The Wait is Over: SEC Adopts Share Repurchase Disclosure Modernization Rules

After proposing amendments to the disclosure requirements regarding share repurchases (also known as share buybacks) in December 2021 and re-opening the comment period for the proposed rules in December 2022, the Securities and Exchange Commission (the “SEC”) adopted its final rules to modernize share repurchase disclosure (the “Final Rules”) on May 3, 2023. The SEC noted in the adopting release that the Final Rules are intended to provide investors with more detailed information so that they may better assess the motivations for companies’ repurchase plans or programs and may determine whether repurchase activity lines up with companies’ stated rationales or instead serves other purposes, such as those related to executive compensation and accounting metrics, such as earnings per share.

The Final Rules do not provide any exemptions and apply to all issuers of securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), other than Canadian companies that report under the MJDS.¹ The Final Rules generally require reporting companies to do the following:

• Disclose in a new quarterly exhibit (Exhibit 26) to their Forms 10-Q and 10-K² daily quantitative repurchase data in a tabular format, eliminating the current requirement to disclose monthly repurchase data in periodic reports
• Include a checkbox in new Exhibit 26 to indicate whether their directors and officers reporting pursuant to Section 16 of the Exchange Act purchased or sold company securities in the four business days before or after the public announcement of a share repurchase plan or program (or the announcement of an increase to an existing plan or program)
• Include narrative disclosure about their objective, rationale, and other matters relating to their share repurchase programs and practices in quarterly periodic reports, as well as disclosure of their policies about trading by officers and directors during repurchase plans or programs
• Disclose the company’s adoption and termination of its Rule 10b5-1 plans
• Tag the newly required disclosure using inline XBRL

Disclosure of Daily Repurchase Data³

1. Final Rules

The Final Rules amend Item 601 of Regulation S-K (“Reg. S-K”) to require companies to file new Exhibit 26 with their Form 10-Qs and Form 10-Ks. Exhibit 26 will disclose, for the period covered by the report (or the company’s fourth quarter for the Form 10-K), the total purchases of shares of the company’s equity securities registered pursuant to Section 12 of the Exchange Act made each day by or on behalf of the company or an “affiliated purchaser.” The Final Rules also eliminate the current requirements under Item 703 of Reg. S-K to disclose monthly repurchase data within periodic reports. The disclosure in Exhibit 26 must be in tabular format and include the following information:

1. The date on which the purchase was executed
2. The class of securities (which must clearly identify the class even if the company only has one outstanding class of securities)
3. The total number of shares purchased on the date (including those purchased by or on behalf of the company or an affiliated purchaser, and regardless of whether made pursuant to a publicly announced company purchase plan or program)
4. The average price paid per share (excluding brokerage commissions and other costs of execution)
5. The total number of shares purchased on the date as part of a publicly announced company purchase plan or program
6. The aggregate maximum number (or approximate dollar value) of shares that may still be purchased under the publicly announced company purchase plan or program
7. The total number of shares purchased on the open market, including shares repurchased in open-market transactions but excluding shares purchased in tender offers, in satisfaction of the company’s obligations upon exercise of outstanding put options that it has issued, or other transactions
8. The total number of shares purchased on the date intended by the company to qualify for the safe harbor in Rule 10b-18 of the Exchange Act⁴
9. The total number of shares purchased on the date intended by the company to qualify for the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act⁵

The SEC provided this example table in the Final Rules:

The table must also include footnotes regarding the adoption or termination date of any Rule 10b5-1 plans referenced in column (i).

2. Departures from Proposed Rules

Although the Final Rules require disclosure of the daily repurchase data, companies must report the daily data quarterly in Forms 10-Q and 10-K. This is a significant improvement over the proposed rules, which would have required companies to provide daily public reports during active programs by furnishing a new Form SR one business day after the date that the company (or affiliated purchaser) executed such a purchase.⁶

On the other hand, the Final Rules require that daily repurchase information be filed with the SEC in Forms 10-Q and 10-K rather than being furnished in a Form SR as originally proposed. As a result, (a) companies will be subject to liability under Section 18 of the Exchange Act for the information, (b) the information will be deemed incorporated by reference into registration statements for offers and sales under the Securities Act of 1933 (the “Securities Act”) (e.g., registration statements on Forms S-1 and S-3), and (c) companies will therefore be subject to liability for the information under Section 11 of the Securities Act. The SEC determined that, because companies will be required to disclose the daily repurchase data on a quarterly basis, they will have more time to obtain, verify, and compile the data. Thus, liability concerns raised by the proposed one-business-day timeframe will be “alleviated.”⁷

Director and Officer Trading Checkbox

1. Final Rules

New Exhibit 26 includes a box that companies must check if any of their directors or officers reporting pursuant to Section 16 of the Exchange Act purchased or sold shares of a class of the company’s equity securities that are registered pursuant to Section 12 of the Exchange Act and subject to a company repurchase plan or program within four business days before or after the company announced the plan or program or an increase of the existing plan or program. In determining whether to check the box, companies are permitted to rely on certain filings/documents unless they know or have a reason to know that such filings were filed inappropriately or that a filing should have been made but was not. These include Forms 3 and 4 and amendments thereto filed with the SEC during the company’s most recent fiscal year, Forms 5 and amendments thereto filed with the SEC with respect to the company’s most recent fiscal year, and any written representation from the reporting person that no Form 5 is required (which the company must maintain in its records for two years and make available to the SEC upon request).

