Court Finds That The SEC Acted Arbitrarily and Capriciously In Adopting Share Repurchase Rule
Friday, November 3, 2023

When the Securities and Exchange Commission proposed to adopt a rule requiring issuers to report day-to-day share repurchase data once a quarter and to disclose the reason why the issuer repurchased shares of its own stock, I submitted a comment letter that argued, among other things, that the SEC's action was arbitrary and capricious:

The Commission's notice of proposed rulemaking includes almost no evidence to support either the imposition of a new disclosure requirement or the proposed frequency of reporting. . . .   In fact, the conditional word could can be found at least 90 times in the Commission's notice. The Administrative Procedure Act requires that the Commission articulate a rational connection between the facts found and choice made.  Burlington Truck Lines, Inc. v. U.S., 371 U.S. 156, 158 (1962).  Simply put, the notice sets forth only speculation, not facts.  Moreover, the speculation that stock buybacks are motivated by management's desire to boost earnings-per-share (EPS) compensation is contradicted by the Commission’s staff report to Congress. . . . .   Adoption the proposed rule on the basis mere speculation would be arbitrary, capricious and an abuse of discretion within the meaning of 5 U.S.C. 706(2)(A).  [some punctuation cleaned up]

The United States Chamber of Commerce was of the same view and gave the SEC three suggestions that explained how it could quantify the proposed rule’s effects.  The SEC admits that it never considered those suggestions. 

I told them (they couldn't believe it);
the U.S. Chamber of Commerce told them (they wouldn't believe it);
it took the Fifth Circuit to tell them

Tuesday, the Fifth Circuit Court of Appeals held that the SEC’s adoption of the rule is arbitrary and capricious.  U.S. Chamber of Commerce v. U.S. Securities & Exchange Comm'n, Case No. 23-60255 (Oct. 31, 2023).    The Court did not vacate the rule, however.  Instead it gave the SEC 30 days to correct the defects in its rule.  

See also Could The SEC Have Made A Weaker Case For Mandating Enhanced Repurchase Disclosures? and Securities And Exchange Commission Amends Rules For Share Repurchase Disclosures

 

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