Chamber Sues SEC Over Share Repurchase Rules

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How did the group begin the litigation in the appellate court? The petition is filed under, among other statutes, 15 U.S.C. § 80a-42(a). That section provides that a "person aggrieved by a final order" of the SEC may obtain review of the order in the U. S. Court of Appeals for the circuit in which the person resides or has his principal place of business by filing a written petition praying that the order of the SEC be modified or set aside in whole or in part. A copy of the petition is then sent to the SEC, and the SEC then files the record on which the order is based. The court has jurisdiction, "which upon the filing of the record shall be exclusive, to affirm, modify, or set aside such order, in whole or in part." The court will not consider any objection to the order of the SEC unless it was previously raised before the SEC or unless there were reasonable grounds for failure to do so. The commencement of proceedings to review the SEC order does not operate as a stay unless the court specifically so orders. The judgment of the court affirming, modifying or setting aside, in whole or in part, the SEC order is final, subject to review by SCOTUS. A similar approach was taken by the Alliance for Fair Board Recruitment, which petitioned for review of the SEC's final order approving the Nasdaq board diversity rule. (See this PubCo post.)

"[s]tock buybacks play an important role in the functioning of healthy and efficient capital markets....The SEC's stock buyback rule doesn't protect investors. Instead, it puts the thumb on the scale to discourage buybacks despite the fact that the repurchasing of shares improves returns for savers and investors across the economy. Buybacks efficiently distribute capital to where it is most likely to result in the investments that grow businesses and add value for shareholders and Main Street investors. The Chamber's lawsuit seeks to protect returns for investors as well as the ability of companies to make decisions free from government micromanagement."

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You may remember that the Chamber was part of the triumvirate—with the National Association of Manufacturers and Business Roundtable—that took on the SEC over the conflict minerals rules—with some success. In April 2014, the D.C. Circuit issued a decision in National Association of Manufacturers, et al. v. SEC, concluding that that the conflict minerals rules "violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have 'not been found to be "DRC conflict free."' Why? Because, by "compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment." (See this PubCo post.) As a result, Corp Fin issued guidance advising that companies "should comply with and address those portions of Rule 13p-1 and Form SD that the Court upheld." In 2015, the D.C. Circuit reaffirmed its initial judgment. (See this PubCo post.) On remand in 2017, the D.C. District Court entered final judgment, holding that the statute and related rules and forms violated the First Amendment to the extent that they required regulated entities to report to the SEC and to state on their websites that any of their products "have not been found to be 'DRC conflict free.'" (See this PubCo post.) Following that action, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule that provided substantial relief to companies subject to the rule. (See this PubCo post.)

One of the bases on which the Chamber is challenging the buyback rules is again that the rules compel speech in violation of the First Amendment. By way of background, the general test for commercial speech, a four-part test generally viewed to provide an intermediate level of scrutiny, was set forth by SCOTUS in Central Hudson Gas & Electric Corp. v. Public Service Commission  (1980). The test involves a four-part analysis: "At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest."

That test was further refined by SCOTUS in Zauderer v. Office of Disciplinary Counsel (1985), where the issue involved not a restriction on speech (as in Central Hudson) but rather an affirmative obligation to disclose factual and non-controversial information. SCOTUS held that compelled commercial speech "rights are adequately protected as long as disclosure requirements are reasonably related to the State's interest in preventing deception of consumers," provided that the requirement is not "unjustified or unduly burdensome disclosure" so as to chill protected commercial speech. (For further discussion of the applicable standards of review, see this PubCo post.) 

In American Meat Institute v. U.S. Dept. of Agriculture, the D.C. Circuit held that the Zauderer language "sweeps far more broadly than the interest in remedying deception." However, that position has not been universally adopted across the circuits and, according to this academic paper (see note 151), the Fifth Circuit is one of the circuits that has limited application of Zauderer to regulations targeting consumer deception. (It's worth noting here that the author observes (note 153) that Justice Clarence Thomas has written that he has "never been persuaded that there is any basis in the First Amendment for the relaxed scrutiny this Court applies to laws that suppress non-misleading commercial speech" and that he "would be willing to reexamine Zauderer  and its progeny in an appropriate case to determine whether these precedents provide sufficient First Amendment protection against government-mandated disclosures.") In AMI, upholding a country-of-origin labeling requirement, the court pointedly contrasted the disclosure required in NAM, maintaining that it did not understand the labeling requirement "to be controversial in the sense that it communicates a message that is controversial for some reason other than dispute about simple factual accuracy." Notably, the concurring opinion by then-Judge Kavanaugh expressed the view that "[u]nlike the mandated disclosures at issue in ... National Association of Manufacturers, for example, a country-of-origin label cannot be considered 'controversial' given the factually straightforward, evenhanded, and readily understood nature of the information.... Cf. National Association of Manufacturers, 748 F.3d at 371 (disclosure requirement that in essence compelled 'an issuer to confess blood on its hands')...." Will the Fifth Circuit view the buyback rules as controversial? As unrelated to consumer deception? As unjustified or unduly burdensome as to chill commercial speech? That remains to be seen.

For additional discussions of the issue of "compelled commercial speech" under the First Amendment, see my posts of 4/14/14, 7/16/14, 7/29/14, 8/18/15, 3/13/17.