SEC Open Meeting on Share Repurchase Disclosure and Private Fund Reporting
U.S. Securities and Exchange Commission
Open Meeting
Wednesday, May 3, 2023
Topline
- Both items were approved by a vote of 3-2, with Chair Gensler, Commissioner Crenshaw, and Commissioner Lizarraga voting yes and Commissioners Peirce and Uyeda opposing.
ITEM 1: Share Repurchase Disclosure Modernization
The Commission will consider whether to adopt rule amendments that modernize and improve disclosure about repurchases of an issuer’s equity securities that are registered under the Securities Exchange Act of 1934, including requiring issuers to present the disclosure using a structured data language.
Staff Discussion
Erik Gerding, Division of Corporation Finance
Gerding began by explaining that the amendments are intended to modernize and improve requirements for stock buybacks. He noted that share repurchases can have a positive or negative impact on the market for an issuer’s securities, as they can be an avenue for returning capital to investors and aligned with shareholder value maximization, or can be driven by other reasons including managers personally benefiting from repurchases or trying to reach accounting targets. Gerding said that these motivations may run counter to the interests of shareholders.
Additionally, he stated that the staff believes the daily quantitative repurchase data and qualitative disclosures will give investors important information, including whether repurchases were done for reasons counter to their interests. Four specific aspects of the proposal include quantitative disclosures, checkbox disclosure as to whether certain officers purchased or sold securities within four days, narrative disclosure about the issuer’s repurchase programs, and quarterly disclosures on Forms 10-K and 10-Q related to adoption and termination of certain trading arrangements.
John Fieldsend, Division of Corporation Finance
Fieldsend said that the amendment will modernize and improve the quality and information related to issuer share repurchases. He noted that under the proposal, listed close end funds must disclose daily quantitative disclosure data annually and semiannually, and foreign issuers at the end of every quarter. He also explained that quantitative repurchase data should be required in a tabular format and include class of shares, average price per share, total number of shares purchased (including as part of a public plan), aggregate maximum number of shares that may yet be purchased, total number of shares purchased on the open market, and total number of shares purchased to qualify for the safe harbor in Rule 10b-18 or pursuant to a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).
Fieldsend also said that the checkbox will allow investors to focus efforts on transactions most beneficial to their analysis, and this information is necessary for investors in foreign private issuers who are not required to provide these disclosures otherwise. The amendments will also eliminate the current requirements in Regulation S-K, Form 20-F, and Form N-CSR to disclose monthly repurchase data in periodic reports.
Fieldsend explained that issuers will be required to include a checkbox indicating whether certain officers/directors purchased or sold shares under a repurchase plan or program within four business days before or after the announcement of that plan. Finally, the amendments will expand the requirements for narrative disclosures of repurchases in Regulation S-K, Form 20-F, and Form N-CSR, and will add new Item 408(d) of Regulation S-K to require quarterly disclosure in periodic reports on Forms 10-Q and 10-K about an issuer’s adoption and termination of trading arrangements.
Jessica Wachter, Division of Economic and Risk Analysis
Wachter explained that the final amendments would require a company to report on a quarterly or semiannual basis. These reports would include quantities and prices repurchased each day, along with the rationale. She noted that the Division expects the new disclosure would convey valuable information to investors regarding the firm’s prospects, and also narrow the current information asymmetry issue.
She pointed out that companies and investors may bear the costs of compliance, but added that the final amendments require disclosure of historical daily information on a quarterly basis, which is intended to alleviate compliance costs and costs associated with information leakage.
Commissioner Questions and Comments
Commissioner Hester Peirce
Peirce began by stating that she cannot support a rule that mandates immaterial disclosures without meaningful exemptions. She said that share repurchases are not inherently problematic, but actually enable companies to return excess cash to shareholders with the net result of capital flowing to where it can be best used. Peirce also noted that the skepticism of repurchases is out of step with previous staff studies, and she argued that the government should not micromanage corporate decisions, including through excessive disclosure. Furthermore, she said that reasonable investors do not need to know about every repurchase, and these changes will bury investors in an avalanche of information.
Pierce also noted concerns about the costs that this rule will impose on companies to produce the data in a structured format and require ancillary disclosures. She also critiqued the lack of accommodations for small and foreign users, as well as the release not addressing concerns about close end funds and banks.
Pierce asked multiple questions of the staff. First, she asked if they believe that the current level of buybacks is suboptimal. Gerding responded that the release does not take a position on whether the overall level of stock buybacks is optimal or not. Rather, the staff is recommending greater information to investors to judge the purposes and impacts of these buybacks. The commissioner also asked how the staff plans to judge the effectiveness of this rulemaking. Gerding said they consider whether investors are getting high quality information about the purposes and impacts of buybacks. Finally, Peirce asked why such aggressive compliance deadlines are needed. Gerding argued that the dates provide ample time. He said that for most domestic registrants the earliest date is January 1, 2024, while other registrants have until June of 2024.
