Chamber of Com of the USA v. SEC ( 2023 )

Case: 23-60255 Document: 00516951547 Page: 1 Date Filed: 10/31/2023
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
____________
October 31, 2023
No. 23-60255 Lyle W. Cayce
____________ Clerk
Chamber of Commerce of the United States of America;
Longview Chamber of Commerce;
Texas Association of Business,
Petitioners,
versus
United States Securities and Exchange Commission,
Respondent.
______________________________
Appeal from an Order of
the Securities and Exchange Commission
Agency Nos. 34-97424,
88 Fed. Reg. 36002, IC-34906
______________________________
Before Smith, Southwick, and Higginson, Circuit Judges.
Jerry E. Smith, Circuit Judge:
The Securities and Exchange Commission (“SEC”) adopted a rule
requiring issuers to report day-to-day share repurchase data once a quarter
and to disclose the reason why the issuer repurchased shares of its own stock.
We consider a challenge to that rule by petitioners Chamber of Commerce of
the United States, Longview Chamber of Commerce, and Texas Association
of Business (“petitioners”).
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I.
Publicly traded companies have a responsibility to their shareholders
to allocate capital in the most efficient way possible. One way in which com-
panies fulfill this responsibility is by reinvesting capital in themselves by
repurchasing their own shares. Such repurchases are common and occur
whenever an issuer of securities (“issuer”) purchases its own stock.
There are many different reasons why a company might repurchase
its shares. Some of those reasons are for the benefit of shareholders, as when
a company repurchases its own shares because it believes they are under-
valued. Others could make investors less likely to buy or retain shares, as
where a repurchase is motivated by a desire to achieve accounting metrics or
to impact executive compensation.
In response to increasing public skepticism of share repurchases, the
SEC conducted a study on buybacks and why issuers repurchase their own
shares. The study concluded that repurchasing shares can be an efficient use
of capital and may indicate that an issuer’s shares are undervalued.
The SEC, however, still believed investors could benefit from en-
hanced repurchase disclosures designed to address supposed information
asymmetries between investors and issuers as to why an issuer was repur-
chasing its shares. The SEC’s rationale was that, because a share repurchase
could signal either that the issuer’s shares were undervalued (and hence an
attractive investment) or that the company was attempting to boost its met-
rics (and hence a poor investment), shareholders, in order to make fully
informed investment decisions, needed to know why a company was repur-
chasing its shares.
2
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The SEC proposed a rule to address that concern. 1 The proposed rule
required issuers to report certain repurchase data within one business day of
the repurchase and to disclose the reason why the issuer was repurchasing its
shares. The proposed rule stated that the SEC was unable to quantify most
of the economic effects of the proposed amendments. Thus, the SEC relied
primarily on a qualitative assessment of the rule’s potential effects, while
encouraging commenters to provide information that could help quantify the
costs and benefits of the proposed rule. The SEC solicited comments on the
proposed rule during a 45-day comment period, which was reopened briefly
to account for a technical difficulty in submitting comments. 2 The comment
period was again reopened, this time for 30 days, to allow for new comments
regarding the impact of an excise tax imposed by the Inflation Reduction
Act. 3
During the comment period, petitioners submitted guidance explain-
ing how the SEC could quantify the proposed rule’s effects. Specifically,
petitioners alerted the SEC to empirical data from academic sources and
information available in existing SEC disclosures that could be used to quan-
tify the economic effects of the proposed rule.
The SEC adopted the final rule on May 3, 2023. As with the proposed
_____________________
1
The SEC issued this rule under the Exchange Act of 1934, Pub. L. No. 73-291,
48 Stat. 881 (1934) (codified as amended at 15 U.S.C. § 78a et seq.), and the Investment
Company Act of 1940, Pub. L. No. 76-768, 54 Stat. 789 (1940) (codified as amended at
15 U.S.C. § 80a-1 et seq). No party disputes the SEC’s statutory authority to promulgate
the final rule.
2
Resubmission of Comments and Reopening of Comment Periods for Several
Rulemaking Releases due to a Technological Error in Receiving Certain Comments,
87 Fed. Reg. 63016, 63016–17 (Oct. 18, 2022).
3
Reopening of Comment Period for Share Repurchase Disclosure Modernization,
87 Fed. Reg. 75975, 75975–77 (Dec. 12, 2022).
3
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rule, the final rule requires issuers to disclose their reasons for repurchasing
shares (“the rationale-disclosure requirement”). The final rule also requires
issuers to collect repurchase data on a day-to-day basis, but in contrast to the
proposed rule, issuers need file this day-to-day data only once per quarter
(“the daily-disclosure requirement”).
Despite petitioners’ comments, however, the SEC maintained that
many of the effects of the daily-disclosure requirement could not be quan-
tified. The SEC did, however, perform a cost-benefit analysis for both the
rationale-disclosure requirement and the daily-disclosure requirement. The
agency continued to believe that the final rule would help investors evaluate
whether a share repurchase was intended to increase the value of the issuer’s
shares or, instead, was undertaken for a purpose unrelated to the market
value of the issuer’s shares.
On May 12, 2023, petitioners filed a petition for review of the final rule
with this court. See 15 U.S.C. § 80a-42(a). They assert that (1) the rationale-
disclosure requirement violates the First Amendment by impermissibly com-
pelling their speech; (2) the SEC acted arbitrarily and capriciously in adopt-
ing the final rule by not considering their comments or conducting a proper
cost benefit analysis; and (3) the SEC did not provide the public with a mean-
ingful opportunity to comment.
II.
We review the SEC’s answers to purely legal questions de novo. Tex.
Clinical Labs, Inc. v. Sebelius, 612 F.3d 771, 775 (5th Cir. 2010). Factual find-
ings the SEC has “identified . . . as the basis, in whole or part, of the rule”
are “conclusive” if “supported by substantial evidence.” 15 U.S.C.