The Final Rules do not define “purchase” or “sale” for this purpose. The reference to reports required under Section 16 of the Exchange Act (“Section 16 Reports”) as the primary basis for the company’s decision whether to check the box might suggest that any transaction required to be reported on Section 16 Reports may be a purchase or sale, but it might suggest that only transactions that constitute a purchase or sale under Section 16 rules are relevant (gifts, for example, would not be a sale, even though reported on Section 16 Reports). Arguably, only open market purchases or sales should be relevant. Absent clarification from the SEC, companies will have to determine what is a disclosable purchase or sale in this context.

Some market participants may infer from a checked box that a purchase or sale should not have been made during the four business days before or after a specified announcement about a repurchase plan or program, as some comment letters noted. We expect companies will evaluate whether to prohibit at least discretionary purchases and sales during the eight business days that would trigger a checked box.

2. Departure from Proposed Rules

The Final Rules require that companies indicate whether directors and officers reporting pursuant to Section 16 of the Exchange Act have engaged in certain equity transactions within four business days of a company repurchase plan or program announcement, rather than 10 business days as was initially proposed. The SEC noted that the originally proposed 10-day period would result in added attention to certain transactions that are insignificant, thereby reducing the value of the checkbox. The Final Rules also require disclosure where such transactions are made within four business days of the announcement of an increase of an existing share repurchase plan or program, which was not included in the proposed rules. Finally, the Final Rules provide new clarification of the filings/documents on which companies may rely in determining whether to check the box.

Narrative Disclosure Regarding Share Repurchase Programs and Practices

1. Final Rules

The Final Rules add requirements for companies to make quarterly narrative disclosure regarding their repurchase programs and practices within their periodic reports. Accordingly, pursuant to revised Item 703 of Reg. S-K, companies are required to disclose in narrative format, referring to corresponding repurchases in the new Exhibit 26 table where applicable:

• the objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of purchases
• the number of shares purchased other than through a publicly announced plan or program and the nature of such transaction(s) (e.g., open market transactions, tender offers, in satisfaction of a company’s obligation upon exercise of outstanding put options, or other transactions)
• information regarding publicly announced repurchase plans or programs, including (i) the date it was announced; (ii) the dollar amount (or share amount) approved; (iii) the expiration date (if any) of each plan or program; (iv) each plan or program that expired during the period covered by the tabular exhibit described above; and (v) each plan or program the company decided to terminate prior to expiration or under which the company does not intend to make further purchases
• any policies and procedures relating to purchases and sales of the company’s securities by its officers and directors during a company repurchase program, including any restrictions on such transactions

2. Departure from Proposed Rules

While the Final Rules’ treatment of Item 703 of Reg. S-K differs to a large extent from that of the proposed rules, the actual substance of the SEC’s proposed changes to Item 703 of Reg. S-K largely remains in the Final Rules, albeit with different placement and formatting (e.g., disclosure of the number of shares purchased and intended to qualify for the affirmative defense conditions of Rule 10b5-1(c) or Rule 10b-18 of the Exchange Act is required in new Exhibit 26 rather than pursuant to Item 703 of Reg. S-K).⁸

Company Rule 10b5-1 Plan Disclosure

1. Final Rules

After omitting certain company-related disclosures from the final rules adopted regarding insider trading arrangements and related disclosure in December 2022, the SEC used the Final Rules to finish the job with amendments to Item 408 of Reg. S-K. Much like the SEC’s new requirements for companies to disclose certain information regarding the trading arrangements of their directors and officers under Item 408(a) of Reg. S-K, the Final Rules require disclosure of whether the company itself adopted or terminated during the quarter covered by the report (or the fourth quarter for the Form 10-K) any “Rule 10b5-1 trading arrangements” as the term is defined in Item 408(a)(1)(i) of Reg. S-K⁹ (“Rule 10b5-1 Plans”). If so, companies are required to disclose “material terms” regarding their Rule 10b5-1 Plans, including (a) the date on which the company adopted or terminated a Rule 10b5-1 Plan; (b) the duration of the Rule 10b5-1 Plan; and (c) the aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 Plan. The Final Rules state that the material terms to be disclosed regarding such Rule 10b5-1 Plans do not include terms with respect to the price at which the party executing the Rule 10b5-1 Plan is authorized to trade. If a company’s disclosure made pursuant to Item 703 of Reg. S-K would satisfy these requirements, it may simply cross-reference to such disclosure.

