[Federal Register Volume 88, Number 105 (Thursday, June 1, 2023)]
[Rules and Regulations]
[Pages 36002-36063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09965]
[[Page 36001]]
Vol. 88
Thursday,
No. 105
June 1, 2023
Part II
Securities and Exchange Commission
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17 CFR Parts 229, 232, 240, et al.
Share Repurchase Disclosure Modernization; Final Rule
Federal Register / Vol. 88 , No. 105 / Thursday, June 1, 2023 / Rules
and Regulations
[[Page 36002]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 232, 240, 249, and 274
[Release Nos. 34-97424; IC-34906; File No. S7-21-21]
RIN 3235-AM94
Share Repurchase Disclosure Modernization
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to modernize and improve disclosure about
repurchases of an issuer's equity securities that are registered under
the Securities Exchange Act of 1934. The amendments require additional
detail regarding the structure of an issuer's repurchase program and
its share repurchases, require the filing of daily quantitative
repurchase data either quarterly or semi-annually, and eliminate the
requirement to file monthly repurchase data in an issuer's periodic
reports. The amendments also revise and expand the existing periodic
disclosure requirements about these repurchases. Finally, the
amendments add new quarterly disclosure in certain periodic reports
related to an issuer's adoption and termination of certain trading
arrangements.
DATES: This final rule is effective on July 31, 2023.
FOR FURTHER INFORMATION CONTACT: John Fieldsend, Special Counsel,
Office of Rulemaking, at (202) 551-3460, Division of Corporation
Finance; and, with respect to the application to investment companies,
Quinn Kane, Special Counsel, at (202) 551-6792, Investment Company
Regulation Office, Division of Investment Management; U.S. Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting amendments to the following
rules and forms:
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\1\ 15 U.S.C. 78a et seq.
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Commission reference CFR citation (17 CFR)
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Regulation S-K:
Items 10 through 1305.............. Sec. Sec. 229.10 through
229.1305.
Item 408........................... Sec. 229.408.
Item 601........................... Sec. 229.601.
Item 703........................... Sec. 229.703.
Regulation S-T:
Rules 10 through 903............... Sec. Sec. 232.10 through
232.903.
Rule 405........................... Sec. 232.405.
Securities Exchange Act of 1934
(``Exchange Act''): \1\
Rule 13a-21........................ Sec. 240.13a-21.
Form F-SR.......................... ...............................
Form 20-F.......................... Sec. 249.220f.
Form 10-Q.......................... Sec. 249.308a.
Form 10-K.......................... Sec. 249.310.
Form N-CSR......................... Sec. Sec. 249.331 and
274.128.
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Table of Contents
I. Introduction
A. Summary of the Proposed Amendments
B. Consideration of Comments
C. Summary of Final Amendments
II. Background
A. Share Repurchases
B. Purpose of the Amendments
III. Discussion of Final Amendments
A. Disclosure of Share Repurchases
1. Proposed Amendments
2. Comments on the Proposed Amendments
a. Comments on the Daily Share Repurchase Disclosure Requirement
b. Comments on Exemptions for Certain Issuers
c. Comments on Repurchases Intended To Satisfy Rule 10b5-1(c)
and Intended To Qualify for the Rule 10b-18 Safe Harbor
d. Comments Concerning Requests for Clarification
e. Other Comments
3. Final Amendments
B. Narrative Revisions to Item 703 of Regulation S-K, Form 20-F,
and Form N-CSR Additional Disclosure
1. Proposed Amendments
2. Comments on the Proposed Amendments
a. Comments on Objective or Rationale for Share Repurchases, and
Process or Criteria Used To Determine the Amount of Repurchases
b. Comments on Policies and Procedures Relating to Purchases and
Sales of the Issuer's Securities by Its Officers and Directors
During a Repurchase Program
c. Comments on Checkbox Requirement
3. Final Amendments
C. Clarifying Amendments
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
D. New Item 408(d)
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
E. Structured Data Requirement
1. Proposed Amendments
2. Comments on the Proposed Amendments
3. Final Amendments
F. Compliance Dates
IV. Other Matters
V. Economic Analysis
A. Baseline and Affected Parties
1. Affected Parties
2. Baseline
B. Benefits
1. General Benefits of the Disclosures
2. Additional Quantitative Repurchase Disclosure
3. Additional Qualitative Repurchase Disclosures
4. Inline XBRL
C. Costs
1. General Costs of the Disclosures
2. Additional Quantitative Repurchase Disclosure
3. Additional Qualitative Repurchase Disclosures
4. Inline XBRL
D. Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
1. Alternative Reporting Frequencies and Disclosure Granularity
2. Alternative Scope of the Disclosure
3. Exemptions for Certain Issuer Categories
4. Alternative Implementation Approaches
5. Structured Disclosure
6. Compliance Dates
VI. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Summary of Comment Letters
C. Summary of Collections of Information Requirements
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1. Estimated Paperwork Burden for Daily Quantitative Share
Repurchase Disclosures
2. Estimated Paperwork Burdens of the Narrative Share Repurchase
Disclosures in Item 703 of Regulation S-K, Form 20-F, Form N-CSR,
and Form F-SR
3. Estimated Paperwork Burdens of New Item 408(d)
D. Incremental and Aggregate Burden and Cost Estimates
VII. Final Regulatory Flexibility Analysis
A. Need for, and Objectives of, the Final Amendments
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Amendments
D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
E. Agency Action to Minimize Effect on Small Entities
Statutory Authority
I. Introduction
A. Summary of the Proposed Amendments
On December 15, 2021,\2\ the Commission proposed amendments to the
disclosure requirements regarding purchases of classes of equity
securities registered under 15 U.S.C. 781 (``Exchange Act section 12'')
made by or on behalf of an issuer or any affiliated purchaser.\3\ The
proposal was intended to modernize and improve the disclosure currently
required by Item 703 of Regulation S-K, Item 16E of Form 20-F, and Item
14 of Form N-CSR about repurchases of an issuer's equity securities.\4\
Specifically the Commission proposed to:
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\2\ Share Repurchase Disclosure Modernization, Release No. 34-
93783 (Dec. 15, 2021) [87 FR 8443 (Feb. 15, 2022)] (``Proposing
Release'').
\3\ For purposes of this release, the term ``issuer'' includes
affiliated purchasers and any person acting on behalf of the issuer
or an affiliated purchaser. The term ``affiliated purchaser'' as
used in Item 703 is defined in 17 CFR 240.10b-18(a)(3). References
throughout this release to ``issuer repurchases'' include purchases
by an affiliated purchaser and purchases by any person acting on
behalf of the issuer or an affiliated purchaser.
\4\ Subsequent to the proposal, the Commission adopted changes
to Form N-CSR that, among other things, redesignated what had been
Item 9 of Form N-CSR to be Item 14. Tailored Shareholder Reports for
Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements, Release No. IC-34731 (Oct. 26,
2022) [87 FR 72758 (Nov. 25, 2022)]. This change became effective
January 24, 2023. Id.
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Require quantitative daily repurchase disclosure on a new
Form SR, which would be furnished to the Commission one business day
after execution of an issuer's share repurchase order;
Amend Item 703 of Regulation S-K, Item 16E of Form 20-F,
and Item 14 of Form N-CSR to require additional detail regarding the
structure of an issuer's repurchase program and its share repurchases;
and
Require that information disclosed pursuant to Item 703 of
Regulation S-K, Item 16E of Form 20-F, Item 14 of Form N-CSR, and Form
SR be reported using a structured data language (specifically, Inline
eXtensible Business Reporting Language or ``Inline XBRL'').
The Commission adopted Item 703 in 2003 \5\ to require disclosure
of any purchase, aggregated on a monthly basis, made by or on behalf of
the issuer or any affiliated purchaser of shares or other units of any
class of the issuer's equity securities registered under Exchange Act
section 12. Currently, Item 703 share repurchase disclosure is required
in Form 10-Q for the issuer's first three fiscal quarters and in Form
10-K for the issuer's fourth fiscal quarter.\6\ The same disclosure is
required by Item 16E of Form 20-F on an annual basis for FPIs, and by
Item 14 of Form N-CSR on a semi-annual basis for registered closed-end
management investment companies that are exchange traded (``Listed
Closed-End Funds'').\7\ The disclosure requirements apply to both open
market and private transactions, and currently require an issuer to
disclose in tabular format:
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\5\ See Purchases of Certain Equity Securities by the Issuer and
Others, Release No. 33-8335 (Nov. 10, 2003) [68 FR 64952 (Nov. 17,
2003)] (``2003 Adopting Release''). The Commission concluded that
disclosure of an issuer's actual purchases would inform investors
whether, and to what extent, the issuer had followed through on its
original plan.
\6\ Certain information regarding share repurchases is also
required to be disclosed in an issuer's financial statements,
including in the statements of cash flows indicating the amount of
cash paid for repurchased securities, see ASC 230-10-45-1 to -2 and
ASC 230-10-45-15, and the statements of changes in shareholders'
equity indicating any reduction in securities outstanding, see ASC
505-30-5 to -10, and additional paid-in capital for the securities
repurchased. See ASC 505-10-50-2 and 17 CFR 210.3-04 (``Rule 3-04 of
Regulation S-X''). ASC 505-30-50 also requires footnote disclosure
of state law restrictions on the availability of retained earnings
for dividend payments as a result of these repurchases, if
applicable. If securities are repurchased for purposes other than
retirement, or if ultimate disposition has not yet been decided, the
amount and cost of the repurchased securities may be shown
separately on the balance sheets and statements of changes in
shareholders' equity as a deduction from the total of securities,
additional paid-in capital, and retained earnings. See ASC 505-30-
45-1.
\7\ Accordingly, unless the context otherwise requires,
references in this release to ``Item 703'' should be read to include
these parallel provisions of Form N-CSR and Form 20-F. In addition
to the disclosures on Form N-CSR that provide detailed information
about Listed Closed-End Fund repurchases, Form N-CEN also requires
closed-end management investment companies to indicate whether they
engaged in a repurchase during the reporting period and, if so, for
what type of security. Item D.4 of Form N-CEN.
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The total number of shares (or units) purchased,
regardless of amount and whether made pursuant to a publicly announced
plan or program, by the issuer or any affiliated purchaser during the
relevant period, reported on a monthly basis and by class, including
footnote disclosure regarding the number of shares purchased other than
through a publicly announced plan or program and the nature of the
transaction;
The average price paid per share (or unit);
The total number of shares (or units) purchased as part of
a publicly announced repurchase plan or program; and
The maximum number (or approximate dollar value) of shares
(or units) that may yet be purchased under the plans or programs.
Footnote disclosure is also required in the aggregate of the
principal terms of all publicly announced repurchase plans or programs,
including:
The date each plan or program was announced;
The dollar amount (or share or unit amount) approved;
The expiration date (if any) of each plan or program;
Each plan or program that has expired during the period
covered by the table; 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.
B. Consideration of Comments
The Commission voted to issue the proposal at an open meeting on
December 15, 2021. The release was posted on the Commission website
that day, and comment letters were received beginning that same date.
The comment period for the Proposing Release was open for 45 days and
ended on April 1, 2022.\8\ The Commission has reopened the comment
period for the Proposing Release twice for different reasons. The first
reopening occurred because certain comments on the Proposing Release
were potentially affected by a
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technological error in the Commission's internet comment form.\9\ The
First Reopening Release was published in the Federal Register on
October 18, 2022, and the comment period ended on November 1, 2022.\10\
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\8\ The public comments we received are available at https://www.sec.gov/comments/s7-21-21/s72121.htm. Unless otherwise
indicated, the comment letters cited herein are those received in
response to the Proposing Release. Two comment letters urged that
the comment period for this proposal, among others, be extended to
at least 60 days. See letter from United States Senator Pat Toomey
and United States Representative Patrick McHenry (Jan. 10, 2022).
Other commenters also asserted that the Commission provided
insufficient time for comment. See, e.g., letters from American
Securities Association (Apr. 1, 2022) (``ASA''), Association of the
Bar of the City of New York (Apr. 1, 2022) (``NYC Bar''), Brit
Stephens (Jan. 28, 2022) (``Stephens''), and U.S. Chamber of
Commerce (Feb. 23, 2022) (``Chamber I'').
\9\ Resubmission of Comments and Reopening of Comment Periods
for Several Rulemaking Releases Due to a Technological Error in
Receiving Certain Comments, Release No. 33-11117 (Oct. 7, 2022) [87
FR 63016 (Oct. 18, 2022)] (``First Reopening Release'').
\10\ A few commenters asserted that the comment period for the
reopened rulemakings was not sufficient and asked the Commission to
extend the comment period for those rulemakings. See, e.g., letters
from Attorneys General of the states of Montana et al. (Oct. 24,
2022) and U.S. Chamber of Commerce (Nov. 1, 2022) (``Chamber IV'').
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The second reopening occurred on December 7, 2022.\11\ The
Commission voted to reopen the comment period in connection with the
addition to the comment file of a staff memorandum analyzing the
potential economic effects of the new excise tax contained in the
Inflation Reduction Act of 2022 \12\ (``Inflation Reduction Act'') on
the proposed amendments. The Inflation Reduction Act was signed into
law after the Proposing Release was published. The Second Reopening
Release was published in the Federal Register on December 12, 2022, and
the comment period closed on January 11, 2023.\13\ We have considered
the potential effects of the excise tax and the additional comments
received \14\ and determined that no changes to the proposed amendments
are necessary as a result of the Inflation Reduction Act because we
believe any impact of the tax on repurchases will not meaningfully
affect the rationale for the amendments, as we describe in more detail
below.\15\
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\11\ Reopening of Comment Period for Share Repurchase Disclosure
Modernization, Release No. 34-96458 (Dec. 7, 2022) [87 FR 75975
(Dec. 12, 2022)] (``Second Reopening Release'').
\12\ See Public Law 117-169, 136 Stat. 1818 (2022).
\13\ The public comments we received in response to the First
Reopening Release and the Second Reopening Release are available at
the same location on the Commission's website as the other comment
letters addressing the Proposing Release at https://www.sec.gov/comments/s7-21-21/s72121.htm. See supra note 8. Some commenters
recommended that the Commission postpone adopting the final
amendments for additional analysis of future economic conditions and
the Inflation Reduction Act's impact on repurchases. See, e.g.,
letters from Professional Services Council (Jan. 11, 2023)
(``PSC''), U.S. Chamber of Commerce (Sept. 20, 2022) (``Chamber
III''), and U.S. Chamber of Commerce (Jan. 11, 2023) (``Chamber
V''). One of these commenters also stated that the comment period
for the Second Reopening Release was insufficient. See letter from
Chamber V.
\14\ See infra Section V.A.2.
\15\ See id. For similar reasons, we do not think it is
necessary to postpone adoption of the proposed amendments.
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We received over 170 unique comment letters on the Proposing
Release and over 3,200 form letters, which we discuss in context below.
We have considered all comments received since December 15, 2021, and
do not believe an additional extension of the comment period is
necessary.\16\
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\16\ Another comment letter raised concerns about the rulemaking
process at the agency more broadly. See letter from United States
Senator Thom Tillis (Nov. 4, 2022). The process followed in adopting
these amendments has complied with the Administrative Procedure Act,
5 U.S.C. 551 et seq., and other legal requirements.
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Additionally, in January 2022,\17\ the Commission proposed
amendments to 17 CFR 240.10b5-1 (``Rule 10b5-1''), which provides
affirmative defenses to allegations of trading on the basis of material
nonpublic information in insider trading cases. The Commission also
proposed new 17 CFR 229.408(a) (``Item 408(a) of Regulation S-K'') to
require disclosure of, among other matters, whether the issuer adopted,
modified, or terminated plans intended to meet Rule 10b5-1's conditions
for establishing an affirmative defense. In December 2022,\18\ the
Commission adopted many of the amendments that it proposed in the Rule
10b5-1 Proposing Release, but did not adopt the portion of proposed
Item 408(a) of Regulation S-K that pertains to the issuer's use of Rule
10b5-1 in response to commenters' recommendation that it be considered
in the context of this rulemaking.\19\
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\17\ Rule 10b5-1 and Insider Trading, Release No. 33-11013 (Jan.
13, 2022) [87 FR 8686 (Feb. 15, 2022)] (``Rule 10b5-1 Proposing
Release'').
\18\ Insider Trading Arrangements and Related Disclosure,
Release No. 33-11138 (Dec. 14, 2022) [87 FR 80362 (Dec. 29, 2022)]
(``Rule 10b5-1 Adopting Release'').
\19\ See, e.g., letters on the Rule 10b5-1 Proposing Release
from Cravath, Swaine & Moore LLP (Mar. 31, 2022) and Simpson Thacher
& Bartlett LLP (Mar. 31, 2022). We have considered the comment
letters received on the Item 408(a) disclosure proposal and discuss
them in the context of new Item 408(d) below. See infra Section
III.D.2.
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Finally, prior to either proposing release, in September 2021, the
Commission's Investor Advisory Committee (``IAC'') \20\ issued
recommendations regarding disclosure of Rule 10b5-1 plans, including
that the Commission ``establish meaningful guardrails around the
adoption, modification, and cancellation of Rule 10b5-1 trading
plans,'' by addressing certain gaps in the rule that allow corporate
insiders to unfairly exploit informational asymmetries.\21\
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\20\ The IAC was established in Apr. 2012 pursuant to section
911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
[Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (2010)] to advise
and make recommendations to the Commission on regulatory priorities,
the regulation of securities products, trading strategies, fee
structures, the effectiveness of disclosure, and initiatives to
protect investor interests and to promote investor confidence and
the integrity of the securities marketplace.
\21\ See IAC, Recommendations of the Investor Advisory Committee
Regarding Rule 10b5-1 Plans (Sept. 9, 2021) (``IAC
Recommendations''), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210916-10b5-1-recommendation.pdf.
The IAC also held a panel discussion regarding Rule 10b5-1 plans at
its June 10, 2021 meeting. See IAC, Meeting Minutes (June 10, 2021),
available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061021-minutes.pdf. The IAC did not consider
issuer share repurchases in its deliberations on its
recommendations. See IAC Recommendations, at n. 1. However, in
response to the Commission's request for comment regarding Item 703
in the Commission's 2016 concept release regarding business and
financial disclosures required by Regulation S-K, see Business and
Financial Disclosure Required by Regulation S-K, Release No. 33-
10064 (Apr. 13, 2016) [81 FR 23915 (Apr. 22, 2016)], the IAC
recommended expanding the disclosure required by Item 703. See
letters in response to the Concept Release from SEC Investor
Advisory Committee (Jun. 15, 2016), available at https://www.sec.gov/comments/s7-06-16/s70616.htm.
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C. Summary of Final Amendments
Having considered all of the comments we received, we are adopting
the final amendments described in this release with some modifications
from the proposal in response to those comments. The final amendments
require the same additional detail regarding the structure of an
issuer's repurchase program and its daily share repurchases, as was
proposed. Further, as proposed, the final amendments require issuers to
tag the disclosure using Inline XBRL.
Although the final amendments require quantitative disclosure of
daily repurchase data, as proposed, the frequency and manner of the
disclosure is different from the proposal. Additionally, while we are
requiring issuers to disclose the total number of shares repurchased
pursuant to a plan that is intended to satisfy the affirmative defense
conditions of Rule 10b5-1(c), and the date that the plan was adopted or
terminated, and whether its repurchases were intended to qualify for
the 17 CFR 240.10b-18 (``Rule 10b-18'') non-exclusive safe harbor, as
proposed, the manner in which registrants provide this disclosure has
changed from the proposal. Further, as discussed in greater detail
below, the final amendments require:
Corporate issuers that file on domestic forms to disclose
daily quantitative repurchase data at the end of every quarter in an
exhibit to their Form 10-Q and Form 10-K (for an issuer's fourth fiscal
quarter);
Listed Closed-End Funds to disclose daily quantitative
repurchase data in their annual and semi-annual reports on Form N-CSR;
and
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Foreign private issuers (``FPIs'') \22\ reporting on the
FPI forms \23\ to disclose daily quantitative repurchase data at the
end of every quarter in the new Form F-SR,\24\ which will be due 45
days after the end of an FPI's fiscal quarter.
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\22\ ``Foreign private issuer'' is defined in 17 CFR 230.405
(``Securities Act Rule 405'') and 240.3b-4 as any foreign issuer
other than a foreign government except for an issuer meeting the
following conditions as of the last business day of its most
recently completed second fiscal quarter: (1) More than 50 percent
of the issuer's outstanding voting securities are directly or
indirectly held of record by residents of the United States; and (2)
Any of the following: (i) The majority of the executive officers or
directors are United States citizens or residents; (ii) More than 50
percent of the assets of the issuer are located in the United
States; or (iii) The business of the issuer is administered
principally in the United States.
\23\ The Commission has adopted a series of forms exclusively
available to FPIs, including the ``F-'' series registration
statements and Forms 20-F and 6-K disclosure forms for annual and
current reports, respectively. These forms have been designed with
reference to international disclosure standards, both in scope and
timing requirements for filing. Although FPIs may voluntarily choose
to register and report using domestic forms, most do not do so.
Unless otherwise specified, all references to FPIs assume they are
not filing on the domestic forms.
\24\ Only FPIs may file their share repurchase disclosures on
the new form, so we are designating the new form as ``Form F-SR''
instead of ``Form SR'' to make it clear that this form is filed only
by FPIs.
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As proposed, the final amendments require an issuer to include a
checkbox above its tabular disclosures indicating whether certain
officers and directors purchased or sold shares or other units of the
class of the issuer's equity securities that are the subject of an
issuer share repurchase plan or program before or after the
announcement of an issuer repurchase plan or program. In a change from
the proposal, we have revised the checkbox requirement so that an
issuer must check the box if the triggering trades occur within four
business days before or after the repurchase announcement, rather than
the ten business days we proposed. For domestic corporate issuers and
Listed Closed-End Funds, this checkbox requirement applies to any
officer or director subject to the 15 U.S.C. 78p(a) (``Exchange Act
section 16(a)'') reporting requirements. In another change from the
proposal, for FPIs, this requirement applies to any director and member
of senior management who would be identified pursuant to Item 1 of Form
20-F, regardless of whether the FPI is reporting on the forms
exclusively available to FPIs or on the domestic forms.\25\ In a
further change from the proposal, the daily quantitative repurchase
data required by the final amendments will be treated as filed in Form
10-Q, Form 10-K, Form N-CSR, and Form F-SR, instead of furnished.
Further, the final amendments eliminate the current requirements in
Item 703 of Regulation S-K, Item 16E of Form 20-F, and Item 14 of Form
N-CSR to disclose monthly repurchase data in periodic reports.
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\25\ See infra note 322 and accompanying text.
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We are also adopting, with some modifications from the proposal,
amendments relating to the revision and expansion of the disclosure
requirements in Item 703, Form 20-F, and Form N-CSR. Specifically, the
final amendments require an issuer to disclose:
The objectives or rationales for its share repurchases and
the process or criteria used to determine the amount of repurchases;
and
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.
We are also adopting new Item 408(d), which requires quarterly
disclosure in periodic reports on Forms 10-Q and 10-K (for the issuer's
fourth fiscal quarter) about an issuer's adoption and termination of
Rule 10b5-1 trading arrangements. This information will also be
reported using Inline XBRL.
II. Background
A. Share Repurchases
As the Commission noted in the Proposing Release, issuers may
repurchase their shares through, among other means, open market
purchases, tender offers, privately negotiated transactions, and
accelerated share repurchases (``ASRs''). Issuers typically disclose
repurchase plans or programs at the time that the share repurchases are
authorized by the board of directors. Most share repurchases are
executed over time through open market purchases. Issuers are not
required to, and typically do not, disclose the specific dates on which
they will execute trades pursuant to an announced repurchase plan or
program.
There are a number of reasons why issuers conduct share
repurchases, and share repurchases can have a positive or negative
impact on the market for an issuer's securities. The high dollar
volume, nearly $950 billion in 2021, of recent share repurchase
activity has been accompanied by public interest in corporate payouts
in the form of share repurchases.\26\ Existing studies, including a
review by Commission staff in 2020,\27\ have considered the rationales
and effects of repurchases. As our staff concluded, repurchases are
often employed in a manner that may be aligned with shareholder value
maximization. Together with dividends, repurchases provide an avenue
for returning capital to investors, which may be efficient if the
issuer has cash it cannot efficiently deploy. Such returns of capital
may also send signals to investors that managers are operating the
issuer efficiently rather than retaining excess cash for potentially
suboptimal use.
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\26\ See Section V.A.2, infra.
\27\ See Response to Congress: Negative Net Equity Issuance
(Dec. 23, 2020) (``2020 Staff Study''), available at https://www.sec.gov/files/negative-net-equity-issuance-dec-2020.pdf. Staff
reports, statistics, and other staff documents (including those
cited herein) represent the views of Commission staff and are not a
rule, regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of these documents and,
like all staff statements, they have no legal force or effect, do
not alter or amend applicable law, and create no new or additional
obligations for any person. The Commission has expressed no view
regarding the analysis, findings, or conclusions contained therein.
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Repurchases also have some unique features that are not easily
replicated through dividend payments, such as potential tax advantages
for some investors, repurchases' greater perceived flexibility, their
potential to provide liquidity or price support when an issuer faces
downward price pressure, and their effect on the amount of the issuer's
shares outstanding (which may in turn mitigate dilutive effects of
other share issuances or favorably adjust an issuer's leverage
ratio).\28\ Importantly, and as we discuss further below, because
investors understand that repurchases reflect managers' judgment about
whether current prices accurately reflect the issuer's fundamental
value, and consume cash that could otherwise be used for other
purposes, repurchases can provide a relatively credible signal of the
issuer's view that its stock is undervalued.\29\ However, as noted in
the Proposing Release,\30\ and by several commenters,\31\ share
repurchases may be at least partially motivated by factors other than
long-term value maximization.
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\28\ See Bonaim[eacute], A.A. & Kahle, K.M., Share Repurchases,
in Handbook of Corporate Finance (B. Espen Eckbo ed., forthcoming
2023) (``Bonaim[eacute] and Kahle (2023)'') and Farre-Mensa, J.,
Michaely, R., & Schmalz, M. Payout Policy, 6 Ann. Rev. Fin. Econ. 75
(2014) (``Farre-Mensa et al. (2014)'').
\29\ See Bonaim[eacute] and Kahle (2023), supra note 28. For
more detailed discussion of this literature, see infra Section
V.A.2. and infra notes 402-403 and accompanying text.
\30\ See Proposing Release, supra note 2, at 8444-8446.
\31\ See, e.g., letters from Professor Alex Edmans (May 9, 2022)
(``Prof. Edmans'') and Professor Robert J. Jackson, Jr., Dr. Edwin
Hu, and Dr. Jonathon Zytnick (Jun. 27, 2022) (``Prof. Jackson, Dr.
Hu, and Dr. Zytnick'').
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[[Page 36006]]
At present, because issuers are not required to report daily
repurchase transactions or provide additional qualitative disclosures
about those transactions, it can be difficult to determine whether
repurchase timing may have been motivated, at least in part, by factors
other than long-term value maximization. For example, issuer
repurchases may be influenced, in part, by a desire to achieve certain
accounting metrics or for other potentially suboptimal reasons.\32\
Some research has found that issuers that would have narrowly missed an
earnings per share (``EPS'') target were more likely to have engaged in
repurchases,\33\ which through their mechanical effect of decreasing
the denominator of that measure help such issuers to meet their target.
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\32\ See Graham J.R., Harvey, C.R. & Rajgopal, S., The Economic
Implications of Corporate Financial Reporting, 40 J. Acct. & Econ. 3
(2005) (reporting that about 12 percent of surveyed executives would
use repurchases to meet an earnings forecast); see also Rulemaking
Petition 4-746, Rulemaking Petition Requesting Repeal and Reform of
Rule 10b-18 to Address Manipulative Repurchase Programs that Harm
Workers, at 4 (June 25, 2019), available at https://www.sec.gov/rules/petitions/2019/petn4-746.pdf (citing research that repurchases
can be used to inflate share price and EPS-linked executive
compensation) (``Rulemaking Petition 4-746''). The 2020 Staff Study
found that, while a majority of the issuers included in the study
either did not have EPS-linked compensation targets or had EPS
targets but their board considered the impact of repurchases when
determining whether performance targets were met or in setting the
targets, approximately 18 percent of repurchasing issuers made
compensatory awards based in part on EPS. See 2020 Staff Study,
supra note 27. Other studies have considered repurchasing issuers
that employed EPS or similar measures for other internal
evaluations, such as promotion or retention, see Bennett, B. et al.,
Compensation Goals and Firm Performance, 124 J. Fin. Econ. 307, 310,
325 (2017) (reporting that executives who just miss performance
thresholds are less likely to be retained), and for the purposes of
creditors or outside analysts, see Kurt, A. C., Managing EPS and
Signaling Undervaluation as a Motivation for Repurchases: The Case
of Accelerated Share Repurchases, 17 Rev. Acct. & Fin. 453 (2018)
(noting that executives manage EPS in order to satisfy creditors and
suppliers, among other reasons) (``Kurt''). For additional academic
research on the use of repurchases as a method of real earnings
management, see infra notes 416-420 and accompanying text.
\33\ See Almeida, H., Fos, V., & Kronlund, M., The Real Effects
of Share Repurchases, 119 J. Fin. Econ. 168 (2016) (``Almeida et al.
(2016)'') and Hribar, P., Jenkins, N., & Johnson, W.B., Stock
Repurchases as an Earnings Management Device, 41 J. Acct. & Econ. 3
(2006) (``Hribar et al. (2006)'').
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The fact that repurchases can significantly impact executive
compensation for some issuers may also affect how managers choose to
employ repurchases. Like all investors, executives who receive equity-
linked compensation stand to benefit from repurchases that improve
their employer's long-term stock price, but in some cases executives
may realize additional gains unavailable to other investors because of
trading by executives or the structure of compensation to those
executives. Some studies have found personal trading by insiders close
in time to predictable changes in share price caused by repurchases or
repurchase-plan announcements, such as concentrated sales in the period
immediately following the issuer's repurchase.\34\ Issuers may also
adjust the timing of their repurchases or repurchase announcements to
increase the returns on insider equity sales.\35\ In these cases, by
timing their sales to closely follow issuer purchases, executives can
benefit in ways that confer a personal benefit to executives without
necessarily increasing the value of the firm.\36\ Thus, equity-based or
EPS-tied compensation arrangements could potentially be one factor that
may influence some executives' decisions to undertake repurchases.\37\
Shareholders may not have sufficient information about all of these
possible purposes and impacts of issuer repurchases.
---------------------------------------------------------------------------
\34\ See Jackson, Jr., R.J., Stock Buybacks and Corporate
Cashouts, Speech by Commissioner Jackson Before the Center for
American Progress (June 11, 2018), available at https://www.sec.gov/news/speech/speech-jackson-061118 (``Jackson Speech''); Ben-Raphael,
A., Oded, J., & Wohl, A., Do Firms Buy Their Stock at Bargain
Prices? Evidence from Actual Stock Repurchase Disclosures, 18 Rev.
Fin. 1299 (2014); Edmans, A., Fang, V.W., & Huang, A. H., The Long-
Term Consequences of Short-Term Incentives, 60 J. Acct. Res. 1007,
1024 (2022) (``Edmans et al. (2022)''); Moore, D., Strategic
Repurchases and Equity Sales: Evidence from Vesting Schedules, 146
J. Banking & Fin. 106717 (2023) (``Moore''); Wang, Z., Yin, Q.E., &
Yu, L., Real Effects of Share Repurchases Legalization on Corporate
Behaviors, 140 J. Fin. Econ. 197 (2021); see also Cziraki P.,
Lyandres, E., & Michaely, R., What Do Insiders Know? Evidence from
Insider Trading Around Share Repurchases and SEOs, 66 J. Corp. Fin.
101544 (2021) (``Cziraki et al. (2021)'') (finding that insider
sales decline ahead of repurchases). One commenter provided us with
economic analysis by Professors Lewis and White disputing the
findings from Commissioner Jackson's Speech. See letter from U.S.
Chamber of Commerce (Apr.1, 2022) (``Chamber II''). But see letter
from Prof. Jackson, Dr. Hu, and Dr. Zytnick in response (asserting
that Lewis and White's analysis of the Jackson data confirms, rather
than undermines, the Jackson conclusion).
\35\ See Edmans et al. (2022), supra note 34; see also Edmans,
A., Goncalves-Pinto, L., Groen-Xu, M., & Wang, Y., Strategic News
Releases in Equity Vesting Months, 31 Rev. Fin. Stud. 4099 (2018)
(``Edmans et al. (2018)'') (reporting that firms disproportionately
release positive news items, including buyback announcements, in
months when CEO equity vests) and Moore, supra note 34.
\36\ See Edmans et al. (2022), supra note 34; see also Moore,
supra note 34, at 2 (reporting that author's findings are
``consistent with managers strategically using share repurchases to
personally benefit from the positive effects of repurchasing on the
stock price'').
\37\ Edmans et al. (2022), supra note 34, at 1010, 1034 (noting
their findings ``are consistent with the CEO announcing repurchases
to falsely signal undervaluation to the market to improve the
conditions for his equity sales''); see also Kurt, supra note 32
(finding evidence that ``managerial incentives--securing bonuses and
maintaining reputations by avoiding EPS misses--potentially lie
behind the opportunistic use'' of some share repurchases). For a
further discussion of the use of repurchases to potentially
influence compensation tied to per-share measures, see infra note
422.
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Some commenters who opposed the proposed amendments questioned the
premise that stock repurchases are deliberately used to enhance
executive compensation or otherwise benefit insiders looking to sell
their shares.\38\ One of these commenters stated that ``[c]oncerns
about companies' using share repurchases to impact earnings per share
(`EPS') or executive compensation are unfounded and ignore existing
protections,'' and pointed to recent academic work that, in the
commenter's view, undermines the premise that executives undertake
repurchases to boost their compensation.\39\ To the extent that
opposing commenters interpret this research to mean that opportunism or
self-interest cannot be a significant motivating factor for share
repurchases, we disagree with their assessment of the underlying
evidence.\40\ In this regard,
[[Page 36007]]
we share the assessment of other commenters who argued that the
research cited by opposing commenters does not undermine the
proposition that personal benefit may be a factor in determining
whether to undertake a share repurchase.\41\
---------------------------------------------------------------------------
\38\ See letters from Chamber II and Craig M. Lewis, Professor
of Law and Joseph T. White, Assistant Professor of Finance,
Vanderbilt University (Oct. 7, 2022) (``Profs. Lewis and White'').
\39\ See letter from Profs. Lewis and White. Among other
research, Profs. Lewis and White cite Guest, N., Kothari, S.P., &
Venkat, P., Share Repurchases on Trial: Large-Sample Evidence on
Share Price Performance, Executive Compensation, and Corporate
Investment, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4149796, at 16 (Jan. 2023) (``Guest et al.'')
(asserting that the study's findings that repurchases do not distort
prices ``helps rule out [the] possibility'' that insiders can ``sell
a portion of their shares at prices that are inflated due to a
buyback'') and PWC, Share Repurchases, Executive Pay and Investment,
BEIS Research Paper Number 2019/11, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/817978/share-repurchases-executive-pay-investment.pdf (finding that in the U.K. there is no or only weak
evidence that repurchases are used to achieve EPS targets).
\40\ For example, with respect to Guest et al., supra note 39,
as the authors of the study report, large repurchasers enjoy
superior returns in the quarter after repurchase, id. at 15, but
perform similarly to non-repurchasers in the following year, id. at
16. This may be consistent with short-term gains from EPS or other
manipulation that are dissipated as more complete information
becomes available to the market, as the researchers appear to
acknowledge in a footnote, see id. at 16 n.19. Such changes in value
would create opportunities for executives to profit from trades
close in time to repurchases. In addition, the authors focus only on
behavior of the largest or most frequent repurchasers, and market-
wide correlations estimated based on those issuers are not
necessarily probative of the behavior of the issuers who stand to
benefit most from small changes in EPS. We are thus more persuaded
by the studies that do find opportunities for executives to profit
from repurchases. See supra note 34. Similarly, with respect to the
PWC study, supra note 39, we note that the U.K. has required next-
day reporting of repurchases since 1981, which may discourage
issuers from attempting to manipulate accounting metrics with
repurchases, because daily data would reveal instances where
repurchases were undertaken at a time when it was obvious to
management they would otherwise miss an EPS target.
The opposing commenters also point to research suggesting that
insider sales following a repurchase or repurchase announcement are
due to coincidences of the corporate calendar (i.e., repurchases
occurring near in time to the expiration of blackout periods), not
deliberate efforts by insiders to benefit from repurchase activity.
See letter from Chamber II (citing Dittmann, I., Lu, A. Y.,
Obernberger, S., & Zheng, J. The Corporate Calendar and the Timing
of Share Repurchases and Equity Compensation, Working paper (2022)
(``Dittmann et al. (2022)''). But as another commenter observed:
``it does not matter if the equity sales are `mechanical' due to
occurring after the end of a blackout period, or `voluntary'. If the
CEO knows that she will be able to sell equity, due to the blackout
period ending, this may still influence her buyback decision.'' See
letter from Prof. Edmans.
\41\ See letters from Prof. Jackson, Dr. Hu, and Dr. Zytnick and
Prof. Edmans.
---------------------------------------------------------------------------
Moreover, we believe opposing commenters have misconstrued the
nature of the concern the proposed amendments sought to address. As
explained below, it is not necessary to find that opportunism drives
the timing of most issuer share repurchases to conclude that it is
appropriate for investors to have more useful information about such
repurchases. Indeed, as the author of several of the studies cited by
these commenters observed, personal benefit may not be ``the only, or
even most important, factor (as the terms `manipulation' or
`opportunism' would suggest) but it may be a consideration. Thus, one
does not need to believe that share buybacks are used for
manipulation--a high hurdle--to find merit in the SEC's proposal.''
\42\ While this commenter specifically referenced the proposal to
require disclosure of any policies and procedures relating to purchases
and sales of the issuer's securities by its officers and directors, we
believe all of the quantitative and qualitative disclosure requirements
that we are adopting in this release together will serve to alert
investors to the possibility of repurchases being motivated, at least
in part, by goals unconnected to increasing shareholders value or
signaling the issuer's view that its stock is undervalued.\43\
---------------------------------------------------------------------------
\42\ See letter from Prof. Edmans.
\43\ See id.
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Currently, investors cannot readily determine the purposes behind
any given share repurchase, and this uncertainty may have adverse
effects on investors and markets. When managers may personally benefit
from repurchases or their timing, it is not as evident, for example,
that a repurchase is intended to distribute excess cash or signal
management's views about the issuer's fundamental value, rather than to
benefit the manager personally. Similarly, if issuers may adjust the
volume or timing of repurchases to reach certain accounting targets or
for other reasons that are not intended to signal management's views
about the firm's value or to return excess cash, such as protecting the
issuer's reputation or managing relationships with customers or
suppliers, some of which may even run counter to the interest of
shareholders, the signal sent by all repurchases is muddied. This
market failure may make it more difficult for investors to value a
company or identify when an issuer's use of cash is well-managed,
reducing investor confidence and market liquidity.\44\
---------------------------------------------------------------------------
\44\ We discuss in more detail the market failures addressed by
the amendments in the Economic Analysis section, below. See infra
Section V.B.1.
---------------------------------------------------------------------------
The additional disclosures that we are adopting, including of daily
quantitative repurchase data, will provide investors with enhanced
information to assess the purposes and effects of repurchases,
including whether those repurchases may have been taken for reasons
that may not increase an issuer's value. At the same time, we are
mindful that any enhanced disclosure requirements will come at a cost
for issuers, and ultimately shareholders, and should be appropriately
tailored to address their intended aims. For those reasons, as
discussed more fully below, we have made certain changes to the final
amendments to help limit the compliance burden on issuers while still
providing investors with the information they need to better assess the
efficiency of, and motives behind, issuer repurchases.
B. Purpose of the Amendments
As we have just described, issuers repurchase shares for multiple
reasons. In many cases, share repurchases may represent an efficient
use of the issuer's capital, such as when returning money to
shareholders exceeds other possible internal investments of
capital.\45\ However, some uses of share repurchases may not be
efficient, such as repurchases conducted to increase management
compensation or to affect various accounting metrics, in either case
when those actions do not increase the value of the firm.\46\
---------------------------------------------------------------------------
\45\ See supra notes 27-29 and accompanying text.
\46\ See supra notes 30-33 and accompanying text.
---------------------------------------------------------------------------
Current repurchase disclosure requirements, which do not require
the issuer to provide quantitative daily repurchase information or
state the objectives or rationales for its repurchases and are reported
in the aggregate at the monthly level, provide investors with
insufficient insight into the efficiency, purposes, and impacts of an
issuer's share repurchases. This frustrates the ability of investors to
separate out and assess the different motivations and impacts of share
repurchases. We have determined that additional disclosures are needed
to remedy these market failures.
Given common frictions on voluntary reporting of this information,
including the strong possibility of significant divergences in the
interests of managers and other investors, we believe mandatory
disclosures are necessary to overcome these informational asymmetries
between issuers and their managers on the one hand and investors on the
other. The additional qualitative disclosures we are adopting will
provide investors with additional information about the structure of an
issuer's repurchase program and its share repurchases that will enable
them to better understand how and why those repurchases are conducted.
The qualitative disclosures, when combined with the daily repurchase
activity disclosure, will allow investors to draw clearer and more
informed conclusions about the purposes and effects of share
repurchases.
The current reporting regime, in which investors receive
information only about the monthly aggregate repurchases of issuers,
fails to provide enough detail for investors to draw informed
conclusions about the purposes and effects of many repurchases. In
contrast, the amendments we are adopting will provide investors with
data about the daily repurchase activity of an issuer and additional
qualitative disclosures that investors can combine with other
disclosures, such as the timing of compensatory awards or executive
equity transactions, to observe whether a given repurchase was apt to
affect executive compensation. Data on daily transactions and the
additional qualitative disclosures would also reveal patterns in which
repurchases were undertaken at times or under conditions that were
likely to affect imminent accounting metrics, or prior
[[Page 36008]]
to the release of material nonpublic information by the issuer.
Investment advisers may use this data in assisting investors in
assessing the purposes and effects of share repurchases.
Requiring that issuers provide disclosures of daily share
repurchases as well as qualitative data will better enable investors to
assess the efficiency, purposes, and impacts of share repurchases.
These disclosures will allow investors to better evaluate whether a
share repurchase was intended to increase the value of the firm or
represented an inefficient deployment of capital, such as by either
providing additional compensation to management or impacting accounting
metrics in ways that were not intended to increase overall firm value.
Disclosures of daily repurchase data and qualitative disclosures may
indicate that management may have timed share repurchases in order to
meet certain earnings goals or targets, to support insiders' trading
positions or to otherwise increase insider compensation. Enhancing the
ability of investors to assess the efficiency, purposes, and impacts of
issuer repurchases would benefit investors and could improve market
efficiency and capital formation.
Accordingly, the purpose of these amendments is to improve the
information investors receive to better assess the efficiency of, and
motives behind, an issuer repurchase. In proposing to amend Item 703,
the Commission expressed the view that enhanced disclosure about share
repurchases would allow investors to ``[b]etter understand an issuer's
motivation for its share repurchase.'' \47\ In this way, the proposed
amendments aimed to assist investors in distinguishing between share
repurchases intended to increase shareholder value or signal the
issuer's view that its stock is undervalued and those that instead were
at least, in part, ``potentially motivated by short-term attempts to
boost the share price'' or to achieve other inefficient objectives.\48\
In the case where repurchases may increase the value of managers'
compensation, for instance, one commenter stated that ``[enhanced]
disclosure is useful because it alerts the market to the possibility of
buybacks being at least partially influenced by the CEO's equity
sales.'' \49\ We agree and, with the benefit of the comments received
on the proposed amendments, continue to believe that an investor's
ability to assess the impact of a given repurchase depends in part on
having the information necessary to evaluate the purposes for which the
repurchase was undertaken.
---------------------------------------------------------------------------
\47\ Proposing Release, supra note 2, at 8445.
\48\ Proposing Release, supra note 2, at 8446 and 8457.
\49\ See letter from Prof. Edmans.
---------------------------------------------------------------------------
We understand that issuers may employ open-market stock repurchases
to credibly signal to investors the issuer's view of the stock's
fundamental value.\50\ The possibility that repurchases may be, in
part, motivated by goals unconnected to the issuer's fundamental value,
such as the manager's compensation or reputation or achieving
accounting metrics required by creditors or expected by analysts, would
reduce the credibility of such signals, even among issuers whose
repurchases are solely intended to signal management's view of the
issuer's value. Similarly, due to asymmetries in information between
the issuer and investors, investors cannot typically observe directly
whether a repurchase represented an efficient use of excess cash aimed
at increasing the issuer's value. Thus, the possibility that some
repurchases are motivated by reasons other than shareholder value
maximization complicates investor efforts to make this determination
absent additional information not currently required to be disclosed.
---------------------------------------------------------------------------
\50\ See, e.g., Asquith, P. & Mullins, Jr. D.W., Signaling with
Dividends, Stock Repurchases, and Equity Issues, 15 Fin. Mgmt. 27,
33-34 (1986).
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Further, as we noted in the Proposing Release,\51\ and as described
above, there is evidence from which investors could reasonably conclude
that some repurchases are at least in part motivated by goals such as
executive compensation or achieving certain accounting targets. Thus,
as the Commission stated, ``it can be difficult for investors to
determine whether the undertaken repurchases were efficient and aligned
with shareholder value maximization, or were at least in part driven by
self-interested behavior of corporate insiders rather than shareholder
interest.'' \52\ Accordingly, we believe that investors should have
sufficient information about how issuers conduct repurchases to make
informed judgments about the likely purposes and effects of the
repurchases, including whether such repurchases provide credible
information about the value of the issuer.
---------------------------------------------------------------------------
\51\ See Proposing Release, supra note 2, at 8444-8445.
\52\ Proposing Release, supra note 2, at 8455.
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We acknowledge that many, perhaps even most, share repurchases are
not undertaken solely or primarily to benefit managers or to achieve
targets, such as those based on EPS. Indeed, as commenters noted,
Commission staff have previously assessed that it is ``unlikely'' that
a ``majority'' of repurchases are so motivated, and instead that
``most'' repurchases are consistent with shareholder value
maximization.\53\
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\53\ See, e.g., letters from Cato Institute (Apr. 1, 2022)
(``Cato''), Chamber II, Maryland State Bar Association (Apr. 5,
2022) (``Maryland Bar''), and National Association of Manufacturers
(Mar. 31, 2022) (``NAM'').
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That fact, however, does not aid investors who are attempting to
assess the efficiency of, and information conveyed by, any given
repurchase by a particular issuer.\54\ Given the opportunity for
repurchases to affect executive compensation or help an issuer to
achieve certain accounting measures, as well as the evidence that some
repurchases do so, investors cannot currently be certain that any given
repurchase in fact conveys information about the issuer's fundamental
value. Thus, as the Commission explained in the Proposing Release,
additional disclosures would, for example, ``help investors gauge
whether . . . repurchases may be motivated by price support for
insiders' sales of their securities, rather than conveying a true
signal of undervaluation.'' \55\ In this regard, we agree with the
observations of a commenter who compared this rationale to disclosure
requirements for potentially self-interested financial advisors where
disclosure allows a client to ``take into account the possibility of a
conflict.'' \56\
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\54\ See, e.g., letters from Better Markets (Apr. 1, 2022)
(``Better Markets I'') (noting that ``disclosures will help
investors identify `opportunistic' share repurchases designed
primarily to benefit management, not the company'') and Council of
Institutional Investors (Mar. 31, 2022) (``CII'') (stating the
amendments ``could strengthen the market's ability to assign premia
to companies that make capital allocation decisions optimizing the
company's long-term performance and assign discounts to companies
that do not'').
\55\ Proposing Release, supra note 2, at 8457.
\56\ See letter from Prof. Edmans (stating that this is similar
to how financial advisors must disclose the commission on products
that they are offering to their clients, such that, although the
product pays the highest commission to the advisor, it is also in
the best interest of the client, so there is no conflict, but the
disclosure is useful to allow the client to take into account ``the
possibility of'' a conflict).
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Further, even efficient repurchases have the potential to
negatively affect investor confidence. As we have described previously,
we are concerned that, in some cases, issuers may repurchase their
stock while the relevant decision makers are aware of material
nonpublic information.\57\ Because issuers are repurchasing their
[[Page 36009]]
own securities, asymmetries may exist between issuers and investors
with regard to information about the issuer and its future prospects.
Investors may be more reluctant to trade in the presence of such
informational asymmetries.\58\
---------------------------------------------------------------------------
\57\ See Rule 10b5-1 Adopting Release, supra note 18, at 80362-
80363 and 80372.
\58\ One commenter suggests that issuers undertake voluntary
arrangements that limit their ability to repurchase at a time the
relevant decision maker is aware of material nonpublic information,
and therefore that the threat of such trading should not serve as a
basis for the amendments. See letter from Securities Industry and
Financial Markets (Apr. 1, 2022) (``SIFMA II''). Other academic
research suggests, however, that some issuers conduct repurchases at
times they are likely to be aware of material nonpublic information
and earn average returns on their trades that are not achieved by
other traders. See Bonaim[eacute], A.A., Harford, J., & Moore, D.,
Payout Policy Tradeoffs and the Rise of 10b5-1 Preset Repurchase
Plans, 66 Mgmt. Sci. 2291 (2020) (reporting that one-third of
disclosed issuer 10b5-1 plans begin trading within one day of
adoption) (``Bonaim[eacute] et al. (2020)'').
---------------------------------------------------------------------------
In light of these concerns, the concerns expressed by
commenters,\59\ and our expectation that the volume of share
repurchases will continue to be significant, we are persuaded that
investors would benefit from additional and more detailed quantitative
and qualitative information related to issuer share repurchases. Such
disclosures would help investors evaluate the purposes, impacts, and
efficiency of share repurchases. Additional information regarding an
issuer's repurchase activity may reveal, for instance, whether those
repurchases likely affected managers' compensation.
