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Thank you, Chair Gensler. As you have heard, the final rule scraps the proposed requirement to disclose share repurchases within one business day. Despite this commendable and much needed change, I cannot support a rule that mandates immaterial disclosures without sensible exemptions. Accordingly, I dissent.
The release fails to demonstrate a problem in need of a solution. The release hints at discomfort with issuer share repurchases and suggests that granular disclosure might unearth nefarious practices related to buybacks. The release points out that share repurchases could be “conducted to increase management compensation or to affect various accounting metrics,” rather than to increase firm value.[1] Some people would argue that issuers should use excess cash to increase employee wages or fund research and development. In some cases, these buyback critics may be correct, but share repurchases are not inherently problematic. To the contrary, they enable companies to return excess cash to shareholders with greater tax-efficiency than dividends.[2] Shareholders who choose to sell their shares back to the company then can reinvest the proceeds into companies that need cash. The net result is that capital flows to where it can best be used. Issuers also sometimes repurchase shares for other legitimate purposes, including to “offset dilution from equity compensation plans, or [as] an appropriate investment when shares are viewed as undervalued.”[3]
The implicit skepticism of issuer repurchases is out of step with the SEC staff’s work on the issue. A 2020 SEC staff study found that repurchases help issuers “maintain optimal levels of cash holdings and minimize their cost of capital” and “on average” have “a positive effect on firm value.”[4] The study also found that increasing or meeting executive compensation levels or meeting “earnings-per-share (EPS)-based performance targets” is “unlikely” to motivate “most repurchase activity.”[5] Other studies have made similar findings.[6] Regardless of whether the findings of the staff study or the sentiment in this release are correct, in a free economy government should not micromanage corporate decisions—even implicitly through onerous disclosure requirements—about whether to use excess cash to buy back shares or for some other purpose.
The final rule, although it wisely backs off essentially real-time disclosure of issuer buybacks, is flawed in its granularity. The reasonable investor does not need to know about every repurchase by every public issuer. Disclosure of daily repurchase information will “bury [investors] in an avalanche of trivial information[,] a result that is hardly conducive to informed decisionmaking.”[7] The release justifies the daily mandate by explaining that “investors cannot currently be certain that any given repurchase in fact conveys information about the issuer’s fundamental value.”[8] Even though the release acknowledges that “many, perhaps even most, share repurchases are not undertaken solely or primarily to benefit managers or to achieve targets, such as those based on EPS,” it worries that this “fact . . . does not aid investors who are attempting to assess the efficiency of, and information conveyed by, any given repurchase by a particular issuer.”[9] True, and they also cannot be certain that every decision regarding a research and development project and or capital investment is efficient and undertaken with pure motives. Yet we do not require the level of disclosure we are requiring here. In many areas, a company’s officers and directors could have wrong motives for their decisions, but the antidote is not requiring companies to describe in painstaking detail every corporate action. As several commenters noted, we risk creating “white noise,” the contextless volume of which could confuse investors. [10]
The immateriality of the mandated disclosure calls into question the benefits of the rule, but the rule’s costs are also a concern. Even with the delayed disclosure, the daily repurchase information could publicly release confidential information, including, in narrow cases, pending merger or acquisition activity[11] or other confidential corporate actions.[12] The provision of the required information, even on the timeline required by the final rule, will impose costs on companies, particularly as they will have to produce the data in structured format.[13] Other elements of the rule may also prove to be costly, including requiring issuers to disclose their rationale behind share repurchase activity, and provide their policies and procedures about executive sales during repurchase programs.
In light of the rule’s questionable benefits, the Commission’s refusal to make reasonable accommodations for small and foreign issuers is puzzling. For example, the Commission could have accommodated smaller reporting companies by providing an extended compliance period or at least temporary relief from the structured data requirements. The Commission also could have adhered to the historical treatment of foreign private issuers (“FPIs”).[14] Instead of deferring to FPIs’ home country regulators, the rule requires them to file on the same quarterly schedule as domestic issuers. If this immaterial information warrants quarterly reporting, will we stop making sensible accommodations to FPIs in other areas as well? The Commission also failed to respond adequately to the unique considerations raised about the new requirement’s application to closed-end funds and banks.[15] Finally, the release imposes unnecessarily aggressive compliance deadlines.