2. Departure from Proposed Rules

The proposed rules did not contemplate these disclosure requirements regarding company Rule 10b5-1 Plans, but the Final Rules largely track the SEC’s proposed rules regarding insider trading arrangements and related disclosure regarding company Rule 10b5-1 Plans which, as previously mentioned, were not included in the SEC’s final rules adopted in December 2022 regarding insider trading arrangements and related disclosure.

Inline XBRL Tagging

Like the proposed rules, the Final Rules will require all of the newly required disclosure to be tagged using inline XBRL.

Considerations and Next Steps

Companies are required to comply with these new disclosure requirements, including providing the daily repurchase data table and checkbox within new Exhibit 26 to their Forms 10-Q and 10-K, the narrative disclosure regarding share repurchase plans or programs and company Rule 10b5-1 Plans in their Forms 10-Q and 10-K, and the related tagging requirements, beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023. For calendar-year companies, this will be the Form 10-K for fiscal year 2023 to be filed in early 2024.¹⁰

In preparing for compliance, companies should take several items into consideration:

• Companies should ensure that they have disclosure controls and procedures in place to track both company and director and officer share repurchase information that will be required for compliance with the Final Rules. The banks and brokers involved in executing such trades will likely need to provide relevant information.
• Companies should determine the identities of their affiliated purchasers and consider adopting policies and procedures to assist the company in keeping track of them and their purchases.
• Companies should consider whether they wish to make changes to their Rule 10b5-1 Plans and practices in light of the new disclosure rules.
• Companies may want to revisit their policies and procedures to determine the extent to which insider trading policies and procedures or other internal policies should be revised to change the timing of trading of company securities by insiders in light of the new disclosure requirements. This could mean delaying the start of the open window period following earnings announcements, when share repurchase plans or programs are often announced, and enhancing pre-clearance procedures to monitor trading more closely during the period before and after significant announcements regarding repurchase plans or programs.
• Companies may wish to consider whether their internal procedures regarding the approval of repurchase plans or programs should be augmented in light of the new disclosure rules.
• If companies do not already have in place policies and procedures relating to company share repurchase plans or programs or the trading in company securities by officers and directors during a repurchase plan or program, companies may wish to consider adopting such policies and procedures.

The V&E team is available to provide more in-depth education about the Final Rules and steps to prepare for future compliance.

¹ The SEC notes that it is not imposing the new requirements on Canadian issuers that file using the Multijurisdictional Disclosure System, or MJDS, because those issuers are subject to a separate reporting regime. See Final Rule: Share Repurchase Disclosure Modernization, SEC Release No. 34-97424 (May 5, 2023) (“Adopting Release”), at 58.

² For Listed Closed-End Funds, this disclosure must be made on a semi-annual basis on Form N-CSR and for Foreign Private Issuers (“FPIs”), this disclosure must be made in a new Form F-SR that must be filed within 45 days after the end of the FPI’s fiscal quarter. For more information on the reporting requirements applicable to Listed Closed-End Funds and FPIs, please contact your V&E attorney.

³ See Footnote 2 regarding the timing/form of disclosure for Listed Closed-End Funds and FPIs.

⁴ Rule 10b-18 provides a company and its affiliated purchasers a non-exclusive safe harbor from liability under certain market manipulation rules when repurchases of the company’s securities are made in accordance with the conditions set forth in Rule 10b-18.

⁵ A trading plan that satisfies the conditions of Rule 10b5-1(c) can be used as an affirmative defense against potential insider trading liability.

⁶ Note, however, that FPIs will still be required to disclose daily repurchase data on a quarterly basis in the new Form F-SR. See Footnote 2 above.

⁷ See Adopting Release at 57.

⁸ Note that the Final Rules slightly tweak the language regarding purchases made with reference to Rules 10b5-1(c) and Rule 10b-18 to address commenters’ concerns that companies are able only to indicate their intent to satisfy/comply with the affirmative defense conditions/safe harbor provided by such rules. See Adopting Release at 61.

⁹ Item 408(a)(1)(i) of Reg. S-K defines “Rule 10b5-1 trading arrangements” as any contract, instruction or written plan for the purchase or sale of securities of the company intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act.

¹⁰ FPIs that file on foreign private issuer forms must disclose the daily repurchase data 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, and provide the narrative disclosure starting in the first Form 20-F filed after their first Form F-SR has been filed. Registered closed-end management investment companies that are exchange traded will disclose the quantitative data and provide the narrative disclosure on Form N-CSR beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024.