§ 78y(b)(4). “We review constitutional issues de novo.” Huawei Techs. USA,
Inc. v. FCC, 2 F.4th 421, 434 (5th Cir. 2021).
The Administrative Procedure Act (“APA”) requires us to “set
4
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aside” agency actions found to be “arbitrary [or] capricious,” “contrary to
constitutional right,” or “without observance of procedure required by law.”
5 U.S.C. § 706(2)(A)–(B), (D); see also 15 U.S.C. § 78y(b)(4). Arbitrary-and-
capricious review requires this court to scrutinize the record to determine
whether the agency has “examine[d] the relevant data and articulate[d] a
satisfactory explanation for its action including a rational connection between
the facts found and the choice made.” Motor Vehicle Mfrs. Ass’n of U.S., Inc.
v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983) (cleaned up). We
“may not supply a reasoned basis for the agency’s decision that the agency
itself has not given.” Id. Finally, we “must set aside any action premised on
reasoning that fails to account for relevant factors or evinces a clear error of
judgment.” Univ. of Tex. M.D. Anderson Cancer Ctr. v. U.S. Dep’t of Health
& Hum. Servs., 985 F.3d 472, 475 (5th Cir. 2021) (cleaned up).
III.
We turn first to petitioners’ claim that the rationale-disclosure
requirement violates the First Amendment by impermissibly compelling
their speech. The First Amendment “includes both the right to speak freely
and the right to refrain from speaking.” Wooley v. Maynard, 430 U.S. 705,
714 (1977). Thus, laws compelling speech normally trigger strict scrutiny and
“may be justified only if the government proves that they are narrowly tai-
lored to serve compelling state interests.” Nat’l Inst. Fam. & Life Advocs. v.
Becerra (“NIFLA”), 138 S. Ct. 2361, 2371 (2018) (cleaned up). But lesser
scrutiny applies when the government compels disclosures in the context of
commercial speech because “the extension of First Amendment protection
to commercial speech is justified principally by the value to consumers of the
information such speech provides.” See Zauderer v. Off. Disciplinary Couns.
Sup. Ct. Ohio, 471 U.S. 626, 651 (1985).
This means that “[s]tates may require commercial enterprises to dis-
5
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close ‘purely factual and uncontroversial information’ about their services”
so long as those disclosures are “reasonably related to a legitimate state
interest” and not “unjustified or unduly burdensome.” 4 The SEC’s primary
defense to petitioner’s constitutional challenge is that the rationale-
disclosure requirement is governed by Zauderer and that it can survive the
lower level of scrutiny. Therefore, we must determine whether Zauderer
applies because the rationale-disclosure requirement compels issuers to
disclose “purely factual and uncontroversial information” in the context of
commercial speech. See Zauderer, 471 U.S. at 651. 5 If so, the rationale-
disclosure requirement is constitutionally permissible so long as it “reasona-
bly relate[s] to a legitimate state interest” and is not “‘unjustified or unduly
burdensome.’” See NetChoice, 49 F.4th at 585 (quoting Zauderer, 471 U.S.
at 651).
1. Zauderer applies because the rationale-disclosure requirement compels
the disclosure of factual and uncontroversial information in the context of
commercial speech.
First, Zauderer’s lower level of scrutiny applies only to compelled dis-
closures that are “purely factual.” See 471 U.S. at 651. Petitioners assert that
the rationale-disclosure requirement compels issuers to disclose their rea-
sons for repurchasing stock and that by its very nature, an issuer’s subjective
_____________________
4
See NetChoice, L.L.C. v. Paxton, 49 F.4th 439, 485 (5th Cir. 2022) (quoting
Zauderer, 471 U.S. at 651), cert. granted, 2023 WL 6319650 (Sept. 29, 2023). The grant of
certiorari does not change the fact that NetChoice remains binding precedent unless and
until the Supreme Court says otherwise. See Wicker v. McCotter, 798 F.2d 155, 157–58 (5th
Cir. 1986).
5 The parties do not dispute that the rationale-disclosure requirement compels dis-
closures only where issuers engage in commercial speech, so we need only determine
whether the rationale-disclosure requirement compels purely factual, uncontroversial
speech.
6
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opinion about the business benefits of its actions cannot be a purely factual
disclosure. Essentially, petitioners urge that any compelled disclosure that
requires an issuer to explain why it is repurchasing stock cannot be a purely
factual disclosure. That contention, however, is foreclosed by NetChoice.
NetChoice dealt with a First Amendment challenge to Texas Business
& Commerce Code § 120.103(a)(1), which regulates large social media plat-
forms. That provision “obligate[d] the Platforms to explain their content
removal decisions.” 6 NetChoice analyzed the constitutionality of Sec-
tion 120.103(a)(1) under Zauderer and held that forcing social media
platforms to explain their reasons for removing content compelled “disclos-
ures that consist of purely factual and uncontroversial information.” See
NetChoice, 49 F.4th at 485–88 (cleaned up).
NetChoice stands for the proposition that forcing a company to
“explain the reason” for its actions is a purely factual disclosure. See id.
at 446, 485. If forcing a social media company to explain why it removed
posts compels a purely factual disclosure, it follows that forcing issuers to
explain why they are repurchasing their shares also compels a purely factual
disclosure.
Although petitioners’ reply brief all but concedes that NetChoice
applies, they instead attempt to minimize the opinion’s impact. They assert
that this part of NetChoice was dictum because NetChoice supposedly did not
dispute that its reasons for removing content constituted purely factual infor-
mation. But that is not so: Though NetChoice’s brief could have done a
better job at articulating Zauderer’s standard, it did repeatedly contend that
_____________________
6
NetChoice, 49 F.4th at 485; Tex. Bus. & Com. Code § 120.103(a)(1) (“[T]he
social medial platform shall . . . notify the user who provided the content of the removal
and explain the reason the content was removed.”).
7
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Zauderer did not apply because the Texas statute compelled disclosures that
were not purely factual, uncontroversial information. 7 Therefore, determin-
ing that Zauderer applied was “necessary to the holding of the case” and thus
was not dictum. Cf. FDIC v. Enventure V, 77 F.3d 123, 125 (5th Cir. 1996).
