TheCorporateCounsel.net

Hang on to your hats! In advance of the more detailed disclosure requirements that will apply to share repurchases conducted later this year and in the future, a 6-page order posted last week shows that the SEC’s Enforcement Division is already on the lookout for shortcomings under the disclosure rules as they currently exist. The Commission instituted cease-and-desist proceedings and reached a $600k settlement with a regional bank based on its purported findings that:

1. FGBI failed to disclose repurchases of its common stock on the open market in its Forms 10-Q and 10-K in connection with an employee stock grant program (“Stock Grant Program” or “Program”) for employees of its wholly-owned subsidiary, First Guaranty Bank (“FGB”), and for annual stock bonus awards made to FGB executives, including FGB’s Chief Executive Officer (“CEO”) and Chief Financial Officer, (“CFO”).

2. From September 2016 through February 2021, FGB used an outside third party, who was not an employee of either FGB or FGBI, to purchase shares of FGBI common stock each quarter on the open market using his own brokerage account. Once the shares were purchased, the third party worked with FGB’s administrative personnel to effectuate the sale of shares to FGB. FGB never took possession of the shares, instead distributing them directly from the third party’s account held at FGB to select employees for that quarter and to its senior executives at year-end. In total, the third party purchased 119,020 shares of FGBI common stock for approximately $2.5 million under these programs.

3. Pursuant to Item 703 of Regulation S-K, 17 C.F.R. § 229.703, FGBI was required to disclose these quarterly and annual purchases made by the third party in FGBI’s Forms 10-Q and 10-K filed with the Commission between March 30, 2017 and May 10, 2021. However, FGBI never disclosed this required information in its quarterly and annual filings. Moreover, FGBI failed to implement controls, policies, or procedures designed to ensure compliance with the disclosure requirements under Item 703.

4. As a result of the conduct described above, FGBI violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 13a-15(a) thereunder.

Although this order involves a corner of the market that’s been under significant scrutiny this year, there’s no reason to think that the Enforcement Division isn’t also watching for compliance issues at companies from other industries. In addition to the specific repurchase disclosures that resulted in the alleged violation, the order also says that the company lacked appropriate disclosure controls – which has been an enforcement theme as of late. Here’s an excerpt:

Although FGBI maintained written procedures and checklists pertaining to disclosures required by the federal securities laws, FGBI had no controls or procedures in place for FGBI’s annual filings designed to ensure FGBI disclosed the quarterly share purchases in its Forms 10-K under Item 703. With respect to FGBI’s quarterly filings on Forms 10-Q, FGBI maintained a Form 10-Q checklist that had only the one question pertaining to Item 703. However, FGBI’s controls and procedures were not designed to ensure that the quarterly purchases made by the third party, an affiliated purchaser of FGBI, would be disclosed under Item 703.

Since the share repurchase disclosure requirements are only going to get more detailed & complex from here, now is the time to revisit disclosure controls and ensure that all checklists and form checks are broad enough to capture all repurchases covered by the rules. Check out the memos – and our recent webcast – about the new rules that we’ve posted in our “Buybacks” Practice Area, to make sure that you and your clients are prepared.

– Liz Dunshee