REITs To Be Impacted By New SEC Share Repurchase Disclosure Requirements

Introduction

On May 3, 2023, the Securities and Exchange Commission (“SEC”) adopted amendments to regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)¹ that will require additional disclosure regarding repurchases of an issuer’s equity securities that are registered under the Exchange Act. According to the SEC, the amendments are intended to “modernize and improve disclosure” about share repurchases.

The final amendments will apply to any publicly traded real estate investment trust (“REIT”) that repurchases any of its equity securities registered under the Exchange Act. The SEC’s adoption of these amendments comes at a time of increased share repurchase activity by REITs,² and REITs with a December 31, 2023 fiscal year end will be required to begin complying with the new requirements in their Form 10-K for the fiscal year ending on December 31, 2023 as it relates to repurchases made during the quarter ending December 31, 2023.³

Final Amendments

Currently, issuers are required to disclose any purchase, aggregated on a monthly basis, made by or on behalf of the issuer or any “affiliated purchaser”⁴ of shares or other units of any class of the issuer’s equity securities registered under Section 12 of the Exchange Act.⁵ This disclosure is required in Form 10-Q for the issuer’s first three fiscal quarters and in Form 10-K for the issuer’s fourth fiscal quarter.

Under the final amendments, the SEC has expanded the disclosure requirements regarding share repurchases to require the inclusion of daily quantitative repurchase data in quarterly filings with the SEC and eliminated the requirement to include monthly repurchase data in these quarterly filings. The amendments also revise and expand the existing periodic disclosure requirements about these repurchases and add a new requirement to provide quarterly disclosure in periodic reports related to an issuer’s adoption and termination of certain trading arrangements.

Disclosure of Daily Repurchase Activity

The final amendments will require every issuer that has a class of equity securities registered pursuant to Section 12 of the Exchange Act and files quarterly reports on Form 10-Q or an annual report on Form 10-K to file, in tabular format, an exhibit to those reports disclosing, for the period covered by the report (the issuer’s fourth fiscal quarter, in the case of an annual report on Form 10-K), the total purchases made each day by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer’s equity securities that are registered by the issuer under Section 12 of the Exchange Act. This table must include:

• The date, which is the date on which the purchase of shares (or units) is executed;
• The class of shares (or units), which should clearly identify the class, even if the issuer has only one class of securities outstanding;
• The total number of shares (or units) purchased on this date, which includes all shares (or units) purchased by or on behalf of the issuer or any affiliated purchaser, regardless of whether made pursuant to publicly announced repurchase plans or programs;
• The average price paid per share (or unit), which must exclude brokerage commissions and other costs of execution;
• The total number of shares (or units) purchased on this date as part of publicly announced repurchase plans or programs;
• The aggregate maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the publicly announced repurchase plans or programs;
• Total number of shares (or units) purchased on this date on the open market, which includes all shares (or units) repurchased by the issuer in open-market transactions, and does not include shares (or units) purchased in tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions;
• Total number of shares (or units) purchased on this date that are intended by the issuer to qualify for the safe harbor in Exchange Act Rule 10b-18; and
• Total number of shares (or units) purchased on this date pursuant to a plan that is intended by the issuer to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).

Issuers must also disclose, by footnote to the table, the date any plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) for the shares (or units) was adopted or terminated.

The final amendments also require an issuer to include a checkbox above the tabular disclosures indicating whether any Section 16 officer or director purchased or sold shares or other units of the class of the issuer’s equity securities that are the subject of an issuer share repurchase plan or program within four business days before or after the issuer’s announcement of a repurchase plan or program or the announcement of an increase of an existing plan or program.

Below is the form of the table contained in the final rule published by the SEC:

The final amendments require issuers to tag this new disclosure in eXtensible Business Reporting Language (“XBRL”).

Expanded Disclosure Requirements Regarding Repurchases

The final amendments revise and expand the existing periodic disclosure requirements about share repurchases. Issuers will be required to include narrative disclosure with respect to their repurchases of equity securities disclosed pursuant to the table described above and refer to the particular repurchases in the table that correspond to the different parts of the narrative, if applicable. Specifically, issuers will be required to disclose:

• The objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of repurchases;
• The number of shares (or units) purchased other than through a publicly announced plan or program, and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions);
• For publicly announced repurchase plans or programs:
  • The date each plan or program was announced;
  • The dollar amount (or share or unit amount) approved;
  • The expiration date (if any) of each plan or program;
  • Each plan or program that has expired during the period covered by the table; and
  • Each plan or program the issuer has determined to terminate prior to expiration, or under which the issuer does not intend to make further purchases.
• Any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restrictions on such transactions.

The final amendments also require issuers to tag this new disclosure in XBRL.

New Disclosure Requirements Regarding Issuer 10b5-1 Plans

The final amendments also include a new disclosure requirement regarding the use of Rule 10b5-1 plans by issuers. Rule 10b5-1 plans are often used by issuers to establish an affirmative defense to insider trading liability under Exchange Act Rule 10b-5. These plans can also be set up to ensure that repurchases are executed in compliance with Exchange Act Rule 10b-18, which creates a voluntary “safe harbor” from liability for stock price manipulation under certain provisions of the securities laws.

