SEC’s New Stock Buyback Rules Come Under Legal Challenge

The Chamber of Commerce of the United States of America filed a legal challenge on Tuesday against the Securities and Exchange Commission’s final rule on stock buyback disclosure. The rule was finalized on May 3.

The business advocacy group’s petition for review was received by the U.S. Court of Appeals for the 5th Circuit on May 12. The Longview (Texas) Chamber of Commerce and the Texas Association of Business are also listed as petitioners, allowing the claim to be filed in the 5th Circuit, which includes Louisiana, Mississippi and Texas.

The Chamber of Commerce’s press release stated that buybacks help distribute capital efficiently and increase returns for investors. In the Chamber of Commerce’s view, the SEC’s final rule would air sensitive managerial decisions and amounts to government micromanagement. The Chamber of Commerce also expressed skepticism that the SEC is trying to protect investors with the rule and accused the regulator of trying to reduce the frequency of buybacks by creating additional disclosure rules. The petition for review asks the 5th Circuit to review the rule without providing any specific points of contention.

A 2002 D.C. Circuit decision in Sierra Club v. EPA held that petitioners “must either identify … evidence sufficient to support its standing to seek review or … submit additional evidence to the court of appeals.”

The SEC’s final rule requires stock issuers to disclose daily share repurchasing data in their quarterly or semi-annual reports and adds Item 408(d) to forms 10-Q and 10-K for this purpose. Issuers will have to disclose the day(s) the shares were bought back, the number purchased and the average price at which they repurchased the shares. They must also disclose the objective or rationales for the buybacks and the criteria used to determine the size of the buyback.

Lastly, issuers will have to disclose policies related to transactions in the issuer’s securities during the repurchase program by its directors; if executives traded within four days of announcing the buyback; if the buyback was done for purposes related to a 10b5 plan; and the creation or termination of any 10b5 plans from their directors and executives.

A 10b5 plan is a trading plan which allows insiders, such as executives, to schedule trades in their company’s stock under pre-defined parameters. The plan is not mandatory but can be used as an affirmative defense against insider trading. The SEC finalized a rule in December 2022 which requires a “cooling off” period of three months before an insider could trade on those plans to prevent them from creating a 10b5 and trading the next day.

Though SEC Chairman Gary Gensler did not mention insider trading in his statement accompanying the announcement of the final rule, it appears to have informed his decision to finalize the stock buyback rule. He explained that the rule would reduce “information asymmetries” between a company engaging in a buyback, which is highly knowledgeable of its own business, and investors who might not be. The SEC also packaged 10b5 plan and executive trading disclosure along with stock buyback disclosure into the same rule.

Stock buybacks are one way to return value to investors. They have a lesser tax liability than paying dividends and can increase share prices. The practice has drawn criticism from Democrats. President Joe Biden identified it as a policy priority in February’s State of the Union address and proposed increasing the stock buyback tax to 4% from 1%, and legislation proposed in February by Senators Sherrod Brown and Ron Wyden, D-Ohio and D-Oregon, respectively, would do just that.

Research from asset manager Janus Henderson found that in 2022 share buybacks hit a record level of $1.3 trillion worldwide.

The huge wave of buybacks “is not a one-year phenomenon,” the Janus report stated. Buybacks have almost tripled in value since 2012, up 182%, besting the 54% growth in dividends during the same period.

The SEC rule passed by a 3 to 2 vote. SEC Commissioner Mark Uyeda said the rule was unfair to foreign issuers who otherwise would make these disclosures in accordance with the requirements of their home jurisdictions, but this rule applies to them as well. Uyeda explained: “This change fundamentally upends the Commission’s long-standing and bipartisan approach of largely deferring to the disclosures made by FPIs pursuant to their home country reporting requirements.”