Statement on the Final Rule: Share Repurchase Disclosure Modernization

Thank you, Chair Gensler. Today’s amendments will significantly alter the quantitative and qualitative disclosure requirements for share repurchases. However, in the future, these amendments may be remembered as the beginning of the end for the Commission’s approach to foreign private issuers (“FPIs”). For more than 55 years, the Commission has allowed FPIs to satisfy their Exchange Act[1] reporting requirements by (1) filing an annual report with information comparable to disclosure provided by domestic companies and (2) furnishing a Form 6-K for any material information disclosed by the FPI under its home country laws, reported pursuant to stock exchange requirements, or provided to its shareholders.[2] Today’s amendments will require FPIs to make quarterly filings to report share repurchases regardless of their home country’s disclosure requirements. This change fundamentally upends the Commission’s long-standing and bipartisan approach of largely deferring to the disclosures made by FPIs pursuant to their home country reporting requirements. Given the significance of this shift in regulatory philosophy, the Commission should have undertaken a separate rulemaking on the issue, instead of including this change as part of a rulemaking focused on share repurchase disclosure.

Today’s amendments effectively send a message to our partners in the European Union, the United Kingdom, Japan, Australia, and elsewhere: regardless of their disclosure regimes, the Commission will sacrifice principles of mutual recognition and international comity to impose its own views on the rest of the world. This approach may ultimately harm U.S. investors and companies. If fewer foreign companies list their stock on a U.S. exchange, U.S. investors seeking portfolio diversification and exposure to individual foreign stocks may need to invest through foreign brokers, trade on foreign exchanges, pay higher costs, and lose any jurisdictional protections provided by the federal securities laws. Furthermore, if foreign regulators follow the Commission’s abandonment of mutual recognition, U.S. companies with international operations may be burdened by additional compliance costs due to foreign regulatory requirements. These costs may ultimately be borne by consumers, in the form of higher prices, or investors, in the form of lower returns.

Today’s amendments also fail to recognize important differences between FPIs and domestic companies. To justify the need for daily repurchase data, the adopting release cites two reasons for why a company might engage in share repurchases that are unrelated to an efficient use of cash: (1) increasing executive compensation and (2) achieving accounting targets.[3] The Commission speculates that daily repurchase data will better enable investors to determine whether repurchases were motivated, at least in part, by either or both of these ulterior motives.[4] However, the release glaringly omits any discussion of how the different reporting requirements between FPIs and domestic companies may eliminate this hypothetical benefit for FPI investors.

Unlike domestic companies, FPIs are neither subject to Section 16 of the Exchange Act[5] nor extensive executive compensation disclosure.[6] Thus, it will be nearly impossible for FPI investors to use the daily data to determine whether repurchases were motivated by executive compensation reasons. Further, while FPIs will be required to disclose repurchase data quarterly, they will not be required to report their financial results quarterly. If the cadence of an FPI’s disclosure of daily repurchase data is not aligned with its disclosure of financial results, investors will be hard pressed to use the repurchase data to assess whether the FPI was attempting to reach an accounting target.

Apart from FPIs, the amendments would also require closed-end funds that are listed on an exchange (“listed closed-end funds”) to provide the same quantitative and qualitative repurchase disclosure as corporate issuers. Listed closed-end funds, however, are distinguishable from corporate issuers in important ways. For example, listed closed-end funds generally do not have officers or employees in the way that corporate issuers do, nor do they compensate fund insiders with equity awards. Instead, listed closed-end funds are managed by an outside investment adviser that is compensated with a management fee. Given that the rationale for most of the new disclosure requirements apply only to corporate issuers, I question the need to include listed closed-end funds as part of these amendments.

A key means of preventing managers from acting in a self-interested manner is for a company to return excess cash to investors. I do not look fondly on the excessive waste of corporate assets during the conglomeration era of the 1960s and 1970s. Placing additional hurdles on returning cash through share repurchase programs in the name of investor protection is yet another misguided effort on the Commission’s regulatory agenda.

Because of these and other concerns that I have with today’s recommendation, I am unable to support it. However, I thank the staff of the Division of Corporation Finance, the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their work on this rulemaking.