---------------------------------------------------------------------------
\59\ See, e.g., letters from Amy Lewis (Dec. 15, 2021)
(``Lewis''); California Public Employees' Retirement System (Mar.
30, 2022) (``CalPERS''), CFA Institute (Apr. 6, 2022) (``CFA
Institute''), CII, and Form Letter A.
---------------------------------------------------------------------------
The daily quantitative repurchase data we are requiring will assist
investors in understanding the purposes and effects of repurchases. For
example, these data will help investors to identify repurchases
undertaken close in time to the date on which an accounting measure,
such as EPS, is likely to trigger other effects. In many cases,
repurchase data aggregated at the monthly level would not be
sufficiently detailed to shed light on these patterns. Similarly, daily
data may allow investors to determine whether an executive may have
sold equity during a month in which there was heavy repurchase
activity, and data aggregated at the monthly level leave it unclear
whether the sales preceded or followed the bulk of the repurchases.
We recognize that these data will not by themselves establish that
a repurchase was undertaken for any particular purpose. As a result,
the final amendments also require issuers to provide investors with
more detailed qualitative information that they could use to evaluate
issuer share repurchases in conjunction with the daily quantitative
repurchase data. We believe that the quantitative and qualitative
information will work together to help investors to identify
repurchases in which efforts to affect compensation or accounting
measures may have played a larger role, and help to credibly identify
repurchases where such goals were unlikely to have played a significant
role.
Detailed reporting could also reveal instances in which an issuer
made large repurchases in advance of announcing material nonpublic
information or allow investors to more readily observe instances in
which share repurchases may have been timed to allow trading while the
issuer was aware of material nonpublic information or to benefit from
other asymmetries. Investors could consider this information in making
future investment decisions with respect to a given issuer. In many
instances, reporting of repurchase activity in aggregate monthly
amounts, as required by our current requirements, may not be precise
enough to reveal patterns in repurchases. Again, we also believe that
qualitative information regarding an issuer's purposes for and policies
regarding repurchases will further aid investors in understanding these
daily quantitative data, and in using them to assess the efficiency of,
and motivations for a repurchase.
The amendments require more detailed quantitative and qualitative
disclosure about issuer share repurchases, and require issuers to
present the disclosure using a structured data language. We believe
that the final amendments will promote investor protection by allowing
investors to:
Better understand the extent of an issuer's activity in
the market, including potential impacts on the issuer's share price;
Better understand an issuer's motivation for its share
repurchases, and how it has structured and is executing its purchase
plan; and
Gain potential insight into any relationship between share
repurchases and executive compensation and stock sales.
III. Discussion of Final Amendments
A. Disclosure of Share Repurchases
1. Proposed Amendments
The Commission proposed new Exchange Act Rule 13a-21 and new Form
SR, which would require issuers, including FPIs and certain Listed
Closed-End Funds, to report any daily purchase made by or on behalf of
the issuer or any affiliated purchaser of shares or other units of any
class of the issuer's equity securities that are registered pursuant to
Exchange Act section 12.\60\ The issuer would be required to furnish
the daily detail in Form SR on the Commission's Electronic Data
Gathering, Analysis, and Retrieval (``EDGAR'') system before the end of
the first business day following the day on which the issuer executes a
share repurchase. The Form SR would require the following disclosure in
tabular format, by date, for each class or series of securities:
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\60\ Currently, registered investment companies other than
Listed Closed-End Funds are not required to provide the repurchase
disclosure under Item 703 of Regulation S-K as implemented in Form
N-CSR. Accordingly, proposed Form SR also would not be filed by
registered investment companies other than Listed Closed-End Funds.
Business development companies, which are not registered investment
companies, provide the repurchase disclosure of Item 703 on Forms
10-K and 10-Q rather than Form N-CSR.
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(1) Identification of the class of securities purchased;
(2) The total number of shares (or units) purchased, including all
issuer repurchases whether or not made pursuant to publicly announced
plans or programs;
(3) The average price paid per share (or unit);
(4) The aggregate total number of shares (or units) purchased on
the open market;
(5) The aggregate total number of shares (or units) purchased in
reliance on the Rule 10b-18 non-exclusive safe harbor; \61\ and
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\61\ Rule 10b-18 provides issuers with a safe harbor from
liability for manipulation under 15 U.S.C. 78i(a)(2) (``Exchange Act
section 9(a)(2)'') and 15 U.S.C. 78j(b) (``Exchange Act section
10(b)'') when they repurchase their common stock in the market in
accordance with the rule's manner, timing, price, and volume
conditions. The proposed disclosure would not provide a defense to
manipulative conduct for purchases that are not in fact eligible to
rely on the safe harbor.
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(6) 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).\62\
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\62\ The Commission adopted Rule 10b5-1 in 2000 to clarify the
meaning of ``manipulative or deceptive device[s] or contrivance[s]''
prohibited by Exchange Act section 10(b) and Rule 10b-5 with respect
to trading on the basis of material nonpublic information. See
Selective Disclosure and Insider Trading, Release No. 33-7881 (Aug.
15, 2000) [65 FR 51716 (Aug. 24, 2000)]. Rule 10b5-1(c) established
an affirmative defense to Rule 10b-5 liability for insider trading
in circumstances where it is clear that the trading was not based on
material nonpublic information and the trade was pursuant to a
binding contract, an instruction to another person to execute the
trade for the instructing person's account, or a written plan.
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The proposed amendments would also require an issuer to disclose
material errors or changes to
[[Page 36010]]
information previously reported on an amended Form SR, which the
Commission indicated would allow for timely and accurate disclosure the
day after execution of the share repurchase order, with the ability to
make corrections, if needed, in amended filings. Additionally, the
Commission proposed to require issuers to furnish, rather than file,
Form SR. As a result, issuers would not be subject to liability under
15 U.S.C. 78r (``Exchange Act section 18'') for the disclosure in the
form, and the information would not be deemed incorporated by reference
into filings under the Securities Act and thus would not be subject to
liability under 15 U.S.C. 77k (``Securities Act section 11''), unless
the issuer expressly incorporated such information.\63\
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\63\ In addition, by requiring the Form SR to be furnished, a
late submission of the form would not affect eligibility to use Form
S-3 or to file a short-form registration statement under General
Instruction A.2 of Form N-2. General Instruction I.A.3(b) to Form S-
3 requires that all reports required to be filed with the Commission
during the preceding 12 months have been filed; the same
requirements apply under General Instruction A.2 of Form N-2.
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2. Comments on the Proposed Amendments
a. Comments on the Daily Share Repurchase Disclosure Requirement
Although there was substantial opposition to the proposal,\64\
several commenters generally supported the proposed daily repurchase
disclosure.\65\ Some of the commenters that supported the proposed
amendments asserted that they would reduce information asymmetries
between issuers and investors,\66\ which would result in ``greater
confidence that they can find accurate, comprehensive information about
a security and the broader investment field.'' \67\ Other commenters
stated that daily disclosure of share repurchases would increase
transparency.\68\
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\64\ See, e.g., letters from American Bar Association, Federal
Regulation of Securities Committee (Apr. 13, 2022) (``ABA
Committee''); American Council of Life Insurers (Feb. 22, 2022)
(``ACLI''); ASA; Bank Policy Institute & American Bankers
Association (Apr. 1, 2022) (``BPI & Amer. Bankers Assoc.''); Cato;
Chamber II; Chevron Corporation (Mar. 31, 2022) (``Chevron'');
Coalition of Business Trades (Apr. 1, 2022) (``Coalition'');
Cravath, Swaine & Moore LLP (Mar. 31, 2022) (``Cravath''); Davis
Polk & Wardwell LLP (Mar. 28, 2022) (``Davis Polk''); DLA Piper LLP
(Apr. 1, 2022) (``DLA Piper''); Dow Inc. (Apr. 1, 2022) (``Dow'');
FedEx Corporation (Apr. 1, 2022) (``FedEx''); Fenwick & West LLP
(Mar. 31, 2022) (``Fenwick''); Guzman & Company (Mar. 28, 2022)
(``Guzman''); Home Depot, Inc. (Apr. 1, 2022) (``Home Depot''); HP
Inc. (Apr. 1, 2022) (``HP''); Institute for Portfolio Alternatives
(Mar. 28, 2022) (``IPA''); International Bancshares Corporation
(Apr. 1, 2022) (``IBC''); Jones Day (Mar. 31, 2022) (``Jones Day'');
Keith Paul Bishop, former California Commissioner of Corporations
(Apr. 6, 2022) (``Bishop''); Maryland Bar; NAM; Norfolk Southern
Corporation (Mar. 31, 2022) (``Norfolk Southern''); NYSE Group, Inc.
(Apr. 1, 2022) (``NYSE''); Paul, Weiss, Rifkind, Wharton & Garrison
LLP (Apr. 1, 2022) (``Paul Weiss''); Pennsylvania Chamber of
Business and Industry (Apr. 1, 2022) (``PA Chamber''); PNC Financial
Services Group (Mar. 30, 2022) (``PNC''); Profs. Lewis and White;
PSC; Quest Diagnostics (Apr. 1, 2022) (``Quest''); Shearman &
Sterling LLP (Apr. 1, 2022) (``Shearman''); SIFMA II; Simpson
Thacher & Bartlett LLP (Mar. 31, 2022) (``Simpson Thacher'');
Society for Corporate Governance (Apr. 1, 2022) (``SCG''); Sullivan
& Cromwell (Apr. 1, 2022) (``Sullivan''); T. Rowe Price (Mar. 30,
2022) (``T. Rowe Price''); Virtu Financial (Mar. 29, 2022)
(``Virtu''); Vistra Corp. (Apr. 1, 2022) (``Vistra''); and Wilson
Sonsini Goodrich & Rosati (Apr. 18, 2022) (``Wilson Sonsini'').
\65\ See, e.g., letters from Alex Hanson-Michelson (Oct. 18,
2022) (``Hanson-Michelson''); Americans for Financial Reform
Education Fund et al. (Apr. 1, 2022) (``AFREF et al.''); Amy (Oct.
23, 2022) (``Amy''); Anonymous (Oct. 29, 2022) (``Anonymous V'');
Anonymous (Oct. 30, 2022) (``Anonymous VI''); Anonymous, Retail
Investor (Dec. 26, 2022) (``Anonymous VII''); Arun R. (Oct. 8, 2022)
(``Arun''); Better Markets I; Better Markets (Jan. 11, 2023);
BrilLiquid LLC (Apr. 1, 2022) (``BrilLiquid''); CalPERS; Calvin
Satterfield (Jan. 13, 2023) (``Satterfield''); CFA Institute; CII;
David B. (Oct. 9, 2022) (``David''); David Jaggard (Oct. 13, 2022)
(``Jaggard''); Richard L. Hecht, Adubon Consulting Group (Jan. 27,
2022) (``Hecht''); International Corporate Governance Network (Mar.
31, 2022) (``ICGN''); James Lutes (Jan. 10, 2023) (``Lutes''); James
Mahr (Oct. 8, 2022) (``Mahr''); Joe Hernandez (Oct. 30, 2022)
(``Hernandez''); Joseph Krugel (Oct. 30, 2022) (``Krugel''); Kayden
Fox (Oct. 8, 2022) (``Fox''); Lewis; Marc Pentacoff (Dec. 23, 2021)
(``Pentacoff''); Mike Kerr (Aug. 16, 2022) (``Kerr''); North
American Securities Administrators Association, Inc. (Apr. 1, 2022)
(``NASAA''); National Employment Law Project (Apr. 1, 2022)
(``NELP''); Oxfam America (Apr. 1, 2022) (``Oxfam''); Professor
Lenore Palladino, UMass Amherst (Mar. 30, 2022) (``Prof.
Palladino''); Prof. Jackson, Dr. Hu, and Dr. Zytnick; Public Citizen
(Apr. 1, 2022) (``Public Citizen''); Roosevelt Institute (Mar. 31,
2022) (``Roosevelt''); Stephen, Consultant (Dec. 29, 2022)
(``Stephen''); Stephane Mans (Jan. 12, 2023) (``Mans''); U.S.
Senators Marco Rubio and Tammy Baldwin (Apr. 1, 2022) (``Senators
Rubio & Baldwin''). Additionally, Form Letter A supported the
proposal.
\66\ See, e.g., letters from CFA Institute and Lewis.
\67\ See letter from Lewis.
\68\ See, e.g., letters from Amy, Anonymous V, Anonymous VI,
Anonymous VII, Andrew (Dec. 26, 2022), Arun, CalPERS, David, D.L.
(Jan. 11, 2023), Fox, Hanson-Michelson, Hernandez, Jaggard, Kerr,
Krugel, Lutes, Mahr, Mans, Satterfield, and Stephen.
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Some commenters asserted that issuers would be able to comply with
the proposed requirement to provide daily repurchase disclosure one
business day after execution of an issuer's share repurchase order
because issuers already comply with these types of strict deadlines in
other markets, and section 16 insiders must report their purchases and
sales within two business days.\69\ Other commenters suggested that the
costs of the proposed amendments would be minimal,\70\ with one
commenter noting that, at most, the proposed amendments would be ``a
minor incremental administrative burden.'' \71\ Some commenters
indicated that the proposed amendments would enable the Commission to
determine issuers' compliance with the Rule 10b-18 safe harbor.\72\ One
form comment letter asserted that such daily disclosure would reduce
the amount of time that insiders know of a repurchase while other
investors remain ignorant and ``give the Commission the tools to
enforce existing laws.'' \73\
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\69\ See, e.g., letters from CalPERS and ICGN.
\70\ See e.g., letters from Better Markets I, CFA Institute, and
Prof. Palladino (stating that the costs of daily reporting ``should
be minimal given the well-established regular reporting of other
financial metrics to the Commission, and the fact that companies are
already reporting aggregate stock buybacks data, which must be
determined from micro-level data'').
\71\ See letter from CFA Institute.
\72\ See, e.g., letters from NELP, Prof. Palladino, and
Roosevelt. These commenters were generally concerned about issuers
manipulating the market for their securities through buybacks
executed not in accordance with the Rule 10b-18 safe harbor.
\73\ See letter from Form Letter A.
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Many commenters opposed the proposal due to the proposed
requirement that issuers provide daily repurchase disclosure one
business day after execution of an issuer's share repurchase order.\74\
Some of these commenters indicated that existing disclosure rules
require near real-time trading information only in situations involving
changes in corporate control or trading by insiders,\75\ and share
repurchase activity does not carry the same signaling value as those
situations.\76\ Other commenters asserted that the justification for
the one business day requirement is not
[[Page 36011]]
evident.\77\ A number of commenters asserted that the proposed
amendments would increase costs without a corresponding benefit.\78\
Some commenters suggested that daily repurchase disclosures could cause
investors to misinterpret an issuer's day-to-day changes in trading
activity,\79\ which could result in unjustified stock price volatility
\80\ or the disruption of confidential merger or acquisition
discussions.\81\ Additionally, although some commenters suggested that
investors might use daily disclosure data to identify the issuer's
trading strategies,\82\ other commenters observed that a move to
periodic reporting should substantially mitigate any such concern.\83\
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\74\ See, e.g., letters from ACCO Brands Corporation (Mar. 30,
2022) (``ACCO''), ACLI, ASA, Bishop, BPI & Amer. Bankers Assoc.,
Business Roundtable (Apr. 1, 2022) (``Business Roundtable''), Cato,
Chamber II, Chamber III, Chevron, Coalition, Cravath, Davis Polk,
DLA Piper, Dow, Ed Armstrong (Dec. 28, 2021) (``Armstrong''), Empire
State Reality Trust (Mar. 29, 2022) (``Empire''), FedEx, Guzman,
Hecht, Home Depot, HP, IBC, Jones Day, Kirkland & Ellis LLP (Apr. 1,
2022) (``Kirkland Ellis''), Maryland Bar, NAM, Norfolk Southern, NYC
Bar, NYSE, PA Chamber, Paul Weiss, Pay Governance (Jan. 24, 2022)
(``Pay Governance''), PNC, Profs. Lewis and White, Quest, SCG,
Shearman, SIFMA II, Simpson Thacher, Stephens, Stuart Kaswell, Esq.
(Mar. 18, 2022) (``Kaswell''), Sullivan, T. Rowe Price, Virtu,
Vistra, and Wilson Sonsini. One of these commenters stated that,
because investors only see earnings quarterly, management's attempt
to use repurchases to affect their pay would only been detected
quarterly, and daily disclosures would not help. See letter from
Profs. Lewis and White.
\75\ See, e.g., letters from Davis Polk (stating that ``only in
cases involving potential changes in corporate control--where the
information called for by Schedule 13D is plainly necessary to allow
investors to make informed investment decisions--and in cases
involving trading by officers, directors and ten percent
shareholders, whose trading may signal changes in insider sentiment
and corporate prospects unknown to the public market'') and T. Rowe
Price.
\76\ See letter from Davis Polk.
\77\ See letters from Chamber II, NAM, and T. Rowe Price.
\78\ See, e.g., letters from Armstrong, BPI & Amer. Bankers
Assoc., Business Roundtable, Cato, Chamber II, Coalition, Davis
Polk, DLA Piper, Dow, Guzman, Maryland Bar, Profs. Lewis and White,
Quest, SCG, T. Rowe Price, and Vistra. For example, commenters
claimed that daily disclosure could boost share price, resulting in
higher repurchase costs; push issuers to revise or abandon share
repurchase plans; cause issuers to substitute ASRs for daily
repurchases, which would increase costs and limit flexibility;
discourage stock-based compensation; deter potential capital
allocation decisions; burden personnel; and incentivize the use of
larger financial firms over smaller ones. See, e.g., letters from
Coalition, Davis Polk, DLA Piper, Guzman, Maryland Bar, Profs. Lewis
and White, Quest, SCG, T. Rowe Price, and Vistra.
\79\ See, e.g., letters from Business Roundtable, Davis Polk,
Dow, FedEx, Home Depot, Kaswell, Profs. Lewis and White, NAM, PNC,
Quest, Shearman, SIFMA II, Simpson Thacher, T. Rowe Price, Wilson
Sonsini, and Vistra. For example, some of the commenters noted that
a benign halt in purchases could be misinterpreted as a signal that
the issuer has material nonpublic information or that the issuer has
lost confidence in the value of its stock. See, e.g., letters from
Business Roundtable, Davis Polk, Dow, Home Depot, NAM, Profs. Lewis
and White, Quest, SCG, Simpson Thacher, T. Rowe Price, and Vistra.
One commenter noted that misinterpretation risks are heightened for
financial services companies because a halt in their share
repurchases could be due to supervisory action by the Federal
Reserve or other regulators, but the issuer may be barred from
disclosing such action. See letter from PNC.
\80\ See, e.g., letters from Cravath, Davis Polk, Profs. Lewis
and White, and SCG.
\81\ See, e.g., letters from Davis Polk, PNC, SIFMA II, and
Sullivan.
\82\ See letters from Home Depot and PNC.
\83\ See letters from Cravath and Davis Polk.
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Several commenters claimed that daily disclosures would result in
an overload of information \84\ that would be too disaggregated for
retail investors to easily parse.\85\ Commenters also expressed the
view that hedge funds and other professional traders would leverage
daily repurchase information to exploit arbitrage opportunities \86\
and actually increase information asymmetry.\87\ Some commenters
asserted that we have failed to identify a ``market failure'' that
would justify additional disclosures and expressed the view that
information asymmetry is advantageous to markets because it
incentivizes some market actors to expend resources developing
information that would be relevant to an issuer's share price.\88\
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\84\ See, e.g., letters from Dow, Kirkland Ellis, NYSE, SCG, and
Vistra.
\85\ See, e.g., letters from ACLI, Armstrong, ASA, Chevron,
Cravath, Dow, Guzman, Hecht, Home Depot, Jones Day, NYSE, PNC,
Profs. Lewis and White, Quest, SCG, Shearman, SIFMA II, and Simpson
Thacher.
\86\ See, e.g., letters from ACCO, Armstrong, ASA, BPI & Amer.
Bankers Assoc., Business Roundtable, Cato, Chevron, Coalition,
Cravath, Davis Polk, DLA Piper, Dow, Empire, FedEx, Guzman, Home
Depot, HP, IBC, Jones Day, NAM, NYC Bar, Norfolk Southern, PA
Chamber, Paul Weiss, PNC, Profs. Lewis and White, Quest, Shearman,
SIFMA II, SCG, Simpson Thacher, Stephens, Sullivan, T. Rowe Price,
Vistra, and Wilson Sonsini. One commenter noted that sophisticated
investors already use their superior technology and resources, which
are not available to ordinary investors, to identify trading
opportunities and earn positive returns by processing the high-
frequency information available on Form 4. See letter from Profs.
Lewis and White.
\87\ See, e.g., letters from NYSE and Profs. Lewis and White.
\88\ See, e.g., letters from Chamber II and Profs. Lewis and
White.
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Several commenters asserted that the proposed daily repurchase
disclosures on Form SR may encourage issuers to act inefficiently to
mitigate the negative consequences of daily disclosure.\89\ Commenters
suggested that issuers may shift from more conservative daily dollar
cost averaging strategies to the more costly practice of effecting
larger repurchases on fewer days to avoid triggering speculation,
continue daily repurchases when it does not make financial sense to do
so, or limit their average daily trading volume to try to ensure that
sophisticated investors viewed the daily trades as immaterial, even if
a larger volume would be more beneficial to shareholders.\90\ One
commenter suggested that share repurchase disclosures are unnecessary
because, even if managers benefit from repurchases through an increased
share price, such an increase also benefits other existing
shareholders.\91\
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\89\ See, e.g., letters from Chevron, Davis Polk, DLA Piper,
Profs. Lewis and White, SIFMA II, and Sullivan.
\90\ See, e.g., letters from ACCO, Armstrong, ASA, BPI & Amer.
Bankers Assoc., Business Roundtable, Cato, Chevron, Coalition,
Cravath, Davis Polk, DLA Piper, Dow, Empire, FedEx, Guzman, Home
Depot, HP, IBC, Jones Day, NAM, NYC Bar, Norfolk Southern, PA
Chamber, Paul Weiss, PNC, Quest, Shearman, SIFMA II, SCG, Simpson
Thacher, Stephens, Sullivan, T. Rowe Price, Vistra, and Wilson
Sonsini.
\91\ See letter from Maryland Bar.
---------------------------------------------------------------------------
Some commenters asserted that share repurchase information is not
meaningful to investors because investors have never asked for detailed
share repurchase information.\92\ One commenter stated that the
proposed amendments would interfere with a corporation's state law
duties by discouraging and deterring companies from undertaking
repurchases that they otherwise judge to be in shareholders'
interest.\93\ Another commenter asserted that the proposed amendments
would violate the First Amendment because the proposed amendments ``do[
] not acknowledge the compelled-speech burdens that come with a next-
day reporting regime.'' \94\
---------------------------------------------------------------------------
\92\ See, e.g., letters from ACCO and Norfolk Southern. See also
letter from Profs. Lewis and White (stating that daily repurchase
data is generally immaterial to investors and that many issuers
already disclose completion or cancellation of open market
repurchase programs if they believe it is material).
\93\ See letter from Cato.
\94\ See letter from Chamber III.
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A number of commenters disputed the proposal's assertion that the
use of share repurchases may help some insiders achieve performance
targets.\95\ Several of these commenters \96\ cited the 2020 Staff
Study \97\ for support, particularly the study's statement that ``82%
of the firms reviewed either did not have EPS-linked compensation
targets or had EPS targets but their board considered the impact of
repurchases when determining whether performance targets were met or in
setting the targets.'' \98\ On the other hand, one commenter \99\
asserted that the proposal did not go far enough to address executive
compensation concerns and urged that the Commission revise Instruction
7 to 17 CFR 229.402(d) (``Item 402(d) of Regulation S-K'') to require
issuers to
[[Page 36012]]
disclose whether their repurchase plans triggered additional
compensation.
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\95\ See, e.g., letters from Bishop, Cato, Chamber II,
Coalition, Maryland Bar, PA Chamber, Pay Governance, Profs. Lewis
and White, SCG, T. Rowe Price, Virtu, and Vistra. But see letter
from Kaswell (stating that the proposal does not go far enough to
address executive compensation concerns and urged that issuers be
required to disclose whether their repurchase plans triggered
additional compensation). Additionally, commenters stated that the
proposal does not reflect the reality that many compensation plans
adjust for repurchases management could not use share repurchases to
inflate earnings because doing so would be thwarted by an issuer's
compensation committee and/or its investors. See, e.g., letters from
Chamber II and Profs. Lewis and White.
\96\ See, e.g., letters from Bishop, Cato, Chamber II,
Coalition, Profs. Lewis and White, T. Rowe Price, Virtu, and Vistra.
\97\ See 2020 Staff Study, supra note 27. See also infra note
383 and accompanying text.
\98\ Id. at 42. Another commenter cited its own study showing
that total shareholder return and capital expenditure growth are
higher for companies with larger buybacks than for companies with
smaller buybacks and concluded that EPS-based incentive plans do not
encourage short-term gains at the expense of long-term performance.
See letter from Pay Governance.
\99\ See letter from Kaswell.
---------------------------------------------------------------------------
One commenter asserted that the amendments are contrary to the
Commission's prior statement to ``minimize the market impact of the
issuer's repurchases, thereby allowing the market to establish a
security's price based on independent market forces without undue
influence by the issuer.'' \100\ Several commenters asked the
Commission to adopt alternative methods and deadlines for issuers to
provide share repurchase disclosures. Some of these commenters
suggested that issuers should make their share repurchase disclosures
on Form 8-K if the repurchases exceed specified volume thresholds,\101\
such as one \102\ or two \103\ percent of the issuer's total
outstanding shares, or some other threshold.\104\ Other commenters
suggested extending the Form SR filing deadline to two days,\105\ ten
days,\106\ or one month after the trade,\107\ or one day after
settlement.\108\ A number of commenters recommended scaling back the
proposal by changing the deadline for the share repurchase disclosure
and the period that the disclosure would encompass.\109\ Commenters
suggested the following deadlines and periods:
---------------------------------------------------------------------------
\100\ See letter from Chamber II (quoting 2003 Adopting Release,
supra note 5, at 64953).
\101\ See, e.g., letters from ABA Committee, DLA Piper, Maryland
Bar, NYC Bar, NYSE, and Sullivan.
\102\ See, e.g., letters from ABA Committee, DLA Piper, NYSE,
Maryland Bar, and Sullivan.
\103\ See letter from Simpson Thacher.
\104\ See letter from FedEx (suggesting that the amendments
replace the share repurchase disclosure on proposed Form SR with
disclosure on Form 8-K, but did not specify the trigger at which the
Form 8-K would be required).
\105\ See, e.g., letters from CII and Philip Forbini (Jan. 11,
2023).
\106\ See letter from Jones Day.
\107\ See id.
\108\ See letter from NASAA.
\109\ See, e.g., letters from Anthem Advisors LLC (Dec. 19,
2022) (``Anthem Advisors''); Armstrong; BrilLiquid; Chamber II;
Cravath; DLA Piper; Guzman; Hecht; Home Depot; HP; Jones Day;
Charles Morris, Greenhouse Funds LLP (Dec. 16, 2021) (``Morris'');
NAM; Pentacoff; Quest; SCG; SIFMA II; Simpson Thacher; and Stephens.
Additionally, one commenter stated that, if the final amendments
include Listed Closed-End Funds, those funds should only be required
to provide daily information semi-annually in their Form N-CSR. See
letter from Investment Company Institute (Apr. 1, 2022) (``ICI I'').
---------------------------------------------------------------------------
Quarterly reporting of daily data; \110\
---------------------------------------------------------------------------
\110\ See letter from Jones Day (stating that the amendments
could achieve the same goals through quarterly disclosure of daily
data).
---------------------------------------------------------------------------
Quarterly or monthly reporting of daily data; \111\
---------------------------------------------------------------------------
\111\ See letter from Anthem Advisors (stating that requiring
daily disclosures in a single monthly or quarterly report listing
all transactions during the preceding period would be preferable
because it would more easily accessed in EDGAR and more easily
understood).
---------------------------------------------------------------------------
Quarterly reporting of biweekly data or limited daily
information; \112\
---------------------------------------------------------------------------
\112\ See letter from Home Depot (recommending, as an
alternative, supplementing current Item 703 disclosure with a list
of dates on which repurchases were made, without the daily volume).
---------------------------------------------------------------------------
Monthly reporting of daily data; \113\
---------------------------------------------------------------------------
\113\ See letter from Cravath (stating that monthly disclosure
of daily data would strike a better balance between the benefits of
the information and the negatives of abuse, noise, and the need to
correct failed trades).
---------------------------------------------------------------------------
Monthly reporting of biweekly data; \114\
---------------------------------------------------------------------------
\114\ See letter from Home Depot (offering this frequency and
period as an alternative to its prior recommendation of quarterly
reporting of biweekly data).
---------------------------------------------------------------------------
Monthly reporting of monthly data; \115\ and
---------------------------------------------------------------------------
\115\ See, e.g., letters from Armstrong, Chamber II, DLA Piper,
Guzman, HP, Morris, NAM, Quest, SCG, SIFMA II, Simpson Thacher, and
Stephens.
---------------------------------------------------------------------------
Weekly reporting of weekly data.\116\
---------------------------------------------------------------------------
\116\ See, e.g., letters from BrilLiquid, Guzman, Hecht, and
Pentacoff.
---------------------------------------------------------------------------
Moreover, one commenter supported the proposal to allow Form SR to
be furnished to the Commission instead of filed, stating that
``inadvertently submitting incorrect data'' on the form should not
``automatically open the door'' to private litigation, particularly
section 11 claims,\117\ and another commenter suggested that the final
amendments include a safe harbor permitting issuers to correct Form SR
errors without liability within four business days of the end of the
calendar month in which corrections are identified.\118\ Some
commenters asked the Commission to provide more specificity around the
materiality standard governing amendments to Form SR, and recommended
either a three or five percent misstatement threshold.\119\ One
commenter disagreed with any materiality threshold, stating that such a
threshold would be more confusing than beneficial.\120\
---------------------------------------------------------------------------
\117\ See letter from NASAA.
\118\ See letter from Cravath.
\119\ See, e.g., letters from Hecht and NASAA.
\120\ See letter from ICGN.
---------------------------------------------------------------------------
b. Comments on Exemptions for Certain Issuers
Several commenters discussed whether the Commission should exempt
certain categories of issuers from the amendments.\121\ Commenters were
split between their support for,\122\ and opposition to,\123\ exempting
FPIs from the proposed quantitative daily disclosure requirements. The
commenters that supported an exemption were generally concerned that
requiring FPIs to file Form SR would deviate from the Commission's
historic practice of deferring to an FPI's home country disclosure
requirements, and some claimed that applying the proposed amendments to
FPIs would subject them to multiple, differing disclosure regimes.\124\
---------------------------------------------------------------------------
\121\ See, e.g., letters from ABA Committee, ACCO, Alternative &
Direct Investment Securities Association (Mar. 31, 2022)
(``ADISA''), Better Markets I, BPI & Amer. Bankers Assoc.,
BrilLiquid, Canadian Bankers Association (Mar. 31, 2022) (``CBA''),
CFA Institute, CII, Cravath, Hecht, IBC, ICGN, ICI I, Nareit (Mar.
31, 2022) (``Nareit''), NYC Bar, NYSE, Profs. Lewis and White,
Roosevelt, SIFMA II, Sullivan, Teachers Insurance and Annuity
Association of America (Apr. 1, 2022) (``TIAA''), TotalEnergies SE
(Apr. 1, 2022) (``TotalEnergies''), and Vereniging Effecten
Uitgevende Ondernemingen (Mar. 30, 2022) (``VEUO''). Additionally,
one commenter recommended exempting from the amendments repurchases
of an issuer's preferred stock. See letter from Vicki Owen (Jan. 19,
2023).
\122\ See, e.g., letters from ABA Committee, CBA, Cravath, NYC
Bar, NYSE, SIFMA II, Sullivan, TotalEnergies, and VEUO.
\123\ See, e.g., letters from Better Markets I, BrilLiquid, CFA
Institute, CII, Hecht, ICGN, and Roosevelt.
\124\ See, e.g., letters from SIFMA II, TotalEnergies, and VEUO.
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One commenter asserted that applying the amendments to FPIs would
discourage foreign companies from listing on U.S. exchanges.\125\ Other
commenters requested that the Commission clarify that the final
amendments would not apply to Multijurisdictional Disclosure System
(``MJDS'') filers.\126\ Some commenters recommended that, at a minimum,
FPIs that are required to provide share repurchase information in their
home country disclosures, and include that information in their filings
on Form 6-K, should be exempt from the proposed quantitative daily
disclosure amendments.\127\ Some of these commenters indicated that
FPIs should not be required to disclose the total number of shares
repurchased in their home countries in reliance on the safe harbor in
Rule 10b-18 nor the total number of shares purchased pursuant to a plan
that is intended to satisfy the affirmative defense conditions of Rule
10b5-1(c) because that information is not likely to provide any
meaningful information to U.S. investors.\128\
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\125\ See letter from NYC Bar.
\126\ See, e.g., letters from ABA Committee, BCE Inc. (Mar. 30,
2022), CBA, Jones Day, and Sullivan.
\127\ See, e.g., letters from SIFMA II, Sullivan, and VEUO.
\128\ See, e.g., letters from SIFMA II and VEUO.
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Most commenters that discussed the issue asserted that the final
amendments should not provide an exemption to smaller issuers.\129\
Nonetheless, one of these commenters recommended that, if the
Commission adopts a next-day reporting requirement, it should provide
smaller reporting companies
[[Page 36013]]
(``SRCs'') \130\ with additional time to furnish their Form SR.\131\
Another commenter suggested that smaller companies should have
simplified reporting requirements, such that they not be required to
provide their Form SR as frequently as other issuers.\132\ One
commenter recommended that SRCs' repurchase reporting threshold be
based on a five percent volume trigger.\133\ Other commenters, however,
asserted that applying the amendments to smaller issuers would be
onerous and unnecessary \134\ and would place an increased burden \135\
on those issuers.
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\129\ See, e.g., letters from ABA Committee, Better Markets I,
BrilLiquid, CFA Institute, Cravath, ICGN, and Hecht.
\130\ ``Smaller reporting company'' is defined in Securities Act
Rule 405 and 17 CFR 240.12b-2 as an issuer that is not an investment
company, an asset-backed issuer (as defined in 17 CFR 229.1101), or
a majority-owned subsidiary of a parent that is not an SRC and that:
(1) Had a public float of less than $250 million; or (2) had annual
revenues of less than $100 million and either: (a) no public float;
or (b) a public float of less than $700 million.
\131\ See letter from Cravath.
\132\ See letter from Hecht.
\133\ See letter from ABA Committee (explaining that ``[s]etting
the Form 8-K threshold at 5% of the total shares outstanding would
be consistent with how SRCs are treated with respect to disclosures
under current Item 3.02 for dilutive issuances in private
transactions,'' and that ``this accommodation would not result in a
meaningful loss of information to investors'').
\134\ See letter from ACCO.
\135\ See letter from Profs. Lewis and White.
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Additionally, one commenter recommended exempting issuers without
an established market for their securities because, in its view,
investors receive little informational value from this disclosure and
there is minimal risk of opportunistic repurchases in such cases.\136\
Another commenter recommended exempting publicly traded government
contractor companies.\137\ A few commenters suggested exempting
regulated banking institutions from the proposed amendments because
those issuers are already required to disclose their regulatory capital
requirements and capital planning process, so the repurchase
information in the proposed amendments would not be necessary for
investors.\138\ One of these commenters acknowledged that the
information required by banking regulators ``does not directly align
with the share-repurchase-specific disclosure the SEC is proposing to
require,'' though the commenter also asserted that such information
``nevertheless provides investors with insights into firms' capital
planning processes and actions.'' \139\
---------------------------------------------------------------------------
\136\ See letter from Publix Super Markets, Inc. (Jan. 10, 2023)
(``Publix''). The commenter also notes that the Inflation Reduction
Act exempts such companies from the excise tax and, therefore,
asserts that a similar exemption should apply here.
\137\ See letter from PSC. The commenter stated that that the
proposed daily reporting requirements would increase costs and offer
no identifiable benefit to publicly traded government contractor
companies because those firms are able to do business only with the
government, so their costs must be covered by their government
customers. As a result, adding the daily disclosure requirements to
these firms would make them less competitive and force them out of
the public markets.
\138\ See, e.g., letters from BPI & Amer. Bankers Assoc. and
IBC.
\139\ See letter from BPI & Amer. Bankers Assoc.
---------------------------------------------------------------------------
Some commenters asserted that Listed Closed-End Funds \140\ should
be exempt from the proposed quantitative daily disclosure amendments
because, given the way the funds are structured, they believe that the
concerns motivating the proposal are absent. Other commenters disagreed
and asserted that Listed Closed-End Funds should be subject to the
final rule.\141\ In response to a request for comment about whether to
exempt, among other issuers, Listed Closed-End Funds from the
structured data requirement, one commenter suggested that there is a
link between having a lower public float and the likelihood of market
manipulation.\142\ Another commenter stated that many Listed Closed-End
Funds repurchase shares when the market price is below net asset value
(``NAV'') and/or to increase NAV for remaining shareholders, and that
given the close relationship between share purchases and NAV, it is
arguably more important for Listed Closed-End Funds to disclose
information regarding their planned and actual repurchase
activity.\143\ Other commenters indicated that the proposed amendments
should exempt trades associated with Rule 10b5-1 plans \144\ and
purchases made in reliance on the Rule 10b-18 safe harbor.\145\
---------------------------------------------------------------------------
\140\ See, e.g., letters from ICI I and TIAA (suggesting that,
because executive compensation is generally not tied to share price
among closed-end funds, these issuers generally have little or no
incentive to misuse share repurchases). See also letter from
Investment Company Institute (Jan. 11, 2023) (asserting that,
because the Inflation Reduction Act exempted Listed Closed-End
Funds, the final amendments should do so too). Some commenters
suggested that the Commission should also exempt ``non-listed
funds'' from the proposed amendments. See letters from ADISA and
IPA. Both the proposed and final amendments, however, would only
apply to Listed Closed-End Funds.
\141\ See letters from CFA Institute, XBRL US (Mar. 31, 2022)
(``XBRL US''), BrilLiquid, Hecht, and ICGN.
\142\ See letter from XBRL US.
\143\ See letter from CFA Institute.
\144\ See letter from PNC.
\145\ See, e.g., letters from HP and SCG.
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c. Comments on Repurchases Intended To Satisfy Rule 10b5-1(c) and
Intended To Qualify for the Rule 10b-18 Safe Harbor
Some commenters generally supported the requirements to disclose
whether repurchases were made pursuant to a Rule 10b5-1(c) plan, as
proposed.\146\ One commenter recommended requiring additional
disclosure regarding an issuer's Rule 10b5-1(c) plan, including
information on adoption, modification, suspension, or termination of
the plan; the maximum number of shares planned for sale under the plan;
and any suspensions or terminations of a planned repurchase pursuant to
such a plan.\147\ Some commenters supported the proposed disclosures
related to the Rule 10b-18 safe harbor, but recommended that the
Commission go farther by repealing Rule 10b-18 and replacing it with
bright-line limits.\148\ Another commenter generally supported the
proposed Rules 10b5-1(c) and 10b-18 disclosures, but indicated that
they should not be applied to FPIs.\149\
---------------------------------------------------------------------------
\146\ See, e.g., letters from CFA Institute, CII, and SIFMA II.
\147\ See letter from CFA Institute.
\148\ See, e.g., letters from AFREF et al.; CFA Institute; CII;
Oxfam; Prof. Palladino; and William Lazonick & Ken Jacobson,
Academic-Industry Research Network (Apr. 1, 2022) (``Lazonick &
Jacobson'').
\149\ See letter from SIFMA II.
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Other commenters opposed generally the requirements to disclose
repurchases intended to satisfy Rule 10b5-1(c) and intended to qualify
for the Rule 10b-18 safe harbor.\150\ One commenter disagreed
specifically with proposed Item 703(c)(2)(iii) and (c)(3)(v), which
would require disclosure of the terminations of Rule 10b5-1 trading
plans, or determinations not to make further purchases under a plan,
because that could lead to unfounded speculation about mergers and
acquisitions or other activities.\151\ Another commenter asserted that
requiring disclosure as to whether share repurchases were made in
reliance on the Rule 10b-18 safe harbor could cause a negative
inference against any issuer not relying on the safe harbor.\152\
---------------------------------------------------------------------------
\150\ See, e.g., letters from Cravath, Dow, Maryland Bar, and
Sullivan.
\151\ See letter from Sullivan.
\152\ See letter from Maryland Bar.
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d. Comments Concerning Requests for Clarification
Some commenters asked the Commission to clarify certain aspects of
the proposed quantitative daily disclosures on Form SR.\153\ One of
these commenters asked the Commission to provide a more precise
definition of ``share repurchase program'' because the term is not
currently ``a legal term of
[[Page 36014]]
art,'' so different issuers may use the term differently.\154\ Other
commenters claimed that the proposed amendments were ambiguous as to
when a transaction would be considered ``executed,'' particularly in
the context of ASRs.\155\ One commenter recommended that the Commission
define the terms, ``business day'' and ``before the end,'' used in the
proposed amendments establishing the Form SR deadline.\156\ Another
commenter requested that the final amendments clarify whether withhold-
to-cover shares would be encompassed by the rule and recommended that
they not be included under any final rule.\157\ Some commenters claimed
that an end of next business day deadline would prejudice issuers on
the west coast,\158\ with one of the commenters pointing out that
``those making filings on Form 4 \159\ are provided not only with two
business days to report insider transactions that are significantly
less frequent than those which would be reported under Form SR, but
such filers are given until 10 p.m. Eastern Time to file.'' \160\
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\153\ See, e.g., letters from Chamber II, Bishop, Cravath, DLA
Piper, FedEx, HudsonWest LLC (Mar. 31, 2022) (``HudsonWest''),
Simpson Thacher, Thomas Nash (Oct. 12, 2022) (``Nash''), and Wilson
Sonsini.
\154\ See letter from Cravath. The commenter suggested that
share repurchase program be defined as ``cash purchases by issuers
in the market for their own account and not for the purpose of
immediately delivering those shares to a third party in satisfaction
of a pre-existing obligation.'' Further, the commenter provided
certain items that should fall outside the definition, including:
(1) arrangements to acquire shares in the market to deliver to
shareholders participating in dividend reinvestment plans, to
employees participating in employee share purchase programs, or to
401(k) or other retirement accounts in satisfaction of ``stock
match'' commitments; (2) arrangements to facilitate the operation of
employee equity incentive plans; (3) self-tender offers; (4) net
share settlement and other transactions where a holder forfeits an
entitlement to an issuer's shares (e.g., in connection with an
option, or upon separation); and (5) cash settlement of transactions
that reference an issuer's shares, such as derivative transactions.
\155\ See, e.g., letters from Chamber II, Cravath, DLA Piper,
FedEx, HudsonWest, Simpson Thacher, and Wilson Sonsini.
\156\ See letter from Bishop.
\157\ See letter from Nash.
\158\ See, e.g., letters from Chevron and HP.
\159\ 17 CFR 249.104.
\160\ See letter from HP.
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e. Other Comments
A number of commenters asked the Commission to adopt additional
Form SR disclosure requirements that the Commission did not propose,
including the number of shares outstanding following the reported
transaction,\161\ the number of shares remaining to be purchased
pursuant to the current repurchase plan,\162\ and the highest and
lowest price paid per share.\163\ A form letter submitted by many
commenters recommended replacing the Rule 10b-18 safe harbor with a
bright-line rule and making stock repurchases beyond the bright-line
rule unlawful.\164\ The commenters also suggested a prohibition on
trading by insiders during repurchase announcements and executions of
repurchase trades within at least ten days of these events.
---------------------------------------------------------------------------
\161\ See, e.g., letters from AFREF et al. and Pentacoff.
\162\ See letter from CFA Institute.
\163\ See letter from AFREF et al.
\164\ See letter from Form Letter A.
---------------------------------------------------------------------------
A few commenters suggested alternatives for the proposed Form SR
disclosures, such as requiring the information to be disclosed as part
of Item 703 of Regulation S-K,\165\ or providing interpretive guidance
to elicit the disclosure instead of revising the Commission's
rules.\166\ Some commenters recommended that, instead of the proposed
quantitative daily share repurchase disclosures, the Commission should
require disclosure about the effect of share repurchases on executive
compensation reported under 17 CFR 229.402 (Item 402 of Regulation S-
K).\167\ One commenter asserted that the effect of share repurchases on
executive compensation pertains to an issuer's corporate governance and
should be resolved by shareholders instead of the Commission.\168\
---------------------------------------------------------------------------
\165\ See letter from SIFMA II.
\166\ See letter from Profs. Lewis and White.
\167\ See, e.g., letters from Maryland Bar and Profs. Lewis and
White.
\168\ See letter from PA Chamber.
---------------------------------------------------------------------------
With respect to the proposed requirement that Form SR disclose the
total number of shares purchased in reliance on Rule 10b-18, some
commenters suggested that issuers should only be required to disclose
whether a purchase ``was intended to comply'' with that safe harbor due
to interpretive legal questions and the speed at which market
quotations of stock prices can change.\169\ Some commenters asked the
Commission to include a phase-in period of nine to 12 months for any
final amendments that the Commission may adopt.\170\
---------------------------------------------------------------------------
\169\ See, e.g., letters from SIFMA II and Sullivan.
\170\ See, e.g., SIFMA II, Sullivan, and Wilson Sonsini.
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3. Final Amendments
We continue to believe that disclosure of issuers' total
repurchases made each day would benefit investors and markets. The
final amendments require the same additional detail regarding an
issuer's daily repurchase activity, as proposed. Moreover, to make this
information readily available for analysis, the final amendments
require that the share repurchase information that is disclosed be
reported using Inline XBRL, also as proposed.
However, although the final amendments require daily repurchase
disclosure, as proposed, the final amendments require a different
deadline and manner of disclosure. In response to commenters'
objections, the final amendments do not require issuers to provide
their daily repurchase disclosure one business day after execution of
their share repurchase order.\171\ Rather, in a change from the
proposal, the final amendments require:
---------------------------------------------------------------------------
\171\ As discussed above, see supra Section III.A.2.d., a number
of commenters requested that we clarify certain aspects of the
proposed amendments. See, e.g., letters from Chamber II, Bishop,
Cravath, DLA Piper, FedEx, HudsonWest, Nash, Simpson Thacher, and
Wilson Sonsini. As a result of the changes from the proposed
amendments to the final amendments, most of these requests are no
longer applicable. Those clarification requests still applicable for
the final amendments are addressed in the appropriate places in this
release.
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Corporate issuers that file on domestic forms to disclose
the total repurchases made each day for the quarter in an exhibit to
their Form 10-Q and Form 10-K (for their fourth fiscal quarter);
Listed Closed-End Funds to disclose daily quantitative
repurchase data in their semi-annual and annual reports on Form N-CSR;
and
FPIs reporting on the FPI forms to disclose daily
quantitative repurchase data at the end of every quarter in new Form F-
SR,\172\ which will be due 45 days after the end of each of the
issuer's fiscal quarters.\173\
---------------------------------------------------------------------------
\172\ See supra note 24.
\173\ The final amendments adopt new Rule 13a-21, as proposed,
which requires applicable FPIs to file a Form F-SR.
---------------------------------------------------------------------------
After considering the comments, we believe that providing the same
detail as was proposed but on a less frequent basis would avoid many of
the costs that commenters noted while still providing important
disclosures that address the informational deficiencies in current
reporting that we have identified. Accordingly, the final amendments
require issuers to disclose their daily quantitative share repurchase
information periodically in quarterly or semi-annual reports
(``periodic reporting'') instead of requiring issuers to disclose it on
a daily basis, as proposed.
Although periodic reporting of daily quantitative data will provide
less frequent repurchase disclosures to investors than would daily
reporting of that data, periodic reporting will still provide investors
with most of the benefits that daily reporting would offer, but at a
lower cost to issuers. In fact, the costs to issuers may be only
incremental because issuers are already reporting share repurchases by
month in their
[[Page 36015]]
periodic reports. Investors will be able to use the granular daily
quantitative data to evaluate an issuer's repurchases in more detail,
including in the context of other point-in-time disclosures, such as
executive compensation and financial statement disclosures.
While this periodic reporting will, in most cases, result in daily
quantitative repurchase data that are available to investors later than
was proposed, investors may well find the disclosure more meaningful
when considered as part of the overall pattern of the issuer's
repurchases, because they will be able to evaluate the efficiency of
the share repurchases based on when the issuer repurchased its shares
and the issuer's stated reasons for doing so. Moreover, this periodic,
rather than daily, reporting should mitigate any concerns raised by
commenters about the potential misinterpretation of an issuer's day-to-
day changes in trading activity \174\ that could cause unjustified
stock price volatility \175\ or disrupt confidential merger or
acquisition discussions.\176\ Additionally, while some commenters
expressed concern that investors might use daily quantitative
disclosure data to gain insight into or identify the issuer's trading
strategies,\177\ as other commenters observed, the move to periodic
reporting should substantially mitigate any such concern.\178\
---------------------------------------------------------------------------
\174\ See, e.g., letters from Business Roundtable, Davis Polk,
Dow, FedEx, Home Depot, Kaswell, Profs. Lewis and White, NAM, PNC,
Quest, Shearman, SIFMA II, Simpson Thacher, T. Rowe Price, Wilson
Sonsini, and Vistra.
\175\ See, e.g., letters from Cravath, Davis Polk, Profs. Lewis
and White, and SCG.
\176\ See, e.g., letters from Davis Polk, PNC, SIFMA II, and
Sullivan.
\177\ See, e.g., letters from Home Depot and PNC.
