SEC Disclosure Rulemaking Authority in Jeopardy After Challenge from Business Community

A coalition of employer groups has sued the SEC, arguing that their stock buyback rules violate the First Amendment of the Constitution. The lawsuit has major implications for future attempts by the SEC to compel corporate disclosures through rulemaking, such as the long-expected human capital metrics proposed rule.

Background: The SEC issued its stock buyback rule this past spring. Generally speaking, the rule requires companies to provide quarterly disclosures to investors detailing their daily buyback activity for that period. The rule also requires companies to provide investors their rationales for stock buybacks.

Legal challenge: A coalition led by the Chamber of Commerce sued the SEC over the rule in May in the Fifth Circuit Court of Appeals, arguing that the rule, among other things, violated the First Amendment. Specifically, the lawsuit claims that the rule violates First Amendment protections against compelled speech. Notably, securities-related speech – such as what is compelled by the buyback rule – is historically considered beyond the scope of protected speech.

The outcome of the lawsuit could have major implications for securities regulation generally and the SEC’s ability to promulgate and enforce meaningful rules. If the rule is struck down on unlawful compelled-speech grounds, SEC authority to issue similar disclosure rules – such as the forthcoming HCM rules – could be significantly limited.

Outlook: Any outcome at the Fifth Circuit is likely to be appealed to the Supreme Court, which may grant review given the novel questions regarding compelled speech and commercial speech. An adverse result for the SEC could open the floodgates for future challenges to any SEC disclosure rules on similar grounds.