And since NetChoice could not determine whether Zauderer applied without
deciding whether § 120.103(a)(1) compelled purely factual and uncontrover-
sial information, its holding in this respect was also authoritative. See
NetChoice, 49 F.4th at 485–88.
In sum, petitioners do not try to distinguish this matter from Net-
Choice. Nor can they, for we held there that a law requiring companies to
explain the reasons behind their actions compelled the disclosure of purely
factual information. Here too, the rationale-disclosure requirement compels
issuers to explain their reasons for repurchasing shares. That is a purely fac-
tual disclosure under NetChoice.
Second, even if a compelled disclosure is purely factual, Zauderer’s
lower level of scrutiny applies only to compelled disclosures concerning
“uncontroversial information.” See Zauderer, 471 U.S. at 651. Petitioners
contend that Zauderer cannot apply because the rationale-disclosure require-
ment forces the issuers to opine on share repurchases, a topic they consider
to be one of the most controversial corporate decisions an issuer can make.
_____________________
7
See, e.g., Brief of Appellees, at 16, NetChoice, L.L.C. v. Paxton, 49 F.4th 439, 485–
87 (5th Cir. 2022) (No. 21-51178) (“Nor can [the Texas law] be saved under the (in-
apposite) commercial-speech doctrine or the limited Zauderer doctrine, which applies only
to non-burdensome, purely factual commercial disclosure requirements.”); id. at 52
(“This case, therefore, is not governed by the Zauderer test for compelled speech in com-
mercial advertising.”). NetChoice also recognized that the platforms disputed whether
Zauderer applied. See NetChoice, 49 F.4th at 487 (“[T]he platforms claim the Zauderer
standard does not apply to disclosure laws that implicate the editorial process—that is, laws
requiring publishers to disclose their editorial policies or explain how they exercise editorial
discretion.”).
8
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That contention is also foreclosed by NetChoice.
As explained above, NetChoice held that forcing social media plat-
forms to explain their reasons for removing content compelled “disclosures
that consist of purely factual and uncontroversial information.” See 49 F.4th
at 485 (cleaned up). It is hard to think of a more controversial topic in current
public discourse than content moderation and social media censorship. If a
social media company’s reason for removing user content was uncontro-
versial in NetChoice, then an issuer’s reason for repurchasing its own shares
is uncontroversial here.
Petitions rely on NIFLA to contend that the rationale-disclosure
requirement is controversial. Their reliance is misplaced. NIFLA held that
Zauderer was inapplicable to clinics that were forced to disclose information
about state-sponsored abortion services, a topic that the Supreme Court
described as “anything but . . . uncontroversial.” NIFLA, 138 S. Ct. at 2372(cleaned up). All NIFLA says is that abortion is too controversial a topic for
Zauderer to govern compelled speech relating to it. See id. The case is consis-
tent with NetChoice’s determination that a social media company’s reasons
for removing content are uncontroversial. Petitioners, in essence, invite us
to hold that the reasons behind a share repurchase are so much more contro-
versial than the reasons behind social media censorship that they engender a
similar level of controversy as does abortion. We decline that invitation.
NetChoice governs and requires us to hold that the rationale-disclosure
requirement compels only uncontroversial information.
In summary, then, the rationale-disclosure requirement compels
issuers to disclose “purely factual and uncontroversial information” in the
context of commercial speech, and its constitutionality is governed by
Zauderer.
9
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2. The rationale-disclosure requirement satisfies Zauderer because the rule
is justified, is reasonably related to a legitimate state interest, and does not burden
petitioners’ protected speech.
Zauderer allows “[s]tates [to] require commercial enterprises to dis-
close ‘purely factual and uncontroversial information’ about their services”
so long as those disclosures are not “‘unjustified or unduly burdensome’”
and are “reasonably related to a legitimate state interest.” NetChoice,
49 F.4th at 485 (quoting Zauderer, 471 U.S. at 651). The SEC bears the bur-
den of showing that the rationale-disclosure requirement is neither unjusti-
fied nor unduly burdensome. NIFLA, 138 S. Ct. at 2377. 8 The SEC has sat-
isfied that burden.
First, a compelled disclosure cannot be permitted if it is “unjusti-
fied.” Zauderer, 471 U.S. at 651. That means the disclosure must be “rea-
sonably related to a legitimate state interest” such that it “remed[ies] a harm
that is potentially real not purely hypothetical.” NetChoice, 49 F.4th at 485;
NIFLA, 138 S. Ct. at 2377 (internal quotation marks omitted). A compelled
disclosure is reasonably related to a legitimate state interest when it is “no
broader than reasonably necessary” to further that interest. See NIFLA,
138 S. Ct. at 2377 (internal quotation marks omitted).
In contrast, a compelled disclosure has purely hypothetical benefits
when the government “points to nothing” supporting its interest. See id._____________________
8
Despite language in NetChoice that could be read as describing the reasonable-
relation requirement as a separate prong of Zauderer, the opinion makes clear that assessing
whether a compelled disclosure is reasonably related to a legitimate state interest is how we
determine whether a compelled disclosure is justified. See NetChoice, 49 F.4th at 485
(“Texas argues—and the Platforms do not dispute —that Section 2 advances the State’s
interest . . . Therefore, the only question is whether the State has carried its burden to show
that the three categories of disclosures required by Section 2 are not unduly
burdensome.”).
10
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Any assumptions the government makes in justifying the compelled disclo-
sure must be more than “speculative.” Zauderer, 471 U.S. at 652.
