The U.S. Chamber of Commerce threatened a lawsuit following the Securities and Exchange Commission’s adoption of rules that strengthen the requirements governing stock buybacks by a vote of 3 to 2. The rules require publicly-traded companies to provide tabular disclosure of their repurchase activity aggregated on a daily basis either quarterly or semiannually depending on the type of the company.
In the U.S. Chamber’s view, the SEC’s decision hurts investors. The powerful business group believes stock buyback improves returns while at the same time making sure that capital flows to where it is most likely to result in investments that grow the economy.
“Today’s rule by the Securities and Exchange Commission to disincentivize share repurchases will hurt the retirement savings of millions of Americans and result in slower economic growth – hurting the wages of working Americans,” Tom Quaadman, executive vice president of the U.S. Chamber’s Center for Capital Markets Competitiveness, said in a statement shortly after the SEC finalized the rules on May 3, 2023.
“Market regulations should reflect economic realities, and it is unfortunate that the SEC chose to prioritize political policies over American investors and the best interests of our economy,” Quaadman added. “The U.S. Chamber will carefully evaluate the impact of this rule and if it looks at all like the proposed rule, we will pursue litigation to protect investors.”
Two conservative commissioners—Hester Peirce and Mark Uyeda—dissented because they also believe costs will outweigh benefits, among other problems.
“The release fails to demonstrate a problem in need of a solution,” Peirce said. “The release hints at discomfort with issuer share repurchases and suggests that granular disclosure might unearth nefarious practices related to buybacks.”
However, the majority of the commissioners and some investor protection advocates see the new rules as necessary.
The regulatory effort to beef up the rules comes as companies have been increasingly buying back their stocks in recent years. And some have criticized that the current rule inappropriately gives executives incentives by taking advantage of less informed shareholders while cashing out their shares at a higher price, among other problems.
“In 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022,” said SEC Chair Gary Gensler. “Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities. Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets.”
Senator Sherrod Brown, a Democrat from Ohio who chairs the Senate Banking Committee, applauded the SEC’s decision.
“Americans need to know that instead of raising wages, scaling up production, and investing in research and development, corporate executives spend billions on buybacks that enrich themselves and Wall Street. This new rule will increase transparency and accountability when corporations buy back their own stock,” Brown said in a statement. “I will continue to fight to rein in excessive buybacks and ensure companies invest in the people who make our economy work.”
Senator Brown has long pushed stock buyback reforms. He passed legislation to levy a 1 percent tax on stock buybacks in August as part of the Inflation Reduction Act and has since introduced bill to increase that tax to 4 percent.
New SEC Rules
In particular, the SEC’s new rules would require tabular disclosure to include, for each day:
- class of shares;
- average price paid per share;
- total number of shares purchased, including the total number of shares purchased as part of a publicly announced plan;
- aggregate maximum number of shares that may yet be purchased under an announced plan;
- total number of shares purchased on the open market; and
- total number of shares purchased that are intended to qualify for the safe harbor in Rule 10b-18 and separately total number of shares purchased under a plan that satisfies the affirmative defense conditions.
The rules are described in Release No. 34-97424, Share Repurchase Disclosure Modernization. The new rules become effective 60 days after publication in the Federal Register.
The rule adopted also require “check a box” indicating if certain directors or officers traded in the relevant securities within four business days before or after the public announcement of a company’s repurchase program.
Companies must also provide narrative disclosure about their buyback programs and practices in periodic reports. Moreover, they must provide quarterly disclosure on Forms 10-K and 10-Q related to the adoption and termination of 10b5-1 trading arrangements.
Domestic operating companies must file the information quarterly. Closed-end funds must include their data in their annual and semi-annual reports. Foreign private issuers must also file quarterly.
The previous rule, set in 2003, had fewer requirements. Companies must disclose: the total number of shares reported monthly by class; the average price paid per share; the total number of shares bought as part of a publicly announced buyback plan; and the maximum number of shares that may yet be purchased under the plans.
In the meantime, the SEC made some modifications to the proposal.
For example, the SEC set aside the proposed requirement to disclose buybacks within one business day in Release No. 34-93783, published in December 2021.
Dave Brown, a partner with Alston & Bird LLP in Washington, explained that Chair Gensler is continuing to adopt rules “by first proposing the most extreme version followed by some pull-back to make it seem reasonable.”
Even with some “welcomed modifications,” Brown believes that the rules will place additional burden on companies that return value to shareholders through stock buyback.
“There continues to be a clear policy preference against share repurchases and a lack of trust with respect to companies’ motivations,” Brown noted. “The SEC is barely hiding that when the release states ‘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.’”
Moreover, Brown said that companies must modify their policies and procedures for share repurchases and the timing of sales by officers and directors.
“Consistent with other recent rule amendments, the SEC’s economic analysis certainly underestimates the time it will take with respect to each Form and underestimates the time it will take to modify a companies policies and procedures,” he said.
This article originally appeared in the May 4, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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