The Securities and Exchange Commission (SEC) has issued for comment two separate but related proposed rule amendments regarding share repurchases and 10b5-1 Plans. The comment period will remain open for 45 days after publication of the proposed rules in the Federal Register.
Issuer Share Repurchases. The SEC has proposed two amendments regarding an issuer’s share repurchase disclosures. Currently, Item 703 of Regulation S-K requires issuers to disclose certain information regarding such repurchases in their quarterly reports. The SEC is concerned that this disclosure scheme prevents investors from timely incorporating information on repurchases into the market or adequately understanding the motivations or rationales behind specific repurchases. In response, the SEC proposes that issuers, including foreign private issuers, listed registered closed-end funds and business development companies, be required to furnish (not file) to the SEC a new Form SR before the end of the first business day following the day on which the issuer executes a share repurchase. Form SR, as proposed, shall require that the issuer list (i) the date of the transaction, (ii) the class of securities purchased, (iii) the total amount purchased, (iv) the average price paid per unit and (v) the aggregate total amount purchased on the open market on the date of the transaction in reliance on Rule 10b-18 or pursuant to a 10b5-1 Plan. Second, the quarterly disclosures under Item 703 of Regulation S-K would be expanded to require the issuer to disclose (i) the objective or rationale of the repurchase, (ii) any policies or procedures used by the issuer’s officers or directors related to the purchase and sale of the securities, (iii) whether the transaction was made pursuant to a 10b5-1 Plan and if so, the date the plan was adopted or terminated, (iv) whether the purchase was made in reliance on the Rule 10b-18 safe harbor and (v) whether certain officers or directors purchased or sold shares within ten days of the announcement of a repurchase plan. Taken together, the SEC believes that the additional information these amendments would provide will allow investors to better understand and evaluate specific issuer repurchases.
The SEC release can be found here.
Trading under 10b5-1 Plans. The SEC is also proposing a series of amendments to the affirmative defense against claims of insider trading provided by Rule 10b5-1(c). Under the defense, directors, officers and issuers that engage in transactions in the issuer’s securities will be deemed to not have entered such transactions “on the basis of” material nonpublic information if the transactions are made pursuant to a prior trading arrangement, so called “10b5-1 Plans,” which must be either a binding contract, instructions to another person or a written plan. The aim of the proposal is to keep the investing public better informed about the use of these plans and to curb transactions that the SEC believes “suggest the misuse of material nonpublic information” by issuers, directors and officers.
First, the SEC proposals would narrow the defense currently available. In its present iteration, the defense is available if the person asserting it demonstrates they entered into the plan in good faith and prior to becoming aware of material nonpublic information, the plan includes certain specified details or formula limiting how and when securities are to be traded or otherwise prevents the person from subsequently influencing how such transactions are entered, and the person can demonstrate that the transaction was made pursuant to the plan. To qualify for the defense under the proposed amendments, the plans must include waiting periods during which no trades could be made under the 10b5-1 Plans (120 days for directors and officers and 30 days for issuers), which would reset if the plan is modified, as well as written certifications from officers and directors that they are not aware of any material nonpublic information and are acting in good faith. The affirmation of good faith, previously requiring individuals to “enter” into the arrangement in good faith, would be amended to require them to “operate” the arrangement in good faith, an attempt by the SEC to cover any modifications or cancellations of the arrangements. In addition, the defense would only be available to one single trade plan in any 12-month period and unavailable to parties that have entered into multiple plans for open market transactions of the same class of securities.
Second, to ensure the market has adequate information about the plans, the SEC is proposing new quarterly disclosures in Forms 10-Q and 10-K, pursuant to proposed Item 408(a) of Regulation S-K. Such disclosure would include whether the issuer, officers or directors have adopted, terminated or modified any trading arrangements (regardless of whether they are intended to satisfy the requirements of 10b5-1(c)). The amendments also include new annual disclosures in Form 10-K, pursuant to proposed Item 408(b) of Regulation S-K, of (i) any insider trading policies and procedures the issuer has adopted, and if none, an explanation of why it has not done so, and (ii) a tabular disclosure of stock option awards made within 14 days before or after the filing of any periodic report, issuer share repurchase, or the filing or furnishing of any current report on Form 8-K that contains material nonpublic information. Finally, the proposals would impact the mix of information on Forms 4 and 5. Bona fide gifts of securities would now be required on Form 4 instead of Form 5, significantly reducing the time a Section 16 filer has to report the gifts. In addition, a new mandatory checkbox disclosure would be added to both Forms 4 and 5 where filers would indicate whether a sale or purchase reported on the form was made pursuant to a 10b5-1 Plan. Taken together, these new reporting measures would significantly expand the amount of information the market has on director and officer transactions.
The SEC release can be found here.
 Foreign private issuers and certain registered closed-end funds are required to make the disclosures under the Form 20-F and Form N-CSR, respectively, and the proposed changes to Rule 703 would equally apply to these Forms.