The SEC has a legitimate interest in promoting the free flow of com-
mercial information. See Lamar Outdoor Adver. Inc., v. Miss. State Tax
Comm’n, 701 F.2d 314, 323 (5th Cir. 1983). The rationale-disclosure require-
ment is reasonably related to that interest. The SEC adopted the require-
ment because of a supposed asymmetry in information surrounding the rea-
sons issuers repurchase their shares. The SEC cited empirical evidence dem-
onstrating that issuers could have many different reasons for repurchasing
shares. Some, such as increasing the value of the shares, are beneficial to
investors. Others, such as a desire to achieve accounting metrics or impact
executive compensation, could make purchasers less inclined to invest.
The stated purpose of the rationale-disclosure requirement is to allow
investors to separate out and assess the different motivations behind, and
impacts of, share repurchases. In the SEC’s view, when investors know why
a company is repurchasing its shares, they can better evaluate whether a share
repurchase was intended to increase the value of the issuer or, instead, rep-
resented an inefficient deployment of capital. Contra NIFLA, 138 S. Ct.
at 2377 (“California points to nothing” supporting its interest).
These rationales may not be enough to survive APA review—see infra
part IV—but they are more than enough to satisfy this prong of Zauderer.
The SEC has demonstrated that the information asymmetry surrounding
share repurchases is a “potentially real not purely hypothetical” harm to
investors. See NIFLA, 138 S. Ct. at 2377 (internal quotation marks omitted).
The rationale-disclosure rule reaches no broader than necessary to address
this harm because the only speech it compels relates directly to alleviating the
information asymmetry.
We need not be persuaded by the SEC’s reasoning to hold that the
11
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benefits of the rationale-disclosure rule are more than purely hypothetical.
Therefore, the rationale-disclosure rule is justified as that word is used in
Zauderer.
Second, even if a compelled commercial disclosure is justified, it still
violates the constitution if it “unduly burden[s]” a speaker’s “protected
commercial speech.” NetChoice, 49 F.4th at 486 (cleaned up). In NIFLA,
the Court held that a California statue compelling a provider of pregnancy-
related services to include a government-sponsored message in promotional
materials was unduly burdensome. See 138 S. Ct. at 2377–78. The statute
required the inclusion of a lengthy message emphasized “by some method
such as larger text or contrasting type or color.” Id. at 2378. That was unduly
burdensome because it “drown[ed] out the facility’s own message.” Id.Here, in contrast, the rationale-disclosure requirement neither bur-
dens issuers’ protected speech nor drowns out their message. The issuer is
free to speak (or not) however and whenever it wishes apart from a privately
crafted explanation of its reasons for repurchasing shares. That is a far lesser
burden than was the California law the Court found unduly burdensome in
NIFLA, which mandated a “29-word statement from the government, in as
many as 13 different languages.” See id. A requirement that compels speech
solely within the narrow confines of SEC filings is not the type of forced dis-
closure that would meaningfully “chill protected commercial speech.”
NetChoice, 49 F.4th at 486 (cleaned up).
In sum, the rationale-disclosure requirement is not unduly burden-
some, and because both elements of the Zauderer test are met, the require-
ment passes constitutional muster.
IV.
Petitioners claim that the final rule violates the APA. They aver the
SEC acted arbitrarily and capriciously when it failed to (1) quantitatively
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analyze the economic implications of its proposed rule whenever feasible,
(2) respond to petitioners’ comments about the agency’s economic implica-
tions analysis adequately, and (3) substantiate the proposed rule’s benefits
adequately. 9
1. The SEC is not required to quantify economic implications generally.
The Exchange Act and the Investment Companies Act (“ICA”)
require the SEC to consider “whether [an] action will promote efficiency,
competition, and capital formation” whenever it engages in rulemaking and
is “required to consider or determine whether an action is “necessary or
appropriate in the public interest,” 15 U.S.C. § 78c(f), or “consistent with
the public interest,” id. § 80a-2(c). Those two statutory commands, peti-
tioners urge, require the SEC to “determine as best it can the economic
implications of the rule it has proposed.” Chamber of Com. of U.S. v. SEC,
412 F.3d 133, 143 (D.C. Cir. 2005). According to petitioners, quantitative
data is the “best” data, so they adduce the SEC cannot rely merely on quali-
tative analyses without first explaining why a rule’s costs and benefits “could
not be quantified.” In other words, petitioners contend that a qualitative
economic impact analysis will satisfy SEC’s statutory obligation only where
it is unable feasibly to conduct any quantitative analysis.
The SEC disagrees, positing that it is duty-bound only to conduct a
“reasonable and reasonably explained” analysis. Huawei, 2 F.4th at 452
_____________________
9
Petitioners raise three additional reasons the rule is arbitrary and capricious. Spe-
cifically, they contend the SEC (1) failed to consider adequately whether the additional dis-
closures would overwhelm retail investors and disincentivize information collection
efforts; (2) ignored fixed costs in its analysis of the share repurchase excise tax; and (3) did
not consider all costs and benefits it identified in its analysis of the rule’s overall effect. But
as we explain in the main text, each of petitioners’ primary contentions justifies granting
the petition for review. It is therefore unnecessary for us to resolve petitioners’ additional
theories.
13
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(internal quotation marks omitted). The agency states that it “need not base
its every action upon empirical data and may reasonably conduct a general
analysis based on informed conjecture.” Nasdaq Stock Mkt. L.L.C. v. SEC,
34 F.4th 1105, 1111 (D.C. Cir. 2022) (cleaned up).
We agree with the SEC that, as a general matter, it is not required to
undertake a quantitative analysis to determine a proposed rule’s economic
implications. The relevant statutory provisions providing the SEC with rule-
making authority do not stipulate such a requirement—they merely com-
mand the SEC to “consider . . . whether the action will promote efficiency,
competition, and capital formation.” 15 U.S.C. §§ 78c(f), 80a-2(c). Per the
text, the agency is only told to “consider,” and that term—shorn of modifiers
or limiters—does not restrict the universe of otherwise permissible methods
by which the SEC can analyze the economic implications of a proposed rule.
