TheCorporateCounsel.net

You might notice an extra spring in every securities lawyer’s step this holiday season now that they know for sure that they will not have to compile detailed tabular disclosure of daily repurchase data, because the SEC’s share repurchase disclosure modernization rulemaking has been vacated by the United States Court of Appeals for the Fifth Circuit. As a result, a rule that I have characterized as “written by economists for economists” and which prompted some probing questions from me as to why this disclosure approach was necessary did not survive to see its implementation (at least for now).

As you no doubt recall, shortly after the SEC adopted the final share repurchase disclosure rulemaking, the U.S. Chamber of Commerce, the Longview Chamber of Commerce and the Texas Association of Business filed a lawsuit challenging the SEC’s share repurchase disclosure rule changes, and at the end of October the Fifth Circuit held that the SEC had acted arbitrarily and capriciously, in violation of the Administrative Procedure Act, when it failed to respond to the petitioner’s comments and failed to conduct a proper cost-benefit analysis. The Court granted the petition for review and issued a limited remand, directing the SEC to correct the defects in the rule within 30 days. The SEC stayed the rule while it conducted its efforts to address the defects in the rulemaking. The SEC ultimately sought an extension of the thirty-day period, but was denied that extension, and when the SEC was not able to meet the Court’s deadline, the Chamber, et al. filed a motion to vacate the rule.

Yesterday, the Fifth Circuit issued an opinion and judgment vacating the rule. The opinion states (footnotes omitted):

On October 31, 2023, we issued an opinion on petitioners’ challenge to the rule of the Securities and Exchange Commission (“SEC”) requiring issuers to report day-to-day share repurchase data once a quarter and to disclose the reason why an issuer repurchased shares of its own stock. Chamber of Com. of the U.S. v. SEC, 85 F.4th 760 (5th Cir. 2023). We held that the SEC had acted arbitrarily and capriciously, in violation of the Administrative Procedure Act (“APA”), when it failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis. We therefore granted the petition for review, issued a “limited remand” directing the SEC “to correct the defects in the rule within 30 days,” and “retain[ed] jurisdiction to consider the decision . . . made on remand.” Id.

On November 22, 2023 — twenty-two days after the initial opinion issued—the SEC filed an opposed motion seeking to extend the thirty-day remand period for an indefinite time. In that motion, the agency explained it “ha[d] worked diligently to ascertain the steps necessary to comply with the Court’s remand order and ha[d] determined that doing so w[ould] require additional time.” We denied that motion on November 26, 2023.

The thirty-day remand period expired on November 30, 2023. One day later, at the request of the Clerk of this court, the SEC filed a letter stating that “the Commission was not able to ‘correct the defects in the rule’ within 30 days of the [c]ourt’s opinion.”

I.

Under the APA, this court must “set aside agency action[] found to be arbitrary [or] capricious, contrary to constitutional right, or without observance of procedure as required by law.” Id. at 767–68 (citations omitted) (cleaned up). Accordingly, “[t]he default rule is that vacatur is the appropriate remedy.” Data Mktg. P’ship v. Dep’t of Lab., 45 F.4th 846, 859 (5th Cir. 2022).

Departing from that default rule is justifiable only in “rare cases”1 satisfying two conditions: First, there must be a “serious possibility” that the agency will be able to correct the rule’s defects on remand. Texas v. United States, 50 F.4th 498, 529 (5th Cir. 2022) (citation omitted). Remand without vacatur is therefore inappropriate for agency action suffering from one or more serious procedural or substantive deficiencies.2 Second, vacating the challenged action would produce “disruptive consequences.” Id. (citation omitted).

In this panel’s earlier opinion, we “recognized that there was at least a serious probability that the SEC would be able to substantiate its decision if given an opportunity to do so.” 85 F.4th at 780 (citations omitted) (cleaned up). We therefore “afford[ed] the agency limited time to remedy the deficiencies in the rule” by remanding “with direction . . . to correct the defects in the rule.” Id.

That thirty-day period has come and gone. The SEC claims to have “worked diligently to ascertain the steps necessary to comply with the Court’s remand order.” Yet the agency has nothing to show for its efforts. It returns to this court empty-handed, admitting that it “was not able to ‘correct the defects in the rule’ within 30 days.” The rule remains no less flawed—and no less unlawful—than it was on October 31, 2023.

II.

The SEC acted arbitrarily and capriciously, in violation of the APA, when it failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis. The challenged rule is VACATED. The mandate shall issue forthwith.

In a separate judgment, the Court stated (footnotes omitted):

This cause was considered on the petition of Chamber of Commerce of the United States of America, Longview Chamber of Commerce, Texas Association of Business, for review of an order of the United States Securities and Exchange Commission and was argued by counsel.

IT IS ORDERED and ADJUDGED that the decision of the United States Securities and Exchange Commission is VACATED.

IT IS FURTHER ORDERED that Respondent pay to Petitioners the costs on appeal to be taxed by the Clerk of this Court.

And with that, we observe the end of the share repurchase disclosure rulemaking, at least for now.

– Dave Lynn