Fort Lauderdale, Fla. (December 27, 2023) - On
December 19, 2023 the U.S. Court of Appeals for the Fifth Circuit
vacated the SEC's Share Repurchase
Disclosure Modernization Rule (the "Repurchase Rule" or
"Rule").
The Repurchase Rule would have required issuers
to:
" Disclose daily stock repurchase activity quarterly or
semiannually;
" Disclose if certain directors or officers traded in relevant
securities within four business days before or after the public
announcement of an issuer's stock repurchase plan or
program;
" Provide narrative disclosure about the issuer's stock
repurchase programs, rationale and practices in its periodic
reports; and provide quarterly disclosure in an issuer's
periodic reports on Forms 10-K and 10-Q related to an issuer's
adoption and termination of 10b5-1 trading arrangements.
For calendar year-end reporting companies, certain of these
disclosure requirements would have applied to the company's
2023 10-K report.
In Chamber of Com. of the USA v. SEC, No. 23-60255 (5th
Cir.), the U.S. Chamber of Commerce and other business groups
challenged the Repurchase Rule, asserting that 1) the
rationale-disclosure requirement under the Rule violates the First
Amendment by impermissibly compelling their speech; (2) the SEC
acted arbitrarily and capriciously in adopting the final Rule by
not considering their comments or conducting a proper cost-benefit
analysis; and (3) the SEC did not provide the public with a
meaningful opportunity to comment.
On October 31, 2023, the court issued an opinion
holding that "the SEC had acted arbitrarily and capriciously,
in violation of the Administrative Procedure Act ("APA"),
when it failed to respond to petitioners' comments and failed
to conduct a proper cost-benefit analysis." The court directed
the SEC to correct the defects in the Rule within 30 days.
On November 22, 2023, the SEC filed a motion with the court requesting an
indefinite extension to review and correct the "defects"
in the Rule. On that same day the SEC issued an order postponing
the effective date of the Repurchase Rule pending further action by
the commission. Many issuers breathed a sigh of relief, albeit
temporary, given the uncertainty as to which aspects of the Rule
— if any — would be "corrected" to the
court's satisfaction. On November 26, 2023, the court denied
the SEC's motion for an extension and the 30-day remand period
expired on November 30, 2023, after which the SEC stated it was
unable to correct the "defects" in the Rule within the
allotted timeframe.
Accordingly, on December 19, 2023 having already found that the SEC
acted arbitrarily and capriciously, in violation of the APA, when
it failed to respond to petitioners' comments and failed to
conduct a proper cost-benefit analysis, the court vacated the
Repurchase Rule in its entirety. The court reasoned that except in
"rare cases" the APA required it to set aside agency
action found to be arbitrary or capricious, contrary to
constitutional right, or without observance of procedure as
required by law. If the SEC wishes to proceed with the Repurchase
Rule, it must restart its rulemaking process from the very
beginning.
Federal agencies are required to consider the costs and benefits of
certain regulations that are expected to have large economic
effects. Most agencies are required to design regulations in a
cost-effective manner and ensure that the benefits of their
regulations justify the costs. Adherence to these requirements is
often overlooked by agencies and is a common ground for attack by
petitioners. The SEC as an independent agency is required under the
Exchange Act and the Investment Company Act to consider whether its
proposed regulations promote efficiency, competition, and capital
formation and whether such regulation is necessary or appropriate
in the public interest or consistent with the public interest. In
this case, the SEC did conduct a cost-benefit analysis; however, it
failed to consider data and comments provided by the public that
cast doubt on the potential benefits of the rule in relation to its
costs.
The outcome of this case has important implications for current and
future SEC rulemaking. There are currently two other actively
pending cases in the Fifth Circuit challenging new SEC rules (i.e.,
the SEC's proxy vote disclosure rule and the private fund adviser rule).
As Suzanne P. Clark, the President and CEO of the
U.S. Chamber of Commerce, put it best, "The Fifth
Circuit's decision on buybacks is a big win for American
businesses, investors, and retirees over government
micromanagement. The court's decision to vacate this rule
underscores a much deeper problem as the SEC rushes to adopt a slew
of ideologically driven rules: a failure to even consider the cost
and impact these regulations will have on companies, U.S. capital
markets, and investors. The Chamber is hopeful that the court's
decision will cause the SEC to take pause before it attempts to
move forward on its more far-reaching and aggressive
agenda."
Industry has found a sympathetic ear in the Fifth Circuit. It will
be important to continue to monitor the current cases before the
court and any future challenges to SEC rulemaking that are certain
to follow. Additionally, it will be interesting to see how —
if at all — the SEC adjusts its aggressive rulemaking agenda
in light of the Fifth Circuit's holding in this case.
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