Appeals Court Cancels SEC Stock Buyback Disclosure Rule



The US 5th Circuit Court of Appeals has vacated a rule by the Securities and Exchange Commission (SEC) requiring issuers to disclose daily stock buybacks on a quarterly basis. The rule, challenged by the US Chamber of Commerce, aimed to reduce information asymmetry between companies issuing stock and investors, curb opportunistic buybacks and insider trading, and enhance price discovery. The court ruled the SEC had not conducted proper cost-benefit analysis, prompting the SEC to withdraw the rule but stock issuers are still required to disclose less-specific buyback information.

U.S. Court of Appeals Vacates SEC’s Share Repurchase Rule

The U.S. 5th Circuit Court of Appeals annulled the share repurchase rule formalized by the Securities and Exchange Commission (SEC) last May. The mandate required issuers to disclose daily stock buybacks quarterly, including pricing, volume, and buyback rationale.

SEC’s Intention Behind the Rule

The SEC designed the rule to reduce information inequality between stock-issuing companies and investors. It aimed to restrict opportunistic buybacks, insider trading, and enhance price discovery. The rule would expose if buyback programs were driven by compensation schemes tied to stock pricing.

The U.S. Chamber of Commerce Challenges the Rule

The U.S. Chamber of Commerce challenged the rule in May. On October 31, three judges from the 5th Circuit determined the SEC failed to conduct a thorough cost-benefit analysis while finalizing the rule. The SEC didn’t consider comments on the frequency of buybacks triggering executive bonuses, and the economic benefit of reduced information asymmetry. Therefore, the court deemed the SEC’s rule adoption as arbitrary and capricious.

Court Orders SEC to Address Issues Within 30 Days

The court granted the SEC 30 days to address the issues. They denied the SEC’s extension request, and on December 1, the SEC conceded it couldn’t “correct the defects in the rule” within the timeline. Consequently, the 5th Circuit vacated the rule on December 19.

SEC’s Likely Actions Post-Verdict

Jay Gould, special counsel with Baker Botts LLC, explains that the SEC will likely re-propose the rule. Gould suggests the process could take a year or more but could eventually succeed. In the absence of the rule, stock issuers must still disclose less-specific information about buybacks on forms 8-K and 10-Q, aggregated monthly.

The SEC’s Attempt to Rein in Buybacks

The SEC’s rule was a part of an effort to control buybacks. The Inflation Reduction Act of 2022 implemented a 1% tax on buybacks, with leaders, including President Joe Biden, proposing an increase to 4%.

Decrease in S&P 500 Companies Stock Buybacks

Standard & Poor’s reports a decrease in S&P 500 companies’ stock buybacks, with the 12-month September 2023 expenditure of $787.3 billion, down 19.8% from September 2022’s $981.6 billion.

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