Do New SEC Disclosure Requirements for Share Repurchases Dilute Their Benefit?

By Don Carpenter, MSAcc/CPA

The use of corporate cash to repurchase shares has been in the spotlight for several years. Used as a means of improving earnings per share or avoiding dilution from employee stock ownership programs, repurchases are nothing new.

As part of the Inflation Reduction Act of 2022, a 1% levy on share repurchases became effective beginning in 2023. Regulation S-K Item 703 was adopted on May 3, 2024, and amends current disclosure rules that require registrants to report share repurchase activity on a quarterly basis. Current disclosures must include the total number of shares repurchased on a monthly basis and whether these shares were repurchased under a publicly announced plan.

The average price paid for the shares is also required to be disclosed. If the shares are repurchased under an announced plan, details of the plan including its date of inception, date of expiration and the amount approved (stated in number of shares or dollar amount) must be disclosed. Registrants typically disclose the required information in the equity footnote with similar or summarized information included in Item 5 (Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities) in the Annual 10-K.

The May amendments require that the number of shares acquired and the average price paid be disclosed on a daily basis for the quarter rather than summarized by month. Foreign private issuers and registered closed-end management investment companies will disclose the information semi-annually.

The daily trading record will be disclosed on an exhibit to the Form 10-Q or Form 10-K. Foreign private issuers will disclose the information on a new form (Form F-SR) and registered closed-end management investment companies will use Form N-CSR.

In addition to reporting the daily activity, registrants must expand their narrative disclosures to include the objectives and rationale for their share repurchases, the process or criteria used to determine the amount of the repurchases, and any policies and procedures relating to purchases and sales of securities by its officers and directors.

Companies will also be required to disclose whether certain officers and directors traded in the relevant security in the four business days before or after the announcement of a repurchase program. Disclosure is required regarding any Rule 10b5-1 trading arrangements begun or terminated during the quarter. Rule 10b5-1 plans allow officers and directors to set up a predetermined plan to sell or acquire shares while adhering to the insider trading regulations.

The proposed regulations do not appear to address the impact of accelerated share repurchases (ASRs) on the effectiveness of the expanded disclosures. The new disclosure requirements are effective for the first full quarter that begins on or after October 1, 2023 (fourth quarter 2023 for calendar year filers).

About the Author: Don Carpenter, MSAcc/CPA, is clinical professor of accounting at Baylor University. Contact him at Don_Carpenter@baylor.edu.

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