\178\ See, e.g., letters from Cravath and Davis Polk.
---------------------------------------------------------------------------
We acknowledge, as a commenter observed, that periodic reporting
will provide information to the market more slowly than the two-
business day maximum delay associated with insider reporting of changes
in beneficial ownership on Form 4.\179\ While both issuer and insider
trades may reflect managers' views of an issuer's value, we recognize
that the much greater frequency of issuer trades pursuant to repurchase
plans relative to trades by individual insiders likely would result in
considerably more frequent reporting by issuers, and thus in greater
costs than those incurred by insiders reporting their transactions on
Form 4. In addition, because of this greater frequency of trading,
there would be a greater risk (as compared to insider transactions)
that daily reporting would allow other market participants to trade
strategically in response to issuer disclosures and greater potential
harm to investors as a result. Further, we believe that even with
periodic reporting investors will still be able to use periodic
reporting of daily repurchases to identify potentially opportunistic
behavior, and that issuers will take into account that likelihood when
determining their trading behavior.
---------------------------------------------------------------------------
\179\ See letter from Roosevelt (asserting that the Commission
should adopt daily reporting ``for similar reasons that Form 4
requires daily disclosure'').
---------------------------------------------------------------------------
The final amendments require daily share repurchase disclosure on a
quarterly basis in Forms 10-Q and 10-K (for the issuer's fourth fiscal
quarter) for corporate issuers reporting on domestic forms and on a
semi-annual basis in Form N-CSR for Listed Closed-End Funds.
Quantitative share repurchase disclosures, aggregated on a monthly
basis, are already required in those forms.\180\ The final amendments
require the disclosure of additional detail with respect to the
already-reported share repurchases. Therefore, investors should be
familiar with looking to these filings for repurchase information.
Moreover, this change should lessen the burden for issuers compared
with the proposal because they are accustomed to providing repurchase
information in these periodic filings. As one commenter noted, it would
be useful for the issuer's transactions to be disclosed in periodic
reports for ``the ease of use and access to information for those who
access EDGAR using the SEC website.'' \181\
---------------------------------------------------------------------------
\180\ Due to the new daily quantitative repurchase disclosure
requirements, we are eliminating the current requirement to provide
quantitative share repurchase disclosures on a monthly basis because
it would be redundant. See infra note 218 and accompanying text.
\181\ See letter from Anthem Advisors.
---------------------------------------------------------------------------
Listed Closed-End Funds will be required to provide their daily
share repurchase disclosures on Form N-CSR on a semi-annual basis. Like
Forms 10-Q and 10-K, Form N-CSR currently requires the disclosure of
quantitative share repurchase disclosures on a semi-annual basis so
investors should likewise be familiar with looking in this filing for
repurchase information. We are subjecting Listed Closed-End Funds to
the final amendments because, although not all of the motivations for
corporate issuer share repurchases apply to them due to differences in
the business model and organizational structure of a fund as compared
to a corporate issuer, investors in Listed Closed-End Funds also will
benefit from the opportunity to evaluate the purposes, impacts, and
efficiency of share repurchases and to understand the impact of such
activity on the value of their investments. As one commenter observed
in opposing an exemption for Listed Closed-End Funds, this interest may
be particularly strong given the close relationship between share
repurchases and NAV, which the commenter believed made it arguably more
important for Listed Closed-End Funds to disclose quantitative and
qualitative information regarding planned and actual repurchases.\182\
Relatedly, absent the additional information required by the final
amendments--including daily quantitative repurchase data--it would be
difficult for investors in Listed Closed-End Funds to distinguish
between price movements that are attributable to repurchase activity as
opposed to other market activity impacting share price.\183\ Further,
as noted by another commenter, disclosure may be of particular
importance for issuers with lower floats, such as Listed Closed-End
Funds, because such issuers may face a greater likelihood that
repurchases will have a significant effect on share price.\184\
---------------------------------------------------------------------------
\182\ See Letter from CFA Institute.
\183\ See Proposing Release, supra note 2, at 8460-8461.
\184\ See letter from XBRL US.
---------------------------------------------------------------------------
The final amendments will require FPIs that report using the FPI
forms to provide disclosure of daily repurchase data on new Form F-SR,
which is to be filed with the Commission quarterly. The Form F-SR will
be due 45 days after the end of the FPI's fiscal quarter to be
consistent with the latest deadline for a quarterly report on Form 10-
Q.\185\ FPIs that report on the FPI forms do not have a quarterly
reporting obligation under the Exchange Act and generally provide
repurchase disclosure only in their annual report on Form 20-F. Our
reasons for adopting quarterly reporting of daily repurchases for FPIs
reporting on the FPI forms are the same as for corporate issuers
reporting on domestic forms.\186\ In addition, similar to the
[[Page 36016]]
amendments we are adopting to our domestic forms, we are eliminating
the requirement in Form 20-F to provide quantitative share repurchase
disclosures on a monthly basis.\187\
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\185\ We are requiring a deadline for the Form F-SR of 45 days
after the end of the fiscal quarter for all four quarters, including
the final quarter of the fiscal year. While domestic corporate
filers receive additional time to file a Form 10-K following the
final quarter of their fiscal year, relative to the time for other
quarterly filings, this extended period is due to the additional
materials that must be included in the Form 10-K. Since no such
difference would exist for the fourth-quarter Form F-SR, we are
requiring a uniform filing deadline after each quarter.
\186\ See letter from CII (stating that issuers that file on
domestic forms and FPIs that file on the FPI forms should be subject
to the same filing obligations). In addition, because FPIs are more
similar to corporate issuers filing on domestic forms than Listed
Closed-End Funds, we are keeping the disclosure frequency consistent
with such corporate issuers. Similarly, we do not believe that semi-
annual reporting of daily repurchase information would be
appropriate for FPIs that do not file on domestic forms for the same
reasons. Therefore, we believe that corporate issuers that file on
domestic forms and FPIs that file on the FPI forms should be subject
to the same filing obligations.
\187\ Form F-SR contains an instruction stating that the
information reported on the form relates to the issuer's securities
in ordinary share form, whether the issuer has repurchased the
shares itself or depositary receipts that represent the shares.
---------------------------------------------------------------------------
When it adopted the Item 703 disclosure requirements in 2003, the
Commission stated that it expected the Item 703 disclosures to provide
investors and the marketplace with important information regarding an
issuer's repurchase activity that would allow them to assess the impact
of an issuer's share repurchases on the issuer's stock price, similar
to periodic disclosure of issuer earnings and dividend payouts.\188\
Disclosure of a monthly aggregation of repurchases, however, does not
always allow investors to assess whether, for example, the bulk of an
issuer's repurchases were made in advance of a specific date, such as
the date on which incentive targets for compensatory awards are
measured or the day material nonpublic information is released to the
public.
---------------------------------------------------------------------------
\188\ See 2003 Adopting Release, supra note 5, at 64962. We
disagree with the commenter who asserted that ``the Commission's
analysis . . . does not sufficiently explain its apparent reversal
of the prior position that the appropriate way to promote
efficiency, competition, and capital formation is to `minimize the
market impact of the issuer's repurchases, thereby allowing the
market to establish a security's price based on independent market
forces without undue influence by the issuer' '' and that this is
not accomplished by ``highlighting them in daily disclosures.'' See
letter from Chamber II. In 2003, the Commission stated that ``Rule
10b-18's safe harbor conditions are designed to minimize the market
impact of the issuer's repurchases.'' See 2003 Adopting Release,
supra note 5. This statement was not in reference to the monthly
repurchase disclosures the Commission adopted at the same time in
Item 703, which the Commission stated were ``intended to enhance the
transparency of issuer repurchases.'' Id. As noted throughout this
release, the amendments we are adopting are similarly intended to
enhance the transparency of issuer repurchases.
---------------------------------------------------------------------------
The Commission proposed additional share repurchase disclosures to
provide investors with further insight into the details of an issuer's
share repurchases, which when combined with other information available
about the issuer, could diminish informational asymmetry, enhance
transparency, and enable investors to undertake a more thorough
assessment of issuer share repurchases.\189\ Investors could use this
more detailed disclosure to monitor and evaluate issuer share
repurchases and their effects on the market for the issuer's
securities.
---------------------------------------------------------------------------
\189\ See Proposing Release, supra note 2, at 8446.
---------------------------------------------------------------------------
In some circumstances, such as when repurchases may affect the
value of compensatory awards to executives or the amount for which
executives can sell such awards, issuers may have incentives to engage
in share repurchases for reasons other than to increase or signal the
issuer's fundamental value. In addition, issuers are repurchasing their
own securities, so they will typically have significantly more, as well
as more detailed, information about the issuer and its future
prospects. Thus, as we have described above, investors will benefit
from having additional disclosures that will enable them to evaluate
the efficiency of share repurchases or determine a pattern of when
repurchases could be timed to affect compensation or to benefit from
material nonpublic information, among other possible uses of daily
repurchase data, thereby increasing investor confidence.
We disagree with commenters who asserted that we have not
identified a ``market failure'' that would justify the additional
disclosures.\190\ In particular, these commenters asserted that there
is no market failure because information asymmetry is advantageous to
markets in that it incentivizes some market actors to expend resources
developing information that would be relevant to an issuer's share
price.\191\ We disagree with these arguments. As the sources cited by
the commenters themselves point out, informational asymmetries are not
necessary to incentivize the production of information.\192\ In the
case of repurchases, relevant information about stock repurchases is
often nonpublic, and thus not typically discoverable by third parties,
including investors, who would benefit from the additional information
conveyed by daily repurchase disclosures. We discuss in more detail the
market failures addressed by the amendments in the Economic Analysis
section, below.\193\
---------------------------------------------------------------------------
\190\ See, e.g., letters from Chamber II and Profs. Lewis and
White.
\191\ Id.
\192\ See Grossman, S.J. & Stiglitz, J.E., On the Impossibility
of Informationally Efficient Markets, 70 Am. Econ. Rev. 393, 404
(1980) (noting that there is also an incentive to acquire
information if ``no one is informed'').
\193\ See infra Section V.B.1.
---------------------------------------------------------------------------
One commenter also asserted that no amendments were necessary
because investors can already glean all necessary information from
existing filings, such as through quarterly filings, mandatory
disclosures of material new repurchase plans, or potential voluntary
disclosures of data issuers deem material to investors.\194\ For
example, the commenter noted that investors can likely infer instances
when repurchases have helped an issuer hit an EPS target because
quarterly filings will reveal aggregate repurchases over the quarter as
well as earnings.\195\
---------------------------------------------------------------------------
\194\ See letter from Profs. Lewis and White.
\195\ Id.
---------------------------------------------------------------------------
While we agree these kinds of informed conclusions based on
existing quarterly data are possible, existing disclosures are
inadequate to provide investors with the information needed to fully
understand the actual impact of a repurchase. Data on daily purchases
are more informative, and so will enable more accurate assessments of
the motives for repurchases. For example, repurchases conducted in the
days immediately before the end of a fiscal quarter, at a time when the
issuer's managers are very likely to know that the issuer will miss an
EPS target, would suggest that the repurchase likely does not fully
signal the issuer's fundamental value, in a way that would not be the
case if such repurchases were conducted in an equal amount each day of
the quarter. Monthly aggregates also are unlikely to consistently
reveal whether repurchases occurred before or after award grants or
trades by executives, which could similarly signal that the repurchase
was, in part, motivated by purposes other than shareholder value.\196\
---------------------------------------------------------------------------
\196\ For this reason, we also disagree with the commenter
suggestion that we could have replaced disclosure of daily
repurchase data with a requirement that the issuer discuss the
impact repurchases may have had on managers' ability to reach
earnings per share targets in its Compensation Discussion and
Analysis (``CD&A'') required pursuant to 17 CFR 229.402(b) (Item
402(b) of Regulation S-K). See id. Such a discussion would not allow
investors to identify which repurchases may have been affected by
managers' incentives, and would not account for other avenues
through which repurchases may affect compensation, such as by
increasing stock prices shortly before a manager sells equity.
Finally, this approach would also fail to identify instances in
which issuers or their managers are driven by other concerns, such
as internal EPS targets that do not affect compensation but instead
affect reputation, retention, or relationships with creditors.
---------------------------------------------------------------------------
One commenter suggested that the amendments are not needed when the
issuer's trades would qualify for a safe harbor provision of Rule 10b5-
1.\197\ Instead, we think that the concerns that justify disclosure
apply fully in that setting. An issuer's use of a Rule 10b5-1 trading
plan would not, for example, affect executives' ability to time trades
[[Page 36017]]
to profit from repurchases. In addition, because there is no required
cooling-off period for issuers, there is an increased risk that an
issuer could adopt and then begin trading under a Rule 10b5-1 trading
plan at a time when it may be aware of material nonpublic
information.\198\ Thus, additional disclosure (including whether the
repurchase was intended to qualify for the affirmative defense under
Rule 10b5-1) is necessary for investors to evaluate the efficiency and
impacts of a repurchase.\199\
---------------------------------------------------------------------------
\197\ See letter from Cravath.
\198\ See Rule 10b5-1 Adopting Release, supra note 18, at 80369.
In the Rule 10b5-1 Adopting Release, the Commission did not adopt a
cooling-off period for issuers, stating that ``further consideration
of potential application of a cooling-off period to the issuer is
warranted.'' Id. at 80371-80372. Please see the discussion of new
Item 408(d), infra Section III.D.
\199\ For similar reasons, we disagree with the commenters who
stated that compliance with Rule 10b-18 would make the proposed
daily repurchase disclosures unnecessary. See letters from HP and
SCG. As we discuss below in this section, whether a trade is
intended to qualify for the non-exclusive safe harbor of Rule 10b-18
may help investors to understand the efficiency of a given
repurchase. In addition, the fact that a repurchase is intended to
qualify for the safe harbor does not significantly affect an
executive's ability to time a personal trade to profit from a
repurchase.
---------------------------------------------------------------------------
We also disagree with the commenter who asserted that to the extent
managers benefit from repurchases through an increased share price,
this increase also benefits other existing shareholders, and so no
disclosure is needed.\200\ Because managers can benefit from
controlling the timing or volume of repurchases, it is more difficult
for investors to interpret the extent to which repurchases increase or
signal the issuer's fundamental value. Similarly, issuers may take
actions to improve the returns on repurchases, such as real earnings
management or repurchases while aware of material nonpublic
information, that may benefit some existing shareholders, but at the
potential expense of long-term liquidity and investor confidence.\201\
Thus, notwithstanding that there may be some investors who benefit in
these scenarios, daily repurchase disclosure is necessary to protect
all investors and the efficient operation of securities markets because
daily data, in combination with other data, would allow investors to
infer when repurchases may have been timed to benefit managers or
otherwise at the expense of some investors.
---------------------------------------------------------------------------
\200\ See letter from Maryland Bar.
\201\ See, e.g., Cooper, L.A., Downes, J.F., and Rao R.P., Short
term real earnings management prior to stock repurchases, 50 Rev.
Quant. Fin. & Acct. 95 (2018) (reporting that managers use inventory
and discretionary expenses, among other items, to manipulate
reported earnings in advance of repurchases).
---------------------------------------------------------------------------
For similar reasons, we disagree with that commenter's request that
we limit new disclosures to discussion about the effects of repurchases
on an executive's compensation.\202\ While such discussion might be
generally informative about whether an issuer's repurchases may have
been affected by managerial incentives, it would not reveal which
particular repurchases were so affected, and would not address issuer
efforts to achieve particular accounting targets for reasons unrelated
to executive compensation, such as promotion, retention, or creditor
preferences.
---------------------------------------------------------------------------
\202\ See letter from Maryland Bar.
---------------------------------------------------------------------------
Further, we disagree with the suggestion by some commenters that we
abandon or delay the amendments because of the recently-enacted tax on
certain share repurchases,\203\ because we expect that the tax will not
meaningfully affect the rationales for the final amendments. As we
describe in more detail below,\204\ we acknowledge that it is possible
that the new one percent tax on some repurchases will reduce annual
repurchases from their current volume of roughly $950 billion,\205\
although some indications are to the contrary.\206\ While any reduction
in repurchase activity would potentially diminish the costs and
benefits of the final amendments, given the vast volume of current
repurchases, we believe that that there will continue to be a
compelling need for enhanced disclosure related to these transactions.
Notwithstanding a commenter's suggestion that the tax would deter
``opportunistic'' buybacks,\207\ to the extent that there are
repurchases for which managerial self-interest plays some role, we do
not expect the tax to have a significant effect on the intended
benefits of the final amendments.\208\
---------------------------------------------------------------------------
\203\ See, e.g., letters from Chamber III, Chamber V, and PSC.
\204\ See infra Section V.A.2.
\205\ See Section V.A.2 infra and note 384 and accompanying
text.
\206\ See Williams-Alvarez, J., The 1% Stock-Buyback Tax Hasn't
Slowed Repurchases. A Proposed 4% Tax Might, Wall St. Journal, Mar.
2, 2023 and Avi-Yonah, R.S., A Different Tax on Stock Buybacks,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4301215 (Dec.
13, 2022) (``[A] 1% tax on buybacks is unlikely to reduce
buybacks.'').
\207\ See letter from Chamber III.
\208\ See Moore, supra note 34 (reporting that managerial
benefit from repurchases is not sensitive to the cost of
repurchasing).
---------------------------------------------------------------------------
Although a number of commenters asserted that daily reporting of
daily data would generally result in an overload of information for
investors,\209\ our adoption of periodic reporting should significantly
reduce these concerns, as some commenters noted.\210\ In any event, we
disagree that information about issuers' daily trading will overload
investors.\211\ Rather than overloading investors with superfluous
data, the information required by the final amendments will provide
them with additional insight into the precise timing of repurchases
that they can use to evaluate the efficiency of and motives for the
issuer's share repurchases in a way that is not possible to do with the
current requirement to disclose monthly data.
---------------------------------------------------------------------------
\209\ See, e.g., letters from Dow, Kirkland Ellis, NYSE, SCG,
and Vistra.
\210\ See, e.g., letters from Anthem Advisors, Cravath, and
Jones Day.
\211\ See letter from Roosevelt (stating that the daily
repurchase disclosures would not create an overabundance of
information for investors).
---------------------------------------------------------------------------
We also disagree with commenters who asserted that more detailed
information would harm smaller retail investors by making the
information too disaggregated to easily parse.\212\ The daily data will
be required to be tagged using Inline XBRL, so these investors and
other market participants will be able to collate that daily data to
another level of detail to suit their level of sophistication. In some
instances, monthly data fail to reveal key details about repurchase
activity, such as whether repurchases occur before or after release of
material nonpublic information.
---------------------------------------------------------------------------
\212\ See, e.g., letters from ACLI, Armstrong, ASA, Chevron,
Cravath, Dow, Guzman, Hecht, Home Depot, Jones Day, NYSE, PNC,
Profs. Lewis and White, Quest, SCG, Shearman, SIFMA II, and Simpson
Thacher.
---------------------------------------------------------------------------
Furthermore, greater transparency ultimately benefits all
investors. For example, newly available data may incentivize
intermediaries, such as investment advisers, to develop the capacity to
analyze the data and provide their analysis to retail or other
clients.\213\ Additionally, to the extent that some traders may have
greater capacity to quickly analyze information about daily
repurchases,\214\ our adoption of periodic reporting should mitigate
any such advantage by allowing for fewer arbitrage opportunities.
---------------------------------------------------------------------------
\213\ Cf. letter from Profs. Lewis and White (arguing that
information asymmetry incentivizes market actors to acquire
information for use by others).
\214\ See, e.g., letters from ACCO, Armstrong, ASA, BPI & Amer.
Bankers Assoc., Business Roundtable, Cato, Chevron, Coalition,
Cravath, Davis Polk, DLA Piper, Dow, Empire, FedEx, Guzman, Home
Depot, HP, IBC, Jones Day, NAM, NYC Bar, Norfolk Southern, PA
Chamber, Paul Weiss, PNC, Profs. Lewis and White, Quest, Shearman,
SIFMA II, SCG, Simpson Thacher, Stephens, Sullivan, T. Rowe Price,
Vistra, and Wilson Sonsini.
---------------------------------------------------------------------------
Relatedly, some commenters raised concerns that daily disclosures
would result in disclosure of information that is not material to
investors,\215\ or asked
[[Page 36018]]
the Commission to include a materiality standard in the final
amendments.\216\ We considered, but rejected, suggestions by these
commenters to require disclosure only of material daily repurchases,
such as repurchases that in the daily aggregate represent one percent
or more of the issuer's outstanding shares. As we have explained, we
believe that in many cases it is not only the amount, but also the
timing of, repurchases that makes them informative to investors.
Assessments of materiality for every repurchase conducted by the issuer
would add significant costs. Further, limiting disclosures to a volume
threshold, such as relatively large aggregate daily purchases, whether
a set one percent figure or otherwise, could encourage issuers that
prefer to avoid disclosure to inefficiently divide their planned
transactions over multiple days or weeks, as pointed out by one
commenter.\217\
---------------------------------------------------------------------------
\215\ See letter from Profs. Lewis and White.
\216\ See, e.g., letters from Hecht and NASAA.
\217\ See letter from SIFMA II (stating that issuers may limit
their average daily trading volume to try to ensure that
sophisticated investors view the daily trades as immaterial, even if
a larger volume would be more beneficial to shareholders).
---------------------------------------------------------------------------
We recognize that certain issuers could conduct a number of daily
repurchases every quarter, which may result in lengthy additional
disclosures in a filing. To 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. Listed Closed-End Funds will be required
to provide their daily repurchase data in the body of Form N-CSR and
FPIs that report on the FPI forms will be required to provide their
daily repurchase data in the body of Form F-SR. Form N-CSR contains
information on a range of specific topics (such as a fund's code of
ethics or, in this case, repurchases) such that providing share
repurchase disclosures in the body of the form presents fewer
readability concerns. On the other hand, Form F-SR will be used
exclusively to report daily repurchase data, so there is no concern
that the daily repurchase data will obscure other disclosures in that
form.
In another change from the proposal, the final amendments will
require the daily repurchase data to be filed instead of furnished.
Because daily repurchase data will be provided on a quarterly or semi-
annual basis, depending on the status of the issuer, the liability
concerns that may have been raised by a requirement to file daily
repurchase data within the proposed one business day timeframe are
alleviated. The issuer will have more time to obtain, verify, and
compile the disclosure compared to the proposal. As a result, we find
it appropriate for issuers to be subject to Exchange Act section 18
liability for the new repurchase disclosure, as they are currently for
filings under Item 703 of Regulation S-K, and the information will be
deemed incorporated by reference into filings under the Securities Act,
which will be subject to Securities Act section 11 liability.
Additionally, the final amendments eliminate the requirement in
current Item 703(a) of Regulation S-K that issuers disclose their
monthly quantitative repurchase data in their periodic reports.\218\
Presently, Item 703 requires corporate issuers reporting on domestic
forms to provide monthly quantitative repurchase data on a quarterly
basis in their Form 10-Qs and Form 10-Ks (for the issuer's fourth
fiscal quarter), Item 16E of Form 20-F requires FPIs to provide monthly
repurchase data in their annual reports on Form 20-F, and Item 14 of
Form N-CSR requires Listed Closed-End Funds to provide monthly
repurchase data in their semi-annual reports on Form N-CSR. In light of
the new requirements to disclose daily repurchase data, we no longer
believe this information is necessary. To the extent that investors,
market participants, and others are interested in monthly repurchase
data, they will be able to collate that data themselves, including by
using Inline XBRL.
---------------------------------------------------------------------------
\218\ Additionally, the final amendments move much of disclosure
in current Item 703(b) to new Item 703(a) and new Item 601(b)(26).
---------------------------------------------------------------------------
Consistent with the proposal, the final amendments do not include
any exemptions.\219\ We have not exempted any category of issuer
because disclosure of daily repurchase data benefits all investors in
issuers that conduct repurchases.\220\ Additionally, to the extent that
certain issuers, such as SRCs, have relatively high information
asymmetries, disclosure about their repurchases may be more informative
to investors. Moreover, although some issuers may provide similar
information to other regulators, requiring all issuers to comply with
the final amendments facilitates investor access because the
information will be disclosed in a common location. In the case of
financial institutions, while one commenter asserted that capital
regulations by other regulators would prevent the institutions from
engaging in opportunistic repurchases,\221\ we are not aware of any
specific regulations that would prevent executives at those
institutions from profiting from repurchases, or that would limit
repurchases at times the institution's managers are aware of material
nonpublic information. We do not believe that any general insights into
an issuer's capital planning that financial-institution regulations
might offer will provide the level of detail investors would receive
from disclosure of daily trade data and specific qualitative discussion
of repurchase policies.
---------------------------------------------------------------------------
\219\ MJDS filers currently do not provide repurchase disclosure
analogous to Item 703 (for filers on the domestic forms) or Item 16E
for foreign private issuers that report using Form 20-F. Consistent
with that approach, we are not imposing the amended repurchase
disclosure requirements on Canadian issuers that file using the MJDS
because those issuers are subject to a separate reporting regime.
Under the MJDS, eligible Canadian issuers may satisfy certain
securities registration and reporting requirements of the Commission
by providing disclosure documents prepared in accordance with the
requirements of Canadian securities regulatory authorities. See
Multijurisdictional Disclosure and Modifications to the Current
Registration and Reporting System for Canadian Issuers, Release No.
33-6902 (Jun. 21, 1991) [56 FR 30036 (July 1, 1991] (``MJDS
Release'').
\220\ As noted above, several commenters recommended that we
exempt issuers conducting repurchases with respect to securities
that are not traded on an exchange from the daily repurchase
disclosures. See letters from Nareit and Publix. However, as
discussed in Section V.D.3, such an exemption would deprive
investors in these issuers of the informational benefits of the
final amendments, which might be relatively more consequential for
investors in issuers with a thin trading market or without a trading
market that lack the price discovery from active trading. In
addition, we note that these issuers are already required to provide
share repurchase disclosures under existing Item 703.
\221\ See letter from BPI & Amer. Bankers Assoc.
---------------------------------------------------------------------------
Moreover, the commenter suggested that the final amendments would
encourage dividend distributions instead of share repurchases as the
preferred mechanism for returning capital to shareholders, which would
tend to undermine banks' fiscal soundness and, the commenter suggests,
be inconsistent with Federal Reserve policies, because dividends
represent a more binding commitment of future resources.\222\ As with
other issuers, we do not believe the amendments significantly affect
the relative appeal of repurchases for financial institutions, and even
if so, are also aware that financial institutions may have other
alternatives to traditional dividends, such as special dividends, that
may not raise the same concerns with respect to the commitment of
future resources.
---------------------------------------------------------------------------
\222\ See id.
---------------------------------------------------------------------------
In addition, our adoption of quarterly disclosures mitigates some
of the concerns of commenters seeking an exemption for various issuer
categories,\223\ which discussed the
[[Page 36019]]
burden of the proposed requirement to provide daily repurchase data one
business day after execution of the issuer's share repurchase order.
The final amendments do not require issuers to provide daily repurchase
data the day after execution. As a result, we expect the change from
the proposal to require quarterly reporting (or semi-annual reporting
for Listed Closed-End Funds) to substantially alleviate commenters'
cost concerns for all issuer categories.\224\
---------------------------------------------------------------------------
\223\ See letters from ABA Committee, ACCO, ADISA, Better
Markets I, BPI & Amer. Bankers Assoc., BrilLiquid, CBA, CFA
Institute, CII, Cravath, Hecht, IBC, ICGN, ICI I, Nareit, NYC Bar,
NYSE, Profs. Lewis and White, Roosevelt, SIFMA II, Sullivan, TIAA,
TotalEnergies, and VEUO.
\224\ See, e.g., letters from ICI I (stating that, in the event
the Commission determines to apply the proposal to Listed Closed-End
Funds, it should ``exclude them from the Form SR reporting
requirements and, instead, require funds to provide the daily
information less frequently in their Form N-CSR'' because of ``the
unique characteristics of funds, including their status as pass-
through investment vehicles with disclosed NAVs that promptly
reflect the effects of share repurchases, and the diminished
concerns that fund insiders will misuse share repurchases for their
own self-interest'') and Roosevelt (stating generally that ``it is
likely that these foreign issuers are already disclosing this
information in other jurisdictions, so would not incur compliance
costs'').
---------------------------------------------------------------------------
Additionally, we note that some commenters asked the Commission
specifically to exempt FPIs that are required to provide share
repurchase information in their home country disclosures and furnish
that information on Form 6-K.\225\ Consistent with our requirements
generally,\226\ if an FPI's home country disclosures furnished on a
Form 6-K satisfy the Form F-SR requirements, it can incorporate by
reference its Form 6-K disclosures into its Form F-SR. Therefore, we do
not believe such an exemption is necessary. FPIs that already disclose
daily data in another jurisdiction will experience only incremental
burdens in reporting those transactions. While these data may already
be available to some investors, making them accessible to all
investors, at the same frequency as for corporate issuers that file on
domestic forms, will allow investors to receive the same information
for FPIs as they receive for corporate issuers that file on domestic
forms, regardless of the form FPIs choose to use.\227\ To the extent
that these disclosures may benefit an issuer's competitors, placing FPI
filing obligations on the same tempo as corporate issuers that file on
domestic forms will also help to level competition between FPIs and
those issuers.
---------------------------------------------------------------------------
\225\ See, e.g., letters from SIFMA II, Sullivan, and VEUO.
\226\ See 17 CFR 240.12b-23.
\227\ One commenter asserted that EU regulations with respect to
insider trading and market manipulation reduce the need for
additional disclosure with respect to repurchases. See letter from
VEUO. We disagree with this suggestion for essentially the same
reasons we disagree with commenters who made similar arguments
regarding Rules 10b5-1 and 10b-18.
---------------------------------------------------------------------------
Other commenters requested that FPIs not be required to disclose
the total number of shares repurchased in their home countries in
reliance on the safe harbor in Rule 10b-18 nor the total number of
shares purchased pursuant to a plan that is intended to satisfy the
affirmative defense conditions of Rule 10b5-1(c).\228\ We believe,
however, that these disclosures help investors to understand the
purposes for a repurchase. The final amendments, therefore, include
those disclosure requirements. To the extent that issuers do not rely
on the safe harbor or affirmative defense for trades conducted outside
the United States, any disclosure obligation on FPIs will be minimal.
If such issuers are concerned about any negative inferences, they may
include additional disclosure explaining why they chose not to rely on
such safe harbor or affirmative defense.
---------------------------------------------------------------------------
\228\ See, e.g., letters from SIFMA II and VEUO.
---------------------------------------------------------------------------
We are revising the proposed requirement to disclose whether
purchases were ``made in reliance on'' the Rule 10b-18 non-exclusive
safe in response to commenters' concerns that issuers are only able to
indicate their intent to comply with the safe harbor. The final rule
will therefore require disclosure of purchases that were ``intended to
qualify for'' the safe harbor.\229\
---------------------------------------------------------------------------
\229\ See, e.g., letters from SIFMA II and Sullivan. We note the
commenters suggested that we adopt the phrase ``intended to comply
with'' the safe harbor, but we believe it is more clear to require
that issuers disclose whether trades were ``intended to qualify
for'' the safe harbor.
---------------------------------------------------------------------------
We have also modified the manner in which issuers will report
certain information relating to Rules 10b-18 and 10b5-1. Proposed Form
SR would have required issuers to disclose, in a table, the total
number of shares purchased daily in reliance on Rule 10b-18 or intended
to qualify for the affirmative defense provisions of Rule 10b5-1(c).
The proposed amendments to Item 703, Form 20-F, and Form N-CSR would
have similarly required issuers to disclose, by footnote to their
monthly repurchase table or the narrative accompanying the table, the
number of shares purchased in reliance on Rule 10b-18 and the number
intended to qualify for the affirmative defense provisions of Rule
10b5-1(c) (and if so, the date(s) the plan was adopted or terminated).
The final amendments require issuers to disclose, in tabular form,
the number of shares purchased daily in reliance on Rule 10b-18 or
intended to qualify for the affirmative defense provisions of Rule
10b5-1(c), as proposed. In a change from the proposal, the final
amendments also require issuers to disclose, by footnote to the daily
repurchase table, the date any plan that is intended to satisfy the
affirmative defense conditions of Rule 10b5-1(c) for the shares was
adopted or terminated. The proposed amendments would have required this
information in the narrative disclosures accompanying the monthly
repurchase table required by Item 703, Form 20-F, and Form N-CSR. After
changing the frequency that issuers must provide their daily
quantitative share repurchase disclosure from one business day after
execution, as proposed, to quarterly or semi-annually in the final
amendments, and deleting the monthly repurchase table from Item 703,
Form 20-F, and Form N-CSR, we believe that requiring this Rule 10b-18
and Rule 10b5-1(c) information in both the table and the narrative
discussion would be duplicative. Requiring this information with the
table would be more efficient for issuers and easier to understand for
investors.
Contrary to some commenters, we believe that whether an issuer
intended to make use of Rule 10b-18 or Rule 10b5-1 in conducting its
repurchases provides useful information to investors. The disclosure as
to whether purchases were intended to qualify for the Rule 10b-18 non-
exclusive safe harbor or the affirmative defense under Rule 10b5-1
provides investors with deeper insight into how an issuer has
structured and designed its repurchase program. The disclosure with
respect to Rule 10b-18 allows investors to gauge whether the given
repurchase program is designed to ``minimize the market impact of the
issuer's repurchases, thereby allowing the market to establish a
security's price based on independent forces.'' \230\ Further, this
disclosure could provide a more informed understanding of how many
shares may yet be purchased under the timing and volume parameters of
Rule 10b-18, reducing information asymmetries for current and
prospective shareholders. In these ways, the disclosure will allow
investors to better evaluate the efficiency and impacts of a
repurchase. While some commenters indicated that as a matter of
practice repurchase programs are designed to meet both the Rule 10b-18
and Rule 10b5-1 safe harbors,\231\ issuers are not required to do so.
Additionally, with disclosure of whether an issuer intended to satisfy
the affirmative defense under Rule 10b5-1,
[[Page 36020]]
investors can more readily determine whether the issuer's managers took
steps to mitigate the possibility of conducting a repurchase while in
possession of material nonpublic information.
---------------------------------------------------------------------------
\230\ 2003 Adopting Release, supra note 5, at 64953.
\231\ See, e.g., letters from HP and Simpson Thacher.
---------------------------------------------------------------------------
Moreover, we are cognizant of the concern shared by some commenters
that the required Rule 10b5-1(c) and Rule 10b-18 disclosures could lead
to unfounded speculation or cause negative inferences.\232\ Rule 10b-18
specifically disclaims any negative inference from an issuer's choice
not to make use of the safe harbor, and Rule 10b5-1 is similarly
described as an ``affirmative defense.'' Therefore, we believe that any
unwarranted inferences from disclosure that an issuer did or did not
use such safe harbor or defense would be limited. We believe the
required disclosures achieve a proper balance between that concern and
the need of investors for additional information concerning an issuer's
share repurchases.
---------------------------------------------------------------------------
\232\ See, e.g., letters from Maryland Bar and Sullivan.
---------------------------------------------------------------------------
We note that one commenter suggested that the final amendments
should include additional disclosures regarding an issuer's Rule 10b5-
1(c) plan, such as information on adoption, modification, suspension,
or termination of the plan; the maximum number of shares planned for
sale under the plan; and any suspensions or terminations of a planned
repurchase pursuant to such a plan.\233\ We have not included these
additional required disclosures relating to Rule 10b5-1(c) because we
believe the required information, together with existing obligations of
issuers to disclose material changes to their share repurchase plans
whether under Rule 10b5-1 or otherwise, is sufficient to inform
investors about an issuer's repurchases. The required disclosures
achieve an appropriate balance between the concerns expressed by
commenters and the need of investors for additional information
concerning an issuer's share repurchases. As discussed above in this
section, if any of the additional disclosures suggested by the
commenter or other additional disclosures are material and necessary to
make other repurchase disclosures not misleading under the
circumstances, the issuer must provide those disclosures.\234\
---------------------------------------------------------------------------
\233\ See letter from CFA Institute.
\234\ See 17 CFR 240.12b-20 (``Rule 12b-20'').
---------------------------------------------------------------------------
Further, we note that some commenters recommended that we repeal
Rule 10b-18 and replace it with bright-line limits,\235\ and that we
not apply the proposed Rule 10b5-1(c) and Rule 10b-18 disclosures to
FPIs.\236\ Repealing and replacing Rule 10b-18 is beyond the scope of
this rulemaking. Consistent with our reasoning for not allowing an
exemption for certain issuers relating to the daily quantitative
repurchase disclosures, we do not believe the final amendments should
exempt FPIs from the Rule 10b5-1(c) and Rule 10b-18 disclosures. These
disclosures benefit all investors in issuers that conduct repurchases.
---------------------------------------------------------------------------
\235\ See, e.g., letters from AFREF et al., CFA Institute, CII,
Lazonick & Jacobson, Oxfam, and Prof. Palladino.
\236\ See letter from SIFMA II.
---------------------------------------------------------------------------
One commenter expressed the view that the proposed amendments would
interfere with state law.\237\ The commenter asserted that the
Commission's purpose in proposing the amendments was to deter share
repurchases generally, which would ``regulate boardroom decisions over
which the Commission has no authority.'' The final amendments do not
regulate repurchases or board consideration of them, nor are they
intended to deter share repurchases. While it is possible that the
amendments could result in some reduction in issuer repurchases,\238\
we do not expect these additional disclosure requirements to have a
significant deterrent effect on these transactions overall. In any
case, the purpose of the final amendments is to provide shareholders
with additional data about the timing and other details of the issuer's
repurchases to allow them to make more informed investment and voting
decisions, consistent with our authority under the Exchange Act.
---------------------------------------------------------------------------
\237\ See letter from Cato.
\238\ See infra Section V.A.2.
---------------------------------------------------------------------------
Another commenter asserted that the proposed amendments' daily
disclosure requirements would violate the First Amendment.\239\ The
commenter claimed that the Commission failed to explain why monthly
disclosures would not be adequate and did not acknowledge the
compelled-speech burdens that come with a next-day reporting regime.
The commenter also noted that the proposed amendments' ``unjustified
insistence on next-day reporting'' were not ``adequately tailored'' to
the governmental interests at stake and to reduce instances of
compelled speech.
---------------------------------------------------------------------------
\239\ See letter from Chamber III.
---------------------------------------------------------------------------
We disagree with the commenter's assertion that the proposed
amendments would violate the First Amendment. As we have explained
earlier in this section, periodic disclosure of daily repurchases
provide a level of detail that will allow investors to assess the
efficiency of, and motives for, those transactions. Additionally, daily
repurchase disclosure allows investors to monitor and evaluate the
issuer's share repurchases and their effects on the market for the
issuer's securities. This disclosure is thus factual in nature and
advances important interests as discussed throughout this release.
Further, after considering comments, the final amendments require
periodic reporting of an issuer's daily repurchases, as opposed to
daily reporting of an issuer's daily repurchases, which greatly
mitigates the associated burdens.
Finally, we note that a number of commenters asked the Commission
to clarify certain terms, times, and transactions, including more
precisely defining ``share repurchase program,'' \240\ ``executed,''
\241\ ``business day,'' \242\ ``before the end;'' \243\ addressing
whether issuers operating in time zones other than Eastern Time would
be given additional time to file their Form SR; \244\ and clarifying
whether the proposal would encompass withhold-to-cover shares.\245\
Because the final amendments do not require issuers to provide their
daily quantitative repurchase disclosures one business day after
execution of their share repurchase order, there is no longer a need
for many of these requested clarifications.
---------------------------------------------------------------------------
\240\ See letter from Cravath.
\241\ See letters from Chamber II, Cravath, DLA Piper, FedEx,
HudsonWest, Simpson Thacher, and Wilson Sonsini.
\242\ See letter from Bishop.
\243\ See id.
\244\ See letters from Chevron and HP.
\245\ See letter from Nash.
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We do not believe it is necessary to make any further
clarifications based on the other comments received. The main
difference between the current Item 703 quantitative repurchase
disclosures and the quantitative repurchase disclosures in the final
amendments is that issuers are required to aggregate their share
repurchases on a daily basis instead of on a monthly basis. Therefore,
the terms, times, and transactions used for, and applicable to, the
current Item 703 disclosure requirements should be applied to the final
amendments.\246\
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\246\ For example, as we discussed in the Proposing Release, the
Commission uses a commonly understood meaning of the term
``execution,'' which will not change based on the final amendments.
See Proposing Release, supra note 2, at n. 23. We are not adopting
the suggestion of one commenter to instead require reporting based
on the settlement date rather than the execution date, see letter
from NASAA, because the commenter's concerns about the execution
date were tied closely to potential errors that might arise under an
execution-date regime with daily filing. Because we are adopting
quarterly reporting, we think the commenter's concerns about the
execution date will be greatly lessened, consistent with our
experience with Item 703.
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[[Page 36021]]
B. Narrative Revisions to Item 703 of Regulation S-K, Form 20-F, and
Form N-CSR Additional Disclosure
1. Proposed Amendments
The Commission proposed to revise and expand the disclosure
requirements in Item 703 of Regulation S-K, Form 20-F, and Form N-CSR
to work in conjunction with proposed Form SR to provide investors with
more detailed and qualitative information that they could use to
evaluate issuer share repurchases. Specifically, the proposal would
require an issuer 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 the date that the plan was adopted or terminated; and
Whether purchases were made in reliance on the Rule 10b-18
non-exclusive safe harbor.
Additionally, the Commission proposed to require that issuers
disclose if any of their officers or directors subject to the reporting
requirements under Exchange Act section 16(a) 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 ten
business days before or after the announcement of an issuer purchase
plan or program by checking a box before the tabular disclosure of
issuer purchases of equity securities.
2. Comments on the Proposed Amendments
a. Comments on Objective or Rationale for Share Repurchases, and
Process or Criteria Used To Determine the Amount of Repurchases
A number of commenters supported the proposal to require an issuer
to disclose its objective or rationale for its share repurchases, and
the process or criteria used to determine the amount of
repurchases.\247\ However, most commenters who discussed this proposal
opposed it.\248\ These commenters expressed concern that the required
disclosure could divulge competitive or sensitive information that
would be harmful to the issuer,\249\ or result in boilerplate
disclosure that would not prove meaningful to investors.\250\
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\247\ See, e.g., letters from CalPERS, CFA Institute, CII, ICGN,
Prof. Palladino, NASAA, Public Citizen, Roosevelt, and Senators
Rubio & Baldwin.
\248\ See, e.g., letters from BPI & Amer. Bankers Assoc.,
Chamber II, Coalition, Cravath, Dow, Jones Day, Kirkland Ellis,
Morris, NAM, PNC, Profs. Lewis and White, SCG, Shearman, SIFMA II,
Sullivan, and Vistra.
\249\ See, e.g., letters from BPI & Amer. Bankers Assoc., PNC,
Profs. Lewis and White, Shearman, SIFMA II, and SCG.
\250\ See, e.g., letters from Chamber II, Coalition, Cravath,
Jones Day, Morris, NAM, and Sullivan.
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Other commenters objected to the proposal on the basis that the
disclosures could be misleading because they would show only a small
part of a company's overall liquidity and capital allocation
policies.\251\ These commenters suggested that any required objective
or rationale disclosures concerning an issuer's share repurchase plans
should be included within a filing's Management's Discussion and
Analysis of Financial Condition and Results of Operations (``MD&A'')
section, so that the disclosures can be evaluated within the larger
context of liquidity and capital allocation. Other commenters suggested
that the final amendments should not require the disclosure of all
share repurchase plans, but only those that are material to the
issuer.\252\ Another commenter asserted that the disclosures would
violate the First Amendment because they would require issuers to
provide disclosure other than ``purely factual, uncontroversial
information'' \253\ and would force the issuer to speak when doing so
would be unduly burdensome.\254\
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\251\ See, e.g., letters from ABA Committee, Dow, Profs. Lewis
and White, Quest, and Shearman. One of these commenters noted that
issuers often include a discussion of repurchase activity in their
MD&A section. See letter from Quest.
\252\ See, e.g., letters from Cravath and Profs. Lewis and
White.
\253\ See letter from Chamber III (citing NIFLA v. Becerra, 138
S. Ct. 2361, 2372 (2018)).
\254\ See letter from Chamber III (citing Am. Meat Inst. v.
USDA, 760 F.3d 18, 34 (D.C. Cir. 2014)).
---------------------------------------------------------------------------
In contrast, other commenters suggested that the Commission require
more disclosure than was proposed.\255\ A few of these commenters
recommended that issuers be required to announce all of their share
repurchase plans \256\ in a standardized format \257\ or on Form 8-
K.\258\ A number of commenters stated that the final amendments should
require issuers to disclose the manner in which they are funding their
share repurchases \259\ out of the concern that some issuers may borrow
funds to finance those transactions.\260\ One commenter asserted that
the final amendments should require a five-year lookback to compare the
average price per repurchased share against the price per share
received pursuant to new issuances and stock compensation plans.\261\
Some commenters recommended disclosure about the impact of share
repurchases on performance targets,\262\ and other commenters suggested
that we adopt amendments requiring issuers to disclose whether they
considered other uses for the funds being used for the share
repurchases.\263\
---------------------------------------------------------------------------
\255\ See, e.g., letters from AFREF et al., Better Markets I,
BrilLiquid, CalPERS, CFA Institute, Form Letter A, ICGN, Prof.
Palladino, Roosevelt, and Senators Rubio & Baldwin.
\256\ See, e.g., letters from BrilLiquid, CalPERS, CFA
Institute, ICGN, and Prof. Palladino.
\257\ See letter from CalPERS.
\258\ See, e.g., letters from BrilLiquid and ICGN.
\259\ See, e.g., letters from AFREF et al., Better Markets I,
CalPERS, CFA Institute, Form Letter A, Prof. Palladino, Roosevelt,
and Senators Rubio & Baldwin.
\260\ See, e.g., letters from AFREF et al., CalPERS, CFA
Institute, Form Letter A, Prof. Palladino, and Senators Rubio &
Baldwin.
\261\ See letter from CFA Institute.
\262\ See, e.g., letters from CFA Institute and CII.
\263\ See, e.g., letters from CFA Institute and Form Letter A.
---------------------------------------------------------------------------
b. Comments on Policies and Procedures Relating to Purchases and Sales
of the Issuer's Securities by Its Officers and Directors During a
Repurchase Program
A number of commenters supported the proposal to require issuers to
disclose 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.\264\ Some commenters recommended that the Commission
adopt a more comprehensive requirement than was proposed.\265\ A few of
these commenters asked the Commission to prohibit corporate insider
trading before, during, and after buyback announcements and
execution.\266\ One commenter recommended requiring disclosure of any
directors, officers, and ten percent
[[Page 36022]]
shareholders who purchased or sold shares within ten days of an
issuer's buyback program announcement.\267\
---------------------------------------------------------------------------
\264\ See, e.g., letters from CII and CFA Institute.
\265\ See, e.g., letters from AFREF et al., Better Markets I,
CII, Oxfam, Prof. Palladino, and Public Citizen.
\266\ See, e.g., letters from AFREF et al., Better Markets I,
Oxfam, Prof. Palladino, and Public Citizen.
\267\ See letter from CII.
---------------------------------------------------------------------------
A few commenters, however, opposed this proposal.\268\ One of these
commenters \269\ suggested that this information would be more
appropriate in 17 CFR 229.407 (``Item 407 of Regulation S-K''), which
contains disclosure requirements regarding corporate governance.
Another commenter asserted that the proposed disclosure could create
the erroneous expectation that an issuer must have such policies and
procedures when it may not have them.\270\ One commenter suggested that
this requirement would effectively ban such insider sales.\271\
---------------------------------------------------------------------------
\268\ See, e.g., letters from ABA Committee and PNC.
\269\ See letter from ABA Committee.
\270\ See letter from PNC.
\271\ See letter from Maryland Bar.
---------------------------------------------------------------------------
c. Comments on Checkbox Requirement
Several commenters supported the proposed requirement for issuers
to disclose if any of their officers or directors subject to the
reporting requirements under section 16(a) 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 ten business days before or after the
announcement of an issuer purchase plan or program by checking a box
before the tabular disclosure of issuer purchases of equity
securities.\272\ Several of these commenters specifically supported
including the ten business-day period.\273\ One commenter noted that
the proposal ``would allow investors to more fully understand how
officer and director stock purchase and sale activities interrelate
with an issuer's share repurchase program.'' \274\ Another commenter
stated that the checkbox ``would allow investors to determine whether
corporate insiders are potentially benefiting unfairly from knowledge
asymmetry by, for example, purchasing shares ahead of an issuer's
repurchase plan announcement, knowing that share prices usually rise
with such an announcement.'' \275\
---------------------------------------------------------------------------
\272\ See, e.g., letters from Better Markets I, CFA Institute,
Hecht, and ICGN. One of these commenters suggested expanding the
checkbox period to 30 days before and after adoption of a repurchase
plan because ``[i]nsiders will know well before the announcement
that the company is considering a stock repurchase program.'' See
letter from Hecht.
\273\ See, e.g., letters from Better Markets I, CFA Institute,
and ICGN. See also letter from Hecht (supporting a 30-day period).
\274\ See letter from CFA Institute.
\275\ See letter from Better Markets I.
---------------------------------------------------------------------------
Other commenters, however, opposed the proposal.\276\ Most of the
commenters opposed to the proposal indicated that the proposed checkbox
requirement would be unnecessary \277\ because it would be duplicative
of the required disclosures in Exchange Act section 16,\278\ and
because trading on material nonpublic information is already
prohibited.\279\ Similarly, one commenter stated that insider
transactions occurring after a repurchase plan announcement should be
excluded from the checkbox requirement because the information is
already public.\280\ Another commenter stated that, if Form SR is
adopted, the data from that form should suffice.\281\ One commenter
asserted it opposed the proposal because insiders do not have access to
any particular repurchase information that would give them a trading
advantage.\282\ Some commenters noted that FPIs would be effectively
excluded from the checkbox requirement because they are exempt from
Exchange Act section 16 reporting.\283\
---------------------------------------------------------------------------
\276\ See, e.g., letters from ABA Committee, BrilLiquid, Chamber
II, Cravath, DLA Piper, HP, Quest, and Simpson Thacher.