Commissioner Caroline Crenshaw
Crenshaw said that this rule advances the foundational statute of the agency. Specifically, she noted that the rulemaking provides investors with more comparable, structured disclosures about corporate share buybacks, as well as information about the rationale and process for determining how many shares to buy back. Overall, she said that this would allow investors to better understand how decisions impact the market, the reason for the decisions, and executives’ actions around these decisions. She concluded by stating that the SEC aims to provide a baseline of quantitative and qualitative disclosures so investors may access information efficiently and with a high degree of reliability.
Commissioner Mark Uyeda
Uyeda opened by stating that today’s amendments will require foreign private issuers to make disclosures regardless of their home country reporting requirements. He argued that this is a change in regulatory philosophy that the Commission should have addressed in a separate rulemaking. He also said that this rulemaking is a message to allies that the SEC will sacrifice principles of partnership, and it could harm US investors and companies. Uyeda noted that costs may be borne by consumers through higher costs or lower returns. Additionally, he said it will be impossible for investors in foreign private issuers to use the daily data to determine whether their actions were motivated by executive compensation due to national laws. Finally, he said that investors will be hard pressed to determine whether the foreign private issuer was using repurchases to meet an accounting standard.
Commissioner Jaime Lizarraga
Lizarraga stated that through this rulemaking the SEC is taking action to provide investors with data to better evaluate the impact of repurchases. He said that information on repurchases is material to investors, but current disclosures providing aggregated monthly purchases do not provide investors with the data they need. Specifically, Lizarraga said that the changes will require quarterly disclosure for domestic and foreign private issuers, and he argued that foreign issuers should not be treated differently than domestic ones as investors should be equally protected regardless of who they invest in. Finally, he said that by requiring issuers to disclose the rationale for repurchases, investors will benefit from disclosures that are not just boilerplate.
Chair Gary Gensler
Gensler said that the rule will increase transparency of the significant means by which issuers transact in their own securities and will enhance the transparency and integrity of the buyback process. Specifically, he explained that the amendment will require issuers to disclose the prior period’s daily buyback activity, providing more detail to the reports already coming in. It will be reported quarterly by both domestic public companies and foreign private issuers, as well as semiannually by closed ends funds. Gensler reiterated Lizarraga’s point that there is not a compelling reason for foreign private issuers to have delayed or longer disclosures than domestic public companies. Additionally, as it relates to directors and executives, the amendment requires disclosure of any policies or procedures related to their trading activity before/after the buyback period was announced. These disclosures will lessen information asymmetry between issuers and investors, and will improve investor visibility into buyback programs to enhance investor protection, capital formation, and trust in the process.
Vote
The item was approved 3-2.
ITEM 2: Enhancing Private Fund Reporting
The Commission will consider whether to adopt amendments to Form PF, the confidential reporting form for certain Commission registered investment advisers to private funds, to require current reporting for certain private fund advisers and revise certain other reporting requirements.
Staff Discussion
William Birdthistle, Division of Investment Management
Birdthistle stated that filings on Form PF provide important, confidential information about the strategies of private equity (PE) and hedge funds. He said that these amendments improve the understanding of the private fund industry and the potential risks within it. He also noted that private fund advisers do not file Form PF until after the fiscal quarter or year ends, and he argued that there is a need for more current and robust information about stress at the largest hedge funds. He said that these requirements will provide timely and meaningful information about how future events will impact hedge funds. Finally, Birdthistle explained that quarterly event reporting will be required by all PE fund advisors, as well as new information from large PE fund advisors about practices they undertake to improve the utility of the information received.
Sam Thomas, Division of Investment Management
Thomas explained the three primary changes to Form PF in more detail. First, the amendment includes new reporting requirements for large hedge funds. The trigger events for these current reporting requirements may serve as a signal of systemic risk or stress, and the staff recommends modifying some of the proposed reporting events and eliminating requirements to report changes in unencumbered cash. Large hedge fund advisers will have to report as soon as practical and no later than 72 hours after a reportable event. Such events would include certain extraordinary investment losses, significant margin and default events, terminations or material restrictions of prime broker relationships, operations events, and events associated with withdrawals and redemptions.
Second, for PE advisors, the amendment adopts several additional reporting items, including more detailed information on the activities of a fund and the implementation of general partner or limited partner claw backs.
Third, all PE fund advisers will be required to file an event report upon the occurrence of one or more trigger events within 60 days of each fiscal quarter end. Such trigger events include the removal of a general partner, certain fund termination events, and the occurrence of an adviser-led secondary transaction.
