On November 22, 2023, the SEC announced that it had issued an order indefinitely postponing the effectiveness of the Share Repurchase Disclosure Modernization rule (the “Repurchase Rule"), pending further SEC action. At the same time, the SEC asked the Fifth Circuit for additional time to respond to the court's order that the SEC correct deficiencies in the Repurchase Rule by November 30. The court denied that motion on November 26. As a result, the SEC has until November 30 to correct the deficiencies the court had found with the SEC's rulemaking, after which we expect the court will consider a renewed motion from the petitioners to vacate the Repurchase Rule.
The Repurchase Rule, discussed in our Client Alert, requires companies to: (i) disclose daily company share repurchase data in a new table filed as an exhibit to reports on Form 10-Q and Form 10-K, (ii) provide narrative disclosure in those filings about the company's share repurchase program, including its objectives and rationale, and referencing the particular repurchases that correspond to that narrative, (iii) indicate by a check box whether any executives or directors traded in the company's equity securities within four business days before or after the public announcement of the repurchase plan or program or the announcement of an increase of an existing share repurchase plan or program, and (iv) provide quarterly disclosure regarding the company's adoption or termination of any Rule 10b5-1 trading arrangements. The Repurchase Rule was scheduled to go into effect beginning with the Form 10-K or Form 10-Q filed for the first full fiscal quarter beginning on or after October 1, 2023, meaning that for calendar year-end companies, these disclosure requirements would have applied to the 2023 Form 10-K. While the Repurchase Rule is stayed, the pre-existing share repurchase disclosure rules, requiring information on share repurchase programs and quarterly repurchase disclosures presented on an aggregated, monthly basis, remain in effect.
As noted above, the SEC's action staying effectiveness of the Repurchase Rule occurred in connection with a motion filed by the SEC in the lawsuit brought by the U.S. Chamber of Commerce and several other business groups in the Fifth Circuit challenging the Repurchase Rule. That lawsuit, filed in May 2023, alleged that (1) the rationale-disclosure requirement in the Repurchase Rule violates the First Amendment by impermissibly compelling companies' speech; (2) the SEC acted arbitrarily and capriciously in adopting the Repurchase Rule by not considering the petitioners' comments on the rule when it was proposed and by not conducting a proper cost-benefit analysis; and (3) the SEC did not provide the public with a meaningful opportunity to comment on the SEC's rule when it was proposed. On October 31, 2023, the Court of Appeals for the Fifth Circuit ruled for the petitioners on the argument that the SEC acted arbitrarily and capriciously when adopting the Repurchase Rule, holding that the SEC failed adequately to respond to petitioners' comments on the SEC's rule proposal and failed to conduct a proper cost-benefit analysis. Rather than invalidating the Repurchase Rule, the court remanded the matter to the SEC to correct the defects it had identified in the Repurchase Rule and, mindful of the Repurchase Rule's effective date, required the SEC to respond by November 30, 2023. On November 22, 2023, the SEC filed a motion with the Fifth Circuit (1) requesting that the court extend the remand period “pending further action by the Commission to remedy the defects in the rule identified in the court's October 31, 2023, opinion," (2) indicated that the Commission would “provide an update within 60 days … on the status of the Commission's efforts to remedy the rule's defects," and (3) “to facilitate" the court's consideration of its motion, stated that the SEC had stayed the Repurchase Rule's effectiveness pending further Commission action. Notably, the petitioners' opposed the SEC's request for an extension. As noted above, the Fifth Circuit denied the SEC's motion, setting the stage for additional motions to be filed in response to the court's initial decision. For the time being, however, it appears that companies can rely on the stay until the SEC or the Fifth Circuit take additional action on the Repurchase Rule.
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We would like to thank Maggie Valachovic and David Korvin from our Washington D.C. office for their work on this post.