Fifth Circuit vacates SEC’s stock buyback rule

Stock Buyback Rule
Chamber of Commerce of the United States v. the Securities and Exchange Commission
Date: Dec. 19, 2023

Issue:  Whether the Securities and Exchange Commission’s (SEC) Share Repurchase Disclosure Modernization Rule violates the First Amendment and Administrative Procedure Act (APA).

Case Summary: In a unanimous decision, a Fifth Circuit panel vacated the SEC’s stock buyback rule because the SEC did not fix the issues identified by the court within the ordered 30-day timeframe.

On May 3, 2023, the SEC adopted the Share Repurchase Disclosure Modernization Rule (stock buyback rule), which curtailed the use of stock buybacks. The stock buyback rule required issuers to report day-to-day share repurchase data once per quarter and to disclose the reason the issuer repurchased shares of its own stock. Companies needed to disclose whether certain officers or directors traded in shares within four business days from a repurchase announcement.

The U.S. Chamber of Commerce, Texas Association of Business and Longview Chamber of Commerce sued to block the SEC from implementing the rule under the APA. According to the trade groups, the mandatory disclosure requirements risked the public airing of important managerial decisions. The groups also argued the rationale-disclosure requirement violates the First Amendment by impermissibly compelling their speech, and the SEC acted arbitrarily and capriciously in adopting the final rule by not considering their comments or conducting a proper cost benefit analysis. In a 3-0 decision, a Fifth Circuit panel ruled the SEC acted arbitrarily and capriciously by failing to respond to the trades groups’ comments and failed to conduct a proper cost benefit analysis of Oct. 31, 2023. The panel granted the trade groups’ petition for review but directed SEC to correct the defects in its rule by Nov. 30, 2023, rather than vacating the rule entirely.

After failing to correct the defects before the deadline, the Fifth Circuit vacated the rule. On Nov. 22, 2023, the SEC moved to extend the 30-day window to correct its defects for an indefinite time. In its motion, the SEC explained that it “worked diligently to ascertain the steps necessary to comply with the court’s remand order and had determined that doing so would require additional time.” The Fifth Circuit denied the SEC’s motion on Nov. 26, 2023. One day after the 30-day period to fix defects expired, the SEC filed a letter at the request of the court. The letter explained the commission could not correct the defects in the rule within 30 days of the court’s opinion.

The Fifth Circuit Judge Jerry E. Smith concluded vacating the rule was the appropriate remedy. According to panel, the court must set aside agency action found to be arbitrary or capricious, contrary to constitutional right, or without observance of procedure as required by law. The panel explained departing from the default rule is only justifiable in rare cases where there is a “serious possibility” the agency could correct the rule’s defects, or vacating the challenged action would produce “disruptive consequences.” The panel determined the SEC did not satisfy the criteria. Although the SEC claimed to have worked diligently to comply with the court’s order, the panel concluded the SEC had nothing to show for its efforts.

Bottom Line: As of Jan. 2, 2024, the SEC has not revealed if it will appeal the Fifth Circuit’s decision.

Document: Opinion