Under the final amendments, an issuer will be required to disclose whether, during the issuer’s last fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report), the issuer adopted or terminated any “Rule 10b5-1 trading arrangement.”⁶ Issuers must also provide a description of the material terms of the Rule 10b5-1 trading arrangement (other than terms with respect to the price at which the party executing the Rule 10b5-1 trading arrangement is authorized to trade), such as:

• The date on which the registrant adopted or terminated the Rule 10b5-1 trading arrangement;
• The duration of the Rule 10b5-1 trading arrangement; and
• The aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 trading arrangement.

Key Takeaways

Given the recent increase in share repurchase activity by publicly traded REITs, these issuers, in particular, should begin preparing for the new disclosure requirements imposed by the final amendments. More specifically, issuers have not historically had to present daily share repurchase data. Public REITs should take steps to enhance their internal controls and financial reporting processes to ensure that they will be able to provide the daily quantitative information called for by the new tabular disclosure requirements.

The final requirements also now require issuers to disclose the objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of repurchases. While we do not anticipate that this disclosure will be difficult to pull together, the new disclosure requirement should inform how public REITs approach the deliberative process associated with the consideration and adoption of a repurchase plan or program and consider how they will craft this disclosure when required.

Public REITs should also take note of the new requirement to disclose any Rule 10b5-1 trading arrangement adopted or terminated during the issuer’s most recently completed fiscal quarter. Although we do not think this disclosure will be difficult to prepare, there are potential foot faults. For example, issuers should be aware that the SEC considers certain modifications or changes to Rule 10b5-1 plans to be equivalent to the “termination” of an existing plan and the adoption of a new plan⁷ — which would trigger the disclosure requirement under the final amendments.

Finally, public REITs should take note of the SEC’s rationale for adopting the final amendments. In particular, the SEC cited studies that have found personal trading by company insiders that occurred “close in time to predictable changes in share price caused by repurchases or repurchase-plan announcements, such as concentrated sales in the period immediately following the issuer’s repurchase.”⁸ Although the final amendments do not expressly prohibit this type of activity, they do require issuers to include a checkbox indicating whether any Section 16 officer or director purchased or sold shares or other units of the class of the issuer’s equity securities that are the subject of an issuer share repurchase plan or program within four business days before or after the issuer’s announcement of the plan or program. The final amendments also require disclosure of any policies and procedures relating to purchases and sales of an issuer’s securities by its officers and directors during a repurchase program, including any restrictions on such transactions. At least one commenter has suggested that “this is a soft way for the SEC to say ‘companies should restrict executives from trading stock during a buyback’”⁹ — and public REITs may want to consider revising their insider trading policies to address (and, potentially, restrict) purchases and sales of securities by officers and directors during a repurchase program.

1 See Sec. & Exch. Comm’n, Share Repurchase Disclosure Modernization [Release Nos. 34-97424; IC-34906; File No. S7-21-21] (May 3, 2023) (to be codified at 17 CFR Parts 229, 232, 240, 249, and 274) (hereinafter, the “Final Rules”), https://www.sec.gov/rules/final/2023/34-97424.pdf.

² See, e.g., Chris Hudgins, US REIT share repurchase activity reaches 4-year high in 2022. S&P Global Market Intelligence (March 31, 2023) (noting that, “[s]tock buyback activity by US equity real estate investment trusts hit a four-year high in 2022, with $4.76 billion worth of common shares repurchased”), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-reit-share-repurchase-activity-reaches-4-year-high-in-2022-74960971.

In addition, REITs are exempt from the excise tax imposed on repurchases of corporate stock by publicly traded corporations. As a result, REITs are more likely to engage in stock buybacks than other types of publicly traded companies. See Inflation Reduction Act of 2022: Excise Tax on Repurchases of Corporate Stock and Interesting Applications to SPACs, V&E Tax Update (August 22, 2022), https://www.velaw.com/insights/inflation-reduction-act-of-2022-excise-tax-on-repurchases-of-corporate-stock-and-interesting-applications-to-spacs/.

³ See Final Rules, supra note 1, at 96, n. 369.

⁴ “Affiliated purchaser” means:

(i) A person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer’s securities; or

(ii) An affiliate who, directly or indirectly, controls the issuer’s purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer; Provided, however, that “affiliated purchaser” does not include a broker, dealer, or other person solely by reason of such broker, dealer, or other person effecting purchases under Exchange Act Rule 10b-18 on behalf of the issuer or for its account, and does not include an officer or director of the issuer solely by reason of that officer or director’s participation in the decision to authorize Rule 10b-18 purchases by or on behalf of the issuer.

See 17 C.F.R. § 240.10b-18(a)(3).

⁵ 17 C.F.R. § 229.703.

⁶ A “Rule 10b5-1 trading arrangement” is defined as any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c). See 17 C.F.R. § 229.408(a)(1)(i).

⁷ See, e.g., Insider Trading Arrangements and Related Disclosures, 87 Fed. Reg. 80,362  (Dec. 29, 2022) (to be codified at 17 C.F.R. pts. 229, 232, 240, and 249). https://www.govinfo.gov/content/pkg/FR-2022-12-29/pdf/2022-27675.pdf.

⁸ See Final Rules, supra note 1, at 15.

⁹ Matt Levine, Is ChatGPT Securities Fraud?, Bloomberg (May 3, 2023), https://www.bloomberg.com/opinion/articles/2023-05-03/is-chatgpt-securities-fraud.