\277\ See, e.g., letters from ABA Committee, BrilLiquid, Chamber
II, Cravath, DLA Piper, Quest, and Simpson Thacher.
\278\ See, e.g., letters from ABA Committee, DLA Piper, and
Simpson Thacher.
\279\ See letter from Quest.
\280\ See letter from DLA Piper.
\281\ See letter from Cravath.
\282\ See letter from HP.
\283\ See, e.g., letters from CBA and Cravath.
---------------------------------------------------------------------------
Several commenters expressed concern about the potential for
misinterpretations as a result of the checkbox.\284\ One commenter
claimed that the checkbox requirement could incorrectly imply that
trading outside the checkbox window is always permissible.\285\ Another
commenter stated that the checkbox could cause investors to assume
incorrectly that the issuer engaged in inappropriate behavior.\286\
Some commenters indicated that the checkbox requirement could give the
incorrect impression that insiders were trading securities as a result
of the issuer's repurchase announcement instead of for other reasons,
such as long-established Rule 10b5-1(c) plans \287\ or automatic sales
to fund tax withholding on share vesting.\288\
---------------------------------------------------------------------------
\284\ See, e.g., letters from ABA Committee, Chamber II,
Cravath, Quest, and Vistra.
\285\ See letter from Cravath.
\286\ See letter from Chamber II (stating that ``any positive
correlation between share repurchases and insider selling is likely
driven by blackout periods and not opportunistic insider trading
around repurchases.'' But see letter from Prof. Jackson, Dr. Hu, and
Dr. Zytnick (refuting that commenter's analysis by providing their
own analysis showing that, even after controlling for blackout
periods, insider sales are significantly higher during
repurchases.).
\287\ See, e.g., letters from Cravath, DLA Piper, and PNC.
\288\ See letter from PNC.
---------------------------------------------------------------------------
Some commenters asserted that Rule 10b5-1(c) plan transactions or
automatic sales to fund tax withholding on share vesting should be
excluded from the checkbox requirement.\289\ One commenter asked that
the Commission state that ``officers and directors trading in a
company's securities at the same time that the company is buying back
its own securities is not in violation [of] any rule or otherwise
harmful.'' \290\ Another commenter stated that insider purchases or
sales should be included in the checkbox requirement only if an
issuer's repurchase plan is publicly announced and implemented.\291\ A
different commenter recommended that the Commission permit issuers to
include context for the checkbox so that trading activities are not
misconstrued.\292\
---------------------------------------------------------------------------
\289\ See, e.g., letters from Cravath, DLA Piper, and PNC.
\290\ See letter from Quest.
\291\ See letter from Cravath (``We also do not believe that a
checkbox requirement is appropriate in the context of repurchase
plans that are not publicly announced.'').
\292\ See letter from ABA Committee.
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Finally, one commenter asked the Commission to clarify how the
checkbox would apply to issuers with multiple classes of stock, each
with its own repurchase plan; whether announcing the increase of an
existing share repurchase plan would constitute the announcement of a
new repurchase plan for purposes of the requirement; and whether an
issuer may rely on Forms 3,\293\ 4,\294\ and 5 \295\ filed with the
Commission to determine whether it should check the box.\296\
---------------------------------------------------------------------------
\293\ 17 CFR 249.103.
\294\ 17 CFR 249.104.
\295\ 17 CFR 249.105.
\296\ See letter from ABA Committee.
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3. Final Amendments
We are adopting final amendments relating to the revision and
expansion of the disclosure requirements in Item 703 of Regulation S-K,
Form 20-F, and Form N-CSR, with some modifications from the proposal in
response to comments received. Consistent with the proposed amendments,
these final amendments work in conjunction with the new periodic
quantitative repurchase disclosures to provide investors with more
detailed information to evaluate an issuer's share repurchases. We
continue to believe that these disclosures will help investors evaluate
whether the issuer is engaged
[[Page 36023]]
in efficient repurchases. Specifically, the final amendments require an
issuer to disclose:
The objectives or rationales for each repurchase plan or
program and process or criteria used to determine the amount of
repurchases; \297\
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\297\ In a clarifying change from the proposal, the final
amendments will require disclosure of the ``objectives or
rationales'' rather than the ``objective or rationale'' for each
repurchase plan or program to make clear that the disclosure is not
limited to one objective or rationale if an issuer has more than
one.
---------------------------------------------------------------------------
Any policies and procedures relating to purchases and
sales of its securities by its officers and directors during a
repurchase program, including any restriction on such transactions; and
Whether any of its directors and officers subject to the
reporting requirements under Exchange Act section 16(a) (for domestic
corporate 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, whether filing on the forms exclusively available to FPIs or
on the domestic forms) 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
repurchase plan or program within four 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 by checking a box before the tabular disclosure of issuer
purchases of equity securities.\298\
---------------------------------------------------------------------------
\298\ As noted above, while we are not adopting the proposed
requirement to provide narrative disclosure under Item 703 regarding
trades intended to qualify for the non-exclusive safe harbor of
Rules 10b-18 or the affirmative defense under Rule 10b5-1(c), we are
requiring substantially the same information be disclosed in tabular
fashion in other registrant filings. See supra notes 229-230 and
accompanying text.
---------------------------------------------------------------------------
Additionally, the final amendments 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), and certain
disclosures for publicly announced repurchase plans or programs,
including:
The date each plan or program was announced;
The dollar amount (or share or unit amount) approved;
The expiration date (if any) of each plan or program;
Each plan or program that has expired during the period
covered by the table; 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.
This same information is already required to be disclosed in our
current rules. In current Item 703, this information is required in a
footnote to the monthly quantitative share repurchase disclosure table.
The final amendments do not change the substance of these requirements.
The only change is that the final amendments change the form of the
requirements from an instruction to the main text of Item 703 and no
longer require the disclosure to be part of a footnote to the monthly
table, as the monthly table will no longer exist. Instead this
disclosure will be required in the main text of the narrative
discussion. We note that some commenters suggested that the final
amendments should include a number of additional, more prescriptive
disclosure requirements relating to the new narrative requirements that
are being added to Item 703, Form 20-F, and Form N-CSR.\299\ The
disclosure we are adopting will provide the information necessary for
investors to evaluate the efficiency of issuer repurchases and their
impact on the market, and we do not believe that the particular
individual disclosures suggested by commenters are needed. To the
extent further material information is necessary to make such
disclosures not misleading, the issuer will be required to provide that
information under existing Rule 12b-20.\300\
---------------------------------------------------------------------------
\299\ Some commenters suggested particular additional
disclosures such as a five-year lookback, see letter from CFA
Institute, the impact of share repurchases on performance targets,
see letters from CFA Institute and CII, or alternative uses for the
share repurchase funds, see letter from CFA Institute and Form
Letter A.
\300\ See Rule 12b-20 (``In addition to the information
expressly required to be included in a statement or report, there
shall be added such further material information, if any, as may be
necessary to make the required statements, in the light of the
circumstances under which they are made not misleading.'').
---------------------------------------------------------------------------
Other commenters suggested that certain aspects of the disclosure
requirements in new Item 703(a) \301\ should not be adopted because
they could result in misleading information. We disagree. We believe
that the required narrative disclosures in the final amendments provide
the information necessary for investors to understand and evaluate an
issuer's share repurchases in a clear and concise manner. For example,
the checkbox requirement will assist investors in identifying issuers
where there is a possibility that repurchases affected the value of
executive compensation, permitting investors to further investigate
whether this possibility should affect their assessment of the
repurchase.\302\ If an issuer believes any of the required disclosures
would result in misleading or confusing information, the issuer may
provide additional disclosure to put the required information in
context. Additionally, as with all of our required disclosures, under
our rules issuers are required to provide any additional information
necessary to make the required disclosure not misleading.\303\
Moreover, issuers are not foreclosed from discussing their repurchases
in other sections of the document, such as in the MD&A section or in
the corporate governance section required by Item 407 of Regulation S-
K.
---------------------------------------------------------------------------
\301\ The information required in new Item 703(a) would have
been required in proposed Item 703(c). We made this change in the
final amendments because we are requiring the tabular disclosure of
the daily quantitative repurchase data in new Item 601(b)(26)
instead of proposed Item 703(a) and (b). See infra Section III.A.3.
\302\ In response to the commenter who suggested we should
exclude from this disclosure automatic sales to fund certain tax
withholding ``to avoid the risk that the checked box would be
provocative despite the fact that the underlying transaction would
only reflect a decision made, in most cases, a year or more prior to
the sale and a decision not typically made by the officer or
director personally,'' we note that in such a circumstance, the
issuer could provide additional disclosure as context for the
required disclosure, which may avoid the concern raised by the
commenter. See letter from PNC.
\303\ See Rule 12b-20.
---------------------------------------------------------------------------
Some commenters stated that they opposed the requirement in
proposed Item 703(a)(1) to disclose the objective or rationale for an
issuer's share repurchases and process or criteria used to determine
the amount of repurchases because this requirement would result in the
exposure of competitive or sensitive information.\304\ One commenter
asked the Commission to clarify that the final amendments are not
intended to require an issuer to disclose such information.\305\
Although the disclosures required by the final amendments should convey
a thorough understanding of the issuer's objectives or rationales for
the repurchases, and the process or criteria it used in determining the
amount of the repurchase, the final amendments do not require issuers
to provide disclosure at a level of granularity that would
[[Page 36024]]
reveal any competitive or sensitive information beyond what may already
be gleaned from other disclosures regarding the business and financial
condition of the issuer.
---------------------------------------------------------------------------
\304\ See, e.g., letters from BPI & Amer. Bankers Assoc., PNC,
Profs. Lewis and White, Shearman, SIFMA II, and SCG.
\305\ See letter from PNC.
---------------------------------------------------------------------------
Other commenters opposed this requirement because, they asserted,
it would result in boilerplate disclosure.\306\ We disagree and note
that the narrative disclosure, in conjunction with the new periodic
quantitative repurchase disclosures, must provide investors with
sufficiently detailed information to evaluate an issuer's share
repurchases. The narrative disclosure also should be appropriately
tailored to an issuer's particular facts and circumstances.
---------------------------------------------------------------------------
\306\ See, e.g., letters from Chamber II, Coalition, Cravath,
Jones Day, Morris, NAM, and Sullivan. We note, however, that one
commenter asserted that, even if the final amendments lead to
boilerplate disclosures, the disclosure would still benefit
investors because it would provide investors with more information
than they have currently, it could become a point of engagement, and
shareholders would be able to inquire about allocation decisions or
provide support for the repurchase. See letter from ICGN.
---------------------------------------------------------------------------
We expect issuers to provide the required disclosure without
relying on boilerplate language, and we received several helpful
suggestions from commenters in that regard.\307\ Although not an
exclusive or exhaustive list, commenters suggested that issuers could
avoid boilerplate language by discussing other possible ways to use the
funds allocated for the repurchase \308\ and comparing the repurchase
with other investment opportunities that would ordinarily be considered
by the issuer, such as capital expenditures and other uses of
capital.\309\ Issuers could also discuss the expected impact of the
repurchases on the value of remaining shares.\310\ Moreover, in
connection with their disclosure of the objectives or rationales for a
repurchase, 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.\311\ Issuers might additionally
discuss the sources of funding for the repurchase, where material, such
as, for example, in the case where the source of funding results in tax
advantages that would not otherwise be available for a repurchase.
---------------------------------------------------------------------------
\307\ See, e.g., letters from AFREF et al., CFA Institute, CII,
Hecht, Prof. Palladino, Roosevelt, and Senators Rubio & Baldwin.
\308\ See, e.g., letters from AFREF et al. and Senators Rubio &
Baldwin.
\309\ See letter from Senators Rubio & Baldwin.
\310\ See, e.g., letters from Prof. Palladino and Roosevelt.
\311\ See letter from CII.
---------------------------------------------------------------------------
We disagree with the commenter who asserted that the amendments
would violate the First Amendment on the grounds that the required
disclosures call for controversial opinions, not ``purely factual''
information.\312\ As we have explained, there are a number of reasons
why issuers undertake share repurchases, and an issuer's purpose in
undertaking a particular repurchase is significant information that can
aid investors in assessing the repurchase, including its purposes and
impacts on the firm and the issuer's value. The requirement that an
issuer disclose the objectives or rationales behind a repurchase can be
directly informative for investors and provide investors with the
proper context to understand the daily quantitative repurchase
disclosures (such as by allowing investors to confirm that the daily
pattern of trades is consistent with the issuer's stated purpose for
those repurchases) and to monitor and evaluate the issuer's share
repurchase and its effects on the issuer's securities. This requirement
thus involves disclosure that is factual in nature, advances important
interests as discussed throughout this release, and complies with the
First Amendment.
---------------------------------------------------------------------------
\312\ See letter from Chamber III.
---------------------------------------------------------------------------
We also disagree with the commenter who suggested that the
requirement to disclose the issuer's policies and procedures relating
to purchases and sales of its securities by its officers and directors
during a repurchase program would effectively ban such insider
sales.\313\ Disclosure of any such policies may aid investors in
determining the extent to which executive's interests may have, at
least in part, helped motivate repurchases. This is a disclosure
obligation that will provide investors with additional relevant
disclosures about issuer repurchases and not a requirement for an
issuer to have, adopt, or change any such policies and procedures.
---------------------------------------------------------------------------
\313\ See letter from Maryland Bar.
---------------------------------------------------------------------------
In a modification from the Proposed Rule, we are requiring that
issuers indicate by checkbox that covered executives have engaged in
equity transactions within four business days of a repurchase
announcement, rather than the ten business days proposed. While the
checkbox is intended to assist investors in identifying transactions
that warrant closer scrutiny, a larger window of time may potentially
result in added attention for a number of transactions that are not as
significant, reducing the value of the checkbox.\314\
---------------------------------------------------------------------------
\314\ Cf. Rule 10b5-1 Adopting Release, supra note 18, at 80390
(reducing the disclosure window for tabular reporting of option
awards pursuant to Item 402(x) of Regulation S-K (17 CFR 229.402(x))
to address concerns about the potential disclosure of many routine
option awards that are less likely to have been affected by material
nonpublic information).
---------------------------------------------------------------------------
We disagree with the commenter who stated that we should not impose
a checkbox requirement for transactions close in time to a repurchase
announcement because, the commenter asserted, such sales are only
coincidences of the corporate calendar and thus cannot represent
efforts by managers to profit from repurchases.\315\ As discussed
above, and as noted by other commenters, the predictability of the
corporate calendar may instead facilitate executive efforts to benefit
personally from repurchases, and thus we continue to believe the
checkbox is appropriate.\316\ For similar reasons, we disagree with the
commenter who stated that the checkbox is not needed in the case of an
executive whose trades would qualify for the affirmative defense under
Rule 10b5-1, because such trades could not reflect nonpublic
information,\317\ and the commenter that stated that the checkbox
requirement should apply only to repurchase plans that are publicly
announced and implemented.\318\ Because repurchases often occur at
relatively predictable times in the corporate calendar, executives can
schedule trades in advance to potentially benefit from those
repurchases that do occur at such times.\319\
---------------------------------------------------------------------------
\315\ See letter from Chamber II.
\316\ See letters from Prof. Edmans and Prof. Jackson, Dr. Hu,
and Dr. Zytnick.
\317\ See letter from DLA Piper.
\318\ See letter from Cravath (``We also do not believe that a
checkbox requirement is appropriate in the context of repurchase
plans that are not publicly announced.'').
\319\ See letters from Prof. Edmans and Prof. Jackson, Dr. Hu,
and Dr. Zytnick.
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Several commenters who opposed the proposed checkbox requirement
asserted that the requirement is unnecessary,\320\ as it duplicates the
existing Exchange Act section 16 disclosures for issuers that file on
domestic forms.\321\ While the checkbox does provide information
available in other disclosures, we believe that it would still be
helpful to investors. The checkbox eliminates the need for investors to
review Exchange Act section 16(a) filings to determine if any
[[Page 36025]]
officer or director has purchased or sold equity securities that are
the subject of an issuer's share repurchase plan or program around the
time of the announcement. Thus, while the relevant data about domestic
issuers are available from other sources, the checkbox allows investors
to focus their efforts on transactions that are the most likely to
benefit from further analysis. Absent the checkbox, identifying the
subset of filings presenting executive equity transactions close in
time to a repurchase announcement would require an investor to manually
cross-check numerous filings. Moreover, this information is necessary
for investors in FPIs because Exchange Act section 16(a) does not apply
to them.
---------------------------------------------------------------------------
\320\ See, e.g., letters from ABA Committee, BrilLiquid, Chamber
II, Cravath, DLA Piper, Quest, and Simpson Thacher.
\321\ See, e.g., letters from ABA Committee, DLA Piper, and
Simpson Thacher.
---------------------------------------------------------------------------
In this regard, in the Proposing Release, the Commission drew no
distinction between domestic issuers and FPIs with respect to the
importance of disclosure regarding insider purchases and sales within
ten business days before or after the announcement of an issuer
repurchase plan or program. However, in applying the same proposed
regulatory text to Form 20-F as to Item 703 of Regulation S-K and Form
N-CSR, which referenced Exchange Act section 16 reporting, the proposed
checkbox amendments to Form 20-F, as drafted, would not have resulted
in any additional disclosures about insiders at FPIs because FPI
securities are exempt from Exchange Act section 16 reporting.\322\ We
appreciate the comments that noted this issue.\323\
---------------------------------------------------------------------------
\322\ See 17 CFR 240.3a12-3.
\323\ See, e.g., letters from CBA and Cravath.
---------------------------------------------------------------------------
We continue to believe this information is as important for
investors in FPIs as it is for investors in other issuers. Consistent
with the way in which executive officers and directors are referenced
in Form 20-F, the checkbox disclosure requirement will now refer to
purchases and sales by any ``director [and] member of senior management
who would be identified pursuant to Item 1 of Form 20-F'' instead of
referencing officers and directors subject to the reporting
requirements under section 16(a) of the Exchange Act. In addition, we
are moving the checkbox from Form 20-F to Form F-SR because we believe
the checkbox is most useful in conjunction with the daily quantitative
repurchase disclosures, which we moved to Form F-SR for FPIs that file
on the FPI forms. Therefore, FPIs will be required to check the box if
an director or member of senior management who would be identified in
Form 20-F pursuant to Item 1 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 four business days
before or after the issuer's announcement of such repurchase plan or
program. Because FPIs may elect to report using Forms 10-Q and 10-K,
for those issuers the checkbox on those forms will include the Form 20-
F reference to directors or senior management.
Other commenters opposed the proposed checkbox requirement because
of the potential for misinterpretations or mischaracterizations,\324\
including that it could give the incorrect impression that insiders
were trading securities because of the announcement instead of for
other reasons, such as long-established Rule 10b5-1(c) plans \325\ or
automatic sales to fund tax withholding on share vesting.\326\ To
remedy any misunderstandings, some commenters suggested that the
Commission should make certain acknowledgments \327\ or that the final
amendments should allow issuers to include context for the checkbox to
avoid any miscomprehension.\328\ We did not revise the final amendments
in response to these comments because, in addition to the required
disclosure of factual information, an issuer may include additional
disclosure to provide context to investors, and would be required to do
so if such additional disclosures are material and necessary to prevent
the required disclosures from being misleading.\329\ In response to a
commenter's suggestions,\330\ we are adopting amendments to clarify
certain aspects of the checkbox requirement. If an issuer has multiple
classes of stock, each with its own repurchase plan, the issuer is
required to check the box in its periodic report if, during that
period, a covered officer or director purchases or sells shares or
other units of the class of the issuer's equity securities that is the
subject of any issuer share repurchase plan or program within four
business days before or after the issuer's announcement of such
repurchase plan or program. Additionally, the issuer is required to
check the box in its periodic report if, during that period, it
announced an increase of an existing share repurchase plan because the
announcement constitutes a new repurchase plan for purposes of the
requirement.
---------------------------------------------------------------------------
\324\ See, e.g., letters from ABA Committee, Chamber II,
Cravath, Quest, and Vistra.
\325\ See, e.g., letters from Cravath, DLA Piper, and PNC.
\326\ See letter from PNC.
\327\ See, e.g., letters from Cravath, DLA Piper, PNC, and
Quest.
\328\ See letter from ABA Committee.
\329\ See Rule 12b-20.
\330\ See letter from ABA Committee.
---------------------------------------------------------------------------
Finally, in response to a commenter's request for
clarification,\331\ we note that a domestic corporate issuer may rely
on Forms 3, 4, and 5 filed with the Commission in determining if it
should check the box provided that the reliance is reasonable. For
example, an issuer would not be able to rely on those forms if the
issuer knows or has reason to believe that a form was filed
inappropriately or that a form should have been filed but was not. The
amendments include a provision in new Item 601(b)(26) and new Item
14(a)(iii) in Form N-CSR that permits an issuer to rely on Forms 3, 4,
and 5 in determining whether to check the box. Form F-SR contains an
analogous provision for FPIs. Because the securities of FPIs are exempt
from section 16,\332\ however, Item 601(b)(26) and Form F-SR permit an
FPI to rely on written representations from its directors and senior
management provided that the reliance is reasonable.
---------------------------------------------------------------------------
\331\ See id.
\332\ See 17 CFR 240.3a12-3.
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C. Clarifying Amendments
1. Proposed Amendments
In the Proposing Release, the Commission proposed clarifying
amendments to Item 703 of Regulation S-K, Form 20-F, and Form N-CSR to
simplify application of the rules and remove unnecessary instructions.
Specifically, the Commission proposed:
To relocate guidance in the Instruction 1 to paragraph
(b)(1) about information to appear in the table and disclosure to
appear in a footnote to the table to paragraph (b)(1) to a new
paragraph (c);
To consistently refer to ``issuer'' instead of
``company''; \333\
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\333\ In Form N-CSR only we would continue to refer to
``registrants'' rather than ``issuer'' or ``company'' for
consistency with other provisions in Form N-CSR.
---------------------------------------------------------------------------
To remove Instructions 1 and 2 in the Instructions to
paragraphs (b)(3) and (b)(4) and effectuate those instructions by
adding ``aggregate'' to the total number of shares for all plans or
programs publicly announced in paragraph (b)(3) in lieu of Instruction
1 and adding proposed paragraph (c) to replace Instruction 2; and
To delete the Instruction to the affected requirements as
they are clear that all purchases, including those that do not satisfy
the conditions of Rule 10b-18, are included.
[[Page 36026]]
2. Comments on the Proposed Amendments
We did not receive any comments on these proposed clarifying
amendments.
3. Final Amendments
We are adopting the clarifying amendments as proposed except that
the reference to new proposed Item 703(c) is now new final Item 703(a).
D. New Item 408(d)
1. Proposed Amendments
In January 2022, the Commission proposed amendments concerning Rule
10b5-1 and insider trading.\334\ Among other matters, the Commission
proposed new disclosure requirements regarding the adoption,
modification, and termination of Rule 10b5-1 plans and certain other
similar trading arrangements by issuers, directors, and officers.
Specifically, the Commission proposed new Item 408(a) of Regulation S-K
to require certain issuers \335\ to disclose:
---------------------------------------------------------------------------
\334\ See Rule 10b5-1 Proposing Release, supra note 17.
\335\ The proposed Item 408(a) of Regulation S-K disclosure
would not apply to registered investment companies or asset-backed
issuers (as defined in 17 CFR 229.1101). See 10b5-1 Adopting
Release, supra note 18, at 80409 note 481.
---------------------------------------------------------------------------
Whether, during its most recently completed fiscal quarter
(the issuer's fourth fiscal quarter in the case of an annual report),
the issuer adopted or terminated any contract, instruction, or written
plan to purchase or sell its securities, whether or not intended to
satisfy the affirmative defense conditions of Rule 10b5-1(c), and a
description of the material terms of the contract, instruction or
written plan, including:
[cir] The date of adoption or termination;
[cir] The duration of the contract, instruction, or written plan;
and
[cir] The aggregate amount of securities to be sold or purchased
pursuant to the contract, instruction, or written plan.
The Commission also proposed to require issuers to disclose similar
information regarding the use of such trading arrangements by its
directors and officers (as defined in 17 CFR 240.16a-1(f) (Rule 16a-
1(f))).
Under the proposed rule, the disclosures would be required in Forms
10-Q and 10-K, as applicable, and tagged using Inline XBRL. Issuers
would be required to provide this information if, during the quarterly
period covered by the report, the issuer, or any director or officer
who is required to file reports under Exchange Act section 16,\336\
adopted or terminated a Rule 10b5-1 plan.
---------------------------------------------------------------------------
\336\ 15 U.S.C. 78p.
---------------------------------------------------------------------------
In December 2022,\337\ the Commission adopted certain aspects of
the Rule 10b5-1 Proposing Release, including the proposed disclosure
requirements with respect to the use of pre-planned trading
arrangements by an issuer's directors and officers. In response to
commenters, the Commission revised the final rule to exclude disclosure
of pricing information. At that time, the Commission did not adopt the
proposal to require corresponding disclosure regarding the use of such
trading arrangements by the issuer of the security. The Commission
noted that, in light of the various comments received on this aspect of
the proposal, further consideration of the potential application of the
disclosure requirement for purchases of equity securities by the issuer
was warranted.
---------------------------------------------------------------------------
\337\ See Rule 10b5-1 Adopting Release, supra note 18.
---------------------------------------------------------------------------
2. Comments on the Proposed Amendments
Several commenters on the Rule 10b5-1 Proposing Release \338\
supported, as a general matter, the proposed requirement for quarterly
reporting of Rule 10b5-1(c) and non-Rule 10b5-1(c) trading arrangements
because such disclosure could provide useful information to investors
and the markets.\339\ One commenter \340\ asserted that the proposed
disclosures would provide long-term shareholders with information that
completes the partial picture about trading by insiders provided by 17
CFR 239.144 (``Form 144'') and Exchange Act section 16 reports.\341\
Commenters were generally divided in their recommendations of what
trading arrangement information should be disclosed.\342\
---------------------------------------------------------------------------
\338\ Comments on the Rule 10b5-1 Proposing Release can be found
at https://www.sec.gov/comments/s7-20-21/s72021.htm.
\339\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Anthony O'Reilly (Mar. 30, 2022); Better
Markets (Apr. 1, 2022); Colorado Public Employees' Retirement
Association (Mar. 29, 2022); Council of Institutional Investors
(Mar. 24, 2022); DLA Piper (Apr. 1, 2022); International Corporate
Governance Network (Mar. 31, 2022); North American Securities
Administrators Association, Inc. (Apr. 1, 2022); and Simpson Thacher
& Bartlett LLP (Mar. 31, 2022).
\340\ See letter in response to the Rule 10b5-1 Proposing
Release from Council of Institutional Investors (Mar. 24, 2022).
\341\ Currently, with the exception of the Rule 10b5-1
representation included in Form 144, there are no disclosure
obligations regarding the use of Rule 10b5-1 trading arrangements.
See letter in response to the Rule 10b5-1 Proposing Release from
American Federation of Labor and Congress of Industrial
Organizations (Apr. 1, 2022).
\342\ One commenter in response to the Rule 10b5-1 Proposing
Release stated that the final rule should not require disclosure of
the number of shares covered by a trading arrangement and the
duration of the arrangement. See letter in response to the Rule
10b5-1 Proposing Release from Quest Diagnostics Inc. (Apr. 1, 2022).
Some commenters recommended the required disclosures should be
limited to the person adopting the plan, the date of adoption or
termination, and duration. See, e.g., letters in response to the
Rule 10b5-1 Proposing Release from Fenwick & West (Mar. 31, 2022)
and Shearman & Sterling LLP (Apr. 1, 2022). Other commenters in
response to the Rule 10b5-1 Proposing Release recommended that the
Commission not require disclosure of the termination of a trading
arrangement because issuers may terminate a trading arrangement in
advance of announcement of a significant corporate transaction, such
as a merger, and that such plan terminations, if disclosed, could
signal the market. See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Sullivan & Cromwell LLP (Apr. 1, 2022) and
Securities Industry and Financial Markets Association, Kevin Carroll
(Apr. 1, 2022).
---------------------------------------------------------------------------
Other commenters did not support the proposed reporting
requirements as a general matter.\343\ A number of commenters expressed
concern regarding the requirement for issuers to provide a description
of the ``material terms'' of any Rule 10b5-1 trading arrangement \344\
because issuers might interpret this to include specific details of a
trading arrangement, such as pricing information.\345\ Several
commenters stated that the disclosure of pricing information and other
details of a Rule 10b5-1 trading arrangement could expose issuers and
their insiders to strategic trades.\346\ A number of
[[Page 36027]]
commenters also recommended that the Commission not require disclosure
regarding non-Rule-10b5-1 trading arrangements \347\ because it would
not provide valuable information to investors, the Commission, or other
market participants.\348\ Moreover, one commenter suggested the
Commission exempt SRCs from the proposed disclosure requirement.\349\
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\343\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from ACCO Brands Corp. (Mar. 31, 2022); Committee
on Securities Law of the of the Business Law Section of the Maryland
State Bar (Apr., 2022); International Bancshares Corporation (Apr.
1, 2022); National Association of Manufacturers (Apr. 1, 2022);
National Venture Capital Association (Apr. 1, 2022); Society for
Corporate Governance (Apr. 1, 2022); Sullivan & Cromwell LLP (Apr.
1, 2022); and Wilson, Sonsini, Goodrich & Rosati (Apr. 11, 2022).
\344\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Cleary, Gottlieb, Steen & Hamilton LLP (Mar.
23, 2022); Davis Polk & Wardwell LLP (Mar. 28, 2022); DLA Piper
(Apr. 1, 2022); Federal Regulation of Securities Committee of the
Business Law Section of the American Bar Association (Apr. 29,
2022); FedEx Corporation (Apr. 1, 2022); Fenwick & West (Mar. 31,
2022); Kirkland & Ellis (Apr. 1, 2022); National Association of
Manufacturers (Apr. 1, 2022); National Venture Capital Association
(Apr. 1, 2022); Quest Diagnostics Inc. (Apr. 1, 2022); Securities
Industry and Financial Markets Association, Joseph P. Corcoran (Apr.
1, 2022); Society for Corporate Governance (Apr. 1, 2022); Sullivan
& Cromwell LLP (Apr. 1, 2022); and Wilson, Sonsini, Goodrich &
Rosati (Apr. 11, 2022).
\345\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Cleary, Gottlieb, Steen & Hamilton LLP (Mar.
23, 2022); Davis Polk & Wardwell LLP (Mar. 28, 2022); DLA Piper
(Apr. 1, 2022); Federal Regulation of Securities Committee of the
Business Law Section of the American Bar Association (Apr. 29,
2022); Fenwick & West (Mar. 31, 2022); Quest Diagnostics Inc. (Apr.
1, 2022); Securities Industry and Financial Markets Association,
Joseph P. Corcoran (Apr. 1, 2022); Society for Corporate Governance
(Apr. 1, 2022); and Wilson, Sonsini, Goodrich & Rosati (Apr. 11,
2022).
\346\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Davis Polk & Wardwell LLP (Mar. 28, 2022);
DLA Piper (Apr. 1, 2022); Fenwick & West (Mar. 31, 2022); National
Venture Capital Association (Apr. 1, 2022); Securities Industry and
Financial Markets Association, Joseph P. Corcoran (Apr. 1, 2022);
Society for Corporate Governance (Apr. 1, 2022); and Wilson,
Sonsini, Goodrich & Rosati (Apr. 11, 2022).
\347\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Cleary, Gottlieb, Steen & Hamilton LLP (Mar.
23, 2022); Shearman & Sterling LLP (Apr. 1, 2022); Simpson Thacher &
Bartlett LLP (Mar. 31, 2022); and Sullivan & Cromwell LLP (Apr. 1,
2022).
\348\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Cleary, Gottlieb, Steen & Hamilton LLP (Mar.
23, 2022); Cravath, Swaine & Moore LLP (Mar. 28, 2022); and Simpson
Thacher & Bartlett LLP (Mar. 31, 2022).
\349\ See letter in response to the Rule 10b5-1 Proposing
Release from Maryland Bar (claiming that SRCs and their insiders are
less likely to engage in the kinds of trading in the securities of
their companies that would cause concern, but these issuers could be
disproportionately impacted by the reporting burden).
---------------------------------------------------------------------------
A few commenters to the Rule 10b5-1 Proposing Release recommended
that the disclosure requirements regarding issuer trading arrangements
be considered in the context of this rulemaking.\350\ One of these
commenters suggested specifically that information relating to issuer
use of Rule 10b5-1 plans could be moved to Item 703 to consolidate
issuer reporting of share repurchases.\351\
---------------------------------------------------------------------------
\350\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Cravath, Swaine & Moore LLP (Mar. 31, 2022)
and Simpson Thacher & Bartlett LLP (Mar. 31, 2022).
\351\ See letter in response to the Rule 10b5-1 Proposing
Release from Simpson Thacher & Bartlett LLP (Mar. 31, 2022.
---------------------------------------------------------------------------
3. Final Amendments
Consistent with the Rule 10b5-1 Adopting Release,\352\ we are
adopting new Item 408(d) of Regulation S-K, to better allow investors,
the Commission, and other market participants to observe how issuers
use Rule 10b5-1 plans. The information also will add important context
for interpreting other disclosures, including the other disclosures we
are adopting in this release, which should help investors value the
issuer's shares and make more informed investment decisions. As noted
above, in the Rule 10b5-1 Adopting Release, the Commission stated that
further consideration of potential application of the disclosure
requirements for purchases of equity securities by the issuer was
warranted. Upon further consideration, and in response to issues raised
by commenters, we believe that the Item 408(a) disclosure that was
proposed for issuers in the Rule 10b5-1 Proposing Release will
complement the disclosures concerning issuer repurchases that we are
adopting in this release and allow investors to better evaluate issuer
repurchases. Therefore, we are adopting new Item 408(d) in this
release. New Item 408(d) substantially mirrors the proposed Item 408(a)
of Regulation S-K disclosure requirement with respect to the issuer's
adoption or termination of a contract, instruction, or written plan to
purchase or sell its own securities that is intended to satisfy the
affirmative defenses conditions of Rule 10b5-1(c).
---------------------------------------------------------------------------
\352\ See Rule 10b5-1 Adopting Release, supra note 18.
---------------------------------------------------------------------------
In a change from the proposal, however, issuers will not be
required to disclose information about the adoption or termination of
any trading arrangement for the purchase or sale of securities of the
issuer that meets the requirements of a non-Rule 10b5-1 trading
arrangement as defined in Item 408(c). Because plans that would qualify
for the affirmative defense under Rule 10b5-1 offer issuers enhanced
protection from potential liability, in addition to other potential
benefits, and are considerably more flexible for issuers than for
insiders, we believe that issuers are incentivized to use trading
arrangements that satisfy the conditions of Rule 10b5-1(c).\353\ We
also agree with commenters who said that information about the issuer's
trading arrangements, other than those intended to qualify for the
affirmative defense, has more limited value to investors or other
market participants than information about such trading arrangements
for insiders.\354\ While issuers may not have reason to specifically
disclose their use of a 10b5-1 plan, we understand that issuers
generally have significant incentives to announce their repurchase
plans, so that mandating disclosure of non-10b5-1 plans would not
typically provide investors with significant new information.
---------------------------------------------------------------------------
\353\ The issuer of a security that relies on the recently
amended Rule 10b5-1(c)(1) affirmative defense will not be subject to
a cooling-off period, any limitation on the use of multiple
overlapping plans, or any limitation on the use of single-trade
plans. See Rule 10b5-1(c)(1)(ii)(B), (D), and (E).
\354\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Cleary, Gottlieb, Steen & Hamilton LLP (Mar.
23, 2022); Cravath, Swaine & Moore LLP (Mar. 28, 2022); and Simpson
Thacher & Bartlett LLP (Mar. 31, 2022).
---------------------------------------------------------------------------
New Item 408(d) will require an issuer to disclose whether, during
its most recently completed fiscal quarter (the issuer's 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). Issuers are also required to provide a description
of the material terms of the contract, instruction, or written plan
(other than terms with respect to the price at which the party
executing the respective trading arrangement is authorized to trade),
such as:
The date on which the registrant adopted or terminated the
Rule 10b5-1 trading arrangement;
The duration of the Rule 10b5-1 trading arrangement; and
The aggregate number of securities to be purchased or sold
pursuant to the Rule 10b5-1 trading arrangement.
In response to comments and consistent with our approach to the
recently adopted Item 408(a) of Regulation S-K,\355\ we have revised
the final rule to clarify that new Item 408(d) does not require
disclosure of the price at which the party executing the trading
arrangement is authorized to trade. We agree with commenters that
disclosing pricing information could allow other persons to trade
strategically in anticipation of planned trades.\356\ As proposed,
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.\357\
Moreover, while we are aware of the potential for a disproportionate
impact on SRCs, we believe that exempting them from this disclosure
requirement would deprive investors in those issuers of material
information about the use of Rule 10b5-1 plans.\358\
---------------------------------------------------------------------------
\355\ See Rule 10b5-1 Adopting Release, supra note 18.
\356\ See, e.g., letters in response to the Rule 10b5-1
Proposing Release from Davis Polk & Wardwell LLP (Mar. 28, 2022);
DLA Piper (Apr. 1, 2022); Fenwick & West (Mar. 31, 2022); National
Venture Capital Association (Apr. 1, 2022); Securities Industry and
Financial Markets Association, Joseph P. Corcoran (Apr. 1, 2022);
Society for Corporate Governance (Apr. 1, 2022); and Wilson,
Sonsini, Goodrich & Rosati (Apr. 11, 2022).
\357\ The Commission did not propose to require FPIs to provide
the Item 408(a) of Regulation S-K disclosure because they do not
file quarterly reports, but it requested comment on whether such a
requirement should apply to them. See Rule 10b5-1 Proposing Release,
supra note 17, at Question # 26. No comments were received on this
point.
\358\ As proposed, see supra note 335, the final amendments do
not apply to asset-backed securities issuers. Therefore, for clarity
we are making a technical amendment to Instruction J of Form 10-K to
allow asset-backed securities issuers to omit Item 408 disclosures.
Instruction J of Form 10-K includes a list of Item requirements that
may be omitted for asset-backed securities issuers.
---------------------------------------------------------------------------
[[Page 36028]]
Although there may be some overlap in the disclosure provided
pursuant to new Item 408(d) and the disclosure provided pursuant to the
amendment to Item 703 of Regulation S-K about an issuer's Rule 10b5-
1(c) trading arrangements adopted during the prior fiscal quarter, new
Item 408(d) would complement the new Item 703 disclosure. The
disclosure requirement in Item 703 will be triggered only if an issuer
had conducted a share repurchase in the prior fiscal quarter. In
contrast, Item 408(d) will require disclosure if a Rule 10b5-1 plan was
adopted or terminated, regardless of whether a share repurchase
transaction pursuant to that plan actually occurred during the prior
fiscal quarter that is covered in the Form 10-Q or Form 10-K (for the
issuer's fourth fiscal quarter). To prevent potential duplicative
disclosures, we are adding a note to Item 408(d)(1), which states that,
if the disclosure provided pursuant to Item 703 contains disclosure
that would satisfy the requirements of Item 408(d)(1), a cross-
reference to that disclosure will satisfy the Item 408(d)(1)
requirements.
E. Structured Data Requirement
1. Proposed Amendments
The Commission proposed to require issuers to tag the information
disclosed pursuant to Item 703 of Regulation S-K, Item 16E of Form 20-
F, Item 14 of Form N-CSR, and Form SR in a structured, machine-readable
data language. Specifically, under the proposed rules issuers would be
required to tag the disclosures in Inline XBRL in accordance with 17
CFR 232.405 (``Rule 405 of Regulation S-T'') and the EDGAR Filer
Manual.\359\ The proposed requirements would include detail tagging of
quantitative amounts disclosed within the tabular disclosures in each
of the aforementioned forms, as well as block text tagging and detail
tagging of narrative and quantitative information disclosed in the
footnotes to the tables required by Item 703 of Regulation S-K, Item
16E of Form 20-F, and Item 14 of Form N-CSR.
---------------------------------------------------------------------------
\359\ This tagging requirement would be implemented by including
cross-references to Rule 405 of Regulation S-T in each of the
repurchase disclosure provisions, and by revising Rule 405(b) of
Regulation S-T to include the proposed repurchase disclosures.
Pursuant to 17 CFR 232.301 (``Rule 301 of Regulation S-T''), the
EDGAR Filer Manual is incorporated by reference into the
Commission's rules. In conjunction with the EDGAR Filer Manual,
Regulation S-T governs the electronic submission of documents filed
with the Commission. Rule 405 of Regulation S-T specifically governs
the scope and manner of disclosure tagging requirements for
corporate issuers and investment companies, including the
requirement in Rule 405(a)(3) to use Inline XBRL as the specific
structured data language to use for tagging the disclosures.
---------------------------------------------------------------------------
2. Comments on the Proposed Amendments
Most of the commenters who discussed requiring issuers to tag the
information that would be disclosed in the proposed amendments
supported the requirement because they asserted that it would improve
the usability of the data.\360\ One commenter noted its concern that
the tagging requirement would be unnecessary and costly.\361\ Another
commenter objected to tagging the narrative disclosure and suggested
limiting the tagging requirement to quantitative repurchase
disclosures.\362\ One commenter asked the Commission to exempt FPIs
from this tagging requirement because their home country may not have a
similar requirement, so tagging would constitute an additional burden
on those issuers.\363\
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\360\ See, e.g., letters from Better Markets I, CalPERS, CFA
Institute, CII, ICGN, NASAA, and XBRL US.
\361\ See letter from NYC Bar.
\362\ See letter from Cravath.
\363\ See letter from VEUO (``FPIs may already be subject to
home country requirements with respect to disclosure of share
repurchases. Such home country requirements will almost certainly
not require preparation of structured data with the same content and
format as the Form SR Requirement. As a result, the structured data
requirement would represent an additional and unnecessary
administrative burden on FPIs'').
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3. Final Amendments
We are adopting, as proposed, final amendments to require issuers
to tag the information disclosed pursuant to Items 601 and 703 of
Regulation S-K, Item 16E of Form 20-F, Item 14 of Form N-CSR, and Form
F-SR in a structured, machine-readable data language in accordance with
Rule 405 of Regulation S-T and the EDGAR Filer Manual. The final
amendments require detail tagging of the quantitative amounts disclosed
within the required tabular disclosures and block text tagging and
detail tagging of required narrative and quantitative information. As
certain commenters noted, requiring XBRL tagging in this manner would
``make the information provided most useful by making the data easier
to review and compare electronically'' \364\ and doing so ``would both
enhance the utility of the information for investors and lower their
costs to gather'' that information.\365\
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\364\ See letter from CalPERS.
\365\ See letter from CII.
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We continue to believe that requiring Inline XBRL tagging of the
repurchase disclosures is beneficial because it makes them more readily
available and easily accessible to investors, market participants, and
others for aggregation, comparison, filtering, and other analysis, as
compared to requiring a non-machine readable data language such as
ASCII or HTML. This requirement also enables automated extraction and
analysis of granular data on actual repurchases, allowing investors and
other market participants to more efficiently perform large-scale
analysis and comparison of repurchases across issuers and time periods,
including comparing repurchases to information on executive's
compensation.\366\ At the same time, contrary to one commenter's
assertion that the Inline XBRL requirements would impose significant
unnecessary and significant compliance costs on issuers,\367\ we do not
expect the incremental compliance burden associated with tagging the
additional information to be unduly burdensome, because issuers subject
to the tagging requirements, including FPIs, are subject to similar
Inline XBRL requirements in other Commission filings.\368\ Moreover, as
a result of the tagging requirements, investors can aggregate or
manipulate the data to display monthly data that they are used to
reviewing.
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\366\ These considerations are generally consistent with
objectives of the recently enacted Financial Data Transparency Act
of 2022, which directs the establishment by the Commission and other
financial regulators of data standards for collections of
information, including with respect to periodic and current reports
required to be filed or furnished under Exchange Act sections 13 and
15(d). Such data standards would need to meet specified criteria
relating to openness and machine-readability and promote
interoperability of financial regulatory data across members of the
Financial Stability Oversight Council. See James M. Inhofe National
Defense Authorization Act for Fiscal Year 2023, Public Law 117-263,
tit. LVIII, 136 Stat. 2395, 3421-39 (2022).
\367\ See letter from NYC Bar.
\368\ Inline XBRL requirements for Listed Closed-End Funds and
business development companies took effect beginning August 1, 2022
(for seasoned issuers) and February 1, 2023 (for all other issuers).
---------------------------------------------------------------------------
F. Compliance Dates
FPIs that file on the 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, which is required by Item 16E of that form,
and the related tagging requirements will be required starting in the
first Form 20-F filed after their first Form F-SR has been filed.
Listed Closed-End Funds will be required to
[[Page 36029]]
comply with the new disclosure and tagging requirements in their
Exchange Act periodic reports beginning with the Form N-CSR that covers
the first six-month period that begins on or after January 1, 2024. All
other issuers will be required to comply with the new disclosure and
tagging 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.\369\
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\369\ For example, the compliance dates for a registrant with a
December 31, 2023 fiscal year end is 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.
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IV. Other Matters
If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application. Pursuant to the Congressional Review
Act,\370\ the Office of Information and Regulatory Affairs has
designated these amendments a ``major rule,'' as defined by 5 U.S.C.
804(2).
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\370\ 5 U.S.C. 801 et seq.
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V. Economic Analysis
We are mindful of the costs imposed by, and the benefits derived
from, our rules. Section 3(f) of the Exchange Act \371\ and section
2(c) of the Investment Company Act of 1940 (``Investment Company Act'')
\372\ require us, when engaging in rulemaking, to consider or determine
whether an action is necessary or appropriate in (or, with respect to
the Investment Company Act, consistent with) the public interest, and
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation. In
addition, 15 U.S.C. 78w(a)(2) (section 23(a)(2) of the Exchange Act)
requires the Commission to consider the effects on competition of any
rules the Commission adopts under the Exchange Act and prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\373\
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\371\ 15 U.S.C. 78c(f).
\372\ 15 U.S.C. 80a-2(c).
\373\ 15 U.S.C. 78w(a)(2).
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We have considered the economic effects of the amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be quantified.
Consequently, while we have, wherever possible, attempted to quantify
the economic effects expected from these amendments, much of the
discussion remains qualitative in nature. Where we are unable to
quantify the economic effects of the final amendments, we provide a
qualitative assessment of the potential effects.
As discussed in greater detail in Sections I and III above, the
final amendments include a requirement to disclose historical daily
repurchase activity in an exhibit to Forms 10-K and 10-Q (for corporate
issuers that report on domestic forms), on Form N-CSR (for Listed
Closed-End Funds), and on new quarterly Form F-SR for FPIs reporting on
the FPI forms (due to be filed within 45 days after the end of the
respective quarter). This disclosure, which is required to be
structured using Inline XBRL, includes the number of shares repurchased
by an issuer, the average price per share paid, total number of shares
purchased as part of publicly announced plans or programs, the maximum
number (or approximate dollar value) of shares that may yet be
repurchased under the publicly announced plans or programs, number of
shares repurchased on the open market, the number of shares intended to
qualify for the Rule 10b-18 non-exclusive safe harbor, and the number
of shares repurchased pursuant to a Rule 10b5-1 plan. This disclosure
will be required to be filed, rather than furnished.
The final amendments also require additional disclosure on Forms
10-Q, 10-K, 20-F, and N-CSR about the issuer's repurchase program and
practices, including the objectives or rationales for the share
repurchases, the process or criteria used to determine the amount of
repurchases, and whether purchases were made pursuant to a plan that is
intended to satisfy the affirmative defense conditions of Rule 10b5-
1(c), or intended to qualify for the Rule 10b-18 non-exclusive safe
harbor. In addition, the final amendments eliminate the requirement in
Item 703 of Regulation S-K that issuers disclose their monthly
repurchase data in their periodic reports. Further, the final
amendments require disclosure of 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 restrictions on
such transactions. Further, the amendments also require an issuer to
indicate whether certain officers or directors 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 four
business days before or after the issuer's public announcement of such
repurchase plan or program. Finally, the amendments add new quarterly
disclosure in periodic reports on Forms 10-K and 10-Q related to an
issuer's adoption and termination of certain trading arrangements. The
final amendments require the additional disclosures to be structured
using Inline XBRL.
A. Baseline and Affected Parties
1. Affected Parties
Repurchase disclosures are currently required by Item 703 of
Regulation S-K (on Forms 10-Q and 10-K), Item 16E of Form 20-F, and
Item 14 of Form N-CSR (for Listed Closed-End Funds). The disclosure is
required with respect to any purchase made by or on behalf of the
issuer or any ``affiliated purchaser'' of shares or other units of any
class of the issuer's equity securities that is registered pursuant to
section 12 of the Exchange Act. Based on staff analysis of EDGAR
filings for calendar year 2021, the amendments will affect the same
categories of issuers, including approximately 6,700 issuers with a
class of securities registered under section 12 that file on Forms 10-Q
and 10-K and approximately 800 issuers with a class of securities
registered under section 12 that file on Form 20-F.\374\ In addition,
based on staff analysis of Morningstar Direct data for 2021,
approximately 500 Listed Closed-End Funds are expected to be affected
by the amendments to Form N-CSR. We lack the data to estimate the
number of affected ``affiliated purchasers.''
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\374\ Registered investment companies (but not business
development companies) and asset-backed securities issuers are
excluded from the count of operating companies cited above. We refer
to FPIs that file on Form 20-F as FPIs in this section for brevity,
unless specified otherwise. Only FPIs that file on Form 20-F are
subject to the amendments. MJDS filers that file on Form 40-F are
not subject to the amendments. See MJDS Release, supra note 219.
