SEC Share Repurchase Disclosure Rule Hits Judicial Wall: What’s Next?
In a significant regulatory reversal, the Securities and Exchange Commission’s ambitious vision to heighten transparency in corporate share repurchase disclosures has hit a legal roadblock. The amendments were poised to change the market’s disclosure landscape starting May 3, 2023. However, in a twist befitting of the volatile market they sought to clarify, these rules have been benched by judicial intervention. As the clock ticks down, the financial world waits as the SEC grapples with the legal quagmire that has stalled their implementation.
On May 3, 2023, the Securities and Exchange Commission (SEC) adopted amendments to modernize the disclosure requirements relating to repurchases of an issuer’s equity securities, including requiring issuers to provide daily repurchase activity on a quarterly or semi-annual basis, depending on the type of issuer.
On October 31, 2023, the United States Court of Appeals for the Fifth Circuit issued an opinion in 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 and sent the SEC share repurchase disclosure rule back to the SEC, giving it 30 days to remedy the deficiencies. The SEC issued an order postponing the effective date of these rule amendments on November 22, 2023, and filed a motion with the Court requesting an extension of the deadline to correct the defects, which subsequently was denied by the Court.
On December 19, 2023, the U.S. Court of Appeals for the Fifth Circuit vacated the SEC’s share repurchase disclosure rule, given the Commission could not correct the defects in the Share Repurchase Disclosure rule within 30 days of the Court’s ruling. This Amendment rule remains pending further Commission action at the current stage. In the meantime, issuers must continue providing share repurchase disclosure with the existing rules in Form 10Qs, Form 10Ks, Form 20-Fs, or Form N-CSRs.
ISSUERS WHO NEED TO COMPLY WITH THE SHARE REPURCHASE DISCLOSURE RULES
The issuers who are required to comply with the share repurchase disclosure rules are:
- Domestic corporate issuers and foreign private issuers with classes of securities registered under the Exchange Act of Act 1934 (the “Exchange Act”) regarding any purchase made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer’s equity securities registered under the Exchange Act;
- Registered closed-end management investment companies that are exchange-traded (“Listed Closed-End Funds”);
- and Business development companies.
HIGHLIGHTS OF THE PROPOSED RULE
The amendments in the proposed rule would have required tabular disclosure of an issuer’s repurchase activity aggregated daily and disclosed either quarterly or semi-annually, depending on filer type. The table required for each day:
- Class and average price per share paid
- Number of shares purchased, including 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 anticipated to satisfy the affirmative defense conditions of Rule 10b5-1(c).
The final amendments were to also revise Item 703 of Regulation S-K (with corresponding changes to Form 20-F and Form N-CSR) by eliminating monthly repurchase disclosure and expanding the 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 the process or criteria used to determine the repurchase amount.
- 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.
With the final gavel falling on December 19, 2023, the U.S. Court of Appeals for the Fifth Circuit left the SEC’s rule in regulatory limbo, having vacated the share repurchase disclosure amendments. As issuers revert to the status quo, the industry is left to speculate on the Commission’s next move. Will the SEC regroup and rewrite the playbook to comply with judicial directives, or will they retreat, leaving market participants to navigate the existing framework? The decision rests with the SEC, and all eyes are on the Commission to see if they will breathe new life into their rule or let the curtain fall on this chapter of regulatory reform.
