SEC Poised to Rework Stock Buyback Rule After Court Tosses It

The Securities and Exchange Commission is likely to consider a do-over for a hotly contested rule on corporate stock buybacks after a federal appeals court struck it down.

The US Court of Appeals for the Fifth Circuit vacated the rule on Dec. 19, after previously finding the SEC failed to conduct a proper analysis of the rule’s costs and benefits. The rule required companies to disclose more information about stock repurchases, including their rationale.

Barring further appeals that save the rule, attorneys expect the SEC will propose a new version as soon as next year.

The rule has political support, particularly from Senate Democrats. And the SEC has maintained the rule is needed to increase transparency around buybacks, with large US companies led by Apple Inc. spending nearly $1 trillion last year to repurchase their own shares.

“It’s something that the SEC seems to feel strongly about,” said Baker Botts LLP partner Carina L. Antweil, who advises SEC-regulated companies.

Any effort to redo the rule and substantiate its purported benefits would only add to the SEC’s busy workload next year. While not an impossible burden, it’s unclear how the SEC would prioritize buyback disclosures against other top agenda items, like finalizing requirements for companies to report greenhouse gas emissions.

A SEC spokesperson said that, “in terms of next steps related to share repurchase disclosures, any staff recommendation will be presented to the Commission.”

Political Fight

The SEC adopted the final buyback rule in May, amid a broader debate about stock repurchases.

S&P 500 companies in 2022 spent a record $923 billion to buy back their own shares, according to the S&P Dow Jones Indices.

Democrats have been particularly critical of buybacks, imposing a 1% excise tax on share repurchases in a 2022 legislative package (Public Law 117-169) when they controlled both chambers of Congress and the White House.

President Joe Biden and Senate Banking Committee Chairman Sherrod Brown (D-Ohio) this year called for raising the tax to 4%, accusing big companies of using buybacks to boost their share price while avoiding long-term spending to grow their business and hire employees.

Defenders argue buyback programs return money to investors and efficiently distribute capital. Anyone who claims all repurchases harm shareholders or are particularly beneficial to CEOs is either an “economic illiterate or a silver-tongued demagogue,” Warren Buffett said in his annual letter to shareholders this year.

Read More: How Stock Buybacks Came to Drive the Stock Market: QuickTake

Currently, SEC rules require companies to disclose share repurchase data that is aggregated on a monthly basis. The now-vacated final rule would’ve required companies to periodically disclose data that is aggregated on a daily basis. Companies also would’ve had to explain their rationale for a repurchase.

“What the SEC was trying to do was use the disclosure regulations to force potential behavior,” said Alston & Bird LLP partner David A. Brown, who advises companies on SEC regulations. The issue “is still politically important to a number of different senators,” he added.

The SEC’s adopted rule dialed back a proposal that would’ve required near real-time data disclosure. Companies like Home Depot Inc. raised concerns that the proposal would’ve allowed sophisticated traders to reverse-engineer their trading plans and front-run repurchases.

SEC ‘Priority’

The SEC argued in court filings that the final rule would help investors evaluate companies’ motivations for a buyback. The additional information would also help investors infer “management’s evolving beliefs about the company’s underlying value,” the agency said.

In an Oct. 31 ruling, the Fifth Circuit said the SEC hadn’t shown that improperly motivated buybacks are a genuine problem, and called the rule’s requirements “clear as mud.” The court also faulted the SEC for failing to address comments from business groups raising questions about the rule’s economic justifications.

Robert Jackson, a New York University law professor and former SEC commissioner, said the rule suffered from “inept economic analysis from the start.”

“I can’t say I understand the SEC’s inability to defend its own rule despite being given the chance to do so, but I do know that investors are not getting the transparency on stock buybacks they deserve,” said Jackson, who left the SEC in 2020.

The SEC was unable to resolve the issues flagged by the Fifth Circuit in the 30-day window set by the court. But the issues appear fixable, some attorneys said. The agency likely can patch the holes with additional time for a new rule proposal, focusing on the cost-benefit analysis and including additional economic rationale for the requirements.

“This is all about how much the SEC wants this rule versus how much they have to do,” said Richard Alsop, a partner in Shearman & Sterling LLP’s capital markets practice. “From everything we’ve seen, this has seemed like a priority for the SEC.”

Benefits vs. Burdens

The nonprofit group Americans for Financial Reform Education Fund has urged the SEC to reintroduce the rule.

“The SEC must stand behind the need to have basic transparency around stock buybacks,” Natalia Renta, senior policy counsel for corporate governance and power at the group, said in a statement.

Still, some lawyers representing public companies question how valuable the buyback information is to investors.

It also would be “costly for a company to have to collect all of that data,” said Troutman Pepper Hamilton Sanders LLP partner David I. Meyers, who advises public companies. Affected companies faced a collective paperwork cost of about $2.84 billion, the SEC estimated in its final rule.

Some businesses are also concerned about disclosing the rationale of a stock purchase. There was a “sense among companies this is really getting into corporate policy and governance,” said Shearman & Sterling capital markets partner Harald Halbhuber.

The US Chamber of Commerce, which challenged the rule, said it hoped the Fifth Circuit’s decision “will cause the SEC to take pause before it attempts to move forward on its more far-reaching and aggressive agenda.”

The case is Chamber of Commerce of the United States of Am. v. SEC, 5th Cir., No. 23-60255.