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Among the issuers described above, issuers that recently engaged in
repurchases are most likely to be affected by the final
amendments.\375\
[[Page 36030]]
Based on data from Compustat and EDGAR filings for fiscal years ending
between January 1, 2021, and December 31, 2021, we estimate that
approximately 3,600 corporate issuers that conducted repurchases would
be more directly affected by the amendments (among them, approximately
300 Form 20-F filers).\376\ In addition, based on staff analysis of
Form N-CEN filings for 2021, approximately 100 Listed Closed-End Funds
conducted repurchases.\377\ Based on these estimates, most of the
affected issuers are corporate issuers that file periodic reports on
domestic forms.
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\375\ Issuers with no repurchases today could be affected by the
amendments to the extent they were planning future repurchases and
such plans were affected by the costs of the additional disclosure
requirements.
\376\ As a caveat, a complete estimate of the number of affected
issuers is limited by data coverage. A source of data commonly used
in existing studies, Standard & Poor's Compustat, has limited
coverage of small and unlisted issuers and FPIs. Therefore, we
supplement Compustat Fundamentals Annual data (version retrieved
June 27, 2022) with structured data from financial statement
disclosures in EDGAR filings (retrieved June 27, 2022), with the
caveat that variation in filer use of tags to characterize their
repurchases may result in some data noise.
\377\ Based upon a staff review, we expect approximately 20
percent of Listed Closed-End Funds to be affected by the amendments
to engage in share repurchases, as compared to approximately half of
corporate issuers.
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New Item 408(d) will affect issuers that undertake share
repurchases through Rule 10b5-1 plans. Data on issuers' use of such
plans are very limited. Some issuers voluntarily disclose their use of
Rule 10b5-1 plans to carry out stock repurchases on Form 8-K or in
periodic reports. Such voluntary reporting is likely to underestimate
the number of affected issuers. Nevertheless, in the current disclosure
regime, it is the most direct source of information on the prevalence
of Rule 10b5-1 plan repurchases. One study examining different
repurchase methods identified ``at least 200 announcements of
repurchases using Rule 10b5-1 [plans] per year from 2011 to 2014'' and
found that ``[In 2014] 29% [of repurchase announcements] included a
10b5-1 plan.'' \378\ Based on a textual search of calendar year 2021
filings, we estimate that approximately 210 issuers (excluding asset-
backed issuers) disclosed share repurchase programs executed under a
Rule 10b5-1 plan.\379\
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\378\ See Bonaim[eacute] et al. (2020), supra note 58.
\379\ The estimate is based on a textual search of calendar year
2021 filings of Forms 10-K, 10-Q, 8-K, as well as amendments and
exhibits thereto in Intelligize. The estimate is based on a textual
search using keywords ``10b5-1 repurchases'' or a combination of
keywords ``repurchase plan'' and ``10b5-1'' (the approach used in
the Proposing Release estimate). Due to a lack of standardized
presentation and the unstructured (i.e., non-machine-readable)
nature of the disclosure, these estimates are approximate and may be
over- or under-inclusive. Asset-backed issuers are not subject to
new Item 408(d). See supra note 358.
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Another, indirect approach to estimating the number of affected
issuers involves extrapolating the number of companies conducting
repurchases under Rule 10b5-1 plans in a given year from a combination
of the incidence of Rule 10b5-1 plan use among voluntarily announced
repurchases (estimated at 29 percent as previously noted \380\) and the
overall number of companies conducting repurchases based on their
financial statements.\381\ Based on data from Compustat and EDGAR
filings for fiscal years ending between January 1, 2021, and December
31, 2021, we estimate that approximately 3,600 operating companies
(excluding asset-backed issuers) conducted repurchases, yielding an
estimate of approximately 1,000 companies affected by the Item 408(d)
amendments.\382\ Item 408(d) does not apply to Listed Closed-End Funds.
---------------------------------------------------------------------------
\380\ See Bonaim[eacute] et al. (2020), supra note 58.
\381\ Using the number of issuers that announce repurchases in a
given year would underestimate the number significantly because
issuers may continue to implement a previously announced repurchase
program over multiple years.
\382\ As a caveat, a complete estimate of the number of affected
issuers is limited by data coverage. A source of data commonly used
in existing studies, Standard & Poor's Compustat, has limited
coverage of small and unlisted registrants and foreign private
issuers. Therefore, we supplemented Standard & Poor's Compustat
Fundamentals Annual data (version retrieved June 27, 2022) with
structured data from financial statement disclosures in EDGAR
filings (retrieved June 27, 2022), with the caveat that variation in
filer use of tags to characterize their repurchases may result in
some data noise. 29 percent x 3600 = 1,044 ~ 1,000.
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Investors will also be affected by the final amendments to the
extent that they benefit from the additional insight into an issuer's
repurchase activity (and bear any costs of analyzing the additional
disclosure). Financial intermediaries that execute repurchases at the
issuer's instruction will also be affected by these amendments to the
extent that they prepare the information necessary for an issuer's
responsive disclosure, and indirectly, to the extent that the
amendments affect the incidence of repurchases and thus demand for
financial intermediaries' services in connection with executing
repurchases. The amendments will also impact officers and directors to
the extent that issuers establish policies or procedures imposing
restrictions on transactions during a repurchase program. Officers and
directors (particularly, in the case of FPIs whose senior management
and directors are not subject to section 16 reporting obligations) may
also be affected by having to provide issuers with information about
their trades. We lack data to assess how many of these parties will be
affected.
2. Baseline
Many studies, spanning decades, examine the motivation for
corporate payout decisions, repurchases among them.\383\ Based on data
for 2021, share repurchases of U.S.-listed companies
---------------------------------------------------------------------------
\383\ For a more detailed discussion of the data and research on
repurchases and other payouts, see 2020 Staff Study; and Farre-Mensa
et al. (2014), supra note 28. The focus of the 2020 Staff Study was
determined by the directive of Congress in its Joint Explanatory
Statement accompanying the Financial Services and General Government
Appropriations Act, which directed the staff to study the recent
growth of negative net equity issuances with respect to non-
financial issuers, including the history and effects of those
issuers repurchasing their own securities, and the effects of those
repurchases on investment, corporate leverage, and economic growth.
The study provided data and statistics on share repurchases across
different types of companies and time periods, as well as an
extensive discussion of related evidence in existing research, which
offers insight into the existing market baseline. For example, the
study discusses the evidence on the favorable market reaction to
repurchase announcements. Among its findings, the study notes that
``[r]epurchases are an increasingly common way firms distribute cash
to shareholders. There are several possible reasons firms conduct
repurchases; some support efficient investment and for some the
connection is less clear. The analysis below suggests that firms are
more likely to conduct repurchases when they have excess cash and
when they would benefit from increased reliance on debt financing.''
The study further notes that ``the data is consistent with firms
using repurchases to maintain optimal levels of cash holdings and to
minimize their cost of capital'' and that ``reasons for repurchases
where the connection to efficient investment is less clear are
unlikely to motivate the majority of repurchases since stock prices
typically increase in response to repurchase announcements,
suggesting that, at least on average, repurchases are viewed as
having a positive effect on firm value . . . [and] that the theories
inconsistent with firm value maximization cannot account for the
majority of repurchase activity.'' In discussing one of the
criticisms of share repurchases, the study notes ``that insider
sales may be timed to coincide with repurchase announcements. If
insiders time sales to coincide with repurchase announcements and
any resulting increase in stock price, executives may be
incentivized to recommend repurchase programs to further their own
gain.'' However, the study notes, it is ``difficult to ascertain the
motivations underlying insider sales.'' See also infra note 390 and
accompanying text.
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[[Page 36031]]
amounted to approximately $950 billion.\384\ Aggregate repurchases have
grown significantly over the past four decades, but the increase
relative to aggregate market capitalization has been significantly more
modest due to the accompanying growth in aggregate market
capitalization; in addition, aggregate repurchases, both in absolute
terms and relative to aggregate market capitalization, have exhibited
considerable cyclical fluctuations (increasing during economic booms
and declining during recessions).\385\ As noted by a commenter, the
growth in repurchases was considerably smaller when adjusted for equity
issuance than when considered in gross terms.\386\ Dividends fluctuate
less than repurchases, consistent with dividends being viewed by the
market as a commitment to regularly return cash to shareholders.\387\
As a result, managers may endeavor to keep dividend payments stable,
mainly avoiding dividend cuts, justifying the market's
interpretation.\388\ Firms that exclusively pay dividends are
increasingly rare whereas the proportion of firms that regularly
conduct repurchases has increased over time, consistent with
repurchases being a partial substitute for dividends.\389\ As a caveat,
existing studies referenced in this release, including the 2020 Staff
Study, are necessarily constrained by existing disclosure
limitations.\390\
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\384\ Based on staff analysis of Standard & Poor's Compustat
Fundamentals Annual data (version retrieved June 27, 2022) related
to share repurchases conducted during fiscal years ending between
January 1, 2021 and December 31, 2021 by issuers listed on U.S.
exchanges (including financial industry issuers and U.S.-listed
issuers incorporated outside the U.S.). This estimate includes
financial industry issuers as well as U.S.-listed foreign-
incorporated issuers with Compustat data. As of this writing, we
lack complete data for fiscal years ending during January 1-December
31, 2022.
\385\ See, e.g., Campello, M., Graham, J., & Harvey, C., The
Real Effects of Financial Constraints: Evidence from a Financial
Crisis, 97 J. Fin. Econ. 470 (2010); Dittmar, A. & Dittmar, R., The
Timing of Financing Decisions: An Examination of the Correlation in
Financing Waves, 90 J. Fin. Econ. 59 (2008) (``Dittmar and Dittmar
(2008)''); Floyd, E., Li, N., & Skinner, D., Payout Policy through
the Financial Crisis: The Growth of Repurchases and the Resilience
of Dividends, 118 J. Fin. Econ. 299 (2015). See also 2020 Staff
Study (observing that growth in aggregate repurchases has fluctuated
over the past several decades, as demonstrated by a large decline
and rebound following the financial crisis, and also observing that
share repurchases net of equity issuances as a percentage of
aggregate market capitalization of public companies have remained
relatively stable over the past decade, within the longer trend of
modest percentage growth over the last forty years). See also letter
from Chamber V (discussing cyclicality and seasonality of
repurchases).
\386\ See letters from Chamber II and Profs. Lewis and White.
The commenter cites findings by Fried: Fried, J.M., & Wang, C.C. Are
Buybacks Really Shortchanging Investment? Harv. Bus. Rev., 88-95,
https://hbr.org/2018/03/are-buybacks-really-shortchanging-investment
(2018, March-April); Fried, J. https://hbr.org/2018/03/are-buybacks-really-shortchanging-investment; Fried, J.M., & Wang, C.C. Short-
Termism and Capital Flows, 8 Rev. Corp. Fin. Stud. 207 (2019); and
Fried, J.M., & Wang, C.C. Short-Termism, Shareholder Payouts and
Investment in the EU, 27 Eur. Fin. Mgmt. 389 (2021). As the
commenter also notes, Asness, Hazelkorn, and Richardson (2018)
``present empirical evidence that repurchases do not mechanically
grow earnings or reduce investment.'' See Asness, C., Hazelkorn, T.,
& Richardson, S. Buyback Derangement Syndrome, 44 J. Portfolio Mgmt.
50 (2018). As the commenter further notes, ``Edmans (2017, 2020)
also argues that issuers do not systematically misuse cash for
repurchases.'' See Edmans, A. (2017, September 15). The Case for
Stock Buybacks, Harv. Bus. Rev.; and Edmans, A. (2020). Grow the
Pie: How Great Companies Deliver Both Purpose and Profit. Cambridge
University Press.
\387\ See, e.g., Brealey, R., Myers, S., & Allen, F., Principles
of Corporate Finance (12th ed. 2017). Issuers generally announce
dividend policies, and markets react strongly to increases and
reductions in dividends. See, e.g., Healy, P. & Palepu, K., Earnings
Information Conveyed by Dividend Initiations and Omissions, 21 J.
Fin. Econ. 149 (1988). Market reactions to initiations and omissions
are even more pronounced. See Michaely, R., Thaler, R., & Womack,
K., Price Reactions to Dividend Initiations and Omissions:
Overreaction or Drift? 50 J. Fin. 573 (1995); Lee, B.S. & Mauck, N.,
Dividend Initiations, Increases and Idiosyncratic Volatility, 40 J.
Corp. Fin. 47 (2016). These studies indicate that decreases in
buybacks do not elicit the same negative market reaction as dividend
decreases.
\388\ For example, one survey of 384 chief financial officers
(``CFOs'') and executives suggests that the ability to avoid
reducing dividends was the top consideration of managers when
determining dividend policy. See Brav, A., Graham, J., Harvey, C., &
Michaely, R., Payout Policy in the 21st Century, 77 J. Fin. Econ.
483 (2005) (``Brav et al. (2005)'').
\389\ See 2020 Staff Study. The partial substitution between
dividends and repurchases has also been documented in academic
studies. See, e.g., Skinner, D., The Evolving Relation between
Earnings, Dividends and Stock Repurchases, 87 J. Fin. Econ. 582
(2008); Grullon, G. & Michaely, R., Dividends, Share Repurchases,
and the Substitution Hypothesis, 57 J. Fin. 1649 (2002).
\390\ The low frequency and the unstructured nature of existing
Item 703 data on repurchase activity limit the ability of existing
studies to gauge the extent of information asymmetry between issuers
and investors associated with the execution of repurchase programs
and its economic effects. Existing disclosure has also limited the
ability of existing studies to draw a causal connection between
managerial incentives and day-to-day execution of repurchase
programs as well as quantify its economic effects. Further, while
public attention has focused on the aggregate trends in repurchases,
the attribution of aggregate trends to specific drivers of
repurchases is complicated due to the presence of confounding
factors that cannot be readily isolated in existing data. The
discussed data limitations should be considered in evaluating
existing studies of the motivations of repurchases. Additional
caveats, where applicable, are referenced in the discussion of
individual strands of research and evidence on repurchases below.
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A recent change that followed the issuance of the Proposing Release
and that is likely to affect share repurchases is the enactment of the
one percent excise tax on share repurchases of covered corporations
under the Inflation Reduction Act, which took effect January 1,
2023.\391\ To the extent that the new excise tax causes some issuers to
reduce the frequency and/or size of their repurchases or choose to
declare a dividend instead, the number of issuers subject to the
amendments will decrease. Among issuers that continue to engage in
share repurchases after the effectiveness of the new excise tax, and
that therefore remain subject to the amendments, some may decrease the
level of share repurchases.\392\ Compared to the use of gross share
repurchases, the application of the excise tax to repurchases net of
equity issuance, which is clarified in recently issued Treasury
guidance,\393\ is likely to narrow the scope of the potential excise
tax effect.\394\ However, it is difficult to forecast how many filers
that engaged in repurchases in the past will cease or reduce
repurchases after the effectiveness of the excise tax due to several
limitations, including confounding macroeconomic and regulatory
factors, a lack of a directly comparable prior regulatory intervention,
uncertainty about how companies will weigh investors' personal tax
preferences against the corporate excise tax on repurchases, and the
fact that other company-specific factors, besides the excise tax on
buybacks, affect payout decisions.\395\
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\391\ See Public Law 117-169, 136 Stat. 1818 (2022). See also
Notice 2023-2 Initial Guidance Regarding the Application of the
Excise Tax on Repurchases of Corporate Stock under Section 4501 of
the Internal Revenue Code, available at https://www.irs.gov/pub/irs-drop/n-23-02.pdf (``Excise Tax Guidance'').
\392\ See Staff Excise Tax Memorandum, at 5.
\393\ See Excise Tax Guidance.
\394\ See Staff Excise Tax Memorandum, at p. 3 and note 11. See
also 2020 Staff Study.
\395\ See Staff Excise Tax Memorandum, at 4, 8. See also letter
from Chamber V (stating that the effects of the excise tax will
likely be unknown for at least a year after it becomes effective due
to the seasonality in stock repurchases and issuances, and also
noting the possibility of a global recession in 2023 that may affect
the quantification of the impact of the excise tax on repurchases
due to the cyclicality of share repurchases and issuances,
concluding that ``a period of at least two years is necessary to
properly gather data and quantify the impact of the excise tax on
share repurchase activity.'').
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As stated in Section I above, we have considered the potential
effects of the excise tax and the additional comments received. While
postponing the analysis of the amendments for one or two years
following the effectiveness of the Inflation Reduction Act would
provide additional repurchase data for the post-excise tax period, we
do not believe that such data is likely to yield meaningful changes to
the analysis of the economic effects of the amendments for two reasons.
First, to the extent that the
[[Page 36032]]
excise tax results in a decline in repurchase activity, both in terms
of the number of repurchasing issuers and the level of repurchases by
the issuers that continue to repurchase, those effects of a potential
change in the market baseline on the economic analysis of the proposed
amendments have been considered above and in the Staff Memorandum. We
do not believe that a decline in repurchase activity due to the excise
tax, should one occur, will have an effect on this economic analysis
that is meaningfully different from a decline in repurchase activity
for other reasons, such as a change in market conditions. Generally,
any significant trends of issuers discontinuing their repurchase
programs as a result of the excise tax will result in a decrease in the
aggregate costs of the rule. We document the evolution of share
repurchases, including the cyclicality in share repurchases, in the
2020 Staff Study. Furthermore, whether the aggregate level of share
repurchases decreases or remains largely unaffected, we continue to
believe that the underlying rationale for the rule--informing investors
in a more comprehensive fashion about the repurchase decisions of
issuers that do continue to conduct repurchases--remains applicable.
Moreover, when corporate repurchase decisions carry a new potential
cost to shareholder value, in the form of an excise tax, informing
shareholders about the reasoning behind, the structure of, and the
incremental nature of, an issuer's repurchase decisions may be even
more important.
Second, more importantly, due to the significant problem of
aggregate confounding factors, obtaining even two additional years of
data after the effectiveness of the excise tax is unlikely to enable us
to identify the incremental contribution of the excise tax. Changes in
macroeconomic and regulatory factors could confound the interpretation
of any change in the level of repurchase activity. For example, it is
virtually impossible to disentangle the role of other aggregate factors
that would have a similar direction of the effect on the level of
repurchase activity, such as the changes in macroeconomic conditions
and monetary policy, from the effects of widespread application of a
new tax on corporate repurchases. For example, a deterioration in
macroeconomic conditions may also lead issuers to conserve cash and
reduce or eliminate share repurchases (the much more flexible form of
shareholder payouts, compared to cash dividends). As another example,
contemporaneous increases in interest rates could make debt relatively
less attractive, leading to a reduction in debt-financed equity
repurchases that would be unrelated to the excise tax change. While the
effects of the excise tax are not expected to change the direction and
the qualitative nature of the economic effects of the amendments
discussed in Sections V.B. and V.C. with respect to any particular
share repurchase that takes place, to the extent that there is a
reduction in the total number of issuers that undertake share
repurchases due to the excise tax, the aggregate economic effects of
the amendments will decrease.\396\ In addition, for issuers that
continue repurchases but decrease their level and thus remain subject
to the amendments, we expect the portion of costs and benefits that
scales with the level of repurchases to decrease.\397\
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\396\ See Staff Excise Tax Memorandum, at 9-12.
\397\ See Staff Excise Tax Memorandum, at 9-12.
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Information about past repurchases is valuable to investors.
Several empirical studies show that on average share prices increase
after share repurchases.\398\ However, some studies do not find this
result.\399\ The differences in the conclusions may be due to
differences in empirical methodology and sample period.\400\ Because
these studies utilize presently available monthly data, they may suffer
from a lack of statistical power. Studies focused on share repurchase
announcements also find positive returns.\401\ Researchers have
identified several channels through which a repurchase could increase
the share price. One of the earliest strands of research on share
repurchases concludes that issuer share repurchases are related to the
undervaluation of its securities.\402\ Corporate insiders likely have a
superior understanding of their business and industry. Academic
research suggests that managers can use increases in distributions,
such as new repurchase programs, to signal their view that the stock is
undervalued and is expected to increase in the future.\403\ Issuers may
also undertake repurchases in an effort to provide price support by
supplying liquidity when selling pressure is high; thus, share prices
would be lower during an issuer's repurchases and higher
afterwards.\404\ Thus, more comprehensive and disaggregated, granular
information
[[Page 36033]]
about recent repurchases and prices of such repurchases should be
useful to investors in inferring the management's evolving beliefs
about the company's underlying value and, in conjunction with other
disclosures, improving price discovery.
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\398\ See, e.g., Dittmar, A. & Field, L.C., Can Managers Time
the Market? Evidence Using Repurchase Price Data, 115 J. Fin. Econ.
261 (2015) (``Dittmar and Field (2015)''); Ben-Rephael, A., Oded,
J., & Wohl, A., Do Firms Buy Their Stock at Bargain Prices? Evidence
From Actual Stock Repurchase Disclosures, 18 Rev. Fin. 1299 (2014)
(``Ben-Rephael et al. (2014)''); Chan, K., Ikenberry, D., & Lee, I.,
Do Managers Time the Market? Evidence from Open-Market Share
Repurchases, 31 J. Banking & Fin. 2673 (2007) (``Chan et al.
(2007)''); Cook, D., Krigman, L., & Leach, J.C., On the Timing and
Execution of Open Market Repurchases, 17 Rev. Fin. Stud. 463 (2004)
(``Cook et al. (2004)'') (finding that larger firms in the sample
perform better than smaller firms in timing the price at which
repurchases are executed); Bargeron, L. & Bonaim[eacute], A.A., Why
Do Firms Disagree with Short Sellers? Managerial Myopia versus
Private Information, 55 J. Fin. & Quantitative Analysis 2431 (2020)
(``Bargeron and Bonaim[eacute] (2020)'') (concluding that managers
of firms facing short selling pressure increase repurchases as a
result of managers' private information advantage over short
sellers). Horizons and methodologies employed in these studies
differ. For example, Dittmar and Field (2015) find that infrequent
repurchasers experience positive price trends for one, three, and
six months after months of actual repurchases (but the result is not
observed for frequent repurchasers); Ben-Rephael et al. (2014) find
a positive one-month drift following the disclosure of actual
repurchases; and Chan et al. (2007) show positive abnormal returns
after repurchase program announcements over up to a four-year
horizon.
\399\ See, e.g., Obernberger, S., The Timing of Actual Share
Repurchases, Working paper (2014) (concluding that contrarian
trading rather than market timing ability explains the observed
relation between returns and actual share repurchases); Dittmar and
Dittmar (2008); Bonaim[eacute], A.A., Hankins, K., & Jordan, B., The
Cost of Financial Flexibility: Evidence From Share Repurchases, 38
J. Corp. Fin. 345 (2016) (``Bonaim[eacute] et al. (2016)'') (finding
that ``actual repurchase investments underperform hypothetical
investments that mechanically smooth repurchase dollars through time
by approximately two percentage points per year on average'').
\400\ As a general caveat, any working papers cited here have
generally not undergone peer review and may be subject to revision.
\401\ See, e.g., Evgeniou, T., Junqu[eacute] de Fortuny, E.,
Nassuphis, N., & Vermaelen, T., Volatility and the Buyback Anomaly,
49 J. Corp. Fin. 32 (2018); Bargeron, L., Kulchania, M., & Thomas,
S., The Timing and Source of Long-Run Returns Following Repurchases,
52 J. Fin. & Quantitative Analysis 491 (2017); Peyer, U., &
Vermaelen, T., The Nature And Persistence of Buyback Anomalies, 22
Rev. Fin. Stud. 1693 (2009). But see Fu, F. & Huang, S., The
Persistence of Long-Run Abnormal Returns Following Stock Repurchases
and Offerings, 62 Mgmt. Sci. 964 (2016) (documenting disappearance
of long-run, post-repurchase abnormal returns during 2003-2012).
\402\ See the survey of the literature on share repurchases in
Farre-Mensa et al. (2014).
\403\ For analysis of signaling with repurchases, see, e.g.,
Vermaelen, T., Common Stock Repurchases and Market Signaling: An
Empirical Study, 9 J. Fin. Econ. 139 (1981); Vermaelen, T.,
Repurchase Tender Offers, Signaling, and Managerial Incentives, 19
J. Fin. & Quantitative Analysis 163 (1984); Constantinides, G. &
Grundy, B., Optimal Investment with Stock Repurchase and Financing
as Signals, 2 Rev. Fin. Stud. 445 (1989); Hausch, D. & Seward, J.,
Signaling with Dividends and Share Repurchases: A Choice Between
Deterministic and Stochastic Cash Disbursement, 6 Rev. Fin. Stud.
121 (1993); McNally, W., Open Market Stock Repurchase Signaling, 28
Fin. Mgmt. 55 (1999). In some studies, authors find that repurchases
send a stronger signal than dividends. See, e.g., Ofer, A. & Thakor,
A., A Theory of Stock Price Responses to Alternative Corporate Cash
Disbursement Methods: Stock Repurchases and Dividends, 42 J. Fin.
365 (1987); Persons, J., Heterogeneous Shareholders and Signaling
with Share Repurchases, 3 J. Corp. Fin. 221 (1997).
\404\ See, e.g., Liu, H. & Swanson, E., Is Price Support a
Motive for Increasing Share Repurchases?, 38 J. Corp. Fin. 77 (2016)
(``Liu and Swanson (2016)'').
---------------------------------------------------------------------------
Comprehensive disclosure of recent actual repurchases should thus
contain valuable information about the issuer's beliefs about the
fundamental valuation of the company that is not revealed to the market
otherwise. Conversely, a lack of comprehensive disclosure contributes
to information asymmetries between investors and issuers. The
additional quantitative and qualitative disclosures we are adopting are
further expected to enhance the information about share repurchases,
providing clearer insights into how and why the issuers undertake
repurchases and the extent to which they are related to temporary
undervaluation of issuer shares, temporary cash windfalls that cannot
be deployed to positive-net present value (NPV) investment projects, or
other objectives. The benefit of the information contained in
disclosures of recent repurchase activity is expected to be lower to
the extent that large issuer repurchases already have a price impact,
resulting in price discovery and indirect revelation of information to
the market, even in the absence of additional disclosure.\405\
Nevertheless, to the extent that an issuer's repurchases incorporate
insiders' future outlook on the firm, they could be informative to
investors (complementing the information in Form 4 filings).
---------------------------------------------------------------------------
\405\ See also letters from Chamber II and Profs. Lewis and
White (noting that ``the information contained in order flow may
subsume much of the information that would be contained in more
frequent disclosure'').
---------------------------------------------------------------------------
The existing disclosure of share repurchases aggregated on a
monthly basis does not allow investors to evaluate the specific timing
of actual repurchases or repurchase patterns or changes in conjunction
with other public information and point-in-time disclosures made by the
issuer and, if applicable, its executives.
Various studies address motivations behind corporate payouts and
the choice of the form of payout (repurchases or dividends).\406\ As
demonstrated by prior research, in a number of instances, the use of
repurchases can be efficient and aligned with shareholder value
maximization and benefit investors.\407\ Sometimes issuers that have
excess cash do not have profitable investment opportunities.\408\ In
such instances, distributing the cash through dividends or repurchases
can alleviate concerns that managers will spend the cash in sub-optimal
ways, such as empire-building acquisitions.\409\ Survey evidence
supports this theory, with the second most cited reason for conducting
a repurchase being the ``lack of good investment opportunities.'' \410\
By returning excess cash to shareholders, repurchases free up the
capital that can then be invested in other businesses that lack the
capital to pursue value-creating investment opportunities. Stock price
reactions to announcements of new repurchase programs are higher for
cash-rich issuers, which may be consistent with the creation of value
when managers remove their discretion over how to invest excess cash
and provide that cash to investors to redeploy as they see fit.\411\
---------------------------------------------------------------------------
\406\ For a more detailed summary of the related studies, see
2020 Staff Study and Farre-Mensa et al. (2014).
\407\ See 2020 Staff Study. See also letters from Chamber II and
Profs. Lewis and White; Lewis, C. M. The Economics of Share
Repurchase Programs (Feb. 2019), available at https://amac.us/wp-content/uploads/2019/02/The-Economics-of-Share-Repurchase-Programs1.pdf.
\408\ See, e.g., 2020 Staff Study stating that ``most
repurchases are conducted by companies with excess cash relative to
investment opportunities,'' as pointed out by a commenter. See
letters from Chamber II and Profs. Lewis and White.
\409\ See Jensen, M., Agency Costs of Free Cash Flow, Corporate
Finance, and Takeovers, 76 Am. Econ. Rev. 323 (1986).
\410\ See Brav et al. (2005).
\411\ See Grullon, G. & Michaely, R., The Information Content of
Share Repurchase Programs, 59 J. Fin. 651-680 (2004).
---------------------------------------------------------------------------
Additionally, issuers may choose repurchases if the excess free
cash flow stems from a one-time windfall, or if they value financial
flexibility and wish to avoid a costly, long-term commitment to higher
dividends.\412\ For instance, firms that favor repurchases tend to have
more volatile cash flows than dividend-paying firms.\413\ Issuers with
excess free cash flow may also choose repurchases over dividends as the
method of payout because repurchases are more tax-efficient for
shareholders.\414\ Finally, repurchases may also be used to adjust an
issuer's leverage upward, as part of adjustment towards the target
capital structure, or as part of a market timing approach to capital
structure.\415\
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\412\ See, e.g., Guay, W. & Harford, J., The Cash-Flow
Permanence and Information Content of Dividend Increases versus
Repurchases, 57 J. Fin. Econ. 385 (2000); Jagannathan, M., Stephens,
C., & Weisbach, M., Financial Flexibility and the Choice between
Dividends and Stock Repurchases, 57 J. Fin. Econ. 355 (2000). See
also supra notes 387-388 and accompanying text.
\413\ See Hoberg, G. & Prabhala, N., Disappearing Dividends,
Catering, and Risk, 22 Rev. Fin. Stud. 79 (2009) (showing that
riskier firms are less likely to pay dividends).
\414\ See, e.g., Feng, L., Pukthuanthong, K., Thiengtham, D.,
Turtle, H.J., & Walker, T.J., The Effects of Cash, Debt, and
Insiders on Open Market Share Repurchases, 25 J. Applied Corp. Fin.
55 (2013). The tax advantage of repurchases has been attenuated but
not eliminated after the 2003 dividend tax cut. Outside of tax-
exempt/tax-deferred accounts, all shareholders are subject to taxes
on dividends for the year the dividend was paid. In the case of
repurchases, only selling shareholders are subject to taxes on
capital gains (the remaining shareholders do not pay taxes until
they sell their shares). See, e.g., Chetty, R. & Saez, E. Dividend
Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax
Cut, 120 Q. J. Econ. 791 (2005); Chetty, R. & Saez, E. The Effects
of the 2003 Dividend Tax Cut on Corporate Behavior: Interpreting the
Evidence, 96 Am. Econ. Rev. 124 (2006); Aboody, A. & Kasznik, R.
Executive Stock-Based Compensation and Firms' Cash Payout: The Role
of Shareholders' Tax-Related Payout Preferences, 13 Rev. Acct. Stud.
216 (2008); Blouin, J., Raedy, J., & Shackelford, D., Dividends,
Share Repurchases, and Tax Clienteles: Evidence from the 2003
Reductions in Shareholder Taxes, 86 Acct. Rev. 887 (2011). Studies
have found companies with investors less averse to dividends due to
tax reasons are more likely to pay dividends, and vice versa. See,
e.g., Desai, M. & Jin, L. Institutional Tax Clienteles and Payout
Policy, 100 J. Fin. Econ. 68 (2011). See also letter from Davis
Polk.
\415\ See, generally, Baker, M. & Wurgler, J., Market Timing and
Capital Structure, 57 J. Fin. 1 (2002). Some other evidence suggests
that firms tend to repurchase stock and issue debt when the cost of
debt falls relative to the cost of equity. See Ma, Y., Nonfinancial
Firms as Cross[hyphen]Market Arbitrageurs, 74 J. Fin. 3041 (2019)
(``Ma (2019)''). See also Hovakimian, A., Role of Target Leverage in
Security Issues and Repurchases, 77 J. Bus. 1041 (2004) (finding
that ``equity issues and repurchases do not offset the accumulated
deviation from the target and they are timed to market
conditions'').
---------------------------------------------------------------------------
Some commentators and studies have noted that opportunistic insider
behavior and agency conflicts, rather than firm value maximization, can
motivate repurchases. In particular, repurchases can serve as a form of
real earnings management (through decreasing the denominator of EPS)
and thus be subject to short-term earnings management objectives of an
executive seeking to meet or beat consensus forecasts.\416\ CFO survey
responses indicate that increasing EPS is an important factor affecting
share
[[Page 36034]]
repurchase decisions.\417\ Investors may take this into account when
evaluating EPS.\418\ Nevertheless, earnings management-motivated
repurchases can have negative real effects on the issuer and its
shareholders, such as forgoing valuable investments.\419\ Some sources
disagree.\420\ Announcements of repurchases and actual repurchase
trades can also result in short-term upward price pressure.\421\ Share
price- or EPS-tied compensation arrangements can thus incentivize
executives to undertake repurchases, in an attempt to maximize their
compensation, even if such repurchases are not optimal from the
shareholder value maximization perspective. A number of studies have
examined the use of repurchases to influence compensation tied to per-
share measures.\422\ Further, a different study examined the real cost
of EPS-motivated repurchases outside the context of compensation.\423\
However, a different study documented a link between EPS targets and
repurchases but did not find evidence of negative effects on
shareholders.\424\ As an important caveat, the discussed incentives
would be weaker to the extent executive compensation plans and board
committees that address executive compensation account for how
repurchases would affect compensation targets and the value of
incentive-based compensation.\425\
[[Page 36035]]
Another instance of potentially inefficient repurchase behavior that
some studies have shown could have a negative effect on investors
involves insider incentives to raise the share price prior to insider
sales.\426\ Other studies reach different conclusions.\427\ As a
caveat, some studies note that in cases where repurchase announcements
coincide with earnings announcements, insider sales activity after the
repurchase announcement may be the result of pent-up liquidity demand
because issuers generally prohibit insiders from trading in the period
leading up to earnings announcements as part of blackout periods.\428\
Further, in cases of findings related to trends in insider sales around
repurchase announcements, such trends may not directly translate to
patterns of insider sales around actual repurchases. As a final caveat,
omitted variables may affect both insider sales and repurchases.\429\
Conversely, some studies note that insider purchases of stock in
conjunction with a repurchase announcement may strengthen the
credibility of the repurchase signal.\430\ CFOs report that they
consider the price of the stock when deciding whether to repurchase
stock.\431\ Further, academic studies have found that firms conduct
repurchases when stock prices are low.\432\ The effects of such issuer
trading on liquidity are not fully certain, with several studies
finding improved liquidity during repurchase programs,\433\ and several
other studies pointing to adverse selection effects of trading by the
better informed issuer.\434\
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\416\ For evidence on the use of repurchases as a method of real
earnings management, see, e.g., Bens, D., Nagar, V., Skinner, D., &
Wong, M.H.F. Employee Stock Options, EPS Dilution, and Stock
Repurchases, 36 J. Acct. & Econ. 51 (2003) (finding that stock
repurchases increase when ``(1) the dilutive effect of outstanding
employee stock options (ESOs) on diluted EPS increases, and (2)
earnings are below the level required to achieve the desired rate of
EPS growth'' and concluding that executives' repurchase decisions
are ``driven by incentives to manage diluted but not basic EPS, and
strengthening our earnings management interpretation'');
Bonaim[eacute], A.A., Kahle, K., & Moore, D., Employee Compensation
Still Impacts Payout Policy, Working Paper (2020) (finding ``a
strong positive relation between the dilutive effect of stock-based
employee compensation and share repurchases''); Burnett, B., Cripe,
B., Martin, G., & McAllister, B., Audit Quality and the Trade-Off
Between Accretive Stock Repurchases and Accrual-Based Earnings
Management, 87 Acct. Rev. 1861 (2012).
\417\ See Brav et al. (2005).
\418\ For example, Hribar et al. (2006), supra note 33, finds
that the market discounts EPS announcements in situations in which
EPS would have been shy of analyst expectations but for share
repurchases (and where repurchases are disclosed along with
quarterly earnings); Kahle, K. When a Buyback isn't a Buyback: Open
Market Repurchases and Employee Options, 63 J. Fin. Econ. 235 (2002)
(noting that the market appears to recognize the anti-dilutive
motive for repurchases and reacts less positively to repurchases
announced by firms with high levels of nonmanagerial options). Kurt
(2018) studies the use of ASRs for real earnings management and
concludes investors ``are not fooled'' by managers' use of ASRs as
an earnings management device. However, Kurt (2018) notes that
``[u]pward revision observed in analysts' EPS forecasts upon the
announcement of ASRs is short-lived, indirectly facilitating firms'
use of ASRs to meet or beat consensus forecasts.'' See Kurt, A.,
Managing EPS and Signaling Undervaluation as a Motivation for
Repurchases: The Case of Accelerated Share Repurchases, 17 Rev.
Acct. Fin. 453 (2018). But see Edmans et al. (2022).
\419\ For example, one recent study finds that repurchases used
to push EPS above analyst expectations are accompanied by a 10%
decrease in capital expenditures and a 3% decrease in research and
development. See, e.g., Almeida et al. (2016), supra note 33. Note
that the Almeida et al. (2016) findings do not necessarily
generalize to repurchases by issuers outside the range of EPS
approaching the earnings target, or to repurchases unrelated to EPS
manipulation. The Almeida et al. (2016) study further finds that,
amongst the subset of issuers that are close to missing the EPS
forecast, ``[i]t is clear that EPS-induced repurchases are on
average not detrimental to shareholder value or subsequent
performance,'' as pointed out by a commenter. See letters from
Chamber II and Profs. Lewis and White. However, the Almeida et al.
(2016) study also notes that ``some firms sacrifice valuable
investments to finance share repurchases.'' A 2016 McKinsey & Co.
report states that share repurchases do not improve shareholder
returns simply by increasing EPS because, under certain conditions,
there may have been more preferable uses for those funds such as
debt reduction and reinvestment in the firm. See Ezekoye, O.,
Koller, T., & Mittal, A., How Share Repurchases Boost Earnings
without Improving Returns, McKinsey (Apr. 29, 2016), available at
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-share-repurchases-boost-earnings-without-improving-returns.
\420\ See PwC (2019) Share Repurchases, Executive Pay and
Investment, BEIS Research Paper No. 2019/011 (``PwC Report'')
(finding in UK data ``no relationship between share repurchases and
investment'' and also finding that, even when focused ``on firms
that would have just missed an EPS target in the absence of a
repurchase, and thus are particularly likely to cut investment to
finance a repurchase . . . [that] these firms did not cut investment
more than other firms that would have just met an EPS target in the
absence of a repurchase.''); Kay, I. & Martin, B. Are Share Buybacks
a Symptom of Managerial Short-Termism? New Insights on Executive
Pay, Share Buybacks, and Other Corporate Investments, PayGovernance
(2019) (finding that ``four-year post-buyback performance on TSR and
CapEx growth was higher for the companies in the large buyback
sample than for the companies with smaller buybacks'', ``that
companies with higher short-term TSR had equal or higher subsequent
long-term TSR and CapEx growth'', and also suggesting that both
companies with small and large buybacks ``appear to be optimizing
earnings growth'').
\421\ With respect to actual share repurchases, a recent study
shows that price support provided by actual share repurchases
improves price efficiency, even when manipulation concerns might be
highest, such as those that occur prior to insider sales. See Busch,
B. & Obernberger, S., Actual Share Repurchases, Price Efficiency,
and The Information Content Of Stock Prices, 30 Rev. Fin. Stud. 324
(2017) (``Busch and Obernberger (2017)''). With respect to share
repurchase announcements, some have suggested that managers may take
advantage of positive stock price reactions to non-binding
repurchase announcements and use disingenuous repurchase
announcements to manipulate share prices. See Chan et al. (2010)
(finding in 1980-2000 data, which predates the 2003 Item 703
amendments, that a limited number of managers may have used
repurchases in a misleading way as ``cheap talk'', noting as a
caveat that ``the total number of buybacks where managers may have
been intending to mislead investors, while nonzero, also appears to
be limited''). Such ``cheap talk'' may result in lower announcement
returns. See, e.g., Bonaim[eacute], A.A., Repurchases, Reputation,
and Returns, 47 J. Fin. & Quantitative Analysis 469 (2012)
(``Bonaim[eacute] (2012)''); Bonaim[eacute] (2015). In contrast,
other studies argue that ``cheap-talk'' repurchase announcements may
correct mispricing by attracting additional market scrutiny. See
Almazan, A., Banerji, S., & De Motta, A., Attracting Attention:
Cheap Managerial Talk and Costly Market Monitoring, 63 J. Fin. 1399
(2008); Bhattacharya, U. & Jacobsen, S., The Share Repurchase
Announcement Puzzle: Theory and Evidence, 20 Rev. Fin. 725 (2016).
Further, as pointed out by some commenters, the 2020 Staff Study
concludes that ``[r]epurchase announcements are accompanied by stock
price increases. This announcement effect does not dissipate over
time, as one would expect if repurchases were based on efforts to
manipulate share prices.'' See letters from Chamber II and Profs.
Lewis and White.
\422\ See, e.g., Cheng, Y., Harford, J., & Zhang, T., Bonus-
Driven Repurchases, 50 J. Fin. & Quantitative Analysis 447 (2015)
(``Cheng et al. (2015)'') (finding that ``when a CEO's bonus is
directly tied to earnings per share (EPS), his company is more
likely to conduct a buyback,'' with the effect being ``especially
pronounced when a company's EPS is right below the threshold for a
bonus award,'' that ``[s]hare repurchasing increases the probability
the CEO receives a bonus and the magnitude of that bonus, but only
when bonus pay is EPS based,'' and further finding that ``[b]onus-
driven repurchasing firms do not exhibit positive long-run abnormal
returns''); Kim, S. & Ng, J., Executive Bonus Contract
Characteristics and Share Repurchases, 93 Acct. Rev. 289 (2018)
(finding that ``managers are more (less) likely to repurchase shares
and spend more (less) on repurchases when as-if EPS just misses
(exceeds) the bonus threshold (maximum) EPS level,'' and that
``[m]anagers making bonus-motivated repurchases do so at a higher
cost''); Marquardt, C., Tan, C., & Young, S. (2011) Accelerated
Share Repurchases, Bonus Compensation, and CEO Horizons, Working
paper (finding that firms are more likely to choose ASRs over open
market repurchases ``when the repurchase is accretive to EPS, when
annual bonus compensation is explicitly tied to EPS performance,
when CEO horizons are short, and when CEOs are more entrenched'').
See also letter from S. Kaswell (supporting benefits of additional
disclosure about whether repurchase plans trigger additional
executive compensation).
\423\ See Almeida et al. (2016) (finding that ``[t]he
probability of share repurchases that increase earnings per share
(EPS) is sharply higher for firms that would have just missed the
EPS forecast in the absence of the repurchase, when compared with
firms that `just beat' the EPS forecast'' and that ``EPS-motivated
repurchases are associated with reductions in employment and
investment, and a decrease in cash holdings'' and concluding that
``managers are willing to trade off investments and employment for
stock repurchases that allow them to meet analyst EPS forecasts'').
See also Rulemaking Petition 4-746.
\424\ See Young, S. & Yang, J., Stock Repurchases and Executive
Compensation Contract Design: The Role of Earnings Per Share
Performance Conditions, 86 Acct. Rev. 703-733 (2011) (finding ``a
strong positive association between repurchases and EPS-contingent
compensation arrangements'' but also finding ``net benefits to
shareholders from this association'' (including ``larger increases
in total payouts'', a more pronounced ``positive association between
repurchases and cash performance'' in the presence of surplus cash;
greater likelihood of undervalued firms ``signal[ing] mispricing
through a repurchase,'' and ``lower abnormal accruals'') and ``no
evidence that EPS-driven repurchases impose costs on share-holders
in the form of investment myopia'').
\425\ See 2020 Staff Study (finding that, based on a review of
compensation disclosures in proxy statements for a sample of 50
firms that repurchased the most stock in 2018 and 2019,''82% of the
firms reviewed either did not have EPS-linked compensation targets
or had EPS targets but their board considered the impact of
repurchases when determining whether performance targets were met or
in setting the targets'' and concluding that ``[m]ost of the money
spent on repurchases over the past two years was at companies that
either do not link managerial compensation to EPS-based performance
targets or whose boards considered the impact of repurchases when
determining whether EPS-based performance targets were met or in
setting the targets, suggesting that other rationales motivated the
repurchases''), which was noted by several commenters. See, e.g.,
letters from Bishop, Cato, Chamber II, Coalition, Profs. Lewis and
White, T. Rowe Price, Virtu, and Vistra. The 2020 Staff Study also
notes that ``[collectively], these findings potentially suggest that
most repurchase activity does not represent an effort to
artificially inflate stock prices or influence the value of option-
based or EPS-linked compensation'', as noted by a commenter (see
letters from Chamber II and Profs. Lewis and White). See also, e.g.,
Fields, R., Buybacks and the Board: Director Perspectives on the
Share Repurchase Revolution, Sept. 20, 2016, available at https://corpgov.law.harvard.edu/2016/09/20/buybacks-and-the-board-director-perspectives-on-the-share-repurchase-revolution/ (concluding, based
on interviews of ``44 directors serving on the boards of 95 publicly
traded U.S. companies with an aggregate market capitalization of
$2.7 trillion'' that ``most directors said that their companies are
aware of the relationship between buyback programs and compensation
and that they make deliberate, informed choices to ensure that they
reward executives for desired behavior rather than for financial
manipulation of share prices. Anticipated buyback effects on EPS are
usually factored into EPS targets, they say, and unanticipated
effects can be adjusted out.''); PwC Report (finding in the UK
setting, which has daily reporting, ``no significant relationship
between share repurchases and either the existence of an EPS
condition or the proportion of an incentive award linked to that
condition within executive pay incentives and share repurchases,''
and finding in UK survey data that ``30% of companies adjust their
EPS targets contained within LTIPs for share repurchase activity,
and most senior executives acknowledge share repurchases should be
reviewed by remuneration committees.''); Bargeron, L., Kulchania,
M., & Thomas, S. Accelerated Share Repurchases, 101 J. Fin. Econ. 69
(2011) (finding limited evidence of earnings management motives for
ASRs in the presence of proxies for the value of flexibility);
Bennett, B., Bettis, C., Gopalan, R., & Milbourn, T. Compensation
Goals and Firm Performance, 124 J. Fin. Econ. 307 (2017) (in Table
5, not finding evidence that firms that just exceed the compensation
EPS goal undertake more repurchases than firms that just miss the
EPS goal, inconsistent with strategic use of repurchases to manage
EPS targets in compensation contracts). See also letters from
Chamber II; Vistra; Maryland Bar; Virtu; T. Rowe Price; Pay
Governance; SCG; Coalition; Cato; PA Chamber; Bishop; and Profs.
Lewis and White.
\426\ See, e.g., letters from AFREF et al., Better Markets I,
CFA Institute, CII, Oxfam, Prof. Palladino, and Public Citizen. See
also, e.g., Chan et al. (2010). See also Bonaim[eacute], A.A. &
Ryngaert, M.D., Insider Trading and Share Repurchases: Do Insiders
and Firms Trade in the Same Direction?, 22 J. Corp. Fin. 35-53
(2013) (``Bonaim[eacute] and Ryngaert (2013)'') (finding that
repurchases that coincide with net insider selling may be related to
price support and/or reasons related to option exercises); Cziraki
et al. (2021), supra note 34, (finding that ``[h]igher insider net
buying is associated with better post-event operating performance, a
reduction in undervaluation, and, for repurchases, lower post-event
cost of capital. Insider trading also predicts announcement returns
and long-term abnormal returns following events.'' They conclude
their results suggest ``insider trades before corporate events
[repurchases and SEOs] contain information about changes both in
fundamentals and in investor sentiment''); Palladino (2020) (finding
increased insider selling in quarters where buybacks are occurring);
Ahmed, W., Insider Trading Around Open Market Share Repurchase
Announcements, Working paper, University of Warwick (2017) (finding
that ``insiders take advantage of higher post-[repurchase]
announcement price and sell more heavily'', and that such selling is
predictive of lower long-term returns). See also Rulemaking Petition
4-746, at 5 and note 17 (expressing concern and citing evidence of
repurchases used to increase share prices at the time when insiders
sell shares) and letter from Prof. Jackson, Dr. Hu, and Dr. Zytnick.
See also, generally, Edmans et al. (2018), supra note 35 (finding
that ``CEOs release 20% more discretionary news items in months in
which they are expected to sell equity, predicted using scheduled
vesting months'' and that ``[t]he increase arises for positive news,
but not neutral or negative news, nor nondiscretionary news'' and
concluding that ``[n]ews in vesting months generates a temporary
increase in stock prices and market liquidity, which the CEO
exploits by cashing out shortly afterwards''; as an important
caveat, while the study includes buybacks among announcements, and
based on other evidence, they are generally viewed as positive
announcements, the study does not provide specific results for
buybacks); Edmans et al. (2022), supra note 34 (finding that
``[v]esting equity is positively associated with the probability of
a firm repurchasing shares'' but that ``it is also associated with
more negative long-term returns over two to three years following
repurchases'' and that ``CEOs sell their own stock shortly after
using company money to buy the firm's stock, also inconsistent with
repurchases being motivated by undervaluation'').
\427\ See, e.g., Liu and Swanson (2016) (finding that
``[c]orporate insiders do not sell from personal stock holdings
during the price support quarter.''); see also Busch and Obernberger
(2017) (concluding with respect to actual share repurchases, that
price support provided by repurchases improves price efficiency,
even when manipulation concerns might be highest, such as those that
occur prior to insider sales).
