On December 15, the SEC proposed rules to address two stated priorities for the agency under Chair Gary Gensler: modernizing disclosure of share repurchases1 and curbing perceived abuses around Rule 10b5-1 and insider trading.2
To help investors better understand, among other things, the extent of a company’s activity in the market (including potential impact on stock price) and a company’s motivation for its share repurchases, the SEC has proposed changes to the existing rule on repurchase disclosure – Item 703 of Regulation S-K – and proposed a new Form SR to require more frequent reporting of repurchase activity.
Changes to Item 703 of Regulation S-K
- A company will have to check a box to indicate whether any of its Section 16 officers or directors purchased or sold shares of company stock within 10 business days before or after the company’s announcement of a repurchase plan or program.
- The existing share repurchase plan tabular disclosure in Forms 10-K and 10-Q will be enhanced to include disclosure of the following new items (in XBRL format with existing disclosure requirements) in footnote or narrative form:
- the objective or rationale for each repurchase plan or program and the process or criteria used to determine the amount of repurchases;
- the number of shares purchased in reliance on the safe harbor in Rule 10b-18;
- the number of shares purchased pursuant to a Rule 10b5-1 plan (and the date of plan adoption or termination); and
- any policies and procedures relating to purchases and sales of a company’s securities by its officers and directors during a repurchase program, including any restrictions on such transactions.
New Form SR/Next Day Reporting
This new form will have to be furnished with the SEC one business day after a company, or one of its affiliated purchasers, executes a share repurchase order. To enhance transparency and enable more timely investor review of share repurchases, the form would require disclosure of the following:
- the date of the repurchase;
- identification of the class of securities purchased;
- the total number of shares purchased, regardless of whether made pursuant to publicly announced plans or programs;
- the average price paid per share;
- the aggregate total number of shares purchased on the open market;
- the aggregate total number of shares purchased in reliance on the safe harbor in Rule 10b-18; and
- the aggregate total number of shares purchased pursuant to a Rule 10b5-1 plan.
Rule 10b5-1 and Insider Trading
Recently, the SEC and its Investor Advisory Committee have been focused on revising Rule 10b5-1 to address “loopholes in the rule that allow corporate insiders to unfairly exploit informational asymmetries.” The SEC has incorporated the Committee’s recommendations to propose amendments to Rule 10b5-1 and new disclosure requirements in Regulation S-K – Item 402(x) and Item 408 – to address concerns about misuse of plans and programs under the auspices of this rule.
Amendments to Rule 10b5-1
As proposed, new conditions to the availability of the affirmative defense under Rule 10b5-1 will include the following:
- Individual Rule 10b5-1 plans must have a 120-day cooling off period before any trades can commence after plan adoption or modification;
- Company Rule 10b5-1 plans must have a 30-day cooling off period before any trades can commence after plan adoption or modification;
- Section 16 officers and directors must personally certify to the company that they are not aware of material nonpublic information (MNPI) regarding the company when adopting or modifying a plan (and that they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of the Securities Exchange Act of 1934, as amended);
- There is no affirmative defense for overlapping Rule 10b5-1 plans for open market trades in the same class of securities;
- Single trade plans are limited to one every 12 months; and
- Rule 10b5-1 plans must be entered into and operated in good faith.
- A company will have to disclose, on an annual basis, whether or not (and if not, why not) it has adopted insider trading policies and procedures (and include disclosure of such policies and procedures).
- A company will have to disclose, on an annual basis, its policies and practices on timing of awards of options, stock appreciation rights or similar awards in relation to disclosure of MNPI (and include tabular disclosure of grants to its named executive officers within 14 days of the release of MNPI (the filing of a Form 10-K or Form 10-Q, issuer share repurchase, or a Form 8-K with MNPI (including an earnings release)) and the market price of underlying securities on the trading days before and after release of the MNPI).
- A company will have to disclose, on a quarterly basis, the adoption or termination of Rule 10b5-1 or other plans for Section 16 officers, directors and the company, in XBRL format. The company will also have to disclose: (1) the name and title of the director/officer (if applicable); (2) the date of plan adoption/termination; (3) the duration of the plan; and (4) the aggregate amount of securities to be sold or purchased under the plan.
- Forms 4 and 5 will be revised to include a checkbox to indicate whether a reported transaction for a Section 16 officer or director was made pursuant to a Rule 10b5-1 plan.
- Section 16 officers and directors will have to report bona fide gifts of equity securities within two business days (rather than on the current delayed basis).
Although both proposed rules will be subject to a 45-day comment period once published in the Federal Register – and the comments are expected to be significant given the scope of the proposed changes – public companies should begin preparing for potential next day reporting of share repurchases and enhanced disclosure of buybacks, insider trading and Rule 10b5-1 plans. Specifically, these companies should: (1) evaluate their current repurchase plans and programs against the new disclosure requirements and consider potential modifications; (2) review their insider trading policies and practices for potential updates; (3) review with their insiders who use Rule 10b5-1 plans the proposed cooling-off periods and certification requirements; (4) review with their Section 16 officers and directors the proposed two business day reporting requirement for bona fide gifts of equity securities; and (5) review or consider adopting stock option grant timing policies.