Jessica Wachter, Division of Economic and Risk Analysis
Wachter said that Form PF currently requires annual reporting for funds, increasing to a quarterly disclosure after passing a certain threshold. She noted that the leverage risk in these funds could lead to fire sales and stated that the changes will require prompt reporting based on significant events at hedge funds. Additionally, the rule will expand annual reporting requirement and require quarterly reporting by some PE funds. Finally, Wachter said that there will be additional costs, but the Division believes they will be limited due to the targeted nature of the amendments.
Commissioner Questions and Comments
Commissioner Hester Peirce
Peirce stated that the Commission has not explained sufficiently why the additional information is needed so quickly. She said that FSOC and the SEC do need high quality information about the markets and firms, but more information is not always better. She also noted that these amendments to Form PF largely appear to be an SEC compliance exercise. Peirce argued that the statutory framework intentionally gives broader latitude to private funds than registered funds, and the SEC is departing from this statutory model by sending a message that the government is a backup risk manager for these funds. She stressed that private funds should focus on managing their risks, not filling out SEC forms, and the entities from which FORM PF receives information should not be on the bailout list.
Finally, she expressed two additional concerns about the unnecessarily short compliance dates and the lack of coordination with the CFTC, which is engaged with the SEC on another Form PF rulemaking. Peirce asked the staff about the compliance dates. Birdthistle replied that a six-month period for compliance applies to the new section related to quarterly reporting, but the other implementation date is a year.
Commissioner Caroline Crenshaw
Crenshaw said that events that benefit or stress one financial institution may affect affiliates, counterparts, competitors, or peers that exist time zones away. She argued that providing the right regulators with timely, critical information in times of market stress or volatility can stem the tides on a potential crisis and help prevent investor harm. She also noted that Congress gave the SEC authority to mandate that investment advisors to private funds provide the SEC and FSOC with information they deem appropriate for the public interest and the assessment of public risk. Today’s adoption amends Form PF to gather such additional information. Crenshaw also said that the new information from PE funds will help the SEC assess trends and provide a roadmap during times of crisis. Overall, she stated that the rules will help provide the SEC with information about this outsized but largely opaque market.
Commissioner Mark Uyeda
Uyeda stated that today’s amendments seem to be the first step at reversing the initial efforts at effective regulation that were implemented in 2011. He said that the Commission fails to identify any particular need for the additional information or provide particular information about how it may improve investor protection. He also noted that the Commission’s low threshold for additional reporting requirements is that events could have systemic risk implications or negatively impact investors, and added that these funds cannot be bailed out and the information on Form PF is not made public.
He also pointed out that the adopting release for today’s amendments makes broad references to systemic risk without providing specific examples of failures that would have been prevented by the additional requirements the release seeks to impose. He said that these recommendations could be characterized as arbitrary and capricious. As it relates to PE fund advisors, he said that the release would require quarterly information after certain trigger events, but struggles to provide concrete examples about how this information will be used to address systemic risk or investor protection concerns.
Finally, Uyeda asked if the economic impact analysis of this rule takes into consideration other rules in this area. Wachter said that if the proposal is adopted, it will become part of the baseline analysis as other rules are considered.
Commissioner Jaime Lizarraga
Lizarraga began by noting that this amendment is updating a rule adopted after the 2008 financial crisis, when Congress enacted Dodd Frank to improve accountability and transparency. One aspect was the monitoring of risk in the private fund industry. He said that the Commission is taking appropriate action to update the reporting framework to meet the reality of today, and the amendments will enhance the Commission’s and FSOC’s ability to assess potential risks that could harm investors or the financial system. He concluded by stating that this visibility will help the Commission and FSOC better identify patterns and systemic risks to capital markets.
Chair Gary Gensler
Gensler said that since adopting Form PF, the SEC has learned a lot and private funds have evolved in their business and investment strategy. He also noted that private funds have nearly tripled in size in the last decade, and today private funds managed by registered investment advisors hold $21 trillion of assets. Including exempt advisors, the entire private fund space is as large as $25 trillion.
Gensler also said that the rule will enhance Form PF in a number of ways, so that large hedge funds and PE funds make current and timely reports on certain events (as opposed to only periodic reports required right now). He argued that this will inform regulators on certain events that may signal systemic risk and investor harm, and also add information that large PE funds must provide on annual reports, including information related to leverage and claw backs.
Finally, the chair noted that hedge funds can create risk for financial stability through their use of leverage. Specifically, he said that their exposure to repurchase agreements and reverse repurchase agreements (particularly in treasury markets) has increased dramatically in recent years. He said that increasing transparency (including through the work the SEC is doing with the CFTC) is very relevant in this space.
Vote
The item was approved 3-2.
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