Finding Safe Harbor: New Share Repurchase Reporting Requirements Allow SEC to Better Monitor Rule 10b-18
The Securities and Exchange Commission (“SEC”) will soon have the tools necessary to enforce its longstanding rules regarding share repurchases.
On May 3, 2023, the SEC adopted new rules to “modernize” its repurchase disclosure requirements.1 Under the new rules, corporations that repurchase their own shares must now disclose daily share repurchase information on a quarterly basis in their Forms 10-Q and 10-K.2 Previously, the SEC had required corporations to disclose only the monthly aggregates of their share repurchases.3 Further, the rules also now require corporations to disclose, among other things, the number of shares repurchased that are intended to qualify for the Rule 10b-18 safe harbor and for the insider trading affirmative defense conditions described in Rule 10b5-1(c).4 For more detailed information on all the filing requirements for the new rules, please see V&E’s full SEC update on the new rule requirements.
The new rules allow the SEC to more accurately monitor whether corporations are staying within the boundaries of the Rule 10b-18 safe harbor. This safe harbor allows a company to avoid liability for market manipulation under the Securities Exchange Act of 1934 (“Exchange Act”) if it meets certain “manner, timing, price, and volume conditions.”5 One condition requires that a corporation not purchase over 25 percent of its average daily trading volume (“ADTV”) in a single day of repurchases.6 But while the safe harbor placed limits on daily trades, the previous SEC rules had only required a corporation to disclose the aggregate monthly volume of share repurchases.7 As noted by former SEC chair Mary Jo White, “detailed trading data regarding repurchases [was] not currently available” for the SEC to monitor whether companies were staying within this safe harbor.8 Thus, the SEC has rarely brought enforcement actions against companies relating to the Rule 10b-18 safe harbor.9 In fact, there is not one single action where the SEC analyzed whether a corporation adhered to the safe harbor to determine liability.10 Now, with accessible data on daily trades, the SEC can do just that.
The new rules come at a time when the corporate practice of share repurchases is coming under increased public and political scrutiny.11 Accordingly, this change in disclosure requirements might signal that the SEC will begin pursuing enforcement actions relating to adherence to the Rule 10b-18 safe harbor. The SEC, however, reaffirmed in its announcement that “Rule 10b-18 specifically disclaims any negative inference from an issuer’s choice not to make use of the safe harbor.”12 It likely made this statement to ease industry concerns that failing to meet the Rule 10b-18 safe harbor conditions could lead to a presumption that companies are violating the Exchange Act. Further, the SEC has framed these new rules as increasing transparency for investors, rather than for SEC enforcement, asserting that the new rules will “provide investors with enhanced information to assess the purposes and effects of share repurchases.”13
Yet, the new rules and the corresponding commissioner statements make clear that the SEC looks upon stock repurchases with suspicion. Chair Gensler opened his personal statement on the rules by highlighting that last year companies had purchased more than $1.25 trillion in stock repurchases.14 He went on to state that the rules will “enhance the transparency and integrity of the buyback process.”15 Echoing this concern, Commissioner Lizárraga in his statement in support of the new rules noted that “opportunistic insider behavior can motivate repurchases” and that these disclosure rules would help “lessen some of the information asymmetries inherent between issuers and investors in buybacks.”16 Commissioner Crenshaw agreed, stating that the disclosures will “provide more comprehensive information for investors, allowing them to better understand how such programs are impacting the market [and] the corporation’s motivation and rationale to use funds to conduct buybacks rather than other projects.”17 These statements could imply that the SEC plans to keep a watchful eye on the practice of share repurchases.
Companies, therefore, should be on notice of the impact the new rules might have on SEC enforcement and ensure that adequate internal processes are in place to accurately disclose their daily share repurchases and the number of shares intended to qualify for the Rule 10b-18 safe harbor.
Dissent Among the Ranks
But not all SEC commissioners agreed that these rules were necessary. In her dissent, Commissioner Peirce found that the rules fail to address any real problem in the industry practice of share repurchases.18 She argued that there was no evidence that share repurchases were being used to increase executive compensation. She even noted that the SEC’s own staff research demonstrated that increasing executive compensation or meeting account-based performance targets, like earnings-per-share, was an “unlikely” motivation for most repurchase programs.19
Commissioner Uyeda also dissented, but he focused on the new rules’ treatment of foreign private investors (“FPIs”).20 These new rules would require the same disclosures of share repurchases for FPIs as the rules require for domestic corporations, regardless of the their home countries’ disclosure requirements. To him, “[t]his change fundamentally upends the Commission’s long-standing and bipartisan approach of largely deferring to the disclosures made by FPIs pursuant to their home country reporting requirements.”21 He further argued that the new disclosure requirements, which are meant to combat corporate insider market manipulation, are inapplicable to FPIs given that they are not “subject to Section 16 of the Exchange Act22 nor extensive executive compensation disclosure.”23 Thus, according to Uyeda, the new disclosure requirements are unhelpful to FPI investors, since they cannot use the “daily data to determine whether repurchases were motivated by executive compensation reasons.”24
What This Means For You
Corporations that issue stock must begin complying with the amendments on their Forms 10-Q and 10-K beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023.25 While this deadline might seem far away, corporations should begin now putting the necessary procedures in place to ensure that they are ready to meet these new disclosure requirements for their share repurchase programs.
1Press Release, U.S. Securities and Exchange Commission, SEC Adopts Amendments to Modernize Share Repurchase Disclosure (May 3, 2023), https://www.sec.gov/news/press-release/2023-85.