Nor do the statutorily stipulated objects of consideration lend any sup-
port to petitioners’ position. A rigorous quantitative cost-benefit analysis is
one way—but not the only way—to determine whether a proposed rule “pro-
mote[s] efficiency, competition, and capital formation.” Id. Accordingly,
there is no textual basis to conclude that the SEC must analyze economic
impacts using quantitative methods whenever it is feasible. 10
Petitioners, citing Business Roundtable v. SEC 11 and Chamber of Com-
merce, maintain the D.C. Circuit has concluded to the contrary. Not so.
_____________________
10
Nor could such a quantitative analysis requirement be read into the relevant
statutory provisions. “Where Congress has required ‘rigorous, quantitative economic
analysis,’ it has made that requirement clear in the agency’s statute.” Inv. Co. Inst. v.
CFTC, 720 F.3d 370, 379 (D.C. Cir. 2013) (quoting Am. Fin. Servs. Ass’n v. FTC, 767 F.2d
957, 986 (D.C. Cir. 1985)); see, e.g., 2 U.S.C. § 1532(a)(2) (mandating “a qualitative and
quantitative assessment of the anticipated costs and benefits” (emphasis added)). No such
statutory requirement is imposed here.
11
647 F.3d 1144 (D.C. Cir. 2011).
14
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Neither lends support to their theory that the Exchange Act and ICA require
the SEC to conduct a quantitative economic analysis whenever feasible.
In Chamber of Commerce, the D.C. Circuit held that difficulties in
determining a rule’s precise costs “d[id] not excuse the [SEC] from its
statutory obligation” because the agency could still have provided a “range
within which [the] cost . . . will fall.” 412 F.3d at 143. And Business Round-
table held that SEC’s failure adequately to “quantify the certain costs or to
explain why those costs could not be quantified” was one basis justifying
vacatur. 647 F.3d at 1149. But in Chamber of Commerce, SEC “stopped” its
cost analysis after asserting “it had no ‘reliable basis for estimating those
costs.’” 12 Similarly, in Business Roundtable, SEC’s prediction “had no basis
beyond mere speculation” and was functionally equivalent to no economic
impact analysis at all. 647 F.3d at 1150.
Neither case restricts the SEC’s ability to rely on a qualitative analysis
for its determination of economic impact. 13 Neither Chamber of Commerce
nor Business Roundtable supports petitioners’ reasoning. It is within the
agency’s discretion 14 to determine the mode of analysis that most allows it
“to determine as best it can the economic implications of the rule it has
_____________________
12
412 F.3d at 144 (quoting Investment Company Governance, 69 Fed. Reg. 46378,
46387 n.81 (Aug. 2, 2004)).
13
See Nasdaq, 34 F.4th at 1113 (distinguishing Business Roundtable since SEC
“explained in detail why [the rule’s effect on] competition would ultimately benefit
investors”).
14
Such discretion is still bounded by default APA requirements. First, the SEC
cannot act arbitrarily and capriciously in choosing the mode of analysis that it uses to
analyze the economic implications of its proposed rule. Second, regardless of the mode of
analysis chosen, the agency “must cogently explain why it has exercised its discretion in a
given manner and must offer a rational connection between the facts found and the choice
made.” Corrosion Proof Fittings v. EPA, 947 F.2d 1201, 1214 (5th Cir. 1991) (cleaned up)
(quoting Chem. Mfrs. Ass’n v. EPA, 899 F.2d 344, 359 (5th Cir. 1990).
15
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proposed.” Chamber of Commerce, 412 F.3d at 143.
2. The SEC failed to respond to petitioners’ comments.
Petitioners contend that the SEC failed to respond to their comments
about the proposed rules’ economic implications. Under the arbitrary-and-
capricious standard, the SEC must show that it has “reasonably considered
the relevant issues and reasonably explained the decision.” FCC v. Prome-
theus Radio Project, 141 S. Ct. 1150, 1158 (2021). That requires the agency to
consider all relevant factors raised by the public comments and provide a
response to significant points within. See Huawei, 2 F.4th at 449. Comments
the agency must respond to include those that “can be thought to challenge
a fundamental premise underlying the proposed agency decision” 15 or
include points that “if true and adopted would require a change in an
agency’s proposed rule.” 16
The SEC, in its proposed rule, stated that “[m]any of the [economic]
effects . . . cannot be quantified.” Share Repurchase Disclosure Moderniza-
tion, 87 Fed. Reg. 8443, 8451 (Feb. 15, 2022). That prompted the agency to
do two things: First, it “encourage[d] commenters to provide data and
information that would help quantify the benefits, costs, and the potential
impacts of the proposed amendments on efficiency, competition, and capital
formation.” Id. Second, for the economic effects the SEC asserted it was
“unable to quantify,” the agency “provide[d] a qualitative assessment.” Id.Indeed, in both the proposed and final rule, the SEC claimed that it provided
quantified economic effects “wherever possible.” Id.; Share Repurchase
_____________________
15
Carlson v. Postal Regul. Comm’n, 938 F.3d 337, 344 (D.C. Cir. 2019) (cleaned up)
(quoting MCI WorldCom, Inc. v. FCC, 209 F.3d 760, 765 (D.C. Cir. 2000)).
16
Mexican Gulf Fishing Co. v. U.S. Dep’t of Com., 60 F.4th 956, 971 (5th Cir. 2023)
(cleaned up) (quoting Huawei, 2 F.4th at 449).
16
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Disclosure Modernization, 88 Fed. Reg. 36002, 36029 (June 1, 2023).
Petitioners maintain—and we agree—that is not so.
