I was so focused in the blog yesterday on the actual share repurchase disclosure requirements that the SEC adopted on Wednesday that I did not get a chance to address the obvious question that comes to mind when considering the Commission action: “Why would the SEC remove disclosure of monthly share repurchase information from the body of periodic reports and now require daily share repurchase data in an exhibit to those same periodic reports?” The outcome, which of course is less bad than requiring daily reporting of share repurchase activity as was originally proposed, still leaves practitioners scratching their head as to whether we are moving in the direction of “data dump” disclosure – i.e., where we get away from carefully crafted quantitative and qualitative disclosure that is filtered by materiality in the body of periodic and current reports toward providing datasets that can be readily crunched by analysts, academics and the SEC to serve their own purposes.
In getting to the “why?” it should first be noted that, in recent years, politicians, institutional investors, the media, academics and governance experts have all criticized share repurchase programs for a wide variety of reasons, and the criticism has only mounted in the past few years amidst the COVID-19 pandemic and the current economic malaise. The focus on share repurchases culminated in the imposition of an excise tax on repurchases in last year’s Inflation Reduction Act of 2022, and the criticism of share repurchases always made it highly likely that the current Commission would act in some manner on the topic. However, in the adopting release for the final share repurchase disclosure rules, the SEC acknowledges:
Existing studies, including a review by Commission staff in 2020, have considered the rationales and effects of repurchases. As our staff concluded, repurchases are often employed in a manner that may be aligned with shareholder value maximization. Together with dividends, repurchases provide an avenue for returning capital to investors, which may be efficient if the issuer has cash it cannot efficiently deploy. Such returns of capital may also send signals to investors that managers are operating the issuer efficiently rather than retaining excess cash for potentially suboptimal use.
Despite these conclusions, there is still mistrust of why repurchases are conducted. The Commission goes on to note in the adopting release:
At present, because issuers are not required to report daily repurchase transactions or provide additional qualitative disclosures about those transactions, it can be difficult to determine whether repurchase timing may have been motivated, at least in part, by factors other than long-term value maximization. For example, issuer repurchases may be influenced, in part, by a desire to achieve certain accounting metrics or for other potentially suboptimal reasons. Some research has found that issuers that would have narrowly missed an earnings per share (“EPS”) target were more likely to have engaged in repurchases, which through their mechanical effect of decreasing the denominator of that measure help such issuers to meet their target.
The fact that repurchases can significantly impact executive compensation for some issuers may also affect how managers choose to employ repurchases. Like all investors, executives who receive equity-linked compensation stand to benefit from repurchases that improve their employer’s long-term stock price, but in some cases executives may realize additional gains unavailable to other investors because of trading by executives or the structure of compensation to those executives. Some studies have found personal trading by insiders close in time to predictable changes in share price caused by repurchases or repurchase-plan announcements, such as concentrated sales in the period immediately following the issuer’s repurchase. Issuers may also adjust the timing of their repurchases or repurchase announcements to increase the returns on insider equity sales. In these cases, by timing their sales to closely follow issuer purchases, executives can benefit in ways that confer a personal benefit to executives without necessarily increasing the value of the firm. Thus, equity-based or EPS-tied compensation arrangements could potentially be one factor that may influence some executives’ decisions to undertake repurchases. Shareholders may not have sufficient information about all of these possible purposes and impacts of issuer repurchases.
In explaining the rationale for replacing the monthly repurchase data with daily repurchase data and enhancing the required disclosure around objectives or rationales for the company’s share repurchases, the Commission notes:
The current reporting regime, in which investors receive information only about the monthly aggregate repurchases of issuers, fails to provide enough detail for investors to draw informed conclusions about the purposes and effects of many repurchases. In contrast, the amendments we are adopting will provide investors with data about the daily repurchase activity of an issuer and additional qualitative disclosures that investors can combine with other disclosures, such as the timing of compensatory awards or executive equity transactions, to observe whether a given repurchase was apt to affect executive compensation. Data on daily transactions and the additional qualitative disclosures would also reveal patterns in which repurchases were undertaken at times or under conditions that were likely to affect imminent accounting metrics, or prior to the release of material nonpublic information by the issuer. Investment advisers may use this data in assisting investors in assessing the purposes and effects of share repurchases.
Thus, the rationale here seems to be that the data dump of daily repurchase activity will facilitate speculative analysis as to the rationale for share repurchases based on the relative timing of those repurchases. That seems to me to be a significant departure from the usual approach to SEC disclosure, and hopefully this is not a harbinger of things to come.
– Dave Lynn, TheCorporateCounsel.net, May 5, 2023