On December 15, 2021, the SEC proposed amendments to Securities Exchange Act Rule 10b-18, which provides issuers and affiliates with a non-exclusive safe harbor from liability for market manipulation under Sections 9(a)(2) and 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934, as amended (“Exchange Act”) when issuers bid for or repurchase their common stock. The proposed new rules are part of a broader SEC initiative aimed at market manipulation and insider trading, including proposed new amendments related to Rule 10b5-1 Insider Trading Plans (see HERE). The proposed amendments are intended to improve the quality, relevance, and timeliness of information related to issuer share repurchases.
The proposed rules would require an issuer to provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. Form SR would require disclosure identifying the class of securities purchased, the total amount purchased, the average price paid, as well as the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) (for more on Rule 10b5-1(c), see HERE).
The proposed amendments would also require an issuer to disclose: (i) the objective or rationale for the share repurchases and the process or criteria used to determine the repurchase amounts; (ii) 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; (iii) and whether the issuer is making its repurchases pursuant to a plan that it intends to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) and/or the conditions of the Exchange Act Rule 10b-18 non-exclusive safe harbor.
The amendments would also make several clarifying rule and form instruction changes.
The SEC allows for limited methods that an issuer can utilize to show confidence in its own stock and assist in maintaining or increasing its stock price. One of those methods is Rule 10b-18 promulgated under the Exchange Act. Exchange Act Rule 10b-18 provides issuers and affiliates with a non-exclusive safe harbor from liability for market manipulation under Sections 9(a)(2) and 10(b) and Rule 10b-5 under the Exchange Act when issuers bid for or repurchase their common stock in accordance with the Rule’s manner, timing, price and volume conditions. Each of the four main conditions of Rule 10b-18 must be satisfied on each day that a repurchase is made. For more on Rule 10b-18, see HERE.
Sections 9 and 10 of the Exchange Act are the general anti-fraud and anti-manipulation provisions under the Act. Section 9(a)(2) of the Exchange Act makes it unlawful for any person to, directly or indirectly, create actual or apparent active trading in a security or raise or depress the price of such security for the purpose of inducing the purchase or sale of such security by others.
Section 10(b) of the Exchange Act makes it unlawful for any person to, directly or indirectly, “use or employ, in connection with the purchase or sale of any security… any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” Rule 10b-5, promulgated under Section 10(b), provides that “[I]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
Companies and affiliates may repurchase the company’s shares through, among other means, open market purchases, tender offers, private negotiated transactions, and accelerated share repurchases. Issuers typically disclose repurchase plans or programs at the time that the share repurchases are authorized by the board of directors. However, most share repurchases are executed over time through open market purchases through share repurchase plans or programs and the company is not required to, and generally does not, disclose the specific dates on which trades are executed. Investors and other market participants normally do not become aware of a company’s actual share repurchase-related trading activity until they are reported in the company’s quarterly periodic reports, long after the trades have been executed.
Currently Item 703 of Regulation S-K requires companies to disclose any purchase of shares made on its behalf or by an affiliated party on a quarterly basis in Forms 10-Q and 10-K and on an annual basis in Form 20-F for foreign private issuers. The disclosure requirement applies to both open market and private transactions. In general, Item 703 requires disclosure of: (i) the total number of shares purchased reported on a monthly basis by class of security; (ii) whether purchases are made other than through a publicly announced plan or program and the nature of the transaction; (iii) the average price paid per share; (iv) the total number purchased as part of a publicly announced share repurchase plan or program; and (iv) the maximum number of shares that may yet be purchased under the plans or programs.
Item 703 also requires a footnote disclosure of the terms of all publicly announced repurchase plans or programs, including: (i) the date the plan or program was announced; (ii) the dollar amount approved; (iii) the expiration date (if any) of each plan or program; (iv) each plan or program that has expired during the reporting period; and (v) each plan or program that has been terminated prior to expiration during the reporting period.
Although Rule 10b-18 provides a safe harbor from the liability provisions of Section 9(a)(2), 10 and Rule 10(b)(5), like most securities rules, the rule does not provide protection from liability where it is utilized as part of a plan or scheme to evade the securities laws. In addition, an issuer must consider the interaction of insider trading laws when attempting to rely on Rule 10b-18, such as whether it is in possession of material non-public information.
Proposed Rule Amendments
The number of repurchase programs has grown significantly in recent years. Although there are several legitimate reasons for a company to use repurchases, including to lower dilution after new stock is issued, to signal a belief that stock is undervalued, or to utilize excess cash, there are also concerns about abuse. A repurchase program results in increasing earning per share (by lowering the total number of shares outstanding) and as such can be used to meet or beat forecasts. In addition, because announcements of repurchases and actual repurchase trades can also effect short-term upward price pressure, share price- or EPS-tied compensation arrangements could incentivize executives to undertake repurchases in an attempt to maximize their compensation. A repurchase program could also increase the stock price in advance of selling activity by insiders and affiliates.
The proposed rules would:
- Require daily repurchase disclosure on new Form SR, which would need to be furnished to the SEC on the EDGAR system one business day after execution of a company’s repurchase order;
- Amend Item 703 to require additional detail regarding the structure of an issuer’s repurchase program and its share repurchases; and
- Require the information reported pursuant to Item 703 and Form SR to use Inline XBRL (see here for more on Inline XBRL – HERE).
The proposal would add new Exchange Act Rule 13a-21 and Form SR that would require all companies, including foreign private issuers and certain registered closed-end funds, to report 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 by the issuer pursuant to Exchange Act Section 12 (for more on Section 12 registration, see HERE).
The Form SR would require the following disclosure in tabular format, by date, for each class or series of securities: (i) identification of the class of securities purchased; (ii) the total number of shares (or units) purchased, including all issuer repurchases whether or not made pursuant to publicly announced plans or programs; (iii) the average price paid per share (or unit); (iv) the aggregate total number of shares (or units) purchased on the open market; (v) the aggregate total number of shares (or units) purchased in reliance on the safe harbor in Rule 10b-18; and (vi) 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) (see HERE).
The Form SR would be required to be furnished (and not filed) with the SEC before the end of the first business day following the day on which the issuer executes a share repurchase. The liability attached to documents that are furnished differs from those that are filed. Although liability under Section 10(b) and Rule 10b-5 of the Exchange Act may attach to documents that are “furnished,” the standard of proof and elements to state a cause of action are different under these rules.
As noted, Form SR would need to be furnished on the EDGAR system and tagged with Inline XBRL.4682b4
Item 703, Form 20-F and Form N-CSR
The proposed rules would also amend Item 703, Form 20-F and Form N-CSR to align with the new Form SR and provide more detailed disclosures. The amendments would require additional disclosures, including:
- 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 if so, the date that the plan was adopted or terminated;
- Whether purchases were made in reliance on the Rule 10b-18 non-exclusive safe harbor; and
- Whether any Section 16 filers (officers/directors/10%+ shareholders) 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 10 business days before or after the announcement of a purchase plan or program.