Fifth Circuit Orders SEC to "Correct Defects" in Issuer Repurchase Rule
Commentary by Steven Lofchie
The U.S. Court of Appeals for the Fifth Circuit ordered the SEC to "correct defects" in its final rulemaking on issuer repurchase disclosures.
In its Opinion, the Court considered a challenge to an SEC final rule on enhanced issuer repurchase disclosures (see previous coverage). The final rule requires issuers to provide additional information on the purpose of their repurchase programs and report more detailed repurchase data on a quarterly or semi-annual basis. The petitioner argued that the SEC (i) acted in violation of the First Amendment by implementing the "rationale-disclosure" requirement which "impermissibly compel[s] their speech," (ii) acted "arbitrarily and capriciously" in adopting the final rule by failing to consider commenter feedback or provide a proper cost benefit analysis and (iii) failed to provide the public a "meaningful opportunity to comment."
The Court rejected the petitioners' arguments based on the First Amendment and on the inadequate length of the comment period. However, the Court agreed with the petitioners that the SEC had failed to respond to comments as to the proposed rules' economic implications and to provide a response to significant points raised. The Court concluded that 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 [of the new requirements]."
The Court stopped short of vacating the Rule, recognizing that "there is at least a serious possibility that the [SEC] will be able to substantiate its decision given an opportunity to do so." As a result, the Court said that it would allow the SEC 30 days to address the "defects in the rule."
Commentary
The Appeals Court language criticizing the SEC's regulatory process is harsh. The Court describes the SEC's justifications for its rulemaking process as being "demonstrably false" (page 18) and "internally contradictory" (page 23). (See also Court Vacates SEC Refusal to Allow Exchange-Listing of Bitcoin Trusts, a case in which the Court described the SEC's conduct as "arbitrary and capricious.)
Although the SEC was ordered to correct significant rulemaking defects, the SEC did not lose on every argument. Perhaps most signficantly, the Court rejected the claim that a 45 day comment period was inadequate, and likely signaled that so long as a comment period met the 30-day statutory minimum, petitioners generally might have a hard time claiming that a short comment period was in violation of the Administrative Procedure Act.
Although the decision in the case did not turn on the substance of the rule, the Court 's description might, in other circumstances, be taken as a wake up call to the regulator. The decision describes the adopted rule requirements as being "clear as mud." The Court goes on to say that the SEC could not even describe "what disclosures the rule actually mandated." (Emphasis in original. Both quotes on page 24.) Similarly significant ambiguities were highlighted concerning the SEC's recently adopted rule on securities lending (See, e.g. Why Comment Periods Matter).