The amendments also revise and expand the disclosure requirements in Item 703, Form 20-F and Form N-CSR (in Inline XBRL). Specifically, issuers will be required to disclose: (1) the objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of repurchases and (2) any policies and procedures (including restrictions) relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program.
The amendments continue to require disclosure of the number of shares (or units) purchased other than through a publicly announced plan or program, and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions), as well as the following disclosures for publicly announced repurchase plans or programs: (1) the date each plan or program was announced; (2) the dollar amount (or share or unit amount) approved; (3) the expiration date (if any) of each plan or program; (4) each plan or program that has expired during the period covered by the relevant daily repurchase table(s); and (5) 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.
If an issuer believes any of the required disclosures would result in misleading or confusing information, it may provide additional disclosure to put the required information in context.
New Item 408(d)
New Item 408(d) of Regulation S-K will require issuers to disclose whether, during their most recently completed fiscal quarter (the fourth fiscal quarter in the case of an annual report), the issuer adopted or terminated a contract, instruction, or written plan to purchase or sell its securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (Trading Arrangement). Issuers will also be required to provide a description of the material terms of the Trading Arrangement (other than pricing terms), such as: (1) the date on which the registrant adopted or terminated the Trading Arrangement; (2) the duration of the Trading Arrangement; and (3) the aggregate number of securities to be purchased or sold pursuant to the Trading Arrangement. Issuers will be required to disclose this information in their quarterly reports on Form 10-Q and Form 10-K (for the issuer’s fourth fiscal quarter) and tag the information using Inline XBRL.
Issuers filing Forms 10-K and 10-Q will be required to comply with the new disclosure and tagging requirements in their periodic reports beginning with the filing that covers the first full fiscal quarter that begins on or after October 1, 2023 (a Form 10-K that includes fiscal quarters beginning before October 1, 2023 need only present data with respect to fiscal quarters beginning on or after that date). FPIs that file on FPI forms will be required to comply with the new disclosure and tagging requirements in new Form F-SR 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 that relates to the Form F-SR filings will be required starting in the first Form 20-F filed after the first Form F-SR has been filed. Listed Closed-End Funds will be required to comply with the new disclosure and tagging requirements in their Exchange Act periodic reports beginning with the Form NCSR that covers the first six-month period that begins on or after January 1, 2024.4
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
The term “affiliated purchaser” for purposes of Item 703 is defined in Rule 10b-18, and is: (1) a person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer’s securities or (2) an affiliate who, directly or indirectly, controls the issuer’s purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer; provided, however, that an “affiliated purchaser” shall not include a broker, dealer, or other person solely by reason of such broker, dealer, or other person effecting Rule 10b-18 purchases on behalf of the issuer or for its account, and shall not include an officer or director of the issuer 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 issuer.
For FPIs, this is a particularly significant change because, to date, the only periodic report under the Exchange Act deemed “filed” (as opposed to “furnished”) has been the Annual Report on Form 20-F. While FPIs are permitted to “file” their Forms 6-K, they generally do not unless, for example, they seek to incorporate such disclosure by reference into a Securities Act filing in connection with a securities offering. As a result, FPIs will be subject to Exchange Act Section 18 liability for the new repurchase disclosure.
MJDS filers currently do not provide repurchase disclosure analogous to Item 703 (or Item 16E for FPIs that report on Form 20-F). Consistent with that approach, the SEC is not imposing the amended repurchase disclosure requirements on Canadian issuers that file using the MJDS.
For example, the compliance dates for a registrant with a December 31, 2023 fiscal year end are as follows: (1) issuers that file periodic reports on Forms 10-Q and 10-K will be required to begin complying with the new disclosure and tagging requirements in their Form 10-K for the fiscal year ending on December 31, 2023 as it relates to repurchases made during the quarter ending December 31, 2023; (2) FPIs that report using Form 20-F will be required to begin filing new Form F-SR for the quarter ending June 30, 2024; and (3) Listed Closed-End Funds will be required to begin complying with the new disclosure and tagging requirements in Form N-CSR for the six-month period ending on June 30, 2024.