Petitioners point to three suggestions they submitted to the SEC that
explained how the agency could quantify the proposed rule’s effects. They
suggested the SEC should quantify
1. “the percentage of issuers’ annual and long-term incentive plans that is
tied to [earnings per share] and how it correlates with buybacks” based
on readily available “academic databases” that “provide detailed data on
executive compensation”;
2. “how many issuers used share repurchases to trigger an executive bonus
that would not have been earned without repurchasing shares” and “the
total executive compensation awarded from potentially opportunistic
buybacks.” They note a British study had conducted such an estimate for
U.K. issuers, and the SEC could just “replicate the threshold analysis”
of that study using preexisting U.S. data;
3. “the incremental benefits of potential reductions in asymmetric infor-
mation stemming from the proposed amendments” by (i) “examin[ing]
how investors react to more frequent repurchase disclosure” in other
jurisdictions; (ii) using existing studies to “compare liquidity measures of
similarly sized issuers operating in the same industry that conduct buy-
backs across countries” with different disclosure frequencies; or
(iii) examining the movement of stock prices on days that repurchases are
disclosed in jurisdictions with daily reporting.
The SEC admits it never considered any of petitioners’ suggestions. 17
_____________________
17
Oral argument was the first time the SEC attempted to engage with the substance
of petitioners’ suggestions. That’s too late. We don’t evaluate post-hoc justifications, given
that “an agency’s action must be upheld, if at all, on the basis articulated by the agency
itself.” BNSF Ry. Co. v. Fed. R.R. Admin., 62 F.4th 905, 910–11 (5th Cir. 2023) (cleaned
17
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On appeal, it instead blames petitioners for failing to (1) “identify any
specific [data] already available that the Commission should have used,” and
(2) raise points which, if true and adopted, would require a change in an
agency’s proposed rule. See Huawei, 2 F.4th at 449, 453. There is no merit
to either of the SEC’s post-hoc justifications:
The first justification—that the suggestions did not identify data—is
demonstrably false. Petitioners’ first suggestion flagged academic databases
containing datasets from the Incentive Lab by Institutional Shareholder Ser-
vices. The second suggestion points to existing SEC disclosures. And the
last expressly references existing academic studies with similar empirical
analyses. Such datasets and academic studies are a far cry from the com-
ments at issue in Huawei that failed to “identify relevant cost data the agency
ignored.” 2 F.4th at 453 (emphasis removed). The Huawei comments were
“asserted without evidence,” “speculative,” and devoid of any “factual
basis.” Id. at 453–54. Petitioners’ suggestions, in contrast, include specific
references to readily available data as well as explanations on “how the SEC
could use these data to quantify the [r]ule’s effects.”
The agency’s second justification—that petitioners’ suggestions did
not raise points that, if true and adopted, would require a change in the pro-
posed rule—is also meritless. The SEC, relying on Prometheus, avers that
“[t]he APA imposes no general obligation on agencies to conduct or com-
mission their own empirical or statistical studies.” 141 S. Ct. at 1160.
The SEC’s reliance on Prometheus is misplaced. There, the FCC had
“repeatedly asked for data” but “received no data” other than the materially
incomplete dataset it already possessed and ultimately relied upon. 141 S. Ct.
at 1159 (cleaned up). That is not so with the rulemaking at issue in this case:
_____________________
up).
18
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The SEC did receive new data in response to its solicitation. Indeed, in the
proposed rule, the SEC expressly asked for and “encourage[d]” commenta-
tors to provide “data and information that would help quantify the benefits,
costs, and the potential impacts of the proposed rule on efficiency, com-
petition, and capital formation.” 87 Fed. Reg. at 8451. And that’s exactly
what petitioners did—provide data that was either readily accessible to, or
already in the possession of, the SEC.
It is hard to fault petitioners for giving the SEC exactly what it had
asked for. And that factual distinction makes all the difference: Critical to
the holding in Prometheus was the FCC’s reliance on both “the data it had”
and “the absence of any countervailing evidence.” 141 S. Ct. at 1159. Prome-
theus thus stands for the proposition that an agency need not create data that
doesn’t already exist. It offers no support for the SEC’s decision to ask for—
and then ignore—already-existing data it did not want to consider.
Undeterred, the SEC then characterizes petitioners’ comments as
mere “recommendation[s] to conduct new studies that [they] contend might
produce useful data.” That is incorrect. All three suggestions address costs
and benefits the SEC identified in the proposed rule, such as the loss of
economically efficient buybacks and increased litigation costs for issuers.
The first suggestion is relevant because it addresses the prevalence of
improperly motivated buybacks—the very concern motivating the SEC’s
instant rulemaking. Two of the “incentives for value-destroying or oppor-
tunistic repurchases” the agency identified in the proposed rule were
“[s]hare price- or EPS-tied compensation arrangements [which] can . . .
incentivize executives to undertake repurchases, in an attempt to maximize
their compensation, even if such repurchases are not optimal from the share-
holder value maximization perspective,” 87 Fed. Reg. at 8457, 8454–55.
Similarly, the second suggestion sheds light on the strength of the incentives
19
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underlying such opportunistic repurchases. And the third suggestion strikes
at the heart of the proposed rule’s purported benefit by examining the mar-
ginal effect of additional disclosures on regulated entities’ behaviors. 18
All three suggestions provide quantification of the rule’s expected
costs and benefits—the very same costs and benefits the SEC asserts “can-
not be quantified.” 19 That destroys the only basis the agency supplied in sup-
port of its decision to conduct a qualitative analysis. 20 The SEC—by con-
tinuing to insist that the rule’s economic effects are unquantifiable in spite of
petitioners’ suggestions to the contrary—has failed to demonstrate that its
conclusion that the proposed rule “promote[s] efficiency, competition, and
capital formation” 21 is “the product of reasoned decisionmaking.” 22
3. The SEC failed adequately to substantiate the rule’s benefits and costs.
“[A] regulation is arbitrary and capricious if the agency ‘failed to
consider an important aspect of the problem.’” Mexican Gulf Fishing,
60 F.4th at 973 (quoting State Farm, 463 U.S. at 43). That “includes, of
_____________________
18
More disclosure isn’t always better. See, e.g., Eugene G. Chewning, Jr. & Adrian
M. Harrell, The Effect of Information Load on Decision Makers’ Cue Utilization Levels and
Decision Quality in a Financial Distress Decision Task, 15 Acct. Org. & Soc’y 527, 539–
40 (1990); Kevin Lane Keller & Richard Staelin, Effects of Quality and Quantity of
Information on Decision Effectiveness, 14 J. Consumer Res. 200, 211–12 (1987).
