Following through on its tacit promise, a Fifth Circuit panel vacated the SEC's Share Repurchase Disclosure Modernization Rule. On Halloween, the panel held that the rulemaking was arbitrary and capricious in violation of the APA, and the Commission was given thirty days to correct the defects in the rule. The remand period expired with the rule remaining "no less flawed—and no less unlawful." The panel accordingly granted a motion to vacate the rule (Chamber of Commerce of the United States of America v. SEC, December 19, 2023, Smith, J.).
Default rule is vacatur. In a brief opinion, the panel laid out the path to vacatur. On October 31, 2023, the court held that when adopting the share repurchase rule, the SEC had acted arbitrarily and capriciously in failing to respond to the Chamber of Commerce's comments and failing to conduct a proper cost-benefit analysis. The court issued a limited remand, giving the Commission 30 days to correct the defects in the rulemaking.
After the remand period expired, the SEC admitted that it was unable to correct the defects in the rule. Under the APA, the court explained, an agency action found to be arbitrary or capricious must be set aside. The default rule is vacatur, unless there is a serious possibility that the defects in a rule can be fixed on remand.
The court remarked that the SEC claimed to have worked diligently, but had returned to the court empty-handed, admitting that it was unable to correct the defects in the rule. "The rule remains no less flawed—and no less unlawful—than it was on October 31, 2023," the court said. Because the SEC arbitrarily and capriciously failed to respond to the Chamber of Commerce's comments and failed to conduct a proper cost-benefit analysis, the challenged rule was vacated.
The judgment accompanying the opinion vacates the rule and orders the SEC to pay the Chamber the costs on appeal. The opinion was issued by a two-judge quorum; Judge Higginson, who was a member of the panel, was recused.
In a statement, Chamber of Commerce President and CEO Suzanne P. Clark called the ruling "a big win for American businesses, investors, and retirees over government micromanagement." She added that the vacatur highlights a larger problem as the SEC "rushes to adopt a slew of ideologically driven rules." Clark said that the Chamber hopes that the SEC will take pause before moving forward on its "far-reaching and aggressive agenda."
The road to vacatur. The events leading up to the rule being vacated were as follows:
- The share repurchase disclosure modernization rule was adopted on May 3, 2023, and became effective in July 2023. The first filings under the rule would have been due after the final quarter of 2023.
- On October 31, 2023, in response to a challenge brought by the Chamber of Commerce, the Fifth Circuit found that the final rule was arbitrary and capricious. The panel said the Commission failed to respond to petitioners' comments and must conduct a proper cost-benefit analysis. The court also said that the rule's primary benefit of decreasing investor uncertainty was inadequately substantiated. The matter was remanded for 30 days for the SEC to fix the identified deficiencies.
- On November 22, 2023, the Commission announced that it had postponed the effective date of the rule, which was then stayed "pending further Commission action." On the same day, the Commission filed a motion asking for an extension of the remand period.
- The Chamber of Commerce opposed the motion, and the panel issued an order denying the extension on November 26.
- On December 1, 2023, the SEC's Office of the General Counsel informed the court that it was not able to correct the defects in the rule within the allotted 30 days.
- On December 7, 2023, the Chamber filed a motion to vacate the final rule. The Chamber argued that the time for the SEC to correct the rule had passed and there was no reason to believe that the rule would be fixed "anytime soon, if ever." The case should be put to rest and issuers given certainty, the Chamber said, and the SEC can always propose another rule concerning buybacks while the existing buyback disclosure rule remains in place.