In an opinion issued on October 31, 2023, a three-judge panel of the United States Court of Appeals for the Fifth Circuit found that the U.S. Securities and Exchange Commission (SEC) acted “arbitrarily and capriciously” in adopting the share repurchase disclosure rules[1] and, as a result, remanded (rather than vacated) the rules and directed “the SEC to correct the defects in the rule within 30 days” of the opinion (or, November 30, 2023).[2]

Following the SEC’s adoption of the share repurchase disclosure rules in May 2023, the U.S. Chamber of Commerce and two Texas business organizations filed a petition with the Fifth Circuit challenging the rules on three grounds—1) the new narrative disclosure requirements violate the First Amendment of the U.S. Constitution by impermissibly compelling speech; 2) the SEC acted arbitrarily and capriciously in adopting the rules because, among other things, it did not consider petitioners’ comments or adequately analyze the costs and benefits of the rules; and 3) the SEC did not provide meaningful opportunity to comment on the rules.

First Amendment. The Fifth Circuit rejected petitioners’ claim that the new narrative disclosure requirement violated the First Amendment, ruling that lesser scrutiny (i.e., not strict scrutiny) applies when, as in the case of the share repurchase disclosure rules, the government is compelling disclosure in the context of commercial speech.[3] According to the Fifth Circuit, under this standard, “‘[s]tates may require commercial enterprises to disclose ‘purely factual and uncontroversial information’ about their services’ so long as those disclosures are ‘reasonably related to a legitimate state interest’ and not ‘unjustified or unduly burdensome.’”[4] Using this standard, the Fifth Circuit found that the new narrative disclosure requirement 1) compels disclosure of “factual and uncontroversial” information in the context of commercial speech[5] and 2) is justified and reasonably related to a state interest (in this case, the SEC’s “legitimate interest in promoting the free flow of commercial information”), and is not unduly burdensome (in this case, issuers are free to speak or not “however and whenever” they wish “apart from a privately crafted explanation of its reasons for repurchasing shares”).[6]

Arbitrary and Capricious. The Fifth Circuit agreed with petitioners’ claim that the SEC acted arbitrarily and capriciously in adopting the rules. While the Fifth Circuit disagreed with petitioners’ contention that the SEC generally is required to conduct quantitative analyses whenever feasible when considering the costs and benefits of a proposed rulemaking, in this case, petitioners had submitted to the SEC three suggestions as to how the SEC could quantify the effects of the proposed rules. These suggestions were submitted in response to the SEC’s request in the proposed rules that commenters “provide data and information that would help quantify the benefits, costs, and the potential impacts of the proposed amendments on efficiency, competition, and capital formation.”[7] In the opinion, the Fifth Circuit stated that the SEC admitted “that it never considered any of petitioners’ suggestions.” The court also stated that “[o]ral argument was the first time the SEC attempted to engage with the substance of petitioners’ suggestions” but that these “post-hoc justifications” were “too late.”[8]

The Fifth Circuit also expressed concerns with the SEC’s substantiation (or lack thereof) of the primary benefits of the rules, which the SEC contends are to 1) “help investors ‘better evaluate whether a share repurchase was intended to increase the value of the firm’ or for an improper purpose” and 2) “promote price discovery.”[9] The Fifth Circuit agreed with petitioners that the SEC never substantiated the threshold issue of whether share repurchases are an actual problem, and questioned whether the SEC substantiated the value of the new disclosures, noting that the new disclosure requirements lacked clarity and stating that, at oral argument, SEC counsel “offered little in the way of clarifying what disclosures the rule actually mandated.”[10] 

Accordingly, the Fifth Circuit determined that the SEC acted arbitrarily and capriciously, in violation of the Administrative Procedure Act (APA), when it failed to respond to the petitioners’ comments and failed to conduct a proper cost-benefit analysis; however, it recognized that the SEC may be able to substantiate its decisions for the rules. As a result, it remanded the rules and provided the SEC with 30 days to “correct the defects.”[11] The Fifth Circuit panel noted that it retained jurisdiction to consider the decision that is made on remand.

Opportunity to Comment. The Fifth Circuit rejected petitioners’ claim that the SEC did not provide meaningful opportunity to comment on the rules. In doing so, the court noted that the APA generally requires only a 30-day minimum comment period and that the SEC provided an initial 45-day comment period, and further stated that it is not for the court “to decide whether an agency has chosen a maximally net beneficial comment period.”[12]

At this time, the share repurchase disclosure rules have not been stayed, and remain in effect. Accordingly, for now, companies should continue to prepare for year-end disclosures with a view to providing these disclosures, if applicable. As a reminder, the share repurchase rules will first be required for fiscal quarters commencing on or after October 1, 2023 (the fourth quarter for calendar-year companies). We are continuing to monitor developments relating to this matter.

The petition for review, petitioners’ and respondent’s briefs, and the opinion are available on the U.S. Chamber of Commerce website here.

[1] Share Repurchase Disclosure Modernization, 88 Fed. Reg. 36,002 (June 1, 2023).

[2] Chamber of Commerce of the United States et al v. SEC, No. 23-60255 (5th Cir. Oct. 31, 2023).

[3] See id. citing to Zauderer v. Off. Disciplinary Couns. Sup. Ct. Ohio, 471 U.S. 626, 651 (1985).

[4] Id. citing to NetChoice, L.L.C. v. Paxton, 49 F.4th 439, 485 (5th Cir. 2022) (quoting Zauderer, 471 U.S. at 651), cert. granted, 2023 WL 6319650 (Sept. 29, 2023). The Fifth Circuit stated that “[t]he grant of certiorari does not change the fact that NetChoice remains binding precedent unless and until the Supreme Court says otherwise. See Wicker v. McCotter, 798 F.2d 155, 157–58 (5th Cir. 1986).”

[5] The Fifth Circuit cited to NetChoice,in which the court “held that forcing social media platforms to explain their reasons for removing content compelled ‘disclosures that consist of purely factual and uncontroversial information.’” Id. citing to NetChoice, L.L.C. v. Paxton, 49 F.4th 439, 485 (5th Cir. 2022) (quoting Zauderer, 471 U.S. at 651), cert. granted, 2023 WL 6319650 (Sept. 29, 2023). The Fifth Circuit stated that “[t]he grant of certiorari does not change the fact that NetChoice remains binding precedent unless and until the Supreme Court says otherwise.”

[6] Chamber of Commerce, No. 23-60255.

[7] Share Repurchase Disclosure Modernization, 87 Fed. Reg. 8,443, 8,451 (Feb. 15, 2022).

[8] Chamber of Commerce, No. 23-60255.

[9] Id.

[10] Id.

[11] Id.

[12] Id.