\428\ See Dittmann et al. (2022), supra note 40 (finding that
``both the timing of buyback programs and the timing of equity
compensation, i.e., the granting, vesting, and selling of equity,
are largely determined by the corporate calendar through blackout
periods and earnings announcement dates,'' ``not support[ing] the
conclusion that CEOs systematically misuse share repurchases at the
expense of shareholders,'' and concluding that ``equity compensation
increases the propensity to launch a buyback program when buying
back shares is beneficial for long-term shareholder value.''); and
Profs. Lewis and White (finding that the rise in insider selling
after repurchase announcements is driven by outliers and issuer
blackout periods) and letter from Chamber II. As a caveat, we note
that the commenters and the Dittmann et al. (2022) study do not
appear to have ruled out the possibility that repurchase and vesting
calendars are not aligned coincidentally.
\429\ As noted in Edmans et al. (2022), an analysis of insider
sales around repurchases may be susceptible to endogeneity concerns
due to omitted variable bias (e.g., if poor investment opportunities
cause the CEO to divest shares and also make it optimal for the firm
to pay out surplus free cash flow).
\430\ Announcement returns are positively related to past
insider purchases, especially for firms that are priced less
efficiently. See, e.g., Dittmar & Field (2015) (finding that
``repurchasing firms with relatively high net insider buying have
significantly lower relative repurchase prices'' and concluding that
firms with more net insider buying repurchase undervalued stock);
Babenko, I., Tserlukevich, Y., & Vedrashko, A., The Credibility of
Open Market Share Repurchase Signaling, 47 J. Fin. & Quantitative
Analysis 1059 (2012) (``Babenko and Vedrashko (2012)'');
Bonaim[eacute] and Ryngaert (2013) (finding that net insider buying
reinforces the undervaluation signal conveyed by repurchases while
net insider selling weakens it); Cziraki et al. (2021), supra note
34, (showing that ``pre-event insider trading contains information
regarding future changes in the cost of capital for repurchasing
firms''). Setting aside the signaling theory, purchases by insiders
during an issuer's repurchases if such insiders are in possession of
material nonpublic information may represent unlawful insider
trading that may harm other market participants. Similar to
insiders, issuers that purchase their securities while in possession
of material nonpublic information may be subject to Rule 10b-5
liability.
\431\ Brav et al. (2005).
\432\ See, e.g., Dittmar and Field (2015); Ben-Rephael et al.
(2014); Chan et al. (2007); Cook et al. (2004).
\433\ See, e.g., Busch and Obernberger (2017); Cook et al.
(2004); Hillert, A., Maug, E., & Obernberger, S., Stock Repurchases
and Liquidity, 119 J. Fin. Econ. 186 (2016). See also letters from
Chamber II and Profs. Lewis and White; Lewis, C.M., & White, J.T.
(2021). Corporate Liquidity Provision and Share Repurchase Programs,
U.S. Chamber of Commerce: Center for Capital Markets Competitiveness
(Fall 2021), available at https://www.centerforcapitalmarkets.com/wp-content/uploads/2021/09/CCMC_Stock-Buybacks_WhitePaper_10.2.21.pdf. See also letter from Chamber II.
\434\ See, e.g., Barclay, M.J., & Smith, C.W. Corporate Payout
Policy: Cash Dividends versus Open Market Repurchases, 22 J. Fin.
Econ. 61 (1988); Ginglinger, E., & Hamon, J., Actual Share
Repurchases, Timing and Liquidity, 31 J. Banking & Fin. 915 (2007)
(using data from France); Brockman, P., & Chung, D.Y. Managerial
Timing and Corporate Liquidity: Evidence from Actual Share
Repurchases, 61 J. Fin. Econ. 417 (2001) (using data from Hong
Kong).
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Presently, information about repurchases, aggregated at the monthly
[[Page 36036]]
level, is provided in periodic reports (on a quarterly basis for
domestic issuers that report on Forms 10-Q and 10-K, on a semi-annual
basis for Listed Closed-End Funds that report on Form N-CSR, and on an
annual basis for FPIs that report on Form 20-F).\435\ Issuers are not
required to provide more disaggregated information than the monthly
aggregates to investors about repurchases. This lack of disaggregated
disclosure about past repurchases likely contributes to information
asymmetries and thus makes it harder for investors to evaluate an
issuer's share repurchase program, determine the correct valuation of
an issuer's securities, and as a result make informed investment
decisions.
---------------------------------------------------------------------------
\435\ In addition to the disclosures on Form N-CSR that provide
more detailed information about Listed Closed-End Fund repurchases,
Form N-CEN also requires closed-end management investment companies
to indicate whether they engaged in a repurchase during the
reporting period and, if so, for what type of security. See supra
footnote 7.
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Although issuers, particularly exchange-listed issuers, may often
announce details of their repurchase programs on a voluntary basis,
issuers are not currently required to do so, or to disclose the
structure or objectives and rationales for their repurchase program. In
particular, to our knowledge, most issuers subject to the final
amendments do not currently disclose daily share repurchase
information. Further, issuers are not required to disclose whether they
allow insiders to trade during repurchases. Thus, it can sometimes be
difficult for investors to determine whether the undertaken repurchases
were efficient and aligned with shareholder value maximization, or were
driven at least in part by factors other than shareholder interests.
The last significant change to repurchase reporting was adopted in
2003,\436\ when the Commission required issuers to present monthly data
on actual repurchases on a quarterly basis in Form 10-Q or 10-K for
domestic corporate issuers, semi-annual basis in Form N-CSR for Listed
Closed-End Funds, and on an annual basis in Form 20-F for FPIs. One
study examined the consequences of this change and found that ``[f]irms
announce significantly fewer and slightly smaller open market
repurchase plans in the enhanced disclosure environment,'' however,
``completion rates (the amount of stock repurchased as a percentage of
the announced amount) significantly increase.'' \437\ The study further
states that ``[m]ore conservative announcement strategies and more
aggressive completion rates are consistent with a decline in false
signaling . . . open market repurchase announcements are viewed as more
credible, on average, in the enhanced disclosure environment.'' \438\
However, as the study notes, ``[a]s with any analysis based on a
regulatory change affecting all firms simultaneously, other
unobservable, macroeconomic trends could have affected repurchase
behavior.'' \439\
---------------------------------------------------------------------------
\436\ See 2003 Adopting Release, supra note 5.
\437\ See Bonaim[eacute] (2015).
\438\ Id.
\439\ Id.
---------------------------------------------------------------------------
Available data on issuer use of Rule 10b5-1 plans under the
baseline was discussed in Section V.A.1 above.
In Sections V.B. and V.C. below we evaluate the anticipated costs
and benefits of the final rule and the anticipated effects of the final
rule on efficiency, competition, and capital formation.
B. Benefits
We begin the discussion with the general benefits applicable to all
of the final amendments, continue to discuss the benefits specific to
the new quantitative repurchase disclosure, and then proceed to the
benefits specific to other amendments.
1. General Benefits of the Disclosures
We anticipate the amendments will give rise to benefits by
strengthening investor protection, improving market efficiency, and
facilitating capital formation. The amended disclosure requirements are
expected to benefit investors (including existing shareholders
contemplating a sale of securities or a purchase of additional
securities) by providing investors with more comprehensive and
comparable disclosures about share repurchases and thus enabling them
to value the issuer's securities more accurately, resulting in better
informed investment decisions.\440\ Existing evidence in academic
research (discussed in detail in Section V.A.2. above) and various
comment letters on the proposal \441\ support the presence of
significant information asymmetries between insiders and other
investors on undertaken repurchases and the extent to which they may
relate to the fundamental value of the issuer's stock. The issuer's
evolving knowledge of the issuer's future prospects, and thus, share
valuation may be reflected in the execution of actual share repurchases
following a repurchase program announcement. Thus, more comprehensive
disclosure of the issuer's repurchase strategy may indirectly inform
investors about the issuer's fundamental value, in addition to other
existing disclosures (unrelated to issuer repurchases). Moreover, to
the extent that reasons for actual repurchases may be confounded by
managerial self-interest, additional information on the timing of
repurchases can be indicative of such agency problems, informing
investors about the likely impacts of repurchases on shareholder
value.\442\ Hence, we disagree with some commenters' \443\ suggestion
that there is no market failure necessitating additional repurchase
disclosures. Continuing the existing regime where issuers are only
mandated to provide abbreviated and aggregated disclosure of share
repurchases, as compared to the final amendments, and relying solely on
voluntary disclosure of additional repurchase plan details to fill
these information gaps is not a solution to the information asymmetry
issues because of market failures arising from collective action and
moral hazard problems.
---------------------------------------------------------------------------
\440\ See supra notes 403-404, 402-404, 432 and accompanying
text.
\441\ See supra notes 65, 146, 247, and 264.
\442\ See supra notes 416-426 and accompanying and following
text.
\443\ See, e.g., letters from Chamber II and Profs. Lewis and
White for a detailed discussion of this argument.
---------------------------------------------------------------------------
Specifically, there are potential collective action problems that
preclude an optimal level of additional voluntary disclosure.
Voluntarily disclosing the additional details of their share repurchase
strategy when other issuers do not do so can place the issuer at a
relative disadvantage. For example, such disclosures can be costly to
individual firms due to the costs of compiling the disclosures, the
potential legal risk stemming from such disclosures, and the potential
costs of leaking valuable private information to competitors that may
infer proprietary information about the issuer. In addition, such
disclosures may reveal information to other traders that may trade
against the issuer, resulting in a less favorable repurchase price,
particularly for multi-quarter repurchase programs. While more
comprehensive repurchase disclosure is privately costly to individual
issuers in such a voluntary framework, such disclosure has positive
informational externalities for investors and other market participants
which are not internalized by each issuer, which may lead issuers to
rationally under-disclose relative to what is optimal from the
investors' perspective.\444\
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\444\ As an alternative to the voluntary repurchase strategy
disclosure, to address the information asymmetries, insiders could
publicly reveal their private information about the stock's
fundamental value. However, an individual issuer doing so could
reveal private information on the firm's strategy to their
competitors, also giving rise to a collective action problem--thus,
a voluntary regime results in too little disclosure.
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[[Page 36037]]
Under the final amendments, all issuers would be required to follow
the same standard framework to disclose repurchase information at the
level of detail that facilitates investor evaluation of repurchase
information and helps them make comparisons among all issuers, thus
enabling better informed investment decisions. The final amendments
would therefore address the aforementioned market failure resulting
from collective action problems.
Furthermore, to the extent that managerial self-interest may affect
some repurchase decisions, moral hazard problems may also contribute to
this market failure by undermining the optimal provision of voluntary
disclosure about share repurchases to investors. In order for voluntary
disclosure to result in the complete revelation of all relevant private
information, there would need to be no agency problems (i.e., no
conflicts of interest between managers and shareholders) such that
managers' sole objective with respect to repurchase disclosures would
be to optimally disclose to shareholders information about repurchases.
However, if managers have other objectives and incentives that
interfere with the decision to make fulsome repurchase disclosures on a
voluntary basis, reliance on the additional disclosures being made
voluntarily may not result in the same complete information. For
example, if some repurchases are not made to maximize shareholder value
due to agency problems, managers may not wish to provide detailed
disclosure. Moreover, when agency problems exist, investors can no
longer be sure if the absence of additional, voluntarily provided
disclosure reflects good or bad news for the firm, given that some
managers may have self-serving incentives. To the extent that there are
instances where some repurchase decisions benefit the management rather
than maximize shareholder value, they would give rise to agency
conflicts with respect to providing sufficient disclosure about
repurchases.
More comprehensive and standardized disclosure about recent
repurchase activity is therefore expected to alleviate information
asymmetries about an issuer's repurchase strategy and therefore be
beneficial to investors (as discussed in detail in Section V.B. below).
Further, the final amendments will ensure greater uniformity across
issuers in the provision of qualitative and quantitative information
about repurchases to investors, facilitating investor comparison and
analysis of information across issuers and time periods. We thus
believe that the decrease in information asymmetry as a result of the
amended disclosure requirements would benefit investors, facilitating
better informed investment decisions. Some commenters have expressed
concern that the disclosure mandated by the amendments will undermine
benefits to investors by eliminating information acquisition
incentives.\445\ However, the disclosure will not eliminate all
information asymmetries for several reasons: (i) the final amendments
include a delay in the timing of the disclosure of the issuer's
repurchase trades; (ii) the final amendments require the revelation of
significant aspects of the repurchase program rather than require the
issuers to reveal the entirety of its private information; and (iii)
investors have disclosure processing costs and differ in their learning
from, and analysis of, public disclosures.\446\
---------------------------------------------------------------------------
\445\ See letters from Chamber II and Profs. Lewis and White,
referring to the argument, motivated by Grossman and Stiglitz
(1980), that ``[w]ithout some level of asymmetric information, there
would be fewer incentives to invest in information collection,
resulting in less price discovery and a corresponding reduction in
liquidity.'' See Grossman, S.J., & Stiglitz, J.E. (1980). On the
Impossibility of Informationally Efficient Markets, 70 Am. Econ.
Rev. 393.
\446\ See Blankespoor, E., deHaan, E. and Marinovic, I. (2020)
Disclosure Processing Costs, Investors' Information Choice, and
Equity Market Outcomes: A Review, 70 J. Acct. & Econ. 101344
(discussing the investor costs of ``monitoring for, acquiring, and
analyzing [public] firm disclosures,'' which they collectively
characterize as ``disclosure processing costs,'' and noting that
``[t]he existence of processing costs means that learning from
disclosures is an active economic choice, much like learning from
any private information source. Rational investors expect a
competitive return to processing and, thus, disclosure pricing
cannot be perfectly efficient'' and that ``[t]here is extensive
evidence that disclosure processing costs affect all types of
investors, from the smallest to most sophisticated, and can affect
stock returns and other market outcomes within rational
equilibria.'').
---------------------------------------------------------------------------
Relative to the baseline of existing disclosure requirements, the
final amendments will require more comprehensive and detailed
disclosure about issuer repurchase programs (including their structure
and objectives, policies related to insider trading around repurchases,
and information about issuer repurchase plans under Rule 10b5-1) and
actual repurchases undertaken by issuers, enabling more insight into
issuers' repurchase decisions and how they impact shareholder value.
The benefits of the amended disclosure requirements may vary across
investors. The described benefits may be more limited for some
sophisticated investors to the extent that those investors can gauge
partial information from the existing disclosures and public
announcements of repurchase programs, and to the extent that some large
repurchases have price impact, indirectly from existing market data.
However, information that is available today is generally much less
extensive and much less standardized across issuers than is required
under the final amendments. Further, investors may differ in their
ability to efficiently process and interpret the additional
disclosures. For example, some commenters indicated that the benefit of
granular day-by-day information about repurchases for informing trading
strategies may be greatest for more sophisticated traders.\447\
However, overall, we believe the amendments will result in
significantly more standardized, comparable, accessible, and generally
more comprehensive disclosure about repurchases, for all repurchasing
issuers subject to the amendments, which is expected to benefit all
investors, including less sophisticated investors.
---------------------------------------------------------------------------
\447\ See infra note 452.
---------------------------------------------------------------------------
2. Additional Quantitative Repurchase Disclosure
The more detailed disclosure of actual repurchases at the daily
level will provide additional information to inform investment
decisions compared to repurchase information aggregated to the monthly
level that is required to be disclosed today (and voluntary
announcements of repurchase programs issuers make today). More granular
data on daily repurchase activity levels and repurchase prices,
relative to existing disclosures, can provide more insight to investors
about the issuer's share repurchase strategy, including the timing of
execution of share repurchase decisions, the evolving outlook on the
valuation of its shares (as revealed by issuer trading), as well as how
recent repurchase decisions relate to other value-relevant corporate
decisions. Investors are expected to derive additional information
benefits from combining the amended repurchase disclosures with
existing financial and other disclosures in periodic reports, earnings
guidance and earnings announcements, proxy statements, etc. In
addition, for FPIs that presently are subject to repurchase disclosure
requirements in annual reports on Form 20-F, the amended disclosure
requirements will ensure significantly timelier disclosure of
repurchase information, making it available to investors on a quarterly
basis.
[[Page 36038]]
Over the last several decades, repurchases have become a partial
substitute for dividends as a means of returning cash to
investors.\448\ Unlike dividends which are smoothed and therefore
highly predictable, repurchases are less so. Overall, the additional
disclosure under the amended requirements will enable investors to
better understand the issuer's share repurchase decisions and how they
relate to shareholder value maximization, what the company's repurchase
strategy is (including the use of Rules 10b-18 and 10b5-1), how the
repurchase strategy varies with market conditions, as applicable, and
whether the repurchase is based on the need to gradually return cash,
potential temporary mispricing, or other factors. This will allow
investors, particularly, shareholders that sell shares during issuer
repurchases, to evaluate a more consistent and standardized disclosure
across various issuers, relative to the baseline. Furthermore, any
decrease in the information asymmetry between issuers and investors and
among investors due to the final amendments should contribute to a
reduction in adverse selection costs, which may promote liquidity.
---------------------------------------------------------------------------
\448\ See supra note 389.
---------------------------------------------------------------------------
In addition, repurchase activity data disaggregated on a day-by-day
basis, combined with other existing disclosures and public information
(e.g., dates and details of earnings announcements, analyst forecasts,
earnings guidance, acquisition announcements, compensation awards,
insider trades etc.), may enable investors to evaluate more accurately
whether some recent repurchases coincided with events that may give
rise to repurchase incentives other than undervaluation of shares or
distribution of excess free cash flow (e.g., meeting/beating the
consensus earnings forecast ahead of the earnings announcements,
increasing the share price prior to an insider's sale, meeting a
threshold in the compensation arrangement etc.). To the extent that the
amended disclosure requirements refine the ability of investors to
gauge the likely impacts of share repurchases on shareholder value
maximization, they are expected to result in better informed investment
decisions. Further, the amended disclosure is expected to provide
investors with additional context (with a greater level of granularity
than the existing disclosure presently reported on an aggregated,
month-by-month basis) for interpreting past repurchase announcements,
which may help investors in evaluating future repurchase announcements
by the issuer. Finally, one potential indirect effect of the amendments
may be to disincentivize repurchases that are not conducive to
shareholder value maximization, to the extent they are present at a
given firm, by drawing investor attention to such instances, benefiting
shareholders.
Some commenters on the daily reporting proposal have suggested that
repurchase data at the daily level may be noisy \449\ (in the sense
that daily fluctuations in repurchases may have various causes other
than new information about the firm's valuation) \450\ and also lead
some investors to draw inaccurate inferences.\451\ These considerations
are in our view unlikely to limit the information benefits of the
disclosure, particularly in the presence of sophisticated investor
bases. Further, the change from the proposal will allow investors to
analyze daily repurchase data within the context of the repurchase
disclosures for the entire quarter and the accompanying qualitative
disclosures, filtering out noise better, rather than trade in response
to each daily report, potentially alleviating some of the commenter
concerns about noise and volatility.
---------------------------------------------------------------------------
\449\ See supra notes 79-81.
\450\ See also Core, J.E. A Review of the Empirical Disclosure
Literature: Discussion, 31 J. Acct. & Econ. 441 (2001) (noting the
finding in Bushee and Noe (2001) that ``increases in `transient'
institutional investors (institutions that trade aggressively) are
associated with increases in stock price volatility'' and stating
that ``[a]ssuming that increases in stock price volatility are
costly, this finding is consistent with the intuition that partial
disclosure is optimal, and that too much disclosure can be as costly
as too little disclosure.'')
\451\ See supra notes 79-80, 84-85, and 92. But see, e.g.,
letter from Roosevelt (disagreeing with the idea that daily data
would lead to too much noise).
---------------------------------------------------------------------------
While some commenters have noted the concern that the daily
granularity of repurchase information may represent data that is too
disaggregated for retail investors to easily parse and benefit
from,\452\ we disagree that this information will widen information
asymmetries among investors. By making more detailed information
accessible to all investors which was not accessible in any way before,
we expect the final amendments to provide more information to retail
investors rather than less. Thus retail investors are expected to
incrementally benefit from the final amendments.
---------------------------------------------------------------------------
\452\ See supra notes 86-87. But see supra note 65 (discussing
comment letters supporting the information benefits of higher-
frequency reporting for investors, including individual investors)
and see also, generally, Easley, D., & O'Hara, M. Information and
the Cost of Capital 59 J. Fin. 1553 (2004) (``Easley and O'Hara
(2004)'') (showing, in a theoretical framework, a positive role for
public information because it reduces the risk for uninformed
traders of holding the asset). Moreover, in equilibrium, the ability
of sophisticated investors to capitalize on their superior
information processing technology strengthens their incentive to
compete for information and contributes to greater informational
efficiency of prices. Furthermore, many of the sophisticated
institutional investors may be involved in delegated portfolio
management, advising or managing portfolios for the benefit of less
sophisticated clients.
---------------------------------------------------------------------------
Consistent with the existing repurchase disclosure requirement, the
new disclosure of historical daily repurchase activity will be required
to be filed rather than furnished. Having the information be filed,
rather than furnished, ensures consistency in the liability standard
applicable to the additional repurchase disclosures provided under
amended Item 703 and the disclosures required to be provided under Item
703 today.\453\
---------------------------------------------------------------------------
\453\ See supra note 7.
---------------------------------------------------------------------------
3. Additional Qualitative Repurchase Disclosures
a. Objectives and Rationales and Repurchase Program Structure
Disclosures
Further, amended Item 703 \454\ will require periodic disclosure of
the objectives and rationales, as well as the structure, of the
issuer's repurchase program. This disclosure is expected to improve the
ability of investors to assess the shareholder value implications of
the issuer's repurchase policy.\455\ Such information benefits are not
limited to instances where share repurchases are not aligned with
shareholder value maximization. In particular, as discussed in Section
V.A.1 above and noted by a commenter,\456\ there are various scenarios
where share repurchases are aligned with shareholder value maximization
(for example, repurchasing undervalued securities, signaling future
issuer prospects, distributing excess free cash flow, or adjusting
capital structure). Disclosure of the objectives and rationales of
share repurchases that enhance shareholder value is also expected to
inform investor decisions and potentially provide investors with a more
comprehensive picture of the repurchasing issuer's circumstances and
future outlook. We continue to recognize the fact that the benefits of
the
[[Page 36039]]
information about the rationales, and the structure of, repurchase
programs could be limited in cases where issuers already voluntarily
provide similar information in repurchase program announcements or
periodic reports, or if some investors are able to infer the purpose or
structure of repurchases from other public information.\457\ The
benefits of the information about the rationales for repurchases may
also be limited if such disclosures provide relatively little
specificity to investors.\458\ However, as discussed above, the final
amendments will require more standardized and comparable disclosure of
the rationales for all issuers subject to the amendments, giving all
investors equal access to this information and thus facilitating all
investors' ability to process this information more effectively.
---------------------------------------------------------------------------
\454\ See supra note 7.
\455\ See supra notes 146-148 and 247 and accompanying text
(discussing comment letters that supported the information benefits
of the amended Item 703 disclosures of the objective and rationale
of the repurchase program and the use of Rules 10b5-1 and 10b-18 to
conduct the repurchase program).
\456\ See, e.g., letter from Chamber II for a detailed
discussion.
\457\ See letter from Chamber II. See also, e.g., Bonaim[eacute]
(2012) (tabulating, in Table 3, evidence on the stated motive of the
announced repurchase program and program completion rates). The
paper finds that ``[f]ew stated motives for repurchases affect
completion rates. Firms that mention undervaluation or general
corporate purposes in their announcements have significantly lower
completion rates, while firms that mention extending a prior plan or
having a strong cash position have significantly higher completion
rates on average. With the above exceptions, completion rates depend
more on what issuers are doing (implied motives) than on what they
are saying (stated motives).'' As a caveat, data obtained from a
voluntary regime may not fully generalize to the mandatory
disclosure of the rationale for repurchases under the amendments.
See also, e.g., letters from Cravath, Dow, and Maryland Bar, which
indicate that investors are unlikely to benefit from the disclosure
of whether repurchases were structured under Rule 10b5-1(c)(1) or
Rule 10b-18.
\458\ See also supra note 250 and accompanying text (discussing
comment letters that stated that the objective and rationale
disclosure would result in boilerplate disclosure that will not
prove meaningful to investors).
---------------------------------------------------------------------------
In some cases, incentives for repurchases may not be aligned with
shareholder value maximization, as discussed in Section V.A.2 above.
The inclusion of the disclosure of the objectives and rationales for
share repurchases may aid investors in assessing whether recent
repurchases were consistent with shareholder value maximization,
potentially resulting in better informed investment decisions.
b. Issuer Rule 10b5-1 Repurchase Plans
The new disclosure requirements under Item 408(d) (discussed in
Section III.D.3 above) will benefit investors in companies that
undertake share repurchases under Rule 10b5-1 by providing greater
transparency about such trading arrangements.\459\ This enhanced
transparency should enable better informed investment decisions and
more efficient allocation of investor capital. The timing of issuer
trading arrangement adoptions and terminations, as well as a
description of the material terms of the trading arrangements, is
expected to provide additional insight into the issuer's repurchase
strategy and the implementation of the previously announced repurchase
plans, potentially aiding investors in making more informed investment
decisions. These informational benefits may be lower in cases in which
investors already can obtain sufficient insight into the issuer
repurchase program from existing repurchase disclosures.
---------------------------------------------------------------------------
\459\ See supra note 339.
---------------------------------------------------------------------------
Informational benefits of the Item 408(d) disclosure may also be
lower in cases of trades that are not driven by temporary
undervaluation of issuers' shares but, for instance, involve gradual
disbursement of excess cash flow or rebalancing of capital structure
towards a target leverage ratio. Finally, similar to the recently
adopted Item 408(a) related to officer and director trading
arrangements, in a change from the proposal, price terms of issuer Rule
10b5-1 plans will be outside the scope of the new Item 408(d)
disclosure. This change will reduce the informational benefits to
investors, compared to the proposed amendments.
c. Insider Trading Checkbox and Policies and Procedures Disclosures
The final amendments require disclosure of: (i) 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, and (ii) whether any section 16
reporting officer or director of an issuer that files on domestic
forms--or senior management or directors of an FPI--purchased or sold
shares or other units of the class of the issuer's securities that are
the subject of an issuer share repurchase plan or program within four
business days before or after the issuer's repurchase announcement.
These requirements may also benefit investors by enabling better
informed investment decisions.\460\ This information may help investors
better interpret repurchase program announcements and disclosures of
actual repurchase activity in formulating projections of an issuer's
future share price. As one example, a lack of restrictions on insider
selling during repurchases, alongside historical disclosures of insider
selling, may help investors gauge whether a repurchase announcement, or
actual repurchases, may be inefficient, for example, potentially
motivated by boosting the share price prior to insiders' sales of their
securities, rather than conveying a true signal of undervaluation or
efficiently disbursing excess cash.\461\ As another example, such a
disclosure may also prompt investors to check whether insiders bought
shares within a few days before the share repurchase announcement. In a
change from the proposal, after considering commenter concerns about
the utility of the disclosure, we are limiting the checkbox disclosure
to insider trading within four business days, rather than ten business
days, before and after the repurchase announcement. By focusing the
disclosure on a narrower time frame more specific to the repurchase
announcement, this is expected to improve the informativeness of the
disclosure to investors.
---------------------------------------------------------------------------
\460\ See supra note 264 and accompanying text.
\461\ See supra note 426.
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As an indirect effect of the amendments, if the additional
disclosures draw investor scrutiny to insider selling during
repurchases, to the extent it occurs at some companies,\462\ the
amendments also may disincentivize repurchase announcements and actual
repurchases motivated by boosting share prices in advance of insider
selling, to the extent such activity exists, instead of shareholder
value maximization, or lead issuers to adopt policies prohibiting such
insider selling.\463\ The benefits of the disclosure of whether any
officer or director has purchased or sold securities of the issuer
around the repurchase announcement are likely to be small for many
issuers that file on domestic forms \464\ to the extent the investors
can obtain the same information from existing Exchange Act section 16
disclosures and public announcements of repurchases.\465\ Nevertheless,
the checkbox disclosure should present this information to investors in
an incrementally more accessible way, resulting in a small decrease in
the costs of accessing this information for those investors that do not
already collate beneficial ownership filings. Further, for
[[Page 36040]]
investors in FPIs whose officers and directors are not subject to
section 16, the disclosure will provide new information that investors
may utilize in conjunction with the qualitative and quantitative
repurchase disclosures.
---------------------------------------------------------------------------
\462\ See supra note 426 and accompanying text.
\463\ Studies have found evidence that changes in mandatory
disclosure affect behavior. See, e.g., Chuk, E.C., Economic
Consequences of Mandated Accounting Disclosures: Evidence from
Pension Accounting Standards, 88 Acct. Rev. 395 (2013);
Bonaim[eacute] (2015).
\464\ Officers and directors of FPIs are not subject to section
16 reporting obligations and would therefore incur higher costs.
\465\ See supra note 272 (discussing comment letters that
supported the benefits of requiring the checkbox disclosure). But
see supra notes 276-282 (discussing comment letters that indicate
that this disclosure is unnecessary).
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4. Inline XBRL
The use of a structured data language (specifically, Inline XBRL)
for the repurchase disclosures under the final amendments will enable
automated extraction of data on issuers' repurchase programs and actual
repurchases, which will allow investors, information intermediaries,
and other market participants to efficiently perform large-scale
analyses and comparisons of repurchases across issuers and time
periods, in line with the suggestions of various commenters that it
would improve the usability of the data.\466\ Structured data on
repurchases could also be efficiently combined with other information
available in a structured data language in corporate filings (e.g.,
financial statement information in periodic reports, as well as
information on insider sales and purchases of securities) and with
market data contained in external machine-readable databases (e.g.,
information on daily share prices and trading volume). The use of a
structured data language will also enable considerably faster analysis
of the disclosed data by investors and other market participants. In
that regard, we expect the particular investors most likely to use the
structured disclosures for their analysis are institutional investors
with the sophistication to process structured data; retail investors
will be more likely to benefit indirectly from the use of structured
disclosure by other parties.\467\
---------------------------------------------------------------------------
\466\ See supra note 360.
\467\ See supra note 452. But see Birt, J.L. Muthusamy, K. &
Bir, P., XBRL and the Qualitative Characteristics of Useful
Financial Information, 30 J. Acct. Res. 107 (2017) (finding
``financial information presented with XBRL tagging is significantly
more relevant, understandable and comparable to non-professional
investors''). Evidence indicates XBRL tagging has improved analyst
coverage and, in some cases, forecast accuracy. See, e.g., Liu, C.,
Wang, T., & Yao, L.J., XBRL's impact on analyst forecast behavior:
An empirical study. J. Acct. Pub. Pol., 33 (2014). Retail investors
have been observed to rely heavily on analyst interpretation of
financial information. See, e.g., Lawrence, A., Ryans, J.P., & Sun,
E.Y., Investor Demand for Sell-Side Research, 92 Acct. Rev. 2
(2017).
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As with the repurchase disclosures, the Inline XBRL structuring
requirements for the insider trading disclosures should augment their
benefits by improving their usability. The magnitude of these benefits
is likely to be modest to the extent that past insider selling activity
around past repurchases, disclosed on beneficial ownership filings,
could be sufficiently representative of future insider selling behavior
in such circumstances, even in the absence of a disclosure of
restrictions. The magnitude of these benefits of reduced information
asymmetry may further be limited to the extent that the existing
repurchase and disclosure practices are already sufficient for price
efficiency.\468\
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\468\ For example, one recent study shows that price support
provided by actual share repurchases contributes to improved price
efficiency, even when manipulation concerns might be highest, such
as those that occur prior to insider sales. See Busch and
Obernberger (2017). See also letter from Chamber II (stating that
managers strategically use share repurchases during periods of
uncertainty and that ``these effects help mitigate risks, allow
institutional and retail investors alike to buy and sell shares
without having a large price impact, and stabilize trading markets.
Thus, repurchases help to reduce volatility, which presents a
benefit to all shareholders, including retail investors, regardless
of whether investors buy and sell shares in their own accounts or
participate indirectly through investment in retirement
accounts.'').
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C. Costs
We begin the discussion with the general costs applicable to all of
the final amendments, continue to discuss the costs specific to the new
quantitative repurchase disclosure, and then address the costs specific
to other amendments.\469\
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\469\ See Section VI for a detailed description of the estimated
burden of the amended disclosure requirements for purposes of the
Paperwork Reduction Act (``PRA''). 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
1. General Costs of the Disclosures
The amended disclosure requirements will impose costs on issuers
(and therefore existing shareholders). The costs of the additional
quantitative repurchase disclosure include direct (compliance-related)
costs to compile and report additional disaggregated repurchase data
compared to what is presently required by Item 703 of Regulation S-K,
Item 16E of Form 20-F, and Item 14 of Form N-CSR (and for FPIs not
reporting on domestic forms, which file annual reports on Form 20-F
today, to provide repurchase disclosures on new Form F-SR, on a
significantly more timely and frequent basis than required today). Such
direct costs of compliance with the final amendments may include both
in-house counsel and external costs.
The final amendments will also impose indirect costs, potentially
affecting the shareholder value. A potential indirect cost of the final
amendments is the risk of sharing sensitive information with
competitors.\470\ It is unclear how likely it is that the amended
disclosure requirements of historical repurchases or the disclosure of
the rationales behind, and structure of, repurchases reveals
significant proprietary information about the issuer's business and
repurchase strategy, above and beyond competitive information that may
be revealed by other disclosures about the business and financial
condition of the issuer. Thus, we expect such indirect costs to be
relatively modest for most issuers.
---------------------------------------------------------------------------
\470\ See supra note 249 and accompanying text (discussing
commenter concerns that the disclosures required by the amendments
could divulge competitive or sensitive information). See also supra
notes 81 and 151 and accompanying text (discussing commenter
concerns about the additional disclosure potentially disrupting
confidential merger negotiations).
---------------------------------------------------------------------------
Another potential indirect cost of the amended disclosure
requirements is the possibility that the amended disclosure
requirements cause issuers to inefficiently decrease repurchases or
otherwise inefficiently deviate from an optimal payout policy. For
example, the described costs of the amended disclosure may potentially
discourage some issuers from repurchases that would otherwise be
optimal for shareholder value (e.g., as a more flexible method of
payout that is generally more efficient from the personal tax
standpoint, compared to dividends).\471\ Such issuers may instead
inefficiently overweigh dividends \472\ or reduce overall corporate
payouts and inefficiently retain excess cash within the firm. Further,
if the costs of the amended disclosure requirements cause issuers to
decrease overall payouts, even if issuers lack positive-net present
value investment opportunities, the resulting decrease in the ability
of investors to efficiently reallocate cash to other, higher-net
present value investment opportunities, may potentially lead to
inefficiencies in the aggregate allocation of capital across
issuers.\473\ Indirect costs specific to the additional quantitative
repurchase disclosure are discussed in Section V.C.2 below.
---------------------------------------------------------------------------
\471\ See supra note 414. See also, e.g., letters from Davis
Polk, DLA Piper, Quest, SCG, and Vistra. However, the personal tax
treatment is not a concern for investors exempt from taxation.
\472\ See, e.g., letter from PA Chamber (noting that the cost of
the amendments will particularly affect companies that rely on share
repurchases as a rational means of investor return and do not have
the business model to make shareholder returns entirely or even
partially via dividend).
\473\ See also letter from Vistra (noting that the proposed
daily reporting frequency requirements could be so ``unreasonably
burdensome as to deter potential capital allocation decisions'').
---------------------------------------------------------------------------
The described direct and indirect costs of the amended disclosure
requirements, if realized, will decrease shareholder value for affected
issuers.
[[Page 36041]]
Finally, the amended disclosure requirements may also affect
financial intermediaries involved in executing repurchases on behalf of
issuers. Such intermediaries may incur additional costs of compiling
disaggregated information about repurchase trades to facilitate the
issuer's compliance with the amended disclosure requirements. Such
information is likely to be relatively readily available. Thus direct
costs are likely to be modest. Nevertheless, intermediaries may need to
make incremental modifications to how they use their existing trade
recordkeeping systems to extract and compile the information required
by the issuer for the new disclosure. Financial intermediaries may also
incur indirect costs of the amended disclosure requirements in the form
of lower revenue if the amended disclosure requirements lead to a
decrease in repurchases.\474\ Intermediaries may pass on their costs to
issuers, which will in turn affect shareholders.
---------------------------------------------------------------------------
\474\ See also letter from Guzman (discussing adverse
competitive effects on smaller financial intermediaries). However,
conversely, financial intermediaries will realize benefits in the
form of higher revenue if the amended disclosure requirements are
followed by an increase in repurchases.
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2. Additional Quantitative Repurchase Disclosure
The costs of the additional quantitative repurchase disclosure
include direct (compliance-related) costs to compile and report
additional disaggregated repurchase data. The aggregate direct costs of
compliance may be larger for issuers that repurchase shares more often
and may incur an incrementally higher cost of preparing the new
repurchase disclosures, including the new periodic disclosure of
historical repurchase activity disaggregated at the daily level. While
we expect many issuers to already compile repurchase information to
comply with current monthly aggregate reporting requirements, issuers
that do not presently compile such repurchase information may incur
some incremental costs to modify their recordkeeping systems and
processes to compile such information. Issuers may incur a cost to
prepare the new disclosures (including the cost of additional time of
in-house counsel or the cost of retaining an outside service provider).
In addition, issuers may need to update their internal recordkeeping
systems and policies and procedures to maintain the information
required by the final amendments and report it on the frequency
required by the amendments.
As one commenter on the daily reporting frequency proposal
indicated, companies may incur additional costs to incorporate new
disclosure into their disclosure controls and procedures to ensure
accurate reporting.\475\ Another commenter on the daily reporting
frequency proposal expressed concern about the significant time and
expense required to collect and collate trade information, research and
correct possible errors, and consult legal and other experts.\476\ In
addition, some commenters pointed out that the daily disclosure may
raise the risk of frivolous litigation, resulting in issuers incurring
legal costs to defend against such claims.\477\
---------------------------------------------------------------------------
\475\ See letter from Norfolk Southern.
\476\ See letter from Empire.
\477\ See, e.g., letters from Davis Polk, Dow, and SCG. See
also, generally, Rogers, J. & Van Buskirk, A. Shareholder Litigation
and Changes in Disclosure Behavior, 47 J. Acct. & Econ. 136 (2009)
(finding that firms reduce the level of information provided after
being involved in disclosure-related class-action securities
litigation cases); Bourveau, T., Lou, Y., & Wang, R. Shareholder
Litigation and Corporate Disclosure: Evidence from Derivative
Lawsuits, 56 J. Acct. Res. 797 (2018) (finding that firms issue more
voluntary disclosure and increaser the length of management
discussion & analysis in their 10-K filings after passage of laws
that make it more difficult to file derivative lawsuits). However,
one study finds that, after accounting for endogeneity, additional
disclosure does not increase the risk of litigation. See Field, L.,
Lowry, M., & Shu, S., Does Disclosure Deter or Trigger Litigation?
39 J. Acct. & Econ. 487 (2005). As an important caveat, the study
analyzes voluntary disclosure of anticipated bad earnings news
rather than mandatory repurchase disclosures. Furthermore, to the
extent that the disclosure raises the risk of shareholder litigation
that is not frivolous, the threat of litigation may serve as a
disciplinary mechanism that curtails inefficient managerial
behavior. See, generally, Chung, C.Y., Kim, I., Rabarison, M.K., To,
T.Y., & Wu, E. Shareholder Litigation Rights and Corporate
Acquisitions, 62 J. Corp. Fin. 101599 (finding that ``reduced risk
of litigation gives managers incentives to engage in value-
destroying acquisitions''); Ferris, S.P., Jandik, T., Lawless, R.M.,
& Makhija, A. Derivative Lawsuits as a Corporate Governance
Mechanism: Empirical Evidence on Board Changes Surrounding Filings,
42 J. Fin. & Quantitative Analysis 143 (2007) (concluding that
``shareholder derivative lawsuits are not frivolous as is often
claimed, but rather that they can serve as an effective corporate
governance mechanism''); Pukthuanthong, K., Turtle, H., Walker, T.,
& Wang, J. Litigation Risk and Institutional Monitoring, 45 J. Corp.
Fin. 342 (2017) (concluding that ``[l]itigation is an effective
monitoring device for short-term investors that substitutes for
internal corporate governance'').
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In a change from the proposal, after considering the concerns of
commenters about the costs of the proposed daily frequency of reporting
repurchase information,\478\ we are not requiring the daily frequency
of reporting. We believe that preparing the disclosure of the
disaggregated repurchase information on a quarterly basis for operating
companies--and on a semi-annual basis for Listed Closed-End Funds--will
considerably decrease the described costs to issuers of the final
amendments, compared to the proposed daily reporting of disaggregated
repurchase information. However, although there is not necessarily
going to be a large cost impact of the final amendments on each
individual issuer, we recognize that, due to the large number of
repurchasing issuers (see Section V.A.1 above), the compliance costs
across issuers that conduct repurchases may be considerable in the
aggregate.\479\
---------------------------------------------------------------------------
\478\ See supra note 64. But see supra notes 70-71 and
accompanying text (discussing commenters that indicated that the
costs of compliance with the proposed requirements would be
minimal).
\479\ For example, as one commenter has noted ``SIFMA
understands from feedback that there are over 500 companies that
repurchase shares on an average trading day.'' See letter from SIFMA
II.
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The new disclosure of historical daily repurchase activity will be
required to be filed rather than furnished. The filing requirement is
expected to result in higher legal costs than the furnishing
requirement, due to potential legal risk of liability under Exchange
Act section 18.\480\ However, because the final amendments will not
require the daily reporting frequency, and because issuers will have a
considerable amount of time to obtain, verify, and compile the
disclosure, the costs of filing, rather than furnishing, the new
disclosure should be relatively modest.
---------------------------------------------------------------------------
\480\ See also letter from NASAA (discussing concerns about
private lawsuits if the daily repurchase disclosure is filed rather
than furnished). See also, generally, supra note 477.
---------------------------------------------------------------------------
The additional quantitative repurchase disclosure will also result
in indirect costs. A key indirect cost of the proposed daily reporting
frequency requirement, as discussed by various commenters,\481\ might
have been that the disclosure may cause the stock price to rise faster
than it would absent such disclosure potentially making additional
repurchases more costly. The reason that daily reporting may have had
this effect is that it could reveal the issuer's plans to repurchase
additional stock to outside investors (to the extent repurchases are
taking place over multiple months and to the extent that investors view
repurchases as being driven by the issuer's positive outlook on the
future stock price).\482\ To the
[[Page 36042]]
extent issuers would have incurred such a cost, other market
participants, who would have otherwise been less informed about the
issuer's outlook on its future share price, would have realized a
benefit in that case. Several commenters also pointed to the potential
for increased market volatility and investor misinterpretation of day-
to-day fluctuations in issuer repurchases as potential costs of the
proposed daily reporting.\483\ Additional indirect costs might include
inefficient changes to their repurchase programs in anticipation of
potential investor scrutiny of the new disclosures.\484\ In some
discrete instances, granular daily disclosure reporting may also
retrospectively reveal potentially sensitive information to competitors
due to a pattern of recent halts of daily repurchases.\485\ Because the
final amendments are not implementing the proposed daily reporting
frequency requirement, and are instead requiring much less frequent
reporting of historical repurchase activity, we expect the described
costs of the final amendments to be significantly more modest compared
to the proposal. In particular, while all indirect costs of the
amendments are expected to be alleviated compared to proposal, the
costs of revelation of the issuer's repurchase strategy to other
traders (referred to as ``front-running'' by various commenters) and
competitors, as well as the costs of potential market volatility
stemming from misinterpretation of daily reports of repurchase activity
are expected to be largely eliminated. To the extent that the much more
tailored approach to quantitative disclosures in the final amendments
compared to the proposal reduces the overall compliance and indirect
costs of the final amendments, in turn, the final amendments should
result in far fewer inefficient reductions in share repurchases,
relative to the proposal.
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\481\ See supra note 78 (referencing comment letters that
discussed the front-running concern stemming from the proposed daily
disclosure). However, because the final rules do not contain a daily
disclosure requirement, we believe that such costs will be
substantially alleviated, if not eliminated, compared to the
proposal.
\482\ This cost could be more pronounced for repurchases under a
Rule 10b5-1(c) plan to the extent that such repurchases exhibit a
greater degree of periodicity and occur over a period of time,
enabling market participants to predict future repurchases to a
greater extent based on historical daily data. However, such
investors may benefit from being able to purchase securities before
the issuer completes the repurchase program, potentially at a lower
price than they would have otherwise.
\483\ See supra notes 450-451 and accompanying text. In
addition, as other commenters point out, an issuer's halt of
repurchases due to a material undisclosed event or confidential
merger discussions may trigger significant market volatility and
potentially derail such confidential discussions. See supra notes
80-81 and accompanying text.
\484\ See, e.g., letters from SIFMA II and Sullivan (noting that
some issuers may continue daily repurchases when it does not make
financial sense to do so, to mitigate the consequences of daily
disclosure). Other issuers may bunch large repurchases into a
compressed time period may experience greater price impact from
large trades. See, e.g., letter from DLA Piper (stating that the
proposed daily disclosure could discourage more efficient daily
repurchases and lead issuers to undertake less efficient periodic
repurchases). See also letters from Chevron and Davis Polk, which
note that the proposed daily disclosure requirement might have led
issuers to follow the more costly practice of effecting larger
repurchases on fewer days. See also supra note 90 and accompanying
text (discussing commenter concerns that the proposed daily
disclosure requirement might, in turn, have led issuers to limit
their average daily repurchase trading volume to try to ensure that
sophisticated investors view the daily trades as immaterial, even if
a larger volume would be more beneficial to shareholders). With the
important caveat about the difficulty of extrapolating inference
about repurchases across international market settings, the limited
available evidence does not point to the prevalence of such bunching
in at least one active trading market with daily reporting of
repurchases (the U.K.). See, e.g., Kulchania, M., & Sonika, R.
Flexibility in Share Repurchases: Evidence from UK, 29 Eur. Fin.
Mgmt. 196 (2023).
\485\ See supra note 81 and accompanying text (discussing
letters from commenters concerned about potential information
leakage of confidential merger negotiations or another similar
material undisclosed event, particularly, if both the prospective
target and the prospective acquirer have halted previously regular
repurchases). We believe that such information leakage concerns are
not likely to be a substantial cost on most issuers, given the most
probable repurchase strategy scenarios. To the extent such concerns
may apply, they could be alleviated, for example, by indicating in
the initial repurchase program announcement that the issuer plans to
repurchase shares intermittently, or by making very minor
modifications to the repurchase strategy that deviate from a
completely predictable trading schedule while the program is being
executed.
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3. Additional Qualitative Repurchase Disclosures
The qualitative disclosure requirements will also result in costs
for issuers. Issuers will incur costs to provide additional disclosure
in periodic reports (including, when required, a description of the
rationales and structure of the repurchase program). While issuers
likely have most of the additional information readily available, these
disclosures may require additional time of counsel and/or management to
describe the rationales for the repurchase program, and the program's
structure, in the periodic report.
The new Item 408(d) requirement for Form 10-K and 10-Q filers will
also impose costs. Such costs will be lower for issuers that already
disclose some information about share repurchase programs under Rule
10b5-1. Issuers are likely to have the information required by this
item readily available, resulting in likely modest direct costs. In the
case of multi-quarter repurchase programs with a fairly repetitive
schedule of pre-planned trades, new Item 408(d) in combination with the
new disclosure of historical repurchase activity and repurchase program
structure, may contribute to potential revelation of detailed
information about the issuer's repurchase strategy and the potential
timeline of likely issuer repurchase trades to other market
participants, which could result in a less favorable repurchase price,
particularly in cases of repurchase programs that span multiple
quarters.\486\ In a change from the proposal, the amendments exclude
price terms of the trading arrangement from the scope of the new
disclosure, which should significantly alleviate such potential costs
to issuers.
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\486\ See supra note 345 and accompanying text. However, there
is some evidence that even the revelation of large predictable
planned trades may not result in such effects. See Bessembinder, H.
et al., Liquidity, Resiliency and Market Quality Around Predictable
Trades: Theory and Evidence, 121 J. Fin. Econ. 142 (2016) (showing,
in a setting with large and predictable exchange-traded fund trades,
that ``traders supply liquidity to rather than exploit predictable
trades in resilient markets'' and not finding ``evidence of the
systematic use of predatory strategies'').
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The requirement to check a box as to whether the specified officer
or director purchased or sold securities in the four business days
before or after a repurchase announcement will involve costs associated
with collecting information from officers and directors. Such costs may
be relatively modest for issuers that file on domestic forms to the
extent that they can rely on the officers' and directors' section 16
filings or representations about their trading activity. However, such
costs are likely to be higher for FPIs whose senior management and
directors are not subject to section 16.
The amended disclosure requirements may also impose costs on
corporate insiders. In particular, the requirement that issuers
publicly disclose whether they have policies and procedures related to
purchases and sales by officers and directors during repurchases, as
well as the disclosure of whether certain officers or directors
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 four business days before or after the issuer's
announcement of such repurchase plan or program, may cause issuers to
increasingly adopt such restrictions in anticipation of the market
scrutiny following such disclosure.\487\
[[Page 36043]]
This disclosure requirement may impose reputational costs or draw
additional scrutiny to officers or directors that engaged in selling
around repurchase announcements, discouraging such selling. The
incremental costs of this disclosure requirement to corporate insiders
of many issuers that file on domestic forms are generally likely to be
small \488\ to the extent the investors can already obtain the same
information from beneficial ownership disclosures and public
announcements of repurchases. However, as some commenters indicated,
there may be potential for misinterpretation that could follow from the
checkbox disclosure, whereby investors draw conclusions about insider
trading activity occurring in proximity to repurchase activity that are
inaccurate.\489\ The costs may be higher for senior management and
directors of FPIs that do not have a section 16 reporting obligation.
