Court Overturns SEC Rule on Share Repurchase Reporting

In a dramatic turn of events, the U.S. Court of Appeals for the Fifth Circuit dealt a heavy blow to the Securities and Exchange Commission (SEC) on December 19, 2023. The court overturned a pivotal rule that mandated daily reporting of share repurchases by issuers. This ruling not only marks a significant setback for the SEC but also raises questions about the future of financial market transparency.

Why the Resistance?

The SEC had introduced the rule on May 3, 2023, with the aim of making share repurchase activities more transparent. Under this rule, issuers were required to report these activities either quarterly or semi-annually. However, the rule faced immediate opposition from various groups, including the U.S. Chamber of Commerce and other business organizations.

Judge Jerry E. Smith, writing for the Fifth Circuit Court, criticized the SEC’s approach as “arbitrary and capricious.” The court found that the SEC had not followed proper procedures under the Administrative Procedure Act (APA), including failing to adequately respond to stakeholder comments and skipping a thorough cost-benefit analysis.

Judge Jerry E. Smith, writing for the Fifth Circuit Court, deemed the SEC’s actions as “arbitrary and capricious” and in violation of the Administrative Procedure Act (APA). The Court criticized the SEC for failing to respond adequately to comments from petitioners and not conducting a thorough cost-benefit analysis.

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Timeline of the Legal Battle

The path to this ruling included several key dates:

• October 31, 2023: The Fifth Circuit Court initially issued its opinion, highlighting the SEC’s procedural failings and ordering a limited 30-day remand to rectify the rule’s deficiencies.
• November 22, 2023: The SEC filed a motion to extend the remand period indefinitely, citing the need for more time to comply with the Court’s order.
• November 26, 2023: This motion was denied by the Court.
• November 30, 2023: The 30-day remand period expired without the SEC correcting the rule’s defects.

Given the SEC’s failure to address the rule’s deficiencies within the allotted time, the court had no option but to overturn the rule. This action is in line with the APA’s requirements for agencies to adhere to legal procedures.

What are the Next Steps?

This ruling poses a significant challenge for the SEC and may require a rethinking of its regulatory approach, especially regarding transparency in financial markets. The case highlights the importance of following proper procedures and conducting thorough analyses when crafting regulatory rules.

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