Defining Issues | January 2024

Insight

SEC share repurchase disclosure rule vacated

Court vacates Share Repurchase Disclosure Modernization rule as SEC is unable to correct defects.

Update: On December 19, the Fifth Circuit Court of Appeals issued its final opinion on the SEC’s Share Repurchase Disclosure Modernization rule, vacating the rule entirely.

This action follows an October 2023 ruling from the Court against the SEC, stating the SEC violated the Administrative Procedure Act when adopting its share repurchase disclosure rules. At that time, the Court did not vacate the disclosure rules but gave the Commission until November 30 to correct the deficiencies.

Consequently, due to the rule vacation on December 19, the decision on whether to pursue further action in the form of an appeal or propose a new rule that addresses the identified defects now rests with the SEC.

Issuers should continue to provide share repurchase disclosures as required under the existing rules.

Applicability

  • Public companies: Domestic issuers, foreign private issuers, and registered closed-end management investment companies that are exchange traded.

Relevant dates

  • On April 1, 2022, the original proposal comment period ended.
  • In October 2022, the SEC reopened the comment period for this proposal due to a technical error. This comment period ended on November 1, 2022.
  • On December 7, 2022, the SEC again reopened the comment period, which ended on January 11, 2023.
  • On May 3, 2023, the SEC adopted the proposed amendments to the rules as final.
  • On October 31, 2023, the United States Court of Appeals for the Fifth Circuit issued its ruling on Chamber of Commerce of the USA v. SEC, stating the SEC violated the Administrative Procedure Act when adopting amendments to its share repurchase disclosure rules. The Court gave the SEC until November 30, 2023 to correct defects.
  • On November 22, 2023, the SEC postponed the effective date of the Share Repurchase Disclosure Modernization rule, resulting in the rule being stayed until further action is taken by the Commission, and filed a motion with the court requesting an extension of the November 30 deadline to correct the defects.   
  • On November 26, 2023, the Court denied the SEC's request for an extension.
  • On December 1, 2023, the SEC informed the Court that it was unable to correct defects in the Share Repurchase Disclosure Modernization rule, giving the Court the ability to vacate the rule.
  • On December 19, 2023, the Court vacated the Share Repurchase Disclosure Modernization rule.

Summary of the Court Ruling

On October 31, 2023, the United States Court of Appeals for the Fifth Circuit issued a ruling against the SEC related to its Share Repurchase Disclosure Modernization rule, which was issued in May 2023. In Chamber of Commerce of the USA v. SEC, the Court ruled that the SEC violated the Administrative Procedure Act by acting arbitrarily and capriciously when it adopted amendments intended to modernize and improve share repurchase disclosures.

Specifically, the Court found that the SEC failed to adequately respond to the Chamber of Commerce’s (and other business groups) comments and failed to conduct a proper cost-benefit analysis.

As a result, the Court granted the petition for review and remanded the case to the SEC to address the deficiencies in the rules within 30 days. The Court emphasized that this was a limited remand and retained jurisdiction over the case.

On November 22, 2023, the SEC postponed the effective date of the Share Repurchase Disclosure Modernization rule and separately requested a time extension from the Court to address the identified defects. However, on November 26, the Court denied the extension, reaffirming the November 30 deadline for remediation. 

On December 1, 2023, the SEC’s Office of General Counsel informed the Court that the Commission was unable to correct the defects in the Share Repurchase Disclosure Modernization rule within 30 days of the Court’s ruling. On December 19, the Court vacated the rule, and the SEC will now need to decide whether to take further action in the form of an appeal or proposal of a new rule that addresses the identified defects. In the meantime, issuers should continue to provide share repurchase disclosures as required under the existing rules.

Summary of the vacated rule

The SEC issued a Fact Sheet summarizing the key provisions of the final rules, which are the subject of the Court rulings discussed above.

The amendments would have required tabular disclosure of an issuer’s repurchase activity aggregated on a daily basis and disclosed either quarterly or semi-annually, depending on filer type.

The table required, for each day:

  • class of shares
  • average price paid per share
  • number of shares purchased, including number of shares purchased pursuant to a publicly announced plan or on the open market
  • number of shares purchased that are intended to qualify for the safe harbor in Rule 10b-18
  • number of shares purchased under a plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).

The final rules required issuers that file on domestic forms to file on a quarterly basis the daily repurchase data in an exhibit to their Form 10-Q and Form 10-K (for the fourth fiscal quarter). Listed Closed-End Funds were to include the data in their annual and semi-annual reports on Form N-CSR. FPIs reporting on FPI forms were to disclose the data in a new Form F-SR, to be filed within 45 days after the end of an FPI’s fiscal quarter.

Issuers were also required to include a checkbox preceding their tabular disclosures indicating whether certain officers and directors purchased or sold shares that are the subject of an issuer share repurchase plan or program within four business days before or after the announcement of that plan or program.

The final amendments were to revise Item 703 of Regulation S-K (with corresponding changes to Form 20-F and Form N-CSR) by:

  • eliminating disclosure of monthly repurchase data in periodic reporting; and
  • enhancing and expanding disclosure requirements related to an issuer’s share repurchases in its periodic filings (e.g. Forms 10-K and 10-Q, Form 20-F and N-CSR).

Specifically, the following narrative disclosures were to be required in an issuer’s periodic filings:

  • The objective or rationale for the issuer’s share repurchases and process or criteria used to determine the amount of repurchases.
  • Any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction on such transactions.

Issuers filing on Forms 10-K and 10-Q were also to be required to disclose whether any Rule 10b5-1 trading arrangements were adopted or terminated and the material terms of such 10b5-1 trading arrangements.

All disclosures were to be tagged using Inline XBRL, including those in new Form F-SR.

 

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