2Closed-end funds that are listed on an exchange are required to provide the same disclosures but on a semi-annual basis. Share Repurchase Disclosure Modernization, U.S. Securities and Exchange Commission, Release No. 34-97324, at 5 (May 3, 2023) (to be codified at 17 C.F.R. pts 229, 232, 240, 249, & 274), https://www.sec.gov/rules/final/2023/34-97424.pdf.
3Id. at 62.
4Rule 10b5-1(c) provides an affirmative defense to allegations of insider trading where the corporate insider had entered into contract or plan to purchase or sell a security, became aware of certain information, and then continued through with the transaction according to such contract or plan. 17 C.F.R. § 240.10b5-1(c).
517 C.F.R. § 240.10b-18.
6This rule also provides that “once each week, in lieu of purchasing under the 25 percent of ADTV limit for that day, the issuer . . .may effect one block purchase if (i) [n]o other Rule 10b-18 purchases are effected that day, and (ii) [t]he block purchase is not included when calculating a security’s four week ADTV.” 17 C.F.R. § 240.10b-18(b)(4).
7See Release No. 34-97324, supra note 2, at 5 (citing Purchases of Certain Equity Securities by the Issuer and Others, Release No. 33-8335 (Nov. 10, 2003) [68 Fed. Reg. 64,952 (Nov. 17, 2003)] (requiring disclosure of any share purchase aggregated on a monthly basis)).
8Letter from Mary Jo White, Chair, Sec. & Exch. Comm’n, to Sen. Tammy Baldwin (July 13, 2015), https://s3.documentcloud.org/documents/2272283/sec-response-to-baldwin-07132015.pdf .
9See e.g., In the Matter of Incomnet, Inc., Joel W. Greenberg, and Stephen A. Caswell, Exchange Act Release No. 40281 (July 30, 1998), https://www.sec.gov/litigation/admin/3440281.txt; SEC Charges Wachovia Corporation With Proxy Disclosure and Other Reporting Violations Involving the 2001 Merger Between First Union Corporation and Old Wachovia Corporation, SEC Litigation Release No. 18,958 (Nov. 4, 2004), https://www.sec.gov/litigation/litreleases/lr18958.htm; In the Matter of Mizuho Securities USA LLC, Exchange Act Release No. 83685 (July 23, 2018), https://www.sec.gov/litigation/admin/2018/34-83685.pdf; see also Lenore Palladino, The $1 Trillion Question: New Approaches to Regulating Stock Buybacks, 36 Yale J. On Regul. Bull. 89, 93 (2018) (noting that the SEC has only brought SEC enforcement actions relating to Rule 10b-18 in a few instances).
10See, e.g., Mizuho Securities USA LLC, Exchange Act Release No. 83685 (noting that while the corporation apparently adhered to the Rule 10b-18 safe harbor for repurchases, it was still liable for failing to maintain and enforce policies to prevent insider trading under Section 15(g) of the Exchange Act).
11See, e.g., Emily Stewart, Bernie Sanders and Chuck Schumer Are Going After Corporate Stock Buyback, Vox.com (Feb. 5, 2019), https://www.vox.com/policy-and-politics/2019/2/5/18212273/bernie-sanders-schumer-stock-buybacks-nyt; Shawn Tully, Stock Buybacks Are Not the Enemy, Fortune (Feb. 14, 2019), https://fortune.com/2019/02/14/stock-buybacks-are-not-the-enemy/; Examining Corporate Priorities: The Impact of Stock Buybacks on Workers, Communities, and Investors: Hearing Before the Subcomm. on Inv. Prot., Entrepreneurship, and Cap. Mkts. of the H. Comm. on Fin. Serv., 116th Cong. 67 (2019).
12See Release No. 34-97324, supra note 2, at 63.
13Supra note 1.
14Gary Gensler, Chair, Sec. & Exch. Comm’n, Statement on Share Repurchase Disclosure Modernization (May 3, 2023), https://www.sec.gov/news/statement/gensler-statement-share-repurchase-disclosure-modernization-050323.
16Jaime Lizárraga, Comm’r, Sec. & Exch. Comm’n, Statement on Modernizing Share Repurchase Disclosures (May 3, 2023), https://www.sec.gov/news/statement/lizarraga-statement-share-repurchase-disclosure-modernization-050323.
17Caroline A. Crenshaw, Comm’r, Sec. & Exch. Comm’n, Statement on Share Repurchases Adoption (May 3, 2023), https://www.sec.gov/news/statement/crenshaw-statement-share-repurchase-disclosure-modernization-050323.
18Hester M. Peirce, Comm’r, Sec. & Exch. Comm’n, No Repurchase Left Behind: Dissenting Statement on Share Repurchase Modernization Rule (May 3, 2023), https://www.sec.gov/news/statement/peirce-statement-share-repurchase-disclosure-modernization-050323?utm_medium=email&utm_source=govdelivery.
20Mark T. Uyeda, Comm’r, Sec. & Exch. Comm’n, Statement on the Final Rule: Share Repurchase Disclosure Modernization (May 3, 2023), https://www.sec.gov/news/statement/uyeda-statement-share-repurchase-disclosure-modernization-050323#_ftn5.
22Section 16 of the Exchange Act requires insiders of public companies to disclose direct and indirect ownership of a company’s securities
23See Uyeda, supra note 20.
25See Release No. 34-97324, supra note 2, at 96.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.