19
87 Fed. Reg. at 8451 (proposed rule); 88 Fed. Reg. at 36029 (final rule).
20
See 87 Fed. Reg. at 8451 (“[W]e have, wherever possible, attempted to quantify
the economic effects expected from these amendments . . . . Where we are unable to
quantify the economic effects of the final amendments, we provide a qualitative assess-
ment.”); 88 Fed. Reg. at 36029 (same).
21
15 U.S.C. §§ 78c(f), 80a-2(c).
22
State Farm, 463 U.S. at 52; see also Huawei, 2 F.4th at 452 (“An agency’s decision
to rely on a cost-benefit analysis as part of its rulemaking can ‘render the rule unreasonable’
if the analysis rests on a ‘serious flaw.’” (quoting Nat’l Ass’n of Home Builders v. EPA,
682 F.3d 1032, 1040 (D.C. Cir. 2012)).
20
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course, considering the costs and benefits associated with the regulation.” Id.And as part of that cost-benefit analysis, the agency must identify benefits
that “bear a rational relationship to the . . . costs imposed.” Id. (citing Pub.
Citizen v. EPA, 343 F.3d 449, 455 (5th Cir. 2003)). 23
The SEC contends the rule primarily helps investors “better evaluate
whether a share repurchase was intended to increase the value of the firm”
or for an improper purpose such as “providing additional compensation to
management.” 88 Fed. Reg. 36008. The agency also avers that the rule
promotes price discovery. 24 But while the rule’s purported benefits may be
more than purely hypothetical, see supra part III.2, neither is adequately
substantiated.
Petitioners insist the first benefit is inadequately substantiated be-
cause the agency “never substantiated the threshold proposition that im-
properly motivated buybacks are actually a problem.” And while the SEC
concedes it never substantiated that proposition in either the proposed or the
final rule,25 the agency nevertheless maintains the rule’s first benefit is ade-
_____________________
23
See R.J. Reynolds Vapor Co. v. FDA, 65 F.4th 182, 189 (5th Cir. 2023) (“At a bare
minimum, ‘[w]hen an agency changes its existing position, it . . . must at least display
awareness that it is changing position and show that there are good reasons for the new
policy.’” (quoting Encino Motorcars LLC v. Navarro, 579 U.S. 211, 221 (2016))).
24
See 88 Fed. Reg. at 36033 (“The additional quantitative and qualitative disclos-
ures we are adopting are further expected to enhance the information about share repur-
chases, providing clearer insights into how and why the issuers undertake repurchases and
the extent to which they are related to temporary undervaluation of issuer shares, tem-
porary cash windfalls that cannot be deployed to positive-net present value (NPV) invest-
ment projects, or other objectives.”).
25
Indeed, the SEC contends in its briefing that “the rule was explicitly not prem-
ised on th[e] notion” that “‘improperly motivated buybacks regularly occur’ in ‘significant
numbers.’” See 88 Fed. Reg. at 36007 (“[I]t is not necessary to find that opportunism
drives the timing of most issuer share repurchases to conclude that it is appropriate for
investors to have more useful information about such repurchases.”).
21
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quately substantiated. That’s because, according to the SEC, investors can
be uncertain about the true motivations underlying a buyback so long as there
exists an opportunity for—and thus possibility of—opportunistic or improp-
erly motivated buybacks. 26
We agree with petitioners. If opportunistic or improperly motivated
buybacks are not genuine problems, then there is no rational basis for inves-
tors to experience any of the uncertainty the SEC now claims warrants the
rule. Concern about uncertainty positively scales with the magnitude and
probability of the matter for which one is uncertain. A reasoned response to
uncertainty about matters of low probability or low magnitude should be
markedly different from those of high probability and magnitude. And that
only makes common sense: Tolerance of uncertainty varies depending on
considerations of likelihood and severity.
It’s no different when it comes to the proposed rule. The rule’s bene-
fit scales with the degree of investor uncertainty in the status quo, and that
degree of uncertainty is tied to the magnitude and probability of opportunistic
or improperly motivated buybacks. The SEC must therefore show that
opportunistic or improperly motivated buybacks are a genuine problem even
under its theory of investor uncertainty. Because the agency has not done so,
the first benefit is inadequately substantiated.
The rule’s second benefit—promoting price discovery—fares no
better than the first. The SEC theorizes that “more comprehensive and dis-
aggregated, granular information about recent repurchases and prices of such
_____________________
26
See, e.g., id. (“[W]e believe all of the quantitative and qualitative disclosure
requirements that we are adopting in this release together will serve to alert investors to the
possibility of repurchases being motivated, at least in part, by goals unconnected to
increasing shareholders value or signaling the issuer’s view that its stock is undervalued.”
(emphasis added)).
22
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repurchases should be useful to investors in inferring the management’s
evolving beliefs about the company’s underlying value and, in conjunction
with other disclosures, [thereby] improving price discovery.” 88 Fed. Reg.
36032–33.
The SEC’s theory is internally contradictory and thus fails adequately
to substantiate the rule’s price-discovery benefit. 27 That theory rests on the
notion that the rule’s additional disclosure requirements will mitigate sub-
optimal voluntary disclosure levels by providing investors with valuable new
information. The SEC reasons that these voluntary disclosure levels are sub-
optimal in the status quo because issuers currently withhold information from
investors on account of the “the potential costs of leaking valuable private
information to competitors.” 88 Fed. Reg. 36036. But the agency soon
changes tack. In its discussion of the rule’s general costs, the SEC adopts the
opposite—and contradictory—position: In concluding that costs of disclos-
ing “significant proprietary information” would be “relatively modest for
most issuers,” the SEC asserts the new disclosures would not contain valua-
ble information. 88 Fed. Reg. 36040.
