Members say the proposal for 10b5-1 plans would limit a corporate’s flexibility to execute buybacks efficiently.
The SEC’s proposal that corporates wait 30 days after the adoption of a Rule 10b5-1 share repurchase plan before buying back stock would significantly restrict the flexibility of companies to execute the plans effectively. That key takeaway emerged at a session NeuGroup convened this week at the request of treasurers examining the potential implications of several SEC proposals issued Dec. 15 regarding 10b5-1 plans, including next-day reporting of buybacks.
- The 30-day cooling-off period for issuers (it’s 120 days for corporate officers and directors) would impede the ability of finance teams to react to quickly changing markets and effectively reduce the number of days corporates can be in the market buying back stock, members attending the session said.
- “In addition to not being able to trade as many days because of the cooling-off period, 10b5-1 plans will become less effective,” one member said. “When we put in our plans, it’s informed by where our stock is trading. If we have to wait 30 days and our stock has moved away from that range, then the pricing grid we would have put in 30 days earlier is no longer going to be as effective. You’re always going to be chasing.”
What to do and what to ask the SEC to do. One member whose company already imposes a 30-day cooling-off period on 10b5-1 stock purchases advised peers that one way to cope with liquidity and price grid issues is to place a cap on the total amount spent in a 10b5-1 plan, “but with a grid that provides a maximum daily spend at different price points.”
- After the session, NeuGroup Insights reached out to David Getzler, head of equity capital markets at Societe Generale, which, like all banks, is discussing responses to the SEC proposals with clients. “We would like the SEC to consider that a 10b5-1 could be adopted 30 days in advance, with the size and price grid to be confirmed while still in an open window, right up to the start date of the program,” he said. “This would not be very different from how companies in effect manage their 10b5-1 programs today.”
- He added, “If the SEC will not be flexible on this, and requires the program size and price grid to be set 30 days in advance, then the actual grid formula could be worded so that the grid prices (for each discrete volume level) adjust to reflect the percentage change in a company’s stock price over that 30-day period before starting execution of the program.”
How companies will make their voices heard. Corporates and their advocates will have 45 days to comment after the proposed amendments are published in the Federal Register. The general consensus among members was that the SEC is not likely to be very flexible. But that won’t stop member companies from expressing their views through business lobbying groups, outside counsel, trade associations and industry associations. Here’s how one member described next steps for his company:
- “Develop a comprehensive understanding of the proposed rules and issues everyone sees with them (which was part of the point of the [NeuGroup] call today—to make sure I’m not missing anything).
- “Develop an internal consensus (along with counsel) of how the potential issues would impact the way we operate and unintended consequences to the marketplace.
- “Work with various groups that are planning on submitting comment letters to make sure they have a fulsome view of the issues as we see them so our concerns are captured in their submissions.”
Daily disclosure: burdensome and maybe worse. The SEC proposals include a requirement that companies report buybacks on the next business day using a new disclosure form—Form SR. Members described this and other disclosure changes as onerous, burdensome and bureaucratic.
- “It certainly feels like the disclosure is overreaching,” one member said. “To have do so daily seems punitive when for 8-Ks you get four days for material announcements; but immaterial buybacks need to be done daily? That seems odd.”
- Some members also fear the information furnished to the SEC falling into the wrong hands. “If we do need to disclose daily what the 10b5-1 buy looks like, the concern is that smart traders would figure out our plan and be able to front-run the market, causing some level of volatility that is good for them but not for anybody else,” one treasurer said.
- Mr. Getzler at Societe Generale agreed, saying, “While our understanding is that the Form SRs will not be publicly available, there is still the risk that someone would be able to access the information. Then they can probably work out the grid instructions from a series of daily reports and really cause problems if a company’s stock drops and someone knows the company will be buying in size on that particular day.”
Seeking clarity. Among other issues, members discussed whether accelerated share repurchase plans (ASRs) would be subject to the same cooling-off period rules as 10b5-1 plans. Assuming the answer is yes, as some members are, one asked whether having two, alternating dealers administering ASR programs would be permitted under the SEC’s proposed amendment that “10b5-1 trading arrangements to execute a single trade are limited to one plan per 12-month period.”
- “The jury is still out on alternating ASRs,” one member responded.
- Another concern is a proposed amendment that “the affirmative defense under Rule 10b5-1(c)(1) does not apply to multiple overlapping Rule 10b5-1 trading arrangements for open market trades in the same class of securities.”
- One member summed up the overall situation facing many in the room concisely: “We’re pretty heavy users of 10b5-1s, so having the cooling-off period, not being able to do overlapping plans, one single-trade plan per year? That would be problematic in terms of making companies less effective in executing buybacks, which would be detrimental to the shareholders the SEC’s proposals are meant to benefit.”