In a change from the proposal, after considering commenter concerns
about the checkbox disclosure, we are limiting the checkbox disclosure
to insider trading within four business days, rather than ten business
days, before and after the repurchase announcement. By focusing the
disclosure on a narrower time frame more specific to the repurchase
announcement, this change is expected to reduce some of the costs of
the disclosure to issuers and insiders, relative to the proposal.
---------------------------------------------------------------------------
\487\ See, e.g., letter from PNC (expressing concern that the
requirement to disclose policies and procedures relating to trading
by officers and directors during a repurchase program could create
an expectation that issuers must have such policies) and letter from
Quest (expressing concern that it may end up either having to
restrict officers and directors from trading during share
repurchases, or consider the impact on officers and directors when
scheduling its repurchases). Any restrictions an issuer imposes on
officer and director trading, for instance, in anticipation of
investor scrutiny of the new disclosures, could also limit the
ability of corporate insiders to purchase or sell securities at
issuers that conduct repurchases periodically over an extended
period of time (such as open market repurchases under a multi-
quarter program, or a Rule 10b5-1 plan). To the extent any such
restrictions limit insider sales, they may decrease the liquidity of
insiders' holdings of an issuer's securities.
\488\ Officers and directors of FPIs are not subject to section
16 reporting obligations and would therefore incur higher costs.
\489\ See supra note 284 and accompanying and following text
(discussing commenter concerns about misinterpretation of the
checkbox disclosure).
---------------------------------------------------------------------------
To the extent that the requirement to disclose whether any officer
or director has purchased or sold securities around the repurchase
announcements leads some companies to forgo making a repurchase
announcement to limit market scrutiny, the amount of information
available to investors about companies' forward-looking repurchase
plans may decrease. Importantly, the described costs are likely to be
small in the case of many issuers that file on domestic forms \490\ to
the extent that investors can already readily obtain the same
information by combining beneficial ownership disclosures of officer
and director trades with public announcements of repurchases.
---------------------------------------------------------------------------
\490\ See supra note 464.
---------------------------------------------------------------------------
4. Inline XBRL
The requirement to use a structured data language for reporting the
newly required disclosures will impose incremental compliance costs on
issuers.\491\ Such costs are expected to be modest as issuers affected
by the amendments (including SRCs and FPIs) already are required to use
Inline XBRL to comply with other disclosure obligations. Moreover, the
scope of the disclosures required to be reported using a structured
data language is limited and thus will require a relatively simple
taxonomy of additional tags, minimizing initial and ongoing costs of
complying with the new tagging requirement.
---------------------------------------------------------------------------
\491\ See letter from NYC Bar (expressing concern regarding the
``unnecessary and significant'' compliance costs and complexity that
would result from the Inline XBRL requirement). See also letter from
VEUO (stating, with respect to foreign private issuers, that the
structured data requirement would be an additional and unnecessary
burden for such issuers).
---------------------------------------------------------------------------
D. Efficiency, Competition, and Capital Formation
On balance we expect that the final amendments may have positive
overall effects on efficiency, competition, and capital formation. In
particular, a decrease in the information asymmetry between issuers and
investors about the value of an issuer's securities as a result of the
disclosure may lead to more informationally efficient prices, and more
efficient capital allocation in investor portfolios.\492\ The decrease
in information asymmetry among investors can alleviate adverse
selection costs and improve stock liquidity. Decreased information
asymmetries between investors and issuers as a result of the enhanced
disclosure under the amendments may also incrementally facilitate
capital formation and reduce the cost of capital.\493\ Further, by
enabling public disclosure of additional repurchase information, the
amendments may result in information being more fully incorporated into
share prices, and therefore, more informationally efficient share
prices. Taken together, the final rules may contribute to more
efficient allocation of capital, capital formation, competition, and
the maintenance of fair and orderly markets. Some commenters on the
daily reporting proposal \494\ asserted that daily repurchase
disclosure furnished one business day after an issuer repurchase may
contain considerable noise, which may lead some investors to draw
inaccurate inferences, reducing these information benefits and
potentially leading to increased volatility and speculative trading.
This consideration is more likely to be pronounced for issuers with a
less sophisticated investor base. As discussed in Section V.C.2 above,
because the final amendments are not implementing the daily reporting
frequency requirement, we believe that these concerns are likely to be
substantially alleviated, if not fully addressed, under the final
amendments.
---------------------------------------------------------------------------
\492\ But see supra note 445.
\493\ As discussed above, the final rules are expected to reduce
information asymmetry between investors and repurchasing issuers,
which can reduce investors' uncertainty about estimated future cash
flows, thus lowering the risk premium they demand and, potentially,
issuer cost of capital. See, e.g., Easley and O'Hara (2004);
Botosan, C., Disclosure and the Cost of Capital: What Do We Know?,
36 Acct. & Bus. Res. 31 (2006) (stating that ``[t]he overriding
conclusion of existing theoretical and empirical research is that
greater disclosure reduces cost of capital''); Lambert, R., Leuz,
C., & Verrecchia, R., Accounting Information, Disclosure, and the
Cost of Capital, 45 J. Acct. Res. 385 (2007) (showing, in a
conceptual framework, that ``increasing the quality of mandated
disclosures should in general move the cost of capital closer to the
risk-free rate'' and ``generally reduce the cost of capital for each
firm in the economy'' and further noting that ``the benefits of
mandatory disclosures are likely to differ across firms.'');
Accelerated Filer and Large Accelerated Filer Definitions, Rel. No.
34-88365 (Mar. 12, 2020) [85 FR 17178 (Mar. 26, 2020)], at 17215,
note 477. As a caveat, while the cited examples relate to disclosure
and cost of capital, they examine other disclosure contexts (not the
frequency of share repurchase reporting), as pointed out by a
commenter. See letters from Chamber II and Profs. Lewis and White.
\494\ See supra notes 79-81.
---------------------------------------------------------------------------
To the extent that the amended requirements affect smaller issuers
to a greater extent than larger issuers, they could result in adverse
effects on competition.\495\ The fixed component of the legal costs of
preparing the disclosure could be one contributing factor.\496\ The
lower liquidity of smaller issuers' securities,\497\ which may
[[Page 36044]]
exacerbate the price impact of the new disclosure, may also contribute
to disproportionate effects of the disclosure on smaller issuers. The
latter effect could be mitigated by the lower incidence, and the lower
average level (relative to issuer size), of repurchases among smaller
issuers.\498\ To the extent that the quarterly reporting of repurchases
for FPIs that file on Form 20-F is a significant additional cost \499\
for such issuers as they do not file quarterly reports with the
Commission, such costs may discourage some foreign issuers from listing
in the U.S. market, resulting in adverse effects on competition.
Compared to the proposal, the much lower frequency of reporting of
additional disaggregated repurchase information is expected to
significantly reduce the compliance and indirect costs of the
disclosure requirements in the final amendments. As a result, to the
extent that smaller filers would have incurred a disproportionate
impact of the new disclosures, this change will also reduce the
potential negative effects of the amendments on competition, compared
to the proposal.
---------------------------------------------------------------------------
\495\ See, e.g., letters from ACCO and Profs. Lewis and White.
See also letter from Guzman (stating that the proposed disclosures
could negatively affect competition in the financial services sector
by inducing issuers to use larger intermediaries instead of smaller
financial firms).
\496\ In the case of funds, while we expect larger Listed
Closed-End Funds and business development companies, or funds that
are part of a large fund complex, to incur higher costs related to
final amendments in absolute terms relative to a smaller fund or a
fund that is part of a smaller fund complex, we expect a smaller
fund to find it more costly, per dollar managed, to comply with the
final amendments because it would not be able to benefit from a
larger fund complex's economies of scale.
\497\ See, e.g., Amihud, Y. & Mendelson, H., Liquidity and Stock
Returns, 42 Fin. Analysts J. 43 (1986) (noting that ``[t]he stocks
of small firms suffer from market `thinness,' which impairs their
liquidity''.); Duarte, H. & Young, L., Why is PIN priced? 91 J. Fin.
Econ. 119 (2009) (in Table 6, showing that larger firm size is
correlated with higher liquidity based on different measures);
Collver, C., A Characterization of Market Quality for Small
Capitalization US Equities, September 2014, available at https://www.sec.gov/files/marketstructure/research/small_cap_liquidity.pdf
(2014) (finding that ``[s]mall cap stocks had larger quoted and
effective spreads and traded much lower volumes than mid cap
stocks'' and that ``[l]iquidity improved with market
capitalization'').
\498\ See, e.g., Dittmar, A., Why Do Firms Repurchase Stock, 73
J. Bus. 331 (2000) (finding that ``large firms are the dominant
repurchasers''); Cheng et al. (2015) (showing in Table 2 that
repurchasing firms are significantly larger than nonrepurchasing
firms); Jiang, Z., Kim, K.A., Lie, E., and Yang, S., Share
Repurchases, Catering, and Dividend Substitution, 21 J. Corp. Fin.
36 (2013) (showing in Table 5 that firm size is positively related
to the fraction of outstanding share purchases by firms on a monthly
basis).
\499\ FPIs may file current reports with the Commission on a
more frequent basis. Further, some FPIs already are subject to more
granular repurchase reporting requirements in their home
jurisdiction, in which case their incremental cost of complying with
the final amendments may be lower than for domestic issuers.
---------------------------------------------------------------------------
As discussed in Section V.C.1 above, a potential indirect cost of
the amended disclosure requirements is the possibility that issuers
inefficiently decrease repurchases. Further, to the extent that
repurchases currently contribute to more informationally efficient
prices and greater liquidity,\500\ any inefficient reduction in
repurchases in response to the amended disclosure requirements will
result in the indirect costs of decreased price efficiency (partly
offset by the information benefits of the new disclosures) and
decreased liquidity. We have discussed mitigating factors for these
effects in detail in Section V.C.1 above. As discussed in Section V.C.1
above, we also believe that the change to the frequency of reporting
the disaggregated repurchase information is likely significantly
alleviate these concerns, compared to the proposal.
---------------------------------------------------------------------------
\500\ See supra note 433.
---------------------------------------------------------------------------
E. Reasonable Alternatives
1. Alternative Reporting Frequencies and Disclosure Granularity
In a change from the proposal, the final amendments require
corporate issuers that file on domestic forms that engage in share
repurchases to report information on repurchases conducted during each
quarter, disaggregated on a day-by-day basis, as suggested by two
commenters.\501\ Relatedly, we are requiring FPIs not reporting on
domestic forms to report the same share repurchase information on Form
F-SR. Listed Closed-End Funds that report on Form N-CSR will be
required to report the information on repurchases, similarly
disaggregated on a day-by-day basis, on a semi-annual basis. As an
alternative, we could require issuers to report repurchase activity
disaggregated on a less granular basis--such as biweekly basis, as
suggested by one commenter,\502\ or weekly basis, as suggested by other
commenters.\503\ Compared to the final amendments, this alternative
would decrease direct and indirect issuer costs associated with the
amended disclosure requirements, as discussed in greater detail in
Section V.C above. In turn, it would also reduce the information
benefits of the disclosure to investors, discussed in greater detail in
Section V.B above, compared to the final amendments. The net effects
would be smaller if the daily repurchase trading has relatively little
incremental information content compared to the more aggregated--weekly
or bi-weekly--totals (e.g., exhibits relatively little variation from
day to day in repurchase volumes and prices), if existing market data
is sufficiently informative about likely issuer repurchases (due to
price impact of large repurchases, even absent disclosure), or if
investors are unable to accurately parse historical repurchase data
disaggregated on a daily basis (e.g., due to noise, as suggested by
some commenters \504\).
---------------------------------------------------------------------------
\501\ See supra notes 110-111.
\502\ See letter from Home Depot.
\503\ See, e.g., letters from BrilLiquid, Guzman, Hecht, and
Pentacoff.
\504\ See supra notes 483-484 and accompanying text.
---------------------------------------------------------------------------
As another alternative, we could adopt a more frequent repurchase
reporting requirement--for example, a daily reporting frequency
requirement, as proposed,\505\ a weekly reporting frequency
requirement,\506\ or a monthly reporting frequency requirement.\507\
Compared to the final amendments, requiring more frequent reporting
would provide investors with less delayed information about issuer
repurchases and potentially enable them to perform a more timely
evaluation of an issuer's repurchase activity, independently or in
conjunction with other disclosures. This alternative may enable
investors that trade based on short-term information to construct a
potentially better informed trading strategy, as well as gauge more
quickly the extent to which recent repurchases, conducted at a specific
point in time, were likely to be aligned with shareholder value
maximization. Such effects would be larger if the alternative
disclosure frequency is higher and/or if the repurchase information is
of a time-sensitive nature. In turn, more frequent reporting,
particularly, the daily reporting frequency, would dramatically
increase issuer costs, including compliance costs, front-running risks,
indirect costs due to potentially inefficient decrease in repurchases,
and other costs discussed in detail in Section V.C above, compared to
the final amendments and the baseline, as noted by various
commenters.\508\
---------------------------------------------------------------------------
\505\ See supra note 65.
\506\ See supra note 116.
\507\ See supra notes 113 (supporting monthly reporting of daily
data), 114 (proposing, among various alternatives, monthly reporting
of biweekly data), and 115 (recommending monthly reporting of
monthly aggregate historical repurchase activity).
\508\ See supra notes 481 (discussing front-running costs) and
484 (discussing potential for inefficient efforts to restructure
repurchase programs in an attempt to minimize the effects of front-
running and price impact of the daily reporting) and accompanying
text.
---------------------------------------------------------------------------
As another alternative, we could adopt a combination of alternative
reporting frequency and an alternative level of disaggregation of the
reported data. For example, we could require reporting of monthly
repurchase activity information on a monthly basis, as suggested by
various commenters.\509\ The costs and benefits of this alternative,
compared to the final amendments, would be determined by the tradeoffs
described above with respect to the greater timeliness of information
as well as a lower level of granularity of repurchase data.
---------------------------------------------------------------------------
\509\ See supra note 115.
---------------------------------------------------------------------------
2. Alternative Scope of the Disclosure
We could modify the scope of the amended disclosure, for instance,
omitting information about the use of Rule 10b-18 and/or Rule 10b5-1 in
the
[[Page 36045]]
new quantitative disclosure,\510\ information about the objectives and
rationales for repurchases,\511\ information about issuer trading plans
in new Item 408(d), or information about any policies and procedures
relating to purchases and sales of the issuer's securities by officers
and directors during repurchases, including any restrictions on such
transactions.\512\ Compared to the final amendments, narrowing the
scope of the required disclosure would reduce the costs to issuers.
However, this alternative would also provide less information to
investors and result in potentially greater information asymmetry,
compared to the final amendments. As another alternative, we could
expand the scope of the amended disclosure, for instance, requiring
additional disclosure in periodic reports about how issuers are
financing their share repurchases, as suggested by some
commenters.\513\ Compared to the final amendments, broadening the scope
of the required disclosure would increase the costs to issuers.
However, this alternative could also on the margin provide additional
information to investors, compared to the final amendments. The
information benefit would depend on whether investors already are able
to infer the additional information from other financial statement
disclosures and MD&A discussion. For example, some investors may be
able to use existing financial statement disclosures to infer whether
debt or other sources of funds were used for share repurchases.
---------------------------------------------------------------------------
\510\ See supra note 150. But see supra notes 146-149.
\511\ See supra note 248.
\512\ See, e.g., letter from PNC (expressing concern that ``such
disclosure requirements are often seen as creating an expectation
that well-managed companies should have such policies and
procedures'').
\513\ See, e.g., letters from Senators Rubio & Baldwin, CalPERS,
Prof. Palladino, Roosevelt, AFREF et al., Better Markets, and CFA
Institute.
---------------------------------------------------------------------------
3. Exemptions for Certain Issuer Categories
We could provide exemptions from all, or some, of the amended
disclosure requirements, or modify the disclosure requirements, for
SRCs.\514\ As another alternative, we could require only the reporting
of repurchases that exceed a certain threshold, such as one or two
percent of the number of shares outstanding,\515\ or provide a
principles-based exemption from the additional disclosure requirements
for repurchases that are not material.\516\ These alternatives could
reduce the aggregate costs of the rule but also reduce the information
available to investors, compared to the final amendments. The economic
effects of the alternative of excluding small filers are uncertain to
the extent that the effects of the amended disclosure on small issuers
are somewhat ambiguous. On the one hand, smaller issuers are more
likely to be affected by the costs of additional disclosure, all else
equal (holding constant the disclosure burden). On the other hand,
smaller issuers are less likely to have repurchases,\517\ which limits
the incremental burden (as well as the incremental benefits) of
additional reporting under the amendments for each small filer.
Further, to the extent that small filers have relatively high
information asymmetries because of lower analyst and institutional
coverage, disclosure about their repurchases may be relatively more
informative to investors.\518\
---------------------------------------------------------------------------
\514\ See supra notes 131-135.
\515\ See supra notes 101-104. See also letter from ABA
Committee (recommending a higher, five percent, trigger for SRCs).
\516\ See also, e.g., letter from Cravath (recommending that a
share repurchase plan that is not material not be required to be
disclosed publicly on periodic reports).
\517\ See supra notes 134-135 and accompanying text.
\518\ See also supra note 129 (discussing comment letters that
recommended not exempting smaller issuers from the amendments).
---------------------------------------------------------------------------
As another alternative, we could provide exemptions or different
requirements for FPIs not reporting on domestic forms,\519\ Listed
Closed-End Funds,\520\ or issuers without an established securities
market.\521\ These alternatives would eliminate or reduce the costs for
the affected issuers but also reduce the information benefits for
investors in these issuers, compared to the final amendments. For
example, as suggested by commenters, not all of the motivations for
corporate issuers' share repurchases will apply to Listed Closed-End
Funds because of differences in the business model and organizational
structure of a fund as compared to a corporate issuer.\522\ We believe,
however, that investors would benefit from receiving timely details
about a fund's repurchase activity so they can make an informed
decision as to whether the fund's share price has been influenced by
this repurchase activity, which is difficult to do without the daily
details the final amendments will provide.
---------------------------------------------------------------------------
\519\ See supra note 122.
\520\ See supra note 140 and accompanying text.
\521\ See supra note 136 and accompanying text.
\522\ See supra note 140 and accompanying text.
---------------------------------------------------------------------------
Additionally, exempting FPIs reporting on FPI forms would prevent
the affected issuers from incurring the cost of multiple, different
layers of repurchase disclosures (and in some cases, on the margin
potentially adding to the burden of U.S. disclosure requirements that
can discourage a U.S. listing). However, it would also reduce the
amount of information available to investors, potentially reducing
their ability to make informed investment decisions, compared to the
final amendments.\523\ Further, exempting such issuers may place them
at a relative competitive advantage to issuers subject to the new
disclosure requirements. Ultimately, the aggregate effects of exempting
these categories of issuers may be incremental as such issuers engage
in relatively fewer repurchases than domestic issuers, as seen in
Section V.A.1 above.
---------------------------------------------------------------------------
\523\ See also supra note 123 and accompanying text (discussing
comment letters that supported the benefits of extending the
amendments to foreign private issuers).
---------------------------------------------------------------------------
Relatedly, exempting unlisted issuers or issuers without any
established securities market more generally would eliminate the costs
of the amendments for such issuers.\524\ Nevertheless, investors in
such issuers would lose the information benefits of the additional
disclosures, which might be relatively more consequential for investors
in issuers with a thin trading market or without a trading market that
lack the price discovery from active trading. The discussion of the
alternative of exempting small issuers also pertains to unlisted
issuers or issuers without an established securities market to the
extent that such issuers tend to be smaller companies.
---------------------------------------------------------------------------
\524\ See letter from Publix. Based on staff analysis of section
12(b) registration status data on issuers with an exchange-listed
class of securities and of Over-the-Counter (``OTC'') Markets' data
on OTC quotation for 2021, we estimate that an established
securities market cannot be identified for approximately 500 out of
7,500 affected filers of Forms 10-Q, 10-K, or 20-F and for
approximately 100 out of 3,600 issuers that undertook repurchases.
See also supra notes 374 and 376.
---------------------------------------------------------------------------
As another alternative, suggested by some commenters,\525\ we could
exempt bank holding companies from the amended disclosure requirements.
Under this alternative, banks would not incur the costs of the
amendments discussed in Section V.C above (including the cost of
potentially divulging confidential information).\526\ The incremental
effect on bank investors may be smaller to the extent that banks' use
of capital is subject to significant regulatory oversight and banks
already disclose more capital and capital planning information than
other
[[Page 36046]]
issuers.\527\ Nonetheless, we believe that information about issuer
repurchases under the final amendments is valuable for addressing
information asymmetries between banks and their investors. Under this
alternative, bank investors would receive significantly less
information about issuer repurchases, compared to the final amendments.
---------------------------------------------------------------------------
\525\ See supra note 140.
\526\ Id.
\527\ Id.
---------------------------------------------------------------------------
4. Alternative Implementation Approaches
We could modify some of the elements of implementation of the
amended disclosure requirements. The final amendments require daily
repurchase data to be reported periodically (as an exhibit to Forms 10-
Q and 10-K, on Form N-CSR, and for FPIs reporting on FPI forms, on new
Form F-SR). As one alternative, we could require all issuers, rather
than only FPIs, to report the historical daily repurchase information
on a new form. By introducing a new form for all issuers, this
alternative could incrementally increase the initial transition costs,
compared to the final amendments. On balance, this alternative is
unlikely to impact ongoing disclosure costs, compared to the final
amendments, holding the scope and frequency of the required disclosure
constant. However, in the case of Listed Closed-End Funds, such an
alternative would require more frequent--quarterly, rather than semi-
annual--reporting of historical daily repurchase data resulting in
timelier disclosure of such information to investors and higher direct
and indirect costs of reporting (described in greater detail in Section
V.C. above) for affected issuers, compared to the final amendments.
Compared to corporate issuers, relatively few funds engage in share
repurchases, as discussed in Section V.A.1 above. Thus, the aggregate
costs and benefits of such an alternative for affected fund issuers are
likely to be modest.\528\ As another alternative, we could require
issuers that file on Forms 10-K and 10-Q to provide the same historical
daily repurchase disclosure in the body of the form, rather than in an
exhibit. Moving the disclosure from the exhibit to the body of the form
is not expected to affect the costs for issuers or informational
benefits to investors, conditional on the contents of the disclosure
requirements remaining the same. In cases of issuers with more daily
repurchases to be disclosed, the increase in the length of the main
body of the periodic report under this alternative could make the
periodic report somewhat less readable to investors (especially those
investors not specifically seeking daily repurchase data), compared to
the final amendments.
---------------------------------------------------------------------------
\528\ See also supra note 140 and accompanying text (discussing
potentially smaller benefits for funds).
---------------------------------------------------------------------------
We are eliminating the existing requirement to provide monthly
breakdowns of repurchase activity in periodic reports. As an
alternative, we could retain this requirement. The costs and benefits
of this alternative compared to the final amendments are similarly
likely to be fairly incremental because the aggregation of daily
information into a monthly breakdown is likely to be low-cost for
filers, and of relatively little incremental importance to investors.
As another alternative, we could require that issuers announce all
share repurchase plans in advance, as suggested by a few
commenters.\529\ Under this alternative, investors may benefit from
additional information related to the issuer's future repurchase plans.
The incremental benefit of the requirement may be limited for issuers
that already routinely disclose repurchase announcements--under
exchange listing standards, companies are required to promptly disclose
material new developments, and, according to at least one law firm,
board authorization of a buyback is generally treated as requiring
disclosure under these standards.\530\ However, such an alternative
would ensure greater consistency, particularly among non-exchange-
listed issuers, in the information being made available to investors
about an issuer's future repurchase plans. As discussed in Section V.A.
above, the authorization of a repurchase program can indicate the
issuer's belief that the stock is undervalued or convey other value-
relevant information to investors. At the same time, to the extent that
issuers that do not presently pre-announce repurchase programs avoid
such announcements because such announcements would be costly for
them--for instance, by effecting a greater degree of upward price
pressure than subsequent periodic reporting of repurchase activity, and
therefore increasing the price of the purchased shares--this
alternative would impose greater cost on such issuers (and their
existing shareholders that do not sell during a repurchase program),
compared to the final amendments.
---------------------------------------------------------------------------
\529\ See, e.g., letters from CFA Institute; CalPERS;
BrilLiquid; and ICGN.
\530\ See SEC Proposes Rules to Modernize Share Repurchase
Disclosures, Wilmer Hale (Dec. 27, 2021), https://www.wilmerhale.com/insights/client-alerts/20211227-sec-proposes-rules-to-modernize-share-repurchase-disclosures.
---------------------------------------------------------------------------
5. Structured Disclosure
As another alternative, we could scale the structured disclosure
requirements compared to the amendments, for instance, by not requiring
that the quantitative disclosure in periodic reports, or the narrative
disclosure, be structured. These alternatives could incrementally
increase the cost of the extraction and analysis of additional
information about the structure and purpose of repurchase programs,
compared to the final amendments. At the same time, the incremental
cost savings for issuers, compared to the final amendments, would
likely be modest since affected filers already tag various other
disclosures in their filings with the Commission.\531\
---------------------------------------------------------------------------
\531\ See 17 CFR 232.405(b) (setting forth structured disclosure
requirements for, inter alia, corporate issuers and closed-end
management investment companies).
---------------------------------------------------------------------------
6. Compliance Dates
FPIs that file on FPI forms will be required to comply with the new
disclosure requirements in the first filing that covers the first full
fiscal quarter that begins on or after April 1, 2024; Listed Closed-End
Funds--in the first filing that covers the first fiscal period that
begins on or after January 1, 2024; and all other issuers--in the first
filing that covers the first full fiscal quarter that begins on or
after October 1, 2023. As an alternative, we could provide a longer
transition period (for example, for up to one year after the effective
date of the final rules), as suggested by some commenters.\532\ Under
this alternative, the costs and benefits of the final amendments
discussed above would be deferred until the compliance date. Further,
to the extent that affected issuers and intermediaries that assist them
with the execution of repurchase programs require some time to
implement new systems, processes, and policies to gather information
for the new disclosures, the alternative could further incrementally
mitigate some of the initial transition challenges and associated
burden, by enabling affected issuers to do so with fewer time
pressures.
---------------------------------------------------------------------------
\532\ See, e.g., letters from SIFMA II; Sullivan; Wilson
Sonsini.
---------------------------------------------------------------------------
VI. Paperwork Reduction Act
A. Summary of the Collections of Information
Certain provisions of our rules and forms that will be affected by
the final
[[Page 36047]]
amendments contain ``collection of information'' requirements within
the meaning of the PRA.\533\ The Commission published notices
requesting comment on revisions to these collections of information
requirements in the Proposing Release and the Rule 10b5-1 Proposing
Release, and it has submitted these requirements to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\534\ The hours and costs associated with preparing and filing the
forms constitute reporting and cost burdens imposed by each collection
of information. An agency may not conduct or sponsor, and a person is
not required to comply with, a collection of information unless it
displays a currently valid OMB control number. Compliance with the
information collections is mandatory. Responses to the information
collections are not kept confidential and there is no mandatory
retention period for the information disclosed. The titles for the
affected collections of information are:
---------------------------------------------------------------------------
\533\ See supra note 469.
\534\ See 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------
``Form 10-K'' (OMB Control No. 3235-0063);
``Form 10-Q'' (OMB Control No. 3235-0070);
``Form 20-F'' (OMB Control No. 3235-0288);
``Form N-CSR'' (OMB Control No. 3235-0570); and
``Form F-SR'' (a new collection of information).
We adopted the existing forms pursuant to the Exchange Act and
Investment Company Act, and are adopting the new form pursuant to the
Exchange Act. The forms set forth the disclosure requirements for
periodic reports filed by issuers to help investors make informed
investment and voting decisions. A description of the final amendments,
including the need for the information and its use, as well as a
description of the likely respondents, may be found in Sections I, II,
and III above, and a discussion of the economic effects of the proposed
amendments may be found in Section V above.
B. Summary of Comment Letters
In the Proposing Release, the Commission requested comment on the
PRA burden hour and cost estimates and the analysis used to derive such
estimates. One commenter directly addressed the PRA analysis of the
proposed amendments,\535\ and other commenters provided responses to
certain requests for comment that have informed some of our PRA
estimates.\536\ Generally, these commenters asserted that the costs and
burdens of the proposed amendments would likely be greater than what
the Commission estimated in the Proposing Release.
---------------------------------------------------------------------------
\535\ See letter from Empire.
\536\ See, e.g., letters from Norfolk Southern and SIFMA II.
---------------------------------------------------------------------------
In the Rule 10b5-1 Proposing Release, the Commission similarly
requested comment on the PRA burden hour and cost estimates and the
analysis used to derive the estimates in that release. We did not
receive any comments that directly addressed the PRA analysis of those
proposed amendments. However, as noted in the Rule 10b5-1 Adopting
Release, we made some changes to proposed Item 408(a) as a result of
comments received in response to the Rule 10b5-1 Proposing Release and
revised our estimates, taking into account the changes and the comments
received. New Item 408(d) that we are adopting in this release reflects
corresponding changes.
C. Summary of Collections of Information Requirements
As discussed in more detail in the Proposing Release \537\ and the
Rule 10b5-1 Proposing Release,\538\ we derived the burden hour
estimates by estimating the change in paperwork burden as a result of
the amendments. As noted in Section III, we have made some changes to
the proposed amendments as a result of comments received, and have
revised our PRA estimates to take into account these changes.
---------------------------------------------------------------------------
\537\ See Section V of the Proposing Release, supra note 2.
\538\ See Section V of the Rule 10b5-1 Proposing Release, supra
note 17.
---------------------------------------------------------------------------
1. Estimated Paperwork Burden for Daily Quantitative Share Repurchase
Disclosures
In the Proposing Release, we estimated a burden of 1.5 hours for
each proposed Form SR, which would include the effects of compiling the
required data elements for each date that the form would be required,
tagging the data using Inline XRBL, and preparing and submitting the
form. Although the final amendments require the same additional detail
regarding the structure of an issuer's repurchase program and its daily
share repurchases as in the Proposing Release, the frequency and manner
of the disclosure is different from the proposal. Instead of requiring
issuers to provide quantitative daily repurchase disclosure on a new
Form SR one business day after execution of an issuer's share
repurchase order, as proposed, the final amendments require issuers to
provide quantitative daily repurchase disclosure on a less frequent
periodic basis.\539\
---------------------------------------------------------------------------
\539\ The final amendments require domestic corporate issuers
and FPIs filing on the FPI forms to file their information quarterly
in their Form 10-Q and Form 10-K (for an issuer's fourth fiscal
quarter) and new Form F-SR, respectively, and Listed Closed-End
Funds to file that information semi-annually in Form N-CSR.
---------------------------------------------------------------------------
The final amendments require corporate issuers reporting on
domestic forms and Listed Closed-End Funds to file daily aggregated
repurchase data in their periodic reports, and FPIs filing on the FPI
forms to file daily aggregated repurchase data quarterly on new Form F-
SR. The repurchase data is to be tagged using Inline XBRL.\540\ The
final amendments require disclosure of a potentially greater quantity
of repurchase data in the particular periodic filing (repurchases over
a quarterly or six-month period, depending on the filer) than would
have been required under proposed Form SR, which would have only
included the repurchases from one day.\541\ In consideration of these
changes, we are estimating the burden hours for the daily quantitative
share repurchase disclosure to be 5.0 hours.
---------------------------------------------------------------------------
\540\ Any burdens associated with interactive data associated
with the final amendments are estimated to be negligible. For
administrative simplicity, these burdens therefore are incorporated
into the burdens associated with the forms, discussed below.
\541\ We recognize that, for issuers to prepare monthly
repurchase data under the current disclosure requirement, they may
already be collecting daily repurchase data. As a result, they may
already have the systems or processes in place to collect or report
some of the repurchase data, which they may be able to leverage for
the new disclosure and may mitigate some of the burdens.
---------------------------------------------------------------------------
We recognize that the burden hours may be higher or lower depending
on the number of applicable repurchases that the issuer conducts in the
period covered by the form. These adjustments will be reflected on
Forms 10-Q, 10-K, N-CSR, and F-SR.\542\ Because any disclosure under
the final amendments would be made quarterly or semi-annually,
depending on the filer type, rather than daily, in total we estimate
that the burdens and costs of the final amendments should be lower than
for the proposed amendments.\543\
---------------------------------------------------------------------------
\542\ We also estimate a burden of 1.0 hour to submit new Form
F-SR. The other forms are existing forms that already reflect a
submission burden.
\543\ We believe the costs for issuers will be lower on an
annual basis because issuers will be required to provide this
disclosure a maximum of four times per year for domestic corporate
issuers and FPIs, and a maximum of two times per year for
registered-closed end funds. The proposed amendments would likely
have required issuers to provide significantly more forms per year
at a greater cost than the final amendments because the proposed
amendments would have required issuers to provide proposed Form SR
one business day after execution every one of an issuer's share
repurchase orders. See letter from SIFMA II (``Additionally, time
and cost implications should also be considered. The 1.5 hours per
day preparation time estimated by the SEC quickly turns into 7.5
hours a week, or more for those who are in the market daily, for the
duration of the share repurchase plan.'').
---------------------------------------------------------------------------
[[Page 36048]]
Additionally, issuers are required currently to file monthly
aggregated repurchase data in their periodic reports. We are
eliminating this requirement. Accordingly, for PRA purposes, we
estimate a reduction in costs and burdens associated with this
requirement of 2.0 hours. These adjustments will be reflected in Forms
10-K, 10-Q, N-CSR, and 20-F.
Our estimates are for the average burden over the first three years
of reporting.\544\ The following table summarizes the estimated
paperwork burden associated with the final amendments' required daily
quantitative repurchase disclosures for issuers of equity securities
registered under section 12 of the Exchange Act in existing Forms 10-K,
10-Q, and N-CSR, and in new Form F-SR and the elimination of the
monthly repurchase disclosures in Forms 10-K, 10-Q, N-CSR, and 20-F.
---------------------------------------------------------------------------
\544\ We acknowledge that final amendments may initially entail
a higher burden as issuers get accustomed to collecting data for,
and preparing, the form. We believe, however, that the burden will
be reduced with subsequent filings.
PRA Table 1--Estimated Paperwork Burden of Daily Quantitative Share
Repurchase Disclosures and Elimination of Monthly Repurchase Disclosures
------------------------------------------------------------------------
Brief explanation of
Affected forms Estimated burden estimated burden
------------------------------------------------------------------------
Form 10-K, Form 10-Q, Form N- An increase of This estimated burden
CSR. 5.0 burden hours includes the
for each estimated 5.0-hour
affected form. burden for the
compilation of the
data elements,
tagging the data
using Inline XBRL,
and preparing the
exhibit (in Form 10-
K and 10-Q) or table
(in Form N-CSR).
Form F-SR..................... 6.0 burden hours This estimated burden
for each includes the
affected form. estimated 5.0-hour
burden for the
compilation of the
data elements,
tagging the data
using Inline XBRL,
and preparing the
form, plus a 1.0-
hour burden for
submitting the Form
F-SR.
Form 10-K, Form 10-Q, Form N- A decrease of 2.0 This estimated burden
CSR, Form 20-F. burden hours for reduction reflects
each affected the elimination of
form. the monthly
aggregated
repurchase data.
------------------------------------------------------------------------
We estimate that the new daily quantitative repurchase disclosure
requirements will change the paperwork burden for filings on the
affected periodic disclosure forms that include share repurchase
disclosure. However, not all filings on the affected forms will include
these disclosures because the disclosures are required only when an
issuer conducts a share repurchase. Based on staff analysis of data
from Compustat and EDGAR filings for fiscal year 2021,\545\ we estimate
that the daily quantitative repurchase disclosure requirements in the
final amendments will affect approximately 3,300 domestic corporate
issuers, 300 FPIs, and 100 Listed Closed-End Funds.
---------------------------------------------------------------------------
\545\ See supra Section V.A.1.
---------------------------------------------------------------------------
Additionally, we note that most issuers that conduct share
repurchases do so over a period of time, rather than by making a single
purchase or a few isolated purchases during the year. Therefore, for
purposes of this PRA analysis, we assume that the daily quantitative
repurchase disclosures will be distributed evenly throughout an
issuer's fiscal year. As a result, we estimate that, annually, the
required daily quantitative repurchase disclosure will be included in
one Form 10-K and three Form 10-Qs for each affected corporate issuer
filing on domestic forms, four Form F-SRs for each affected FPI, and
two Form N-CSRs for each affected Listed Closed-End Fund. Based on the
staff's findings, the table below sets forth our estimates of the
number of filings on these forms that include share repurchase
disclosure.\546\
---------------------------------------------------------------------------
\546\ We used this data to extrapolate the effect of these
changes on the paperwork burden for the listed periodic reports. The
OMB's PRA filing inventories represent a three-year average, which
may not align with the actual number of filings in any given year.
PRA Table 2--Estimated Number of Affected Filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
Number of forms that Number of Increase in burden Decrease in burden
issuers Current include filings that hours for daily hours for daily
affected by Forms that include annual share include share quantitative share quantitative share
Issuer type the share repurchase responses repurchase repurchase repurchase repurchase
repurchase disclosure in PRA disclosure disclosure disclosures per disclosures per
disclosure inventory annually annually per form form, form
annually per issuer
(A) (B)................ (C) (D) (E) = (A) x (D) (F) = (E) x 5.0 (G) = (E) x 2.0
[Forms 10-K, 10-Q, [Forms 10-K, 10-Q,
N-CSR] or 6.0 20-F, N-CSR]
[Form F-SR]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corporate Issuer Reporting on 3,300 10-K............... 8,292 1 3,300 16,500 (6,600)
Domestic Forms. 10-Q............... 22,925 3 9,900 49,500 (19,800)
FPI............................... 300 F-SR............... 0 4 1,200 7,200
20-F............... 729 1 300 (600)
Registered Closed-End Fund........ 100 N-CSR.............. 6,898 2 200 1,000 (400)
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 36049]]
2. Estimated Paperwork Burdens of the Narrative Share Repurchase
Disclosures in Item 703 of Regulation S-K, Form 20-F, Form N-CSR, and
Form F-SR
As discussed in Section III.B.3., the modifications in the final
amendments from the proposed amendments relating to the narrative
disclosures in Item 703 of Regulation S-K and Form N-CSR are generally
limited to clarifying certain aspects of the proposed amendments.
Therefore, because the substantive requirements for those disclosures
is the same, our PRA estimate is the same as the PRA estimate in the
Proposing Release. As a result, we continue to estimate a burden of 3.0
hours for each form for all the narrative disclosures in Item 703 of
Regulation S-K and Form N-CSR. We estimate those 3.0 hours to consist
of 0.5 hours for the checkbox and 2.5 hours for the remaining narrative
disclosures.
However, in a change from the proposal, the final amendments
require FPIs to include one part of their narrative disclosures, the
checkbox disclosure requirement, in Form F-SR, whereas the other three
narrative disclosures will be in Form 20-F. Accordingly, we are
estimating that the narrative disclosure burden for Form 20-F will be
2.5 hours, consistent with the 2.5 hour narrative disclosure burden for
corporate issuers filing on domestic forms and Listed Closed-End Funds
without the burden for the checkbox. However, because Exchange Act
section 16 does not apply to investors in FPIs and thus FPIs may not
rely on Exchange Act section 16 filings, we believe FPIs will have a
larger burden in collecting the information necessary to comply with
the checkbox requirement than other issuers. Therefore, we are
estimating the burden hours for the checkbox requirement for Form F-SR
to be 1.0 hour, rather than 0.5 hours.
Our estimate is for the average burden over the first three years
of reporting.\547\ The following table summarizes the estimated
paperwork burdens associated with the final amendments' required
narrative disclosure for issuers of equity securities registered under
section 12 of the Exchange Act in Forms 10-K, 10-Q, 20-F, N-CSR, and F-
SR.
---------------------------------------------------------------------------
\547\ We acknowledge that final amendments may initially entail
a higher burden as issuers get accustomed to collecting data for,
and preparing, the form. We believe, however, that the burden will
be reduced with subsequent filings.
PRA Table 3--Estimated Paperwork Burden of the Narrative Share
Repurchase Disclosures in Item 703 of Regulation S-K, Form 20-F, and
Form N-CSR
------------------------------------------------------------------------
Estimated burden Brief explanation of
Affected forms increase estimated burden
------------------------------------------------------------------------
Form 10-K, Form 10-Q, Form N- An increase of This estimated burden
CSR. 3.0 burden hours includes the
for each estimated 3.0-hour
affected form. burden for the
narrative share
repurchase
disclosures,
including the
checkbox
requirement, and the
use of structured
data for this
information.
Form 20-F..................... An increase of This estimated burden
2.5 burden hours includes the
for each estimated 2.5-hour
affected form. burden for the
narrative share
repurchase
disclosures, other
than the checkbox
requirement, and the
use of structured
data for this
information.
Form F-SR..................... 1.0 burden hour This estimated burden
for each includes the
affected form. estimated 1.0-hour
burden for the
checkbox requirement
in the narrative
share repurchase
disclosures and the
use of structured
data for this
information.
------------------------------------------------------------------------
We estimate that the new narrative disclosure requirements will
increase the paperwork burden for filings on the affected periodic
disclosure forms that include share repurchase disclosure. However, as
we discussed above, not all filings on the affected forms will include
these disclosures because the disclosures are required only when an
issuer conducts a share repurchase. Additionally, as discussed above,
we estimate that the narrative disclosure requirements in the final
amendments will affect approximately 3,300 domestic corporate issuers,
300 FPIs, and 100 Listed Closed-End Funds.
Additionally, because most issuers that conduct share repurchases
do so over time, rather than by making a single purchase or a few
isolated purchases during the year, for purposes of this PRA analysis,
we assume that the narrative disclosures will be distributed evenly
throughout an issuer's fiscal year. As a result, we estimate that,
annually, the required narrative disclosure will be included in one
Form 10-K and three Form 10-Qs for each affected corporate issuer
filing on domestic forms, four Form F-SRs and one Form 20-F for each
affected FPI, and two Form N-CSRs for each affected Listed Closed-End
Fund. Based on the staff's findings, the table below sets forth our
estimates of the number of filings on these forms that will include
share repurchase disclosure.\548\
---------------------------------------------------------------------------
\548\ We used this data to extrapolate the effect of these
changes on the paperwork burden for the listed periodic reports. The
OMB's PRA filing inventories represent a three-year average, which
may not align with the actual number of filings in any given year.
PRA Table 4--Estimated Number of Affected Filings
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
Number of forms that
issuers Current include Number of filings Burden hour Burden hour Burden hour
affected by Forms that include share annual share that include increase for increase for increase for
Issuer type the repurchase disclosure responses repurchase share repurchase narrative share narrative share narrative share
repurchase in PRA disclosure disclosure repurchase repurchase repurchase
disclosure inventory annually annually per form disclosures disclosures disclosures
annually per issuer
(A) (B)........................... (C) (D) (E) = (A) x (D) (F) = (E) x 3.0 (G) = (E) x 2.5 (H) = (E) x 1.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Corporate Issuer Reporting on Domestic Forms.. 3,300 10-K.......................... 8,292 1 3,300 9,900
10-Q.......................... 22,925 3 9,900 29,700
FPI........................................... 300 20-F.......................... 729 1 300 750
F-SR.......................... 0 4 1,200 1,200
[[Page 36050]]
Listed Closed-End Fund........................ 100 N-CSR......................... 6,898 2 200 600
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
3. Estimated Paperwork Burdens of New Item 408(d)
New Item 408(d) requires disclosure with respect to an issuer's
adoption or termination of a contract, instruction, or written plan to
purchase or sell its own securities that is intended to satisfy the
affirmative defenses conditions of Rule 10b5-1(c). The final amendments
do not require issuers to disclose information about the adoption or
termination of any trading arrangement for the purchase or sale of the
issuer's securities that meets the requirements of a non-Rule 10b5-1
trading arrangement, nor do the final amendments require issuers to
disclose pricing terms. We estimate a three-hour disclosure burden with
respect to the issuer's adoption or termination of a contract,
instruction, or written plan to purchase or sell its own securities
that is intended to satisfy the affirmative defenses conditions of Rule
10b5-1(c).\549\ Our estimate is for the average burden over the first
three years of reporting.
---------------------------------------------------------------------------
\549\ In the Rule 10b5-1 Proposing Release, see supra note 17,
the Commission estimated that the average incremental burden for an
issuer to prepare the proposed Item 408(a) disclosure would be 15
hours. However, in the Rule 10b5-1 Adopting Release, see supra note
18, the Commission modified Item 408(a) so that the final rule does
not require disclosure of pricing terms or quarterly disclosure
regarding an issuer's adoption and termination of Rule 10b5-1 plans
and non-Rule 10b5-1 trading arrangements. As a result, the
Commission reduced the estimated PRA burden for Item 408(a)
disclosure by five hours, because it estimated a two-hour burden of
disclosing the pricing terms and a three-hour burden of preparing
the proposed disclosure regarding the adoption and termination of
Rule 10b5-1 and non-Rule 10b5-1 trading arrangements by issuers.
---------------------------------------------------------------------------
The following table summarizes the estimated paperwork burdens
associated with the final amendments' required Item 408(d) disclosures
for issuers in Forms 10-K and 10-Q.
PRA Table 5--Estimated Paperwork Burden of New Item 408(d)
------------------------------------------------------------------------
Brief explanation of
Affected forms Estimated burden estimated burden
increase increase
------------------------------------------------------------------------
Form 10-K, Form 10-Q.......... An increase of This estimated burden
3.0 burden hours includes the
for each of the estimated 3.0-hour
affected forms. burden for the
required disclosure
of an issuer's
adoption or
termination of any
contract,
instruction, or
written plan for the
purchase or sale of
securities intended
to satisfy the
affirmative defense
conditions of Rule
10b5-1(c) and
require the use of
structured data for
this information.
------------------------------------------------------------------------
We estimate that the new Item 408(d) disclosure will increase the
current paperwork burden for filings on the affected forms. However, as
we discussed above, not all filings on the affected forms will include
these disclosures because the disclosures are required only when an
issuer adopts or terminates a contract, instruction, or written plan to
purchase or sell its own securities that is intended to satisfy the
affirmative defenses conditions of Rule 10b5-1(c). As noted in Section
V.A.1, an indirect approach to estimating the number of affected
issuers involves extrapolating the number of companies conducting
repurchases under Rule 10b5-1 plans in a given year from a combination
of the incidence of Rule 10b5-1 plan use among voluntarily announced
repurchases (estimated at 29 percent as previously noted) \550\ and the
overall number of companies conducting repurchases based on their
financial statements.\551\ Based on data from Compustat and EDGAR
filings for fiscal years ending between January 1, 2021, and December
31, 2021, we estimate that approximately 3,600 operating companies
conducted repurchases, yielding an estimate of approximately 1,000
companies affected by the Item 408(d) amendments.\552\
---------------------------------------------------------------------------
\550\ See supra note 378.
\551\ Using the number of issuers that announce repurchases in a
given year would underestimate the number significantly because
issuers may continue to implement a previously announced repurchase
program over multiple years.
\552\ Item 408(d) does not apply to FPIs filing on FPI forms or
Listed Closed-End Funds.
---------------------------------------------------------------------------
Additionally, because most issuers adopt or terminate a Rule 10b5-1
trading plan throughout the year, rather than adopting or terminating a
single Rule 10b5-1 trading plan during the year, for purposes of this
PRA analysis, we assume that each issuer will enter, adopt or terminate
Rule 10b5-1 trading plans evenly throughout the year. As a result, we
estimate that, annually, the new Item 408(d) disclosure will be
included in one Form 10-K and three Form 10-Qs. Based on the staff's
findings, the table below sets forth our estimates of the number of
filings on Forms 10-K and 10-Q that will be affected by new Item
408(d).\553\
---------------------------------------------------------------------------
\553\ We used this data to extrapolate the effect of these
changes on the paperwork burden for the listed periodic reports. The
OMB's PRA filing inventories represent a three-year average, which
may not align with the actual number of filings in any given year.
---------------------------------------------------------------------------
[[Page 36051]]
PRA Table 6--Estimated Number of Affected Filings for New Item 408(d)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
Number of forms that
issuers Current include Number of filings Burden hour
affected by Forms that include share annual share that include increase for new
Issuer type the repurchase disclosure responses repurchase share repurchase item 408(d)
repurchase in PRA disclosure disclosure disclosures
disclosure inventory annually annually per form
annually per issuer
(A) (B).......................... (C) (D) (E) = (A) x (D) (F) = (E) x 3.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corporate Issuer Reporting on Domestic Forms. 1,000 10-K......................... 8,292 1 1,000 3,000
10-Q......................... 22,925 3 3,000 9,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
D. Incremental and Aggregate Burden and Cost Estimates
Below we estimate the incremental and aggregate changes in
paperwork burden as a result of the final amendments. These estimates
represent the average burden for all issuers, both large and small. In
deriving our estimates, we recognize that the burdens will likely vary
among individual issuers. The final amendments will create a new
required collection of information and change the burden per response
of existing collections of information.
We calculated the burden estimates by multiplying the estimated
number of responses by the estimated average amount of time it would
take an issuer to prepare and review disclosure required under the
final amendments. For purposes of the PRA, the burden is to be
allocated between internal burden hours and outside professional costs.
The table below sets forth the percentage estimates we typically use
for the burden allocation for each collection of information and the
estimated burden allocation for the new collection of information. We
also estimate that the average cost of retaining outside professionals
is $600 per hour.\554\
---------------------------------------------------------------------------
\554\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $600 per hour. At the proposing
stage, we used an estimated cost of $400 per hour. We are increasing
this cost estimate to $600 per hour to adjust the estimate for
inflation from August 2006.
PRA Table 7--Estimated Burden Allocation for the Affected Collections of
Information
------------------------------------------------------------------------
Outside
Collection of information Internal (%) professionals
(%)
------------------------------------------------------------------------
Forms 10-K, 10-Q, and N-CSR............ 75 25
Forms 20-F and F-SR.................... 25 75
------------------------------------------------------------------------
The table below illustrates the incremental change to the total
annual compliance burden of affected forms, in hours and in costs, as a
result of the final amendments' estimated effect on the paperwork
burden per response.
