SEC Stays Share Repurchase Rule Following Court Decision
Fifth Circuit finds SEC acted “arbitrarily and capriciously,” directing SEC to revise rule within 30 days
Our earlier client briefing has been updated to include the SEC’s order staying the share repurchase disclosure rule
In a ruling that previews the challenges the U.S. Securities Exchange Commission (the “SEC”) can expect to its ambitious rulemaking agenda, the U.S. Court of Appeals for the Fifth Circuit has given the SEC 30 days to “correct the defects” in the share repurchase disclosure rule it adopted in May 2023. On November 22, 2023, the SEC issued an order staying the rule pending further action.
Under the rule, SEC-registered corporate issuers are required to file quarterly reports and related annual disclosures setting out more detailed disclosure of share repurchases, including the rationale for share repurchases. We detailed these requirements in our earlier client briefing.
The U.S. Chamber of Commerce and two other petitioners challenged the rule, arguing that: (1) requiring issuers to disclose their rationales for share repurchases violates the First Amendment; (2) the SEC acted arbitrarily and capriciously in adopting the rule; and (3) the SEC did not provide the public with a meaningful opportunity to comment. The court rejected the first and third arguments, but held that the SEC acted arbitrarily and capriciously, in violation of the Administrative Procedure Act (the “APA”), when it failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis.
Here are the key takeaways from U.S. Chamber of Commerce v. SEC:
- The rule has not been vacated – The court found the rule defective but did not vacate it, instead remanding the case to the SEC to correct its defects.
- The SEC has stayed the rule – The court gave the SEC 30 days to remedy the rule’s deficiencies, and on November 22, 2023, the SEC stayed the rule pending further action. The court has retained the jurisdiction to review the rule again when it is revised.
- The SEC must substantiate the rule’s benefits – The court agreed that the SEC had not substantiated the threshold proposition that opportunistic or improperly motivated buybacks are an actual problem. It also found that the SEC’s price discovery argument is contradictory because the SEC argues that the additional disclosure requirements will provide investors with valuable new information, while also contending that the disclosure of “significant proprietary information” would be “relatively modest for most issuers,” implying that the new disclosures would not contain valuable information.
- The SEC must respond to comments challenging the rule’s fundamental premises – Another key factor in the court’s decision is that the SEC had not considered at least three of the petitioners’ specific recommendations. Under the arbitrary-and-capricious standard, the SEC must consider all relevant factors raised by the public comments and provide a response to significant points within those comments.
- The court rejected the First Amendment argument – Significantly, the court rejected the petitioners’ argument that requiring issuers to disclose their rationales for share repurchases compels speech in violation of the First Amendment – an argument that has been raised in connection with other SEC rulemakings, including the proposed climate change disclosure rule. The court held that the SEC had satisfied the “lower level of scrutiny” that applies when commercial enterprises are required to disclose “purely factual and uncontroversial information” about their services.
- A 45-day comment period is sufficient – Noting that the APA generally requires only a minimum 30-day comment period, the court rejected the argument that the 45-day comment period was too short, a criticism that had been made about many of the SEC’s recent rulemakings.
Under the rule as adopted, foreign private issuers are not required to file new Form F-SR until 45 days after the end of the first full fiscal quarter that begins on or after April 1, 2024, and related Form 20-F narrative disclosure are not due until the first Form 20-F filed after the first Form F-SR filing. The SEC has not provided any indication of when it might be issuing a revised rule.
We will continue to monitor developments in this area and encourage you to contact us if you have any questions.