In the latest defeat for SEC Chair Gensler, the Fifth Circuit Court of Appeals ruled that the SEC’s new stock buyback rules are “arbitrary and capricious,” giving the SEC 30 days to correct the “defects” in the rule.
Background on the SEC's stock buyback rules: the SEC adopted the rule in May of this year, with the stated aim of “modernizing and improving” disclosure regarding company stock repurchases. The rule, which requires quarterly reporting of detailed quantitative information on daily repurchase activity, was widely derided on the grounds that a) the rule assumed misconduct with no evidence, and b) the cost to companies of compliance outweighs any supposed benefit to investors.
“Rule’s requirements are clear as mud.” The Chamber of Commerce submitted a petition to the Fifth Circuit for review of the rule, and the Court agreed that the SEC failed to substantiate its claims that “opportunistic or improperly motivated buybacks are a genuine problem” and failed to conduct a proper cost-benefit analysis.
Implications of the court ruling: The Court declined to vacate the rule, instead kicking it back to the SEC to “remedy the deficiencies.” The question is whether this will have any impact on other rulemaking, such as climate rules or much-anticipated human capital metrics rules. Although the rationale for HCM disclosures may be stronger than with the buybacks rule, the SEC can still be held accountable if the requirements are so onerous that any supposed benefit to investors is far outweighed by the cost to companies – not to mention the question of materiality. Finally, the realization that controversial rules will continually be challenged may encourage the Chair to take feedback into consideration before proposing a rule.