The final rule is not as bad as it could have been,[16] but better-than-it-might-have-been is not my standard for supporting a final rule. That said, I am thankful to staff across the Commission for their hard work on this release and for their engagement with me on it. As always, their work is excellent. Among others, I want to thank staff in the Divisions of Corporation Finance, Investment Management, Economic and Risk Analysis, the Office of General Counsel, and others throughout the Commission.
[2] Craig Lewis and Joshua White, Corporate Liquidity Provision & Share Repurchase Programs at 13, U.S. Chamber of Commerce Center for Capital Markets Competitiveness (Sept. 24, 2021),
https://www.centerforcapitalmarkets.com/wp-content/uploads/2021/09/4-01-22-CCMC_StockBuybacks2022-9.pdf (hereinafter, Lewis and White study) (“Consider a dividend paid to all investors simultaneously. Tax laws typically treat the dividend as ordinary income and, thus, paying a dividend triggers potential tax obligations for all investors. In the case of a share repurchase, selling shareholders will be subject to capital gains taxes. If the capital gains tax rate is lower than the ordinary income tax rate, these investors will realize a higher after-tax rate of return on their investment. Moreover, only those investors that tender shares trigger tax obligations since shareholders that do not sell defer tax obligations to a future sale date. Yet, non-selling shareholders still benefit from any corresponding increase in the stock price. On net, share repurchases allow shareholders to determine when they are exposed to personal taxes rather than imposing taxes on retail investors.”).
[3] Letter from DLA Piper at 2 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122329-
278373.pdf.
[5] SEC study at 7 (“For example, the declining level of option-based compensation suggest that efforts to use repurchases to maintain the value of compensation grants do not account for most firms’ increased use of repurchases. Similarly, the relatively low incidence of firms having earnings-per-share (EPS)-based performance targets, as well as the rate at which boards of directors consider the impact of repurchases when setting EPS-based performance targets or determining whether they have been met, further supports the conclusion that efforts to increase compensation are unlikely to account for most repurchase activity.”); see also id. at 45 (“[M]ost of the money spent on repurchases over the past two years was at companies that either do not link managerial compensation to EPS-based performance targets or whose boards considered the impact of repurchases when determining whether EPS-based performance targets were met or in setting the targets, suggesting that other rationales motivated the repurchases.”).
[6] See, e.g., Lewis and White study at 4 (“[C]laims of opportunistic or manipulative use of share repurchases by insiders are not supported by economic analysis.”).
[7] TSC Indus. v. Northway, 426 U.S. 438, 448-449 (1976).
[10] See, e,g., Letter of ACLI at 2 (Feb. 22, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20117468-269587.pdf (“ [I]nvestors are already flooded with enormous amounts of information. Adding daily reporting of share repurchase information is only going to add to the avalanche of information and overwhelm investors. Life insurance companies already disclose in quarterly analyst calls the number and amount of shares repurchased during the quarter. In addition, companies disclose this information in the quarterly Form 10Q’s and the Form 10K. The reporting requirements included in the proposed rule are unlikely to impact an investor’s decision to invest in a company. Likely over time, the enhanced reporting will be white-noise that will be disregarded by investors, but will leave companies with the daily burden and cost of compliance.”); Letter of SIFMA at 13 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122315-278365.pdf (“In addition, SIFMA does not believe that daily reporting will provide useful information to investors on issuer share repurchase activity, as the sheer volume of data reported will create substantial ‘white noise,’ impeding rather than helping investors monitor and evaluate issuer activity. Many forms of disclosure are fundamental to an issuer’s valuation (and quickly reflected in an issuer’s stock price), but others can be more technical in nature. The proposed disclosure of daily corporate share repurchase activity on Form SR would be the latter. Without being relevant to an issuer’s earnings or valuation, daily disclosure of an issuer’s share repurchase activity could nonetheless influence an issuer’s stock price, assuming such information is not equally understood by all investors.”); Letter from Dow at 5 (“We are additionally concerned that daily reporting of share repurchases will provide large volumes of trading activity information which will be scrutinized by market participants and the press, but for which there will be no context, leading to speculation and noise in the capital markets instead of increasing investor confidence. While market participants will be able to use the Form SR disclosures to track such changes in activity in virtually real time, there will be no context for the information, which is likely to lead to speculation about why trading patterns have changed, perhaps abruptly. In particular, if an issuer suddenly stops trading, investors and others will ask themselves whether there is a pending acquisition, unexpected liquidity issues, a belief by the issuer that the stock is overvalued, or perhaps just unfavorable market conditions, with each investor guessing, and trading on, their own answers to these questions in light of any other speculation that may already have been occurring.”).
