Dec 12 -- The Securities and Exchange Commission (“Commission”) is reopening the comment period for its proposal, Share Repurchase Disclosure Modernization, Exchange Act Release No. 34-93783 (Dec. 15, 2021) (“Proposing Release”). The Commission proposed amendments to modernize and improve disclosure about repurchases of an issuer's equity securities that are registered under the Securities Exchange Act of 1934. Specifically, the proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments would also enhance the existing periodic disclosure requirements about these purchases. The Commission subsequently reopened the comment period for the Proposing Release in Resubmission of Comments and Reopening of Comment Periods for Several Rulemaking Releases Due to a Technological Error in Receiving Certain Comments, Exchange Act Release No. 34-96005 (Oct. 7, 2022). In addition, after the proposed amendments were published for public comment, an excise tax on share repurchases was signed into law. A staff memorandum was added to the public comment file on December 7, 2022 to analyze the impact of the new excise tax on the potential economic effects of the proposed amendments. The Commission is reopening the comment period to allow interested persons the opportunity to analyze and comment on the additional analysis.
The comment period for the proposed amendments published February 15, 2022, at 87 FR 8443, which was initially reopened on October 7, 2022, at 87 FR 63016, is again reopened. Comments should be received on or before January 11, 2023.
As described more fully in the Proposing Release, the Commission proposed changes to the requirements for disclosure of purchases of equity securities made by or on behalf of an issuer or any affiliated purchaser. The proposed amendments were intended to improve the quality, relevance, and timeliness of information related to issuer share repurchases. The proposed amendments would modernize and improve the disclosure required about repurchases of an issuer's equity securities by:
• Requiring daily repurchase disclosure on a new Form SR, which would be furnished to the Commission one business day after execution of an issuer's share repurchase order;
• Amending Item 703 of Regulation S-K, with corresponding changes to Item 16E of Form 20-F for foreign private issuers and Item 9 of Form N-CSR for certain registered-closed end investment management companies, to require additional detail regarding the structure of an issuer's repurchase program and its share repurchases; and
• Requiring information disclosed pursuant to Item 703, Item 16E of Form 20-F, Item 9 of Form N-CSR, and new Form SR to be reported using a structured data language (specifically, Inline eXtensible Business Reporting Language).
After the proposed amendments were published for public comment, The Inflation Reduction Act of 2022 (“Act”) was signed into law on August 16, 2022. Section 10201 of the Act adds new section 4501 of the Internal Revenue Code of 1986 (“Internal Revenue Code”), which imposes upon “covered corporations” a non-deductible excise tax equal to one percent of the fair market value of any stock of the corporation which is repurchased by such corporation during the taxable year. Under the Act, a “covered corporation” is any domestic corporation the stock of which is traded on an “established securities market” (within the meaning of section 7704(b)(1) of the Internal Revenue Code). The excise tax applies to share repurchases after December 31, 2022.
The staff of the Division of Economic and Risk Analysis has prepared a memorandum that discusses potential economic effects of the new excise tax on the incidence and level of share repurchases, which are a part of the market baseline for the proposed amendments. We believe that the information presented in the Staff Memorandum has the potential to be informative for evaluating the proposed amendments in light of this recently enacted legislation. We are, therefore, reopening the comment period for an additional 30 days to permit interested parties to comment on the Staff Memorandum, which has been included in the comment file. In addition to the requests for comment included in the Proposing Release, the Commission specifically seeks comments on the following:
1. Would the Act's new excise tax affect the proposed amendments' potential economic effects? If so, what would the specific impact (or impacts) of the new excise tax be? How would the new excise tax interact with the effects of the direct and indirect costs of the proposed amendments on issuers and investors?
2. The Staff Memorandum estimates that, based on year 2020 (2021) data, of the approximately 3,300 (3,600) issuers engaged in repurchases and subject to the proposed amendments, approximately 2,000 (2,300) issuers would be affected by the excise tax. Do you agree with these estimates? If you do not agree with these estimates, please explain why. Please also provide alternative estimates and explain why you believe those alternatives would be more accurate.
3. Do you agree with the qualitative analysis in the Staff Memorandum of the likely directional effects of the new excise tax on share repurchases? Is there other, additional research the staff should consider? If so, please discuss this research and why you believe it is relevant to the analysis.
4. What is the likelihood, if any, given the Act's new excise tax that issuers will replace share repurchases with dividends, including special dividends? Is it administratively more costly to distribute a dividend, or special dividend, as a means to return cash to shareholders as compared to repurchases? If so, please discuss how the costs differ.
5. The Staff Memorandum states that issuers subject to the proposed amendments, but that are exempted from the new excise tax, would not be directly affected by the new excise tax (but they may incur indirect effects). Are there any additional impacts that the staff should consider? Would these issuers incur any indirect effects? For example, the Staff Memorandum includes as possible indirect effects competitive spillovers of a decrease in repurchases among issuers subject to the excise tax, or changes in investor sentiment regarding repurchases in response to the decline in share repurchases among a considerable number of issuers. Would competitive spillovers or changes in investor sentiment affect share repurchase activity by issuers subject to the proposed amendments, but that are exempted from the new tax? If so, what would these impacts be? What other indirect effects would occur?
6. The Staff Memorandum states that the excise tax is not expected to change the direction of the expected economic effects of the proposed amendments with respect to any particular share repurchase that takes place, but that it may affect the total number of share repurchases that occur, and thus may affect the aggregate impact of the proposed amendments. Do you agree? Please provide the reasoning for your response.
7. The Staff Memorandum states that the categories of costs and benefits described in the Proposing Release would likely remain the same, but the magnitude may change as a result of the excise tax. Do you agree with this assessment? If not, what other costs or benefits should be considered in assessing the potential economic effects of the proposed amendments?
8. Do you agree with the conclusion in the Staff Memorandum that the general efficiency, competition, and capital formation considerations discussed in the Proposing Release are expected to continue to apply except for the potential competitive effects discussed in the Staff Memorandum?
We request and encourage any interested person to submit comments regarding the proposed amendments, specific issues discussed in this release, the Staff Memorandum, or the Proposing Release, and other matters that may have an effect on the proposed amendments. Commenters are urged to be as specific as possible; when commenting, it would be most helpful if you include the reasoning behind your position or recommendation. All comments received to date on the proposed amendments will be considered and need not be resubmitted.
Staff Memorandum, Division of Economic and Risk Analysis (December 7, 2022) Re: Supplemental Analysis of the Potential Implications of the Recently Enacted Excise Tax on Share Repurchases for the Economic Effects of Share Repurchase Disclosure Modernization Amendments
https://www.sec.gov/comments/s7-21-21/s72121-20152424-320317.pdf
Proposing Release:
https://www.federalregister.gov/d/2022-01068
Comments received to date:
https://www.sec.gov/comments/s7-21-21/s72121.htm
FRN reopening comment period, seeking input on staff memo:
https://www.federalregister.gov/d/2022-26898