The SEC cannot have it both ways. It is illogical for the rule simul-
taneously to accept and to reject the reasoning underlying the price discovery
benefit. The rule’s price discovery benefit is therefore unsubstantiated. 28
The price-discovery benefit would still be inadequately substantiated
even if we were to disregard the fact that the SEC’s theory is internally
contradictory. First, the agency fails to demonstrate that it considered rele-
_____________________
27
See Sw. Elec. Power Co. v. EPA, 920 F.3d 999, 1021 (5th Cir. 2019) (“[A]n
agency’s action is arbitrary and capricious if illogical on its own terms.” (cleaned up)).
28
See R.J. Reynolds Vapor Co., 65 F.4th at 189 (“[W]hen an agency changes its
existing position, it . . . must . . . show that there are good reasons for the new policy.”
(quoting Encino, 579 U.S. at 222) (cleaned up)).
23
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vant factors in concluding the rule’s additional disclosures would impose
“relatively modest [costs] for most issuers.” 88 Fed. Reg. 36040. Looking
at the rule’s disclosure requirements explains why that is the case. Plainly
put: The rule’s requirements are clear as mud. Issuers are instructed not to
“rely[] on boilerplate language” but are offered no guidance except a non-
exclusive and non-exhaustive list compiling myriad suggestions from com-
mentators. 29 Worse still, there is no safe harbor even for issuers whose dis-
closures discuss all the rule’s suggestions. And even when pressed at oral
argument, counsel for the SEC offered little in the way of clarifying what
disclosures the rule actually mandated. The price-discovery benefit is not the
product of reasoned decisionmaking.
Regardless, the rule cannot be sustained on the price-discovery ration-
ale even if we were to assume that the price-discovery benefit is adequately
substantiated. Under the harmless-error doctrine, a challenged rule survives
judicial review notwithstanding error only if such error “clearly had no bear-
ing on the procedure used or the substance of the decision reached.” 30
As explained above, the rule’s primary benefit—decreasing investor
uncertainty about motivations underlying buybacks—is inadequately sub-
_____________________
29
These suggestions direct issuers to discuss: (1) “other possible ways to use the
funds allocated for the repurchase and [to] compar[e] the repurchase with other investment
opportunities that would ordinarily be considered by the issuer, such as capital expendi-
tures and other uses of capital”; (2) “the expected impact of the repurchases on the value
of remaining shares”; (3) “factors driving the repurchase, including whether their stock is
undervalued, prospective internal growth opportunities are economically viable, or the
valuation for potential targets is attractive”; and (4) “the sources of funding for the
repurchase, where material, such as, for example, in the case where the source of funding
results in tax advantages that would not otherwise be available for a repurchase.” 88 Fed.
Reg. at 36024.
30
Sierra Club v. U.S. Fish & Wildlife Serv., 245 F.3d 434, 444 (5th Cir. 2001)
(quoting U.S. Steel Corp. v. EPA, 595 F.2d 207, 215 (5th Cir. 1979); see 5 U.S.C. § 706 (“due
account shall be taken of the rule of prejudicial error”).
24
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stantiated. Almost every part of the SEC’s justification and explanation of
the rule reflects the agency’s concern about opportunistic or improperly
motivated buybacks. That error permeates—and therefore infects—the
entire rule. Consequently, we cannot conclude that error in the SEC’s sub-
stantiation of the first benefit clearly had no bearing on the remainder of the
rule.
Because the SEC acted arbitrarily and capriciously in failing ade-
quately to (1) respond to petitioners’ comments and (2) substantiate the
rule’s benefits, we grant the petition for review.
V.
Petitioners contend the SEC did not provide adequate opportunity for
notice and comment. Under the APA, agencies must “give interested per-
sons an opportunity to participate in the rule making through submission of
written data, views, or arguments.” 5 U.S.C. § 553(c).
We disagree with petitioners. They aver the SEC’s initial forty-five-
day comment period should “raise red flags” because it was shorter than
sixty days. But the APA generally requires only a minimum thirty-day com-
ment period. 31 And “while interested parties should be able to participate
meaningfully in the rulemaking process, the public ‘need not have an oppor-
tunity to comment on every bit of information influencing an agency’s deci-
sion.’” Tex. Off. of Pub. Util. Couns. v. FCC, 265 F.3d 313, 326 (5th Cir. 2001)
(quoting Texas v. Lyng, 868 F.2d 795, 800 (5th Cir. 1989)). We cannot con-
clude that the initial comment period was so short as to deprive petitioners
_____________________
31
Chem. Mfrs. Ass’n, 899 F.2d at 347. See also Nat’l Lifeline Ass’n v. FCC, 921 F.3d
1102, 1117 (D.C. Cir. 2019) (“[A] 30-day comment period is generally the shortest time
period sufficient for interested persons to meaningfully review a proposed rule and provide
informed comment.” (internal citations omitted)).
25
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of a meaningful opportunity to comment on the proposed rulemaking. Peti-
tioners may have hoped for more time, but it is not for us to decide whether
an agency has chosen a maximally net beneficial comment period.
Accordingly, the SEC’s notice and comment period satisfies the
APA’s requirements.
VI.
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. We recognize that “there is at least a serious
possibility that the agency will be able to substantiate its decision given an
opportunity to do so.” Texas v. United States, 50 F.4th 498, 529 (5th Cir.
2022) (quoting Texas Ass’n of Mfrs. v. US. Consumer Prod. Safety Comm’n,
989 F.3d 368, 389–90 (5th Cir. 2021)). Short of vacating the rule, we there-
fore afford the agency limited time to remedy the deficiencies in the rule.
Because, for the reasons explained, the SEC’s adoption of the Share
Repurchase Disclosure Modernization Rule is arbitrary and capricious, the
petition for review is GRANTED, and this matter is REMANDED with
direction to the SEC to correct the defects in the rule within 30 days of this
opinion. This is a limited remand. This panel retains jurisdiction to consider
the decision that is made on remand.
26