[11] See, e.g., Letter from Davis Polk at 2-3, Mar. 28, 2022, https://www.sec.gov/comments/s7-21-21/s72121-20121498-273485.pdf (“Similarly, it would not be unusual for public companies to halt their share repurchases when they are involved in M&A discussions. Under today’s reporting regime, companies can engage in such discussions and halt their share repurchases without fueling market speculation. Under the proposed rules, however, if two companies in the same industry have both halted their repurchase programs at the same time, and if there is no other likely explanation, market volatility based upon a presumed potential M&A transaction should be expected.”); Letter from PNC Financial Services Group at 5-6 (Mar. 30, 2022) (“Under the proposal, the issuer’s daily reporting would have established a market expectation for daily purchases (outside of earnings-related blackout periods). The issuer enters preliminary merger negotiations, and thereafter it deems these discussions to have crossed the line over into materiality. At this point, the issuer prudently ceases its repurchase activity, which the market learns of within days due to the sudden cessation of its prior daily Form SR filings. Generally, at this point the issuer would not otherwise be obligated to disclose the ongoing negotiations, and it is common for premature disclosure of merger negotiations to be potentially detrimental to successful completion of a transaction. For the market, without explanation from the issuer, it would be a logical conclusion at this point that something material had happened, and, depending on what else is known about the issuer at the time, the market may surmise that the cause was a pending merger. Or the market might jump to an unwarranted and inaccurate conclusion as to the source. In either event, the resulting rumors and possible impacts on trading volumes and prices could cause harm to the issuer and its shareholders, including by imperiling a transaction that otherwise might be in the issuer’s best interests or by introducing volatility in trading in its stock.”).
[12] See, e.g., Letter from Dow at 5 (“Companies, in the meanwhile, will be faced with the difficult choice between adopting a no-comment policy and letting speculation and potentially erratic trading continue, or continuously explaining reasons for confidential trading decisions, which may adversely affect the repurchase program or require revealing prematurely sensitive information about strategic developments or transactions.”).
[13] See Letter from New York City Bar at 3 (Apr. 1, 2022) (“The Committee is also concerned regarding the unnecessary and significant compliance costs and complexity that would result from the proposed Inline XBRL tagging requirements. The Committee would ask the Commission to consider allowing filers to amend their original filings within a limited additional window to address the concern that tagging requirements delay filings. To comply with such requirements, many issuers would be forced to incur the costs of training personnel or hiring new personnel with the specific technical knowledge required to properly complete the Inline XBRL tagging, and issuers unable to complete the Inline XBRL tagging internally would need to outsource such tagging to outside filing vendors, greatly increasing the time and expense for each filing.”).
