US Fifth Circuit tells SEC to rework stock buyback disclosure rule

Several business groups sue the SEC to block new rules requiring public companies to disclose more details about stock buybacks.

The US Fifth Circuit Court of Appeals in New Orleans, La, has told the SEC it acted “acted arbitrarily and capriciously”, in violation of the Administrative Procedure Act, by failing to conduct a proper cost-benefit analysis when crafting a new rule requiring companies to provide more timely disclosures on stock buybacks. It has given the agency 30 days to “correct the defects in the rule”.

The court dismissed the plaintiffs’ other claims, except for the cost-benefit analysis violation, and it refused to vacate the rule entirely.

Public companies

On May 3, the SEC finalized the rule, requiring most public companies to provide daily tallies on their share repurchases, rather than the monthly aggregates that they had been obligated to report. Companies also have to check a box if their officers and directors purchased or sell shares within four business days of announcing a buyback program, among other requirements.

Under the rule, the disclosures have to be included in companies’ quarterly reports, starting in the fourth quarter or 2023.

In crafting the new rule, the SEC’s commissioners said the more specific disclosures would make it easier for analysts to compare the timing of share buybacks to stock trades by managers and directors, thereby helping to identify buybacks that are designed to boost executive compensation or earnings per share rather than to maximize shareholder returns.

Global stock buybacks in 2022 reached an all-time high of $1.3trn, 22% higher than the previous year, according to research from asset manager Janus Henderson Investors.

SEC Chair Gary Gensler said at the time the new rule was finalized that it would “enhance the transparency and integrity of the buyback process”.

Share repurchases tend to drive a stock’s price higher, and along with dividends they are one of the main ways companies return spare cash to their investors. Democrats have long criticized the transactions, saying they distort the tax system and encourage companies to distribute profits to investors and executives rather than investing in employees, technology, or production.

Global stock buybacks in 2022 reached an all-time high of $1.3trn, 22% higher than the previous year, according to research from asset manager Janus Henderson Investors.

The stock-buyback rule rule passed the SEC’s five-member commission along party lines, with Republican commissioners Hester Peirce and Mark Uyeda voting against it.

The fight from business interests

A trio of business groups led by the US Chamber of Commerce sued the SEC shortly after the rule’s passage, filing the lawsuit in a conservative appeals court that industry groups fighting federal government regulation tend to use. That circuit court covers Texas, Louisiana and Mississippi, and 20 of its 26 judges were nominated by Republican presidents.

In a statement issued in May, the Chamber said it “seeks to protect returns for investors as well as the ability of companies to make decisions free from government micromanagement”. The Chamber’s co-plaintiffs in the lawsuit are a pair of Texas-based groups, the Texas Association of Business and the Longview Chamber of Commerce.

The SEC did beat back the US Chamber in a lawsuit the business advocacy group pursued this year in a US district court in Texas, but the Chamber appealed the decision, sending it to (you guessed it) the Fifth Circuit.

That case focused on the SEC’s revised proxy advice regulations, and in it, the district court said the securities regulator was operating within its remit when it relaxed Trump-era restrictions on proxy advisory firms such as Institutional Shareholder Services Inc and Glass, Lewis & Co – entities that provide assistance to investors when they are voting at companies’ annual meetings. The appellate court decision is pending.