SEC Empowers Stakeholders by Restarting Comment Period for Revolutionary Share Repurchase Transparency Rule
The Securities and Exchange Commission (SEC) has once again made the comment period available for the proposed rulemaking on the modernization of share repurchase disclosure. The comment period was restarted so that a memorandum could be added to the public comment file that had been prepared by the Division of Economic and Risk Analysis (“DERA”), and so that the public could provide feedback on the memorandum.
This memorandum presents an analysis of the potential economic effects of the proposed rulemaking in light of section 4501 of the Internal Revenue Code of 1986 (hereinafter referred to simply as “the Internal Revenue Code”).
Section 4501, which was added to the Internal Revenue Code by the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), imposes on a covered corporation a non-deductible excise tax equal to 1% of the fair market value of any stock repurchased by the corporation, subject to certain exceptions. This tax was added to the Internal Revenue Code by the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”).
The Inflation Reduction Act had not yet been signed into law on the date that the Securities and Exchange Commission (Commission) first proposed the Share Repurchase Disclosure Modernization rulemaking on December 15, 2021. As a consequence of this, the discussion of the costs and benefits of the rulemaking that was included in the proposing release did not take into account the impact that the excise tax would have on the frequency and volume of share repurchases.
It is possible that as a result of the excise tax, companies will reduce the amount of money they spend on share repurchases and instead turn to dividends, including special dividends, as their preferred method of returning capital to shareholders. This is one of the potential implications of the excise tax. Any such reduction in the activity of share repurchase could, in