[14] See, e.g., Letter from Sullivan & Cromwell at 7-8 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122211-278250.pdf (“We urge the SEC to exempt FPIs from the proposed new requirement to furnish Form SR. Rather, we believe the SEC should retain its historic approach of permitting FPIs to comply with the more tailored disclosure requirements established by their home country regulators, and to then promptly provide any such material disclosures to U.S. investors on a Form 6-K. Subjecting FPIs to the Form SR disclosure requirement would be inconsistent with the SEC’s historical treatment of FPIs and is not necessary for ensuring that U.S. investors receive material information regarding share repurchases by FPIs.”); Letter from SIFMA at 18 (“Requiring FPIs to file a Form SR would also be a departure from the Commission’s previous regulation of FPIs’ share purchases, which has favored allowing FPIs’ home countries to regulate how such purchases can be conducted and disclosed. In the context of share repurchases, allowing home country regulators to set disclosure standards is particularly important, given difference in market structure across jurisdictions. As the Commission noted in the Rule 10b-18 adopting release, that safe harbor was crafted based on the manner in which the securities markets operate in the United States, while FPIs were often subject to home country rules and disclosure requirements regarding issuer repurchase activity and often conducted share repurchases while benefiting from safe harbors available to them under the rules of their home country or other non-U.S. markets on which their shares trade . . . SIFMA would urge the Commission to retain its historic approach of permitting FPIs to comply with the more tailored disclosure requirements crafted by their home country regulators, and then continue providing any such material disclosure to U.S. investors on a Form 6-K.”).
[15] See, e.g., Letter from Bank Policy Institute and American Bankers Association at 6-7 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122500-278556.pdf (“Investors already have a great deal of information with respect to the capital actions of Regulated Banking Institution issuers due to the public information available about regulatory capital requirements and the regulatory capital planning process applicable to these issuers. Investors have access not only to the detailed capital and capital planning regulations with which these issuers must comply, but also to disclosure about firms’ performance under supervisory and, if applicable, firm-run stress tests. Although this information does not directly align with the share-repurchase-specific disclosure the SEC is proposing to require, it nevertheless provides investors with insights into firms’ capital planning processes and actions. In addition, the regulatory requirements and scrutiny applicable to Regulated Banking Institutions’ capital planning processes and actions act as a de facto constraint on any of the manipulative activity that the Share Repurchase Proposal is attempting to address in proposing additional disclosure with respect to share repurchase activity, both in Item 703 of Regulation Securities and Exchange Commission. Thus, in the context of Regulated Banking Institutions, the additional disclosure in the proposals is not necessary.)”; Letter from Investment Company Institute at 1-2 (Apr. 1, 2022), https://www.sec.gov/comments/s7-21-21/s72121-20122898-279268.pdf (“With the proposals, the Commission intends to address concerns that issuers and their ‘insiders’ could engage in abusive trading tactics either to increase company share prices to enhance executive compensation and insider stock values or otherwise to profit from insider trading information. These stated concerns, however, are misplaced for funds. Fund insiders have little to no ability or incentive to engage in these practices. Funds are pass-through investment vehicles that, by their nature, inhibit a fund insider’s ability to engage in the abusive trading tactics described. Fund market share prices are based primarily on a fund’s NAV, which is transparent, computed pursuant to strict pricing requirements, and promptly reflects share repurchases. The transparency provides fund shareholders with the requisite information to assess the impact that a share repurchase might have on fund share values and neutralizes any information asymmetries that fund insiders otherwise might have over fund shareholders, eliminating the need for funds to separately report repurchases. Also, fund compensation arrangements generally are not tied to fund market share prices or earnings per share directly, and we are unaware of any fund insiders who are directly compensated in fund shares or options, giving them little to no incentive to manipulate fund share prices. Accordingly, as we discuss further below, we strongly recommend that the Commission exclude funds from each proposal.”).
[16] Had the Commission made the rule as bad as it could have been, I could have conveyed that I was not in sync with that decision by titling my statement “Bye-Bye-Buybacks.” See *NSYNC, Bye Bye Bye, No Strings Attached, Zomba Recording LLC (2000), https://www.youtube.com/watch?v=C27NShgTQE4.
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