There has been a significant amount of attention paid to market manipulation and insider trading during the past few years. Now, the SEC is proposing a new rule that targets a lot of these ongoing issues. Specifically, the change will amend Rule 10b-18 and Rule 10b-5 of the Securities Exchange Act.
The new rule would require issuers to submit a new Form SR before the close of the first business day following the start of a share repurchase program. Issuers would have to indicate the average price paid per share, the total number of shares purchased, and the class of securities purchased. Companies would also be required to aggregate the total amount purchased on the open market in accordance with SEC rules.
Why Companies Repurchase Shares
There are several reasons why a company might decide to repurchase shares. They include:
- Company leadership may believe that the market has discounted its shares by too much.
- A business might decide to repurchase shares to boost its financial ratios.
- Some companies decide to invest in themselves by repurchasing existing shares.
The effect of a share buyback program is that it reduces the number of outstanding shares on the market. It also increases the ownership stake of the current stakeholder. It can also increase the company’s share price, making a company look more attractive to potential investors.
Why The Rule Changes Are Taking Place Now
The number of companies executing a share repurchase has grown significantly during the past few years. Even though most share repurchase programs are legitimate, there are concerns that this opening could be subject to abuse. Some are concerned that a repurchase program could be used by executives to maximize their compensation or inflate the stock price ahead of insiders and affiliates selling their own shares.
The New Provisions in the Proposed Rule
The specific provisions that could be instituted by the new rules include:
- Issuers would be required to issue a daily repurchase disclosure form on the SEC EDGAR system within one business day after the execution of a repurchase order.
- Item 703 would require more details regarding the structure of the repurchase, including the average price paid, the class of securities, and the number of shares purchased.
- The information on 703 and Form SR would need to use Inline XBRL.
The main goal of a new rule is to improve transparency regarding share repurchase programs.
What Effect Might the New Rule Have?
Right now, companies have multiple options for repurchasing shares. They can use tender offers, open market purchases, accelerated share repurchases, and privately negotiated transactions. Often, issuers disclose repurchase plans when they are issued by the board of directors; however, many share repurchases take place over an extended amount of time. Companies do not disclose the specific dates on which those trades are executed. These rule changes would increase transparency regarding programs, allowing the SEC to keep a closer eye on companies that might be attempting to manipulate their share price.
Colonial Stock Transfer administers company buyback and repurchase programs for all of its public and private company clients. To get started, contact us to learn more.