PRA Table 8--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Final Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total
incremental Change in outside Change in outside
Collection of information increase in Change in company hours professional hours professional costs
burden hours
(A) \a\ (B) = (A) x 0.75 or 0.25 (C) = (A) x 0.25 or 0.75 (D) = (C) x $600
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................... 22,800 17,100 5,700 $3,420,000
10-Q................................................... 68,400 51,300 17,100 10,260,000
20-F................................................... 150 37.5 112.5 67,500
N-CSR.................................................. 1,200 900 300 180,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Sum of columns (F), (G), or (H) in Tables 2, 4, and 6 for each affected form.
[[Page 36052]]
The following tables summarize the requested paperwork burden,
including the estimated total reporting burdens and costs, under the
final amendments.
PRA Table 9--Requested Paperwork Burden Under the Final Amendments \555\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Requested change in burden
-------------------------------------------------------------------------------------------------------------------------------------
Change in
Form Current Current burden Current outside Number of Change in outside Current Outside
annual hours professional affected company professional annual Burden hours professional
responses cost burden responses hours costs responses cost burden
(A) (B) (C) (D) (E) \a\ (F) \b\ (G) \c\ (H) = (B) + (I) = (C) + (F)
(E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K................................................. 8,292 13,988,770 $1,835,588,919 3,300 17,100 $3,420,000 8,292 14,005,870 $1,839,008,919
Form 10-Q................................................. 22,925 3,098,084 410,257,154 9,900 51,300 10,260,000 22,925 3,149,384 420,517,154
Form 20-F................................................. 729 478,983 576,490,625 300 38 67,500 729 479,021 576,558,125
Form N-CSR................................................ 23,680 227,137 5,949,524 200 900 180,000 23,680 228,037 6,129,524
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ From column (B) in Table 8.
\b\ From column (D) in Table 8.
\c\ From column (A).
The below summarizes the requested paperwork burden for the new
Form F-SR collection of information, including the estimated total
reporting burdens and costs, under the final amendments as described in
Section III.A. For purposes of the PRA, we estimate that new Form F-SR
will entail a 6.5-hour compliance burden per response with 1,200 annual
responses.
PRA Table 10--Requested Paperwork Burden for the New Collection of Information
----------------------------------------------------------------------------------------------------------------
Requested paperwork burden
Collection of information --------------------------------------------------------------------------------
Annual responses Burden hours Outside professional cost burden
(A) \a\ (A) x 7.0 x (0.25) \b\ (A) x 7.0 x (0.75) x $600 \c\
----------------------------------------------------------------------------------------------------------------
Form F-SR...................... 1,200 2,100 $3,780,000
----------------------------------------------------------------------------------------------------------------
\a\ From column (E) in Tables 2 and 4.
VII. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with the Regulatory Flexibility Act
(``RFA'').\556\ It relates to the final amendments to the rules and
forms described in Section III above.
---------------------------------------------------------------------------
\555\ Figures in this table are rounded to the nearest whole
number.
\556\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
A. Need for, and Objectives of, the Final Amendments
The final amendments modernize and improve disclosure about
repurchases of an issuer's equity securities that are registered under
section 12 of the Exchange Act. The amendments require additional
detail regarding the structure of an issuer's repurchase program and
its share repurchases, require the filing of daily quantitative
repurchase data either quarterly or semi-annually, and eliminate the
requirement to file monthly repurchase data in an issuer's periodic
reports. The amendments also revise and expand the existing periodic
disclosure requirements about these purchases. Finally, the amendments
add new quarterly disclosure in certain periodic reports related to an
issuer's adoption and termination of certain trading arrangements.
The reasons for, and objectives of, the final amendments are
discussed in more detail in Sections I, II, and III above. We discuss
the economic impact and potential alternatives to the amendments in
Section V, and the estimated compliance costs and burdens of the
amendments under the PRA in Section VI above.
B. Significant Issues Raised by Public Comments
In the Proposing Release \557\ and the Rule 10b5-1 Proposing
Release,\558\ the Commission requested comment on any aspect of the
Initial Regulatory Flexibility Analysis (``IRFA''), including the
number of small entities that would be affected by the proposed
amendments, the existence or nature of the potential impact of the
proposed amendments on small entities discussed in the analysis, how
the proposed amendments could further lower the burden on small
entities, and how to quantify the impact of the proposed amendments. We
did not receive any comments that specifically addressed the IRFA.
However, some commenters addressed aspects of the proposals that could
potentially affect small entities.
---------------------------------------------------------------------------
\557\ See supra note 2.
\558\ See supra note 17.
---------------------------------------------------------------------------
In particular, two commenters asserted that the proposed amendments
would increase the burdens on smaller issuers,\559\ and another
commenter indicated its concern that the proposed amendments would
induce issuers to use larger financial services firms over smaller
ones.\560\ Several commenters
[[Page 36053]]
did not support exempting smaller issuers from the proposed
amendments,\561\ but some of these commenters suggested providing small
issuers with more time to provide the daily quantitative repurchase
disclosures.\562\ Additionally, one commenter on the Rule 10b5-1
Proposing Release supported exempting SRCs from proposed Item 408(a),
which we are adopting as new Item 408(d).\563\ For the reasons
discussed in further detail above,\564\ we have not adopted any
exemption for small entities.
---------------------------------------------------------------------------
\559\ See letters from ACCO (``Regarding the Commission's
Buyback Proposal, we find the real-time disclosure and incremental
detail of Form SR to be onerous and unnecessary, but we would
support similar enhanced disclosure to be reported in line with XBRL
as part of the normal periodic reporting process. We don't view the
proposed additional frequency and details as benefiting investors,
while the burden (including the costs of compliance) placed on
smaller public companies like ours would be significant.'') and
Profs. Lewis and White (``Although small issuers likely conduct
fewer repurchases than larger ones, they do repurchase their own
shares periodically to offset equity dilution from compensation
plans or to alter their capital structure. By nature of their size,
small issuers incur disproportionate relative compliance costs.'').
\560\ See letter from Guzman (``[T]he new rules would have the
collateral damage of likely decreasing competition in the investment
banking industry, shifting business away from smaller firms to large
bulge bracket investment banks. This collateral effect would be
driven by the erroneous perception that larger firms are better able
to cope with the additional reporting requirements. While this
concern is absolutely without basis in our case, it is a perception
that may be common among risk-averse corporate treasuries. Multiple
companies have told us that they believe larger institutions would
be better equipped to (1) handle the additional compliance
requirements and (2) better protect them from potential front-
running trading that is likely to be created if their repurchase
activity is reported daily.'').
\561\ See, e.g., letters from Better Markets I, BrilLiquid, CFA
Institute, Cravath, Hecht, and ICGN.
\562\ See, e.g., letters from Cravath and Hecht.
\563\ See letter in response to the Rule 10b5-1 Proposing
Release from Maryland Bar.
\564\ See Sections III.B.3 and III.C.3.
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C. Small Entities Subject to the Final Amendments
The final amendments would affect some issuers that are small
entities. The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small governmental jurisdiction.'' \565\
For purposes of the RFA, under our rules, an issuer, other than an
investment company, is a ``small business'' or ``small organization''
if it had total assets of $5 million or less on the last day of its
most recent fiscal year and is engaged or proposing to engage in an
offering of securities not exceeding $5 million.\566\ An investment
company, including a business development company,\567\ is considered
to be a ``small business'' or ``small organization'' if it, together
with other investment companies in the same group of related investment
companies, has net assets of $50 million or less as of the end of its
most recent fiscal year.\568\
---------------------------------------------------------------------------
\565\ 5 U.S.C. 601(6).
\566\ See 17 CFR 240.0-10(a).
\567\ Business development companies are a category of closed-
end investment company that are not registered under the Investment
Company Act. See 15 U.S.C. 80a-2(a)(48) and 80a-53-64.
\568\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------
Commission staff estimates that there are approximately 780 issuers
with a class of securities registered under section 12 of the Exchange
Act that file with the Commission (other than investment
companies),\569\ 23 Listed Closed-End Funds,\570\ and nine business
development companies \571\ that may be considered small entities and
are potentially subject to the final amendments other than new Item
408(d). Commission staff also estimates that, as of January 2022, there
were approximately 1,380 issuers and two business development companies
that may be considered small entities that would be subject to new Item
408(d).\572\
---------------------------------------------------------------------------
\569\ This estimate is based on staff analysis of issuers,
excluding co-registrants, subsidiaries, investment companies, or
asset-backed securities, with EDGAR filings of Form 10-K and 20-F,
or amendments thereto, filed during the calendar year of January 1,
2021, to December 31, 2021. Analysis is based on data from XBRL
filings, Compustat, Ives Group Audit Analytics, and manual review of
filings submitted to the Commission.
\570\ This estimate is derived from an analysis of data obtained
from Morningstar Direct as well as data reported to the Commission
for the period ending June 2021.
\571\ Id.
\572\ This estimate is based on staff analysis of Form 10-K
filings on EDGAR, or amendments thereto, filed during the calendar
year of Jan. 1, 2021, to Dec. 31, 2021, and on data from XBRL
filings, Compustat, and Ives Group Audit Analytics. The staff noted
that the estimated number of small entities includes approximately
344 entities that are special purpose acquisition companies
(``SPACs''). A SPAC is typically a shell company that is organized
for the purpose of merging with or acquiring one or more
unidentified private operating companies within a certain time
frame. Some of these small entities that are SPACs are unlikely to
remain small entities once the SPAC has completed its initial
business combination and becomes an operating company.
---------------------------------------------------------------------------
D. Projected Reporting, Recordkeeping and Other Compliance Requirements
The final amendments apply to small entities to the same extent as
other entities, irrespective of size. As noted in Section VI.D. above,
while we acknowledge that smaller entities are more likely to be
affected by the costs of additional disclosure, smaller entities are
also less likely to have share repurchases, which would limit the
incremental burden of additional reporting under the final
amendments.\573\ In addition, while we expect larger Listed Closed-End
Funds and business development companies (``funds''), or funds that are
part of a large fund complex, to incur higher costs related to final
amendments in absolute terms relative to a smaller fund or a fund that
is part of a smaller fund complex, we expect a smaller fund to find it
more costly, per dollar managed, to comply with the final amendments
because it would not be able to benefit from a larger fund complex's
economies of scale.
---------------------------------------------------------------------------
\573\ See supra Section V.D. In addition, in Section V.C. above
we further note that to the extent that the final amendments affect
small filers to a greater extent than large filers, they could
result in adverse effects on competition.
---------------------------------------------------------------------------
The final amendments require additional detail regarding the
structure of an issuer's repurchase program and quantitative disclosure
of its daily repurchase data that the issuer must tag using Inline
XBRL. The final amendments are intended to modernize and improve
disclosure about repurchases of an issuer's equity securities that are
registered under section 12 of the Exchange Act. More specifically, the
final amendments require:
Corporate issuers that file on domestic forms to disclose
daily quantitative repurchase data at the end of every quarter in an
exhibit to their Form 10-Q and Form 10-K (for an issuer's fourth fiscal
quarter);
Listed Closed-End Funds to disclose daily quantitative
repurchase data in their annual and semi-annual reports on Form N-CSR;
and
FPIs reporting on the FPI forms to disclose daily
quantitative repurchase data at the end of every quarter in the new
Form F-SR, which will be due 45 days after the end of an FPI's fiscal
quarter.
Additionally, the final amendments require an issuer to include a
checkbox above its tabular disclosures indicating whether its officers
and directors subject to the Exchange Act section 16(a) reporting
requirements (for domestic corporate issuers and Listed Closed-End
Funds) or its directors and members of senior management who would be
identified pursuant to Item 1 of Form 20-F (for FPIs) 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. Further, the final
amendments eliminate the current requirements in Item 703 of Regulation
S-K, Item 16E of Form 20-F, and Item 14 of Form N-CSR to disclose
monthly repurchase data in periodic reports.
Additionally, the final amendments require an issuer to disclose:
The objectives or rationales for its share repurchases and
the process or criteria used to determine the amount of repurchases;
Any policies and procedures relating to purchases and
sales of the issuer's securities during a repurchase program by the
officers and directors, including any restriction on such transactions;
and
Whether it made its repurchases pursuant to a plan that is
intended to satisfy the affirmative defense conditions of Rule 10b5-
1(c) and the date that the plan was adopted or terminated, and/or
whether its repurchases were intended to qualify for
[[Page 36054]]
the Rule 10b-18 non-exclusive safe harbor.
The final amendments also include new Item 408(d), which requires
quarterly disclosure in periodic reports on Forms 10-Q and 10-K (for
the issuer's fourth fiscal quarter) about an issuer's adoption and
termination of Rule 10b5-1 trading arrangements. This information will
also be reported using Inline XBRL.
We anticipate that the direct costs of preparing disclosures in
response to the final amendments will likely be relatively small as
repurchase information will be readily available to issuers, including
small entities, because they are already required to provide repurchase
disclosures under existing rules. Additionally, to the extent that the
final requirements have a greater effect on small filers relative to
large filers, they could result in adverse effects on competition. The
fixed component of the legal costs of preparing the disclosure could be
one contributing factor. Compliance with certain provisions of the
final amendments may require the use of professional skills, including
accounting, legal, and technical skills.\574\ The final amendments are
discussed in detail in Sections I, II, and III above. We discuss the
economic impact, including the estimated compliance costs and burdens
of the final rules on all issuers, including small entities, in
Sections V and VI above.
---------------------------------------------------------------------------
\574\ See supra Section III.
---------------------------------------------------------------------------
E. Agency Action To Minimize Effect on Small Entities
The RFA directs us to consider alternatives that would accomplish
our stated objectives, while minimizing any significant adverse impact
on small entities. In connection with the amendments, we considered the
following alternatives:
Establishing different compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.\575\
---------------------------------------------------------------------------
\575\ See supra Section III.
---------------------------------------------------------------------------
The final amendments are intended to improve disclosure about
repurchases of an issuer's equity securities for investors to evaluate
those activities and decrease information asymmetry between issuers and
investors. The additional disclosure, which will be provided in a
machine-readable format, should permit investors to more quickly and
efficiently evaluate information relating to issuer share repurchases,
on a more granular basis. Moreover, any burdens associated with
interactive data associated with the final amendments are estimated to
be negligible.\576\
---------------------------------------------------------------------------
\576\ See supra note 540.
---------------------------------------------------------------------------
With respect to using performance rather than design standards, the
final amendments use design standards to promote uniform compliance
requirements for all registrants and to address the concerns underlying
the amendments, which apply to entities of all size. For example, the
final amendments set forth specific disclosure requirements an issuer
must satisfy in providing its daily quantitative disclosure
information. These design standards will better ensure that investors
will be provided with further insight into the details of an issuer's
share repurchases, which when combined with other information available
about the issuer, could diminish informational asymmetry, enhance
transparency, and enable investors to undertake a more thorough
assessment of issuer share repurchases.
The final amendments do not provide an exemption or otherwise
establish a delayed compliance timetable for small entities. We note,
however, that small entities (and other issuers) are already required
to provide repurchase disclosures under existing rules. Moreover, while
we acknowledge that small entities are more likely to be affected by
the costs of additional disclosure, all else equal (holding constant
the disclosure burden), small entities are less likely to have share
repurchases,\577\ which would limit the incremental burden of
additional reporting under the final amendments for each small entity.
Further, to the extent that small entities have relatively high
information asymmetries because of lower analyst and institutional
coverage, the additional disclosure about their repurchases may be
relatively more informative to investors. The final amendments do,
however, simplify and consolidate reporting for small entities (and
other issuers) by requiring quarterly and semi-annual reporting of
daily quantitative repurchase data instead of daily reporting of such
data, as proposed.
---------------------------------------------------------------------------
\577\ See supra Section V.D.
---------------------------------------------------------------------------
Statutory Authority
The amendments contained in this release are being adopted under
the authority set forth in sections 12, 13, 15, and 23(a) of the
Exchange Act, and sections 8, 23, 24(a), 30, 31, and 38 of the
Investment Company Act.
List of Subjects in 17 CFR Parts 229, 232, 240, 249, and 274
Reporting and record keeping requirements, Securities.
For the reasons set forth in the preamble, the Commission is
amending title 17, chapter II of the Code of Federal Regulations as
follows:
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
0
1. The authority citation for part 229 continues to read as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C.
1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec.
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
0
2. Amend Sec. 229.408 by adding paragraph (d) to read as follows:
Sec. 229.408 (Item 408) Insider trading arrangements and policies.
* * * * *
(d)(1) Disclose whether, during the registrant's last fiscal
quarter (the registrant's fourth fiscal quarter in the case of an
annual report), the registrant adopted or terminated any Rule 10b5-1
trading arrangement as that term is defined in paragraph (a)(1)(i) of
this section. In addition, provide a description of the material terms
of the Rule 10b5-1 trading arrangement (other than terms with respect
to the price at which the party executing the Rule 10b5-1 trading
arrangement is authorized to trade), such as:
(i) The date on which the registrant 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.
Note 1 to paragraph (d)(1): If the disclosure provided pursuant
to Sec. 229.703 contains disclosure that would satisfy the
requirements of paragraph (d)(1) of this section, a cross-reference
to that disclosure will also satisfy the requirements of
[[Page 36055]]
paragraph (d)(1). (2) The disclosure provided pursuant to paragraph
(d)(1) of this section must be provided in an Interactive Data File
as required by Sec. 232.405 of this chapter (Rule 405 of Regulation
S-T) in accordance with the EDGAR Filer Manual.
0
3. Amend Sec. 229.601 by:
0
a. In the exhibit table in paragraph (a), adding entry 26; and
0
b. Adding paragraph (b)(26).
The additions read as follows:
Sec. 229.601 (Item 601) Exhibits.
(a) * * *
Exhibit Table
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Securities act forms Exchange act forms
-----------------------------------------------------------------------------------------------------------------------------------------------------
S-1 S-3 SF-1 SF-3 S-4 \1\ S-8 S-11 F-1 F-3 F-4 \1\ 10 8-K \2\ 10-D 10-Q 10-K ABS-EE
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* * * * * * *
(26) Purchases of equity securities by the ...... ...... ........ ........ ........ ...... ....... ...... ...... ........ ..... ........ ........ X X ............
issuer and affiliated purchasers.........
* * * * * * *
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ An exhibit need not be provided about a company if: (1) With respect to such company an election has been made under Form S-4 or F-4 to provide information about such company at a level
prescribed by Form S-3 or F-3; and (2) the form, the level of which has been elected under Form S-4 or F-4, would not require such company to provide such exhibit if it were registering a
primary offering.
\2\ A Form 8-K exhibit is required only if relevant to the subject matter reported on the Form 8-K report. For example, if the Form 8-K pertains to the departure of a director, only the
exhibit described in paragraph (b)(17) of this section need be filed. A required exhibit may be incorporated by reference from a previous filing.
* * * * * * *
(b) * * *
(26) Purchases of equity securities by the issuer and affiliated
purchasers. (i) Every issuer that has a class of equity securities
registered pursuant to section 12 of the Exchange Act (15 U.S.C. 781)
that files quarterly reports on Form 10-Q or an annual report on Form
10-K must file, in the following tabular format, an exhibit to those
reports disclosing, for the period covered by the report (or the
issuer's fourth fiscal quarter, in the case of an annual report on Form
10-K), the total purchases made each day by or on behalf of the issuer
or any ``affiliated purchaser,'' as defined in Sec. 240.10b-18(a)(3)
of this chapter, of shares or other units of any class of the issuer's
equity securities that are registered by the issuer pursuant to section
12 of the Exchange Act.
(ii) The information provided pursuant to this paragraph (b)(26)
must be provided in an Interactive Data File as required by Sec.
232.405 of this chapter (Rule 405 of Regulation S-T) in accordance with
the EDGAR Filer Manual.
(iii) This paragraph (b)(26) shall not apply to an investment
company registered under the Investment Company Act of 1940 (15 U.S.C.
80a-1 et seq.).
(iv) Disclose in the table:
(A) The date, which is the date on which the purchase of shares (or
units) is executed (column (a));
(B) The class of shares (or units), which should clearly identify
the class, even if the issuer has only one class of securities
outstanding (column (b));
(C) The total number of shares (or units) purchased on this date,
which includes all shares (or units) purchased by or on behalf of the
issuer or any affiliated purchaser, regardless of whether made pursuant
to publicly announced repurchase plans or programs (column (c));
(D) The average price paid per share (or unit), which shall be
reported in U.S. dollars and exclude brokerage commissions and other
costs of execution (column (d));
(E) The total number of shares (or units) purchased on this date as
part of publicly announced repurchase plans or programs (column (e));
(F) 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 (column (f));
(G) Total number of shares (or units) purchased on this date on the
open market, which includes all shares (or units) repurchased by the
issuer in open-market transactions, and does not include shares (or
units) purchased in tender offers, in satisfaction of the issuer's
obligations upon exercise of outstanding put options issued by the
issuer, or other transactions (column (g));
(H) Total number of shares (or units) purchased on this date that
are intended by the issuer to qualify for the safe harbor in Sec.
240.10b-18 of this chapter (Rule 10b-18) (column (h)); and
(I) Total number of shares (or units) purchased on this date
pursuant to a plan that is intended by the issuer to satisfy the
affirmative defense conditions of Sec. 240.10b5-1(c) of this chapter
(Rule 10b5-1(c)) (column (i)).
(v) Disclose, by footnote to the table, the date any plan that is
intended to satisfy the affirmative defense conditions of Rule 10b5-
1(c) for the shares (or units) in column (i) was adopted or terminated.
(vi) In determining whether to check the box under ``Issuer
Purchases of Equity Securities,'' the issuer may rely on the following,
unless the issuer knows or has reason to believe that a form was filed
inappropriately or that a form should have been filed but was not:
(A) A review of Forms 3 and 4 (Sec. Sec. 249.103 and 249.104 of
this chapter) and amendments thereto filed electronically with the
Commission during the issuer's most recent fiscal year;
(B) A review of Form 5 (Sec. 249.105 of this chapter) and
amendments thereto filed electronically with the Commission with
respect to the issuer's most recent fiscal year;
(C) Any written representation from the reporting person that no
Form 5 is required. The issuer must maintain the representation in its
records for two years, making a copy available to the Commission or its
staff upon request; and
(D) For foreign private issuers, any written representations from
the directors and senior management who would be identified pursuant to
Item 1 of Form 20-F, provided that the reliance is reasonable. The
issuer must maintain the representation in its records for two years,
making a copy available to the Commission or its staff upon request.
BILLING CODE 8011-01-P
[[Page 36056]]
Figure 1 to Paragraph (b)(26)--Issuer Purchases of Equity Securities
(Tabular Format)
[GRAPHIC] [TIFF OMITTED] TR01JN23.000
BILLING CODE 8011-01-C
* * * * *
0
4. Revise Sec. 229.703 to read as follows:
Sec. 229.703 (Item 703) Purchases of equity securities by the issuer
and affiliated purchasers.
(a) Disclose the specified information in narrative form with
respect to the issuer's repurchases of equity securities disclosed
pursuant to Sec. 229.601(b)(26) (Item 601(b)(26) of Regulation S-K)
and refer to the particular repurchases in the table in Item 601(b)(26)
of Regulation S-K that correspond to the different parts of the
narrative, if applicable:
(1) The objectives or rationales for each repurchase plan or
program and the process or criteria used to determine the amount of
repurchases.
(2) 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).
(3) For publicly announced repurchase plans or programs:
(i) The date each plan or program was announced;
(ii) The dollar amount (or share or unit amount) approved;
(iii) The expiration date (if any) of each plan or program;
(iv) Each plan or program that has expired during the period
covered by the table in Item 601(b)(26) of Regulation S-K; and
[[Page 36057]]
(v) 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.
(4) 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 restrictions on such transactions.
(b) The disclosure provided pursuant to paragraph (a) of this
section must be provided in an Interactive Data File as required by
Sec. 232.405 of this chapter (Rule 405 of Regulation S-T) in
accordance with the EDGAR Filer Manual.
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
0
5. The general authority citation for part 232 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-6a, 80b-10, 80b-11, 7201
et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
6. Amend Sec. 232.405 by:
0
a. Revising the introductory text and paragraphs (a)(2) and (4) and
(b)(4)(iii);
0
b. Adding paragraph (b)(4)(iv); and
0
c. Revising Note 1 to Sec. 232.405.
The revisions and addition read as follows:
Sec. 232.405 Interactive Data File submissions.
This section applies to electronic filers that submit Interactive
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101)
of Regulation S-K), General Instruction F of Form 11-K (Sec. 249.311
of this chapter); paragraph (101) of Part II--Information Not Required
to be Delivered to Offerees or Purchasers of Form F-10 (Sec. 239.40 of
this chapter), Sec. 240.13a-21 of this chapter (Rule 13a-21 under the
Exchange Act), paragraph 101 of the Instructions as to Exhibits of Form
20-F (Sec. 249.220f of this chapter), paragraph B.(15) of the General
Instructions to Form 40-F (Sec. 249.240f of this chapter), paragraph
C.(6) of the General Instructions to Form 6-K (Sec. 249.306 of this
chapter), Sec. 240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under
the Exchange Act), Note D.5 of Sec. 240.14a-101 of this chapter (Rule
14a-101 under the Exchange Act), Item 1 of Sec. 240.14c-101 of this
chapter (Rule 14c-101 under the Exchange Act), General Instruction I of
Form F-SR (Sec. 249.333 of this chapter), General Instruction C.3.(g)
of Form N-1A (Sec. Sec. 239.15A and 274.11A of this chapter), General
Instruction I of Form N-2 (Sec. Sec. 239.14 and 274.11a-1 of this
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec. 239.17a
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4
(Sec. Sec. 239.17b and 274.11c of this chapter), General Instruction
C.3.(h) of Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter),
and General Instruction C.4 of Form N-CSR (Sec. Sec. 249.331 and
274.128 of this chapter) specify when electronic filers are required or
permitted to submit an Interactive Data File (Sec. 232.11), as further
described in note 1 to this section. This section imposes content,
format, and submission requirements for an Interactive Data File, but
does not change the substantive content requirements for the financial
and other disclosures in the Related Official Filing (Sec. 232.11).
(a) * * *
(2) Be submitted only by an electronic filer either required or
permitted to submit an Interactive Data File as specified by Item
601(b)(101) of Regulation S-K, General Instruction F of Form 11-K
(Sec. 249.311 of this chapter); paragraph (101) of Part II--
Information Not Required to be Delivered to Offerees or Purchasers of
Form F-10 (Sec. 239.40 of this chapter), Sec. 240.13a-21 of this
chapter (Rule 13a-21 under the Exchange Act), paragraph 101 of the
Instructions as to Exhibits of Form 20-F (Sec. 249.220f of this
chapter), paragraph B.(15) of the General Instructions to Form 40-F
(Sec. 249.240f of this chapter), paragraph C.(6) of the General
Instructions to Form 6-K (Sec. 249.306 of this chapter), Rule 17Ad-
27(d) under the Exchange Act, Note D.5 of Rule 14a-101 under the
Exchange Act, Item 1 of Rule 14c-101 under the Exchange Act, General
Instruction I to Form F-SR (Sec. 249.333 of this chapter), General
Instruction C.3.(g) of Form N-1A (Sec. Sec. 239.15A and 274.11A of
this chapter), General Instruction I of Form N-2 (Sec. Sec. 239.14 and
274.11a-1 of this chapter), General Instruction C.3.(h) of Form N-3
(Sec. Sec. 239.17a and 274.11b of this chapter), General Instruction
C.3.(h) of Form N-4 (Sec. Sec. 239.17b and 274.11c of this chapter),
General Instruction C.3.(h) of Form N-6 (Sec. Sec. 239.17c and 274.11d
of this chapter), or General Instruction C.4 of Form N-CSR (Sec. Sec.
249.331 and 274.128 of this chapter), as applicable;
* * * * *
(4) Be submitted in accordance with the EDGAR Filer Manual and, as
applicable, Item 601(b)(101) of Regulation S-K, General Instruction F
of Form 11-K (Sec. 249.311 of this chapter), paragraph (101) of Part
II--Information Not Required to be Delivered to Offerees or Purchasers
of Form F-10 (Sec. 239.40 of this chapter), Rule 13a-21 under the
Exchange Act, paragraph 101 of the Instructions as to Exhibits of Form
20-F (Sec. 249.220f of this chapter), paragraph B.(15) of the General
Instructions to Form 40-F (Sec. 249.240f of this chapter), paragraph
C.(6) of the General Instructions to Form 6-K (Sec. 249.306 of this
chapter), Rule 17Ad-27(d) under the Exchange Act, Note D.5 of Rule 14a-
101 under the Exchange Act, Item 1 of Rule 14c-101 under the Exchange
Act, General Instruction I to Form F-SR (Sec. 249.333 of this
chapter), General Instruction C.3.(g) of Form N-1A (Sec. Sec. 239.15A
and 274.11A of this chapter), General Instruction I of Form N-2
(Sec. Sec. 239.14 and 274.11a-1 of this chapter), General Instruction
C.3.(h) of Form N-3 (Sec. Sec. 239.17a and 274.11b of this chapter),
General Instruction C.3.(h) of Form N-4 (Sec. Sec. 239.17b and 274.11c
of this chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.
239.17c and 274.11d of this chapter); or General Instruction C.4 of
Form N-CSR (Sec. Sec. 249.331 and 274.128 of this chapter).
(b) * * *
(4) * * *
(iii) Any disclosure provided in response to: Sec. 229.402(x) of
this chapter (Item 402(x) of Regulation S-K); Sec. 229.408(a)(1) and
(2) of this chapter (Item 408(a)(1) and (2) of Regulation S-K); Sec.
229.408(b)(1) of this chapter (Item 408(b)(1) of Regulation S-K); Sec.
229.408(d) of this chapter (Item 408(d) of Regulation S-K); and Item
16J(a) of Form 20-F (Sec. 249.220f of this chapter).
(iv) Any disclosure provided in response to: Sec. 229.601(b)(26)
of this chapter (Item 601(b)(26) of Regulation S-K); Sec. 229.703 of
this chapter (Item 703 of Regulation S-K); Item 16E of Form 20-F (Sec.
249.220f of this chapter); Item 14 of Form N-CSR (Sec. Sec. 249.331
and 274.128 of this chapter); Rule 13a-21 under the Exchange Act; and
General Instruction I to Form F-SR (Sec. 249.333 of this chapter).
* * * * *
Note 1 to Sec. 232.405: Item 601(b)(101) of Regulation S-K
specifies the circumstances under which an Interactive Data File
must be submitted and the circumstances under which it is permitted
to be submitted, with respect to Sec. Sec. 239.11 (Form S-1),
239.13 (Form S-3), 239.25 (Form S-4), 239.18 (Form S-11), 239.31
(Form F-1), 239.33 (Form F-3), 239.34 (Form F-4), 249.310 (Form 10-
K), 249.308a (Form 10-Q), and 249.308 (Form 8-K). General
Instruction F of Form 11-K (Sec. 249.311 of this chapter) specifies
the circumstances under which an Interactive Data File must be
submitted, and the circumstances under which it is permitted to be
submitted, with respect to Form 11-K. Paragraph (101) of Part II--
Information not
[[Page 36058]]
Required to be Delivered to Offerees or Purchasers of Form F-10
(Sec. 239.40 of this chapter) specifies the circumstances under
which an Interactive Data File must be submitted and the
circumstances under which it is permitted to be submitted, with
respect to Form F-10. Paragraph 101 of the Instructions as to
Exhibits of Form 20-F (Sec. 249.220f of this chapter) specifies the
circumstances under which an Interactive Data File must be submitted
and the circumstances under which it is permitted to be submitted,
with respect to Form 20-F. Paragraph B.(15) of the General
Instructions to Form 40-F (Sec. 249.240f of this chapter) and
Paragraph C.(6) of the General Instructions to Form 6-K (Sec.
249.306 of this chapter) specify the circumstances under which an
Interactive Data File must be submitted and the circumstances under
which it is permitted to be submitted, with respect to Sec. Sec.
249.240f (Form 40-F) and 249.306 of this chapter (Form 6-K). Rule
17Ad-27(d) under the Exchange Act specifies the circumstances under
which an Interactive Data File must be submitted with respect the
reports required under Rule 17Ad-27. Note D.5 of Sec. 240.14a-101
of this chapter (Schedule 14A) and Item 1 of Sec. 240.14c-101 of
this chapter (Schedule 14C) specify the circumstances under which an
Interactive Data File must be submitted with respect to Schedules
14A and 14C. Rule 13a-21 under the Exchange Act and General
Instruction I to Form F-SR (Sec. 249.333 of this chapter) specify
the circumstances under which an Interactive Data File must be
submitted, with respect to Form F-SR. Item 601(b)(101) of Regulation
S-K, paragraph (101) of Part II--Information not Required to be
Delivered to Offerees or Purchasers of Form F-10, paragraph 101 of
the Instructions as to Exhibits of Form 20-F, paragraph B.(15) of
the General Instructions to Form 40-F, and paragraph C.(6) of the
General Instructions to Form 6-K all prohibit submission of an
Interactive Data File by an issuer that prepares its financial
statements in accordance with Sec. Sec. 210.6-01 through 210.6-10
of this chapter (Article 6 of Regulation S-X). For an issuer that is
a management investment company or separate account registered under
the Investment Company Act of 1940 (15 U.S.C. 80a et seq.) or a
business development company as defined in section 2(a)(48) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), General
Instruction C.3.(g) of Form N-1A (Sec. Sec. 239.15A and 274.11A of
this chapter), General Instruction I of Form N-2 (Sec. Sec. 239.14
and 274.11a-1 of this chapter), General Instruction C.3.(h) of Form
N-3 (Sec. Sec. 239.17a and 274.11b of this chapter), General
Instruction C.3.(h) of Form N-4 (Sec. Sec. 239.17b and 274.11c of
this chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.
239.17c and 274.11d of this chapter), and General Instruction C.4 of
Form N-CSR (Sec. Sec. 249.331 and 274.128 of this chapter), as
applicable, specifies the circumstances under which an Interactive
Data File must be submitted.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
7. The general authority citation for part 240 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o,
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll,
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L.
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise
noted.
* * * * *
0
8. Add Sec. 240.13a-21 to read as follows:
Sec. 240.13a-21 Purchases of equity securities by a foreign private
issuer and affiliated purchasers.
(a) Every foreign private issuer that has a class of equity
securities registered pursuant to section 12 of the Act (15 U.S.C. 781)
and that does not file quarterly reports on Form 10-Q (Sec. 249.308a
of this chapter) and annual reports on Form 10-K (Sec. 249.310 of this
chapter) must file a Form F-SR (Sec. 249.333 of this chapter)
disclosing, for the period covered by the form and as specified by the
form, the aggregate purchases during each day made by or on behalf of
the issuer or any ``affiliated purchaser,'' as defined in Sec.
240.10b-18(a)(3), of shares or other units of any class of the issuer's
equity securities that is registered by the issuer pursuant to section
12 of the Act, within the time period specified in General Instruction
I to Form F-SR. The information provided pursuant to the form must be
provided in an Interactive Data File as required by Sec. 232.405 of
this chapter (Rule 405 of Regulation S-T) in accordance with the EDGAR
Filer Manual.
(b) Paragraph (a) of this section shall not apply to an investment
company registered under the Investment Company Act of 1940 (15 U.S.C.
80a-1 et. seq.).
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
9. The authority citation for part 249 continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat.
1904; Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309 (2012), Sec. 107
Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001 Pub. L. 114-94,
129 Stat. 1312 (2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat.
1063 (2020), unless otherwise noted.
Section 249.220f is also issued under secs. 3(a), 202, 208, 302,
306(a), 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745,
and secs. 2 and 3, Pub. L. 116-222, 134 Stat. 1063.
* * * * *
Section 249.308a is also issued under secs. 3(a) and 302, Pub.
L. 107-204, 116 Stat. 745.
* * * * *
Section 249.310 is also issued under secs. 3(a), 202, 208, 302,
406 and 407, Pub. L. 107-204, 116 Stat. 745.
* * * * *
0
10. Amend Form 20-F (referenced in Sec. 249.220f) by revising Part II,
Item 16E.
Note: Form 20-F is attached as Appendix A to this document.
Form 20-F will not appear in the Code of Federal Regulations.
0
11. Amend Form 10-Q (referenced in Sec. 249.308a) by revising the
heading of Item 2 in Part II, paragraph (c) to Item 2 in Part II, and
paragraph (c) to Item 5 in Part II.
Note: Form 10-Q is attached as Appendix B to this document.
Form 10-Q will not appear in the Code of Federal Regulations.
0
12. Amend Form 10-K (referenced in Sec. 249.310) by revising General
Instruction J(1)(l), paragraph (c) to Item 5 in Part II and Item 9B in
Part II.
Note: Form 10-K is attached as Appendix C to this document.
Form 10-K will not appear in the Code of Federal Regulations.
0
13. Add Sec. 249.333 to read as follows:
Sec. 249.333 Form F-SR.
This form shall be used for reporting of purchases by or on behalf
of the issuer or an affiliated purchaser of equity securities
registered by the issuer pursuant to section 12 of the Exchange Act (15
U.S.C. 781) that does not file quarterly reports on Form 10-Q (Sec.
249.308a), and annual reports on Form 10-K (Sec. 249.310), pursuant to
Sec. 240.13a-21 of this chapter.
0
14. Add Form F-SR (referenced in Sec. 249.333).
Note: Form F-SR is attached as Appendix D to this document. Form
F-SR will not appear in the Code of Federal Regulations.
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
15. The general authority citation for part 274 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and 80a-37 unless
otherwise noted.
* * * * *
[[Page 36059]]
0
16. Amend Form N-CSR (referenced in Sec. Sec. 249.331 and 274.128) by
revising Item 14.
Note: The text of Form N-CSR is attached as Appendix E to this
document. Form N-CSR will not appear in the Code of Federal
Regulations.
By the Commission.
Dated: May 3, 2023.
Vanessa A. Countryman,
Secretary.
Appendix A--Form 20-F
Form 20-F
* * * * *
Part II
* * * * *
Item 16E Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
(a) For the Form F-SRs filed during the fiscal year covered by
the Form 20-F, disclose the specified information in narrative form
with respect to the issuer's repurchases of equity securities that
were disclosed in the issuer's Form F-SRs (required by Sec.
240.13a-21 of this chapter), and refer to the particular repurchases
in the table in the applicable Form F-SR that correspond to the
different parts of the narrative, if applicable:
(1) The objectives or rationales for each repurchase plan or
program and the process or criteria used to determine the amount of
repurchases.
(2) 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
company, or other transactions).
(3) For publicly announced repurchase plans or programs:
(i) The date each plan or program was announced;
(ii) The dollar amount (or share or unit amount) approved;
(iii) The expiration date (if any) of each plan or program;
(iv) Each plan or program that has expired during the period
covered by the tables in Form F-SRs; and
(v) 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.
(4) Any policies and procedures relating to purchases and sales
of the issuer's securities by its directors and members of senior
management during a repurchase program, including any restrictions
on such transactions.
(b) The disclosure provided pursuant to this Item must be
provided in an Interactive Data File as required by Sec. 232.405 of
this chapter (Rule 405 of Regulation S-T) in accordance with the
EDGAR Filer Manual.
* * * * *
Appendix B--Form 10-Q
FORM 10-Q
* * * * *
Part II--Other Information
* * * * *
Item 2. Unregistered Sales of Equity Securities, Use of
Proceeds, and Issuer Purchases of Equity Securities.
(c) Furnish the information required by Item 703 of Regulation
S-K (Sec. 229.703 of this chapter) for any repurchases made in the
quarter covered by the report.
* * * * *
Item 5. Other Information.
* * * * *
(c) Furnish the information required by Items 408(a) and 408(d)
of Regulation S-K ((Sec. Sec. 229.408(a) and 229.408(d)).
* * * * *
FORM 10-K
* * * * *
General Instructions
* * * * *
J. Use of This Form by Asset-Backed Issuers
* * * * *
(1) * * *
* * * * *
(l) Item 9A, Controls and Procedures and Item 9B(b), Other
Information;
* * * * *
Part II
* * * * *
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
* * * * *
(c) Furnish the information required by Item 703 of Regulation
S-K (Sec. 229.703 of this chapter) for any repurchase made in the
fourth quarter of the fiscal year covered by the report.
* * * * *
Item 9B. Other Information
(a) The registrant must disclose under this item any information
required to be disclosed in a report on Form 8-K during the fourth
quarter of the year covered by this Form 10-K, but not reported,
whether or not otherwise required by this Form 10-K. If disclosure
of such information is made under this item, it need not be repeated
in a report on Form 8-K which would otherwise be required to be
filed with respect to such information or in a subsequent report on
Form 10-K.
(b) Furnish the information required by Items 408(a) and 408(d)
of Regulation S-K (Sec. Sec. 229.408(a) and 229.408(d) of this
chapter).
* * * * *
Appendix D--Form F-SR
United States Securities and Exchange Commission
Washington, DC 20549
FORM F-SR
Foreign Private Issuer Share Repurchase Report
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
-----------------------------------------------------------------------
(Translation of Registrant's name into English)
-----------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
-----------------------------------------------------------------------
(Address of Principal Executive Offices)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(Name, Telephone, Email and/or Facsimile number and Address of
Company Contact Person)
Securities registered pursuant to Section 12(b) of the Act:
------------------------------------------------------------------------
Trading Name of each exchange
Title of each class symbol(s) on which registered
------------------------------------------------------------------------
------------------------------------------------------------------------
Securities registered pursuant to section 12(g) of the Act:
-----------------------------------------------------------------------
(Title of class)
-----------------------------------------------------------------------
(Title of class)
General Instructions
I. Repurchases To Be Reported and Time for Filing of Report
If purchases are made by or on behalf of the registrant or any
``affiliated purchaser,'' as defined in 17 CFR 10b-18(a)(3) of this
chapter, of shares or other units of any class of the registrant's
equity securities that is registered pursuant to section 12 of the
Securities Exchange Act of 1934 (15 U.S.C. 781), file with the
Commission in accordance with the requirements of 17 CFR 240.13a-21
(Rule 13a-21) the information set forth below in an Interactive Data
File as required by 17 CFR 232.405 of this chapter (Rule 405 of
Regulation S-T) in accordance with the EDGAR Filer Manual within 45
days after the end of the registrant's fiscal quarter.
[[Page 36060]]
II. Items To Be Disclosed in Form F-SR
(a) The date, which is the date on which the purchase of shares
(or units) is executed (column (a));
(b) The class of shares (or units), which should clearly
identify the class, even if the registrant has only one class of
securities outstanding (column (b));
(c) The total number of shares (or units) purchased on this
date, which includes all shares (or units) purchased by or on behalf
of the registrant or any affiliated purchaser, regardless of whether
made pursuant to publicly announced repurchase plans or programs
(column (c));
(d) The average price paid per share (or unit), which shall be
reported in U.S. dollars and exclude brokerage commissions and other
costs of execution (column (d));
(e) The total number of shares (or units) purchased on this date
as part of publicly announced repurchase plans or programs (column
(e));
(f) 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 (column (f));
(g) Total number of shares (or units) purchased on this date on
the open market, which includes all shares (or units) repurchased by
the registrant in open-market transactions, and does not include
shares (or units) purchased in tender offers, in satisfaction of the
registrant's obligations upon exercise of outstanding put options
issued by the registrant, or other transactions (column (g));
(h) Total number of shares (or units) purchased on this date
that are intended by the registrant to qualify for the safe harbor
in Sec. 240.10b-18 of this chapter (Rule 10b-18) (column (h)); and
(i) Total number of shares (or units) purchased on this date
pursuant to a plan that is intended by the registrant to satisfy the
affirmative defense conditions of Sec. 240.10b5-1(c) of this
chapter (Rule 10b5-1(c)) (column (i)).
(j) Disclose, by footnote to the table, the date any plan that
is intended to satisfy the affirmative defense conditions of Rule
10b5-1(c) for the shares (or units) in column (i) was adopted or
terminated.
III. Instructions for Preparing the Report
(a) This form is not to be used as a blank form to be filled in,
but only as a guide in the preparation of the report meeting the
requirements of 17 CFR 240.13a-21 (Rule 13a-21). The report shall
contain all columns of the table, and any columns for which there is
no relevant information may be appropriately marked or left blank.
The table may contain additional columns as necessary to provide
disclosure responsive to the requirements of Rule 13a-21 provided
the answers thereto are prepared in the manner specified in Rule
12b-13 (17 CFR 240.12b-13). These General Instructions are not to be
filed with the report.
(b) The disclosure provided relates to the registrant's
securities in ordinary share form, whether the registrant has
repurchased the shares or depositary receipts that represent the
shares.
(c) Price data and other data should be stated in the same
currency used in the registrant's primary financial statements.
(d) In determining whether to check the box under ``Registrant
Purchases of Equity Securities,'' the registrant may rely on written
representations from the directors and senior management who would
be identified pursuant to Item 1 of Form 20-F, provided that the
reliance is reasonable. The registrant must maintain the
representation in its records for two years, making a copy available
to the Commission or its staff upon request.
IV. Submission of the Form
This form must be submitted in electronic format via our
Electronic Data Gathering Analysis and Retrieval System (EDGAR) in
accordance with EDGAR rules set forth in Regulation S-T (17 CFR part
232). You must provide the signatures required for the Form in
accordance with 17 CFR 232.302.
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[[Page 36061]]
[GRAPHIC] [TIFF OMITTED] TR01JN23.002
BILLING CODE 8011-01-C
[[Page 36062]]
Appendix E--Form N-CSR
Form N-CSR
* * * * *
Item 14. Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers
(a) Purchases of Equity Securities by the Registrant and
Affiliated Purchasers.
(i) If the registrant is a closed-end management investment
company, provide the specified information in the following tabular
format, disclosing, for the period covered by the report, the total
purchases made during each day by or on behalf of the registrant or
any ``affiliated purchaser,'' as defined in Sec. 240.10b-18(a)(3)
of this chapter, of shares or other units of any class of the
registrant's equity securities that is registered by the registrant
pursuant to section 12 of the Exchange Act.
(ii) Disclose in the table:
(A) The date, which is the date on which the purchase of shares
(or units) is executed (column (a));
(B) The class of shares (or units), which should clearly
identify the class, even if the registrant has only one class of
securities outstanding (column (b));
(C) The total number of shares (or units) purchased on this
date, which includes all shares (or units) purchased by or on behalf
of the registrant or any affiliated purchaser, regardless of whether
made pursuant to publicly announced repurchase plans or programs
(column (c));
(D) The average price paid per share (or unit), which shall be
reported in U.S. dollars and exclude brokerage commissions and other
costs of execution (column (d));
(E) The total number of shares (or units) purchased on this date
as part of publicly announced repurchase plans or programs (column
(e));
(F) 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 (column (f));
(G) Total number of shares (or units) purchased on this date on
the open market, which includes all shares (or units) repurchased by
the registrant in open-market transactions, and does not include
shares (or units) purchased in tender offers, in satisfaction of the
registrant's obligations upon exercise of outstanding put options
issued by the registrant, or other transactions (column (g));
(H) Total number of shares (or units) purchased on this date
that are intended by the registrant to qualify for the safe harbor
in Sec. 240.10b-18 (Rule 10b-18) of this chapter (column (h)); and
(I) Total number of shares (or units) purchased on this date
pursuant to a plan that is intended by the registrant to satisfy the
affirmative defense conditions of Sec. 240.10b5-1(c) (Rule 10b5-
1(c)) of this chapter (column (i)).
(iii) Disclose, by footnote to the table, the date any plan that
is intended to satisfy the affirmative defense conditions of Rule
10b5-1(c) for the shares (or units) in column (i) was adopted or
terminated.
(iv) In determining whether to check the box under ``Registrant
Purchases of Equity Securities,'' the registrant may rely on the
following, unless the registrant knows or has reason to believe that
a form was filed inappropriately or that a form should have been
filed but was not:
(A) A review of Forms 3 and 4 (17 CFR 249.103 and 249.104) and
amendments thereto filed electronically with the Commission during
the registrant's most recent fiscal year;
(B) A review of Form 5 (17 CFR 249.105) and amendments thereto
filed electronically with the Commission with respect to the
registrant's most recent fiscal year; and
(C) Any written representation from the reporting person that no
Form 5 is required. The registrant must maintain the representation
in its records for two years, making a copy available to the
Commission or its staff upon request.
BILLING CODE 8011-01-P
[[Page 36063]]
[GRAPHIC] [TIFF OMITTED] TR01JN23.001
(b) Disclose the specified information in narrative form with
respect to the registrant's repurchases of equity securities
disclosed in paragraph (a) and refer to the particular repurchases
in the table in paragraph (a) that correspond to the different parts
of the narrative, if applicable:
(1) The objectives or rationales for each repurchase plan or
program and the process or criteria used to determine the amount of
repurchases;
(2) 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 registrant's
obligations upon exercise of outstanding put options issued by the
registrant, or other transactions);
(3) For publicly announced repurchase plans or programs:
(i) The date each plan or program was announced;
(ii) The dollar amount (or share or unit amount) approved;
(iii) The expiration date (if any) of each plan or program;
(iv) Each plan or program that has expired during the period
covered by the table in paragraph (a); and
(v) Each plan or program the registrant has determined to
terminate prior to expiration, or under which the registrant does
not intend to make further purchases.
(4) Any policies and procedures relating to purchases and sales
of the registrant's securities by its officers and directors during
a repurchase program, including any restrictions on such
transactions.
(c) The disclosure provided pursuant to this Item must be
provided in an Interactive Data File as required by Sec. 232.405 of
this chapter (Rule 405 of Regulation S-T) in accordance with the
EDGAR Filer Manual.
[FR Doc. 2023-09965 Filed 5-31-23; 8:45 am]
BILLING CODE 8011-01-C