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May 05, 2023

SEC adopts new rules requiring expanded disclosure of buyback programs

US Chamber of Commerce threatens to fight changes with litigation

The US securities regulator has brought in new rules forcing companies to disclose more information about share-buyback activity following a year in which corporates spent record amounts repurchasing their own stock.

The changes, adopted by the SEC this week in a 3-2 vote, mean companies will need to report information such as daily repurchase activity, whether directors traded close to announcements and the thinking behind buyback programs.

The move significantly increases the disclosure demands on companies over their buyback activity – currently they need only reveal monthly aggregate information – but the SEC backed off from calls for reporting on a daily basis.

SEC chair Gary Gensler
SEC chair Gary Gensler | Photo: Third Way Think Tank

Proponents of more transparency argue that repurchase programs can be used for reasons other than efficiently returning capital to investors, such as boosting management compensation or inflating the share price prior to insider sales. They say investors need more information to understand why companies are conducting repurchases.

But critics have reacted angrily to the changes, with the US Chamber of Commerce threatening to challenge them with litigation.

‘Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities,’ says SEC chair Gary Gensler in a statement. ‘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.’

Daily view

Under the new rules, issuers must report daily buyback activity covering areas such as number of shares purchased, average price paid and share class. Most companies will need to make the disclosures on a quarterly basis, starting from the fourth quarter of this year.

In addition, companies are required to include a checkbox that indicates whether senior individuals conducted trades in the relevant shares four business days before or after the announcement of a buyback program.

Companies must also provide expanded narrative disclosure about buyback programs, covering a company’s ‘objectives or rationale’ for the activity, the process used to decide the volume of repurchases and any policies or procedures related to transactions made by officers and directors.

In another change, issuers will need to report information on the adoption and termination of Rule 10b5-1 trading arrangements, which allow insiders to sell stock under a predetermined schedule.

Strong criticism

Tom Quaadman, executive vice president at the US Chamber of Commerce, has hit out at the new rules, saying the regulator has prioritized ‘political policies over American investors and the best interests of our economy’.

‘Share repurchase agreements… improve returns for savers and investors across the economy while at the same time ensuring capital flows to where it is most likely to result in investments that grow our economy and improve our standard of living,’ he says in a statement.

‘Today’s rule by the SEC 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.’

Man reading business newspaper
Photo: Adeolu Eletu

Buybacks by S&P 500 companies hit a record high of $922.7 bn in 2022, up from $881.7 bn the previous year, according to data from S&P Global. Major announcements have continued this year, including from Apple, which confirmed $90 bn in additional repurchases yesterday during its Q2 results.

In January, a new 1 percent tax on buybacks took effect, with US President Joe Biden threatening to quardule it during his State of the Union address. Referring to the energy sector, he said companies have ‘invested too little of that profit to increase domestic production and keep gas prices down’.

The debate over buybacks led legendary investor Warren Buffett to address the topic in his 2023 annual letter to shareholders, where he stated repurchases benefit ‘all shareholders’ if they occur at the right price.