Business Groups Sue SEC Over Stock Buyback Rules

Agency says the rules will make buybacks more transparent

A trio of business groups led by the U.S. Chamber of Commerce sued the Securities and Exchange Commission Friday (12.05.2023) to block new rules requiring public companies to disclose more information about their stock buybacks.

The lawsuit, filed in a conservative appeals court favored by industry groups fighting government regulation, is one of the first legal challenges to SEC Chair Gary Gensler’s rule-making agenda. Wall Street is gearing up for a protracted battle against its main regulator as Mr. Gensler moves toward adopting dozens of rules opposed by the industry.

In a statement, the U.S. Chamber said it “seeks to protect returns for investors as well as the ability of companies to make decisions free from government micromanagement.”

Under the new SEC rules, most public companies will have to provide daily tallies on their share repurchases, rather than the monthly aggregates that they currently report. They will also be required to check a box if their officers and directors purchased or sold shares within four business days of announcing a buyback program, among other requirements. The disclosures will have to be included in companies’ quarterly reports, starting with the fourth quarter.

An SEC spokesman said the agency will “vigorously defend the challenged rule in court.”

Agency officials say more granular disclosures will make it easier for analysts to compare the timing of share buybacks to stock trades by managers and directors. They say the disclosures will also help identify buybacks designed to boost executive compensation or earnings per share, rather than to maximize shareholder returns. Mr. Gensler said last week the new rules would “enhance the transparency and integrity of the buyback process.”

Share repurchases tend to drive a stock’s price higher. Along with dividends, they are one of the main ways companies return spare cash to their investors. Democrats have long criticized the transactions, saying they distort the tax system and encourage companies to distribute profits to investors and executives rather than investing in workers, technology or production.

The rule passed the SEC’s five-member commission along party lines last week, with both Republicans voting against it.

The U.S. Chamber’s co-plaintiffs in the lawsuit are a pair of Texas-based groups, the Texas Association of Business and the Longview Chamber of Commerce. They filed suit in the Fifth U.S. Circuit Court of Appeals, which covers Texas, Louisiana and Mississippi, and where 20 of 26 judges were nominated by Republican presidents.

While it has yet to finalize most of the rules proposed under Mr. Gensler, the SEC has fended off two legal challenges. The most recent was an attempt by the U.S. Chamber to reinstate some restrictions on firms that provide proxy-voting advice to shareholders of public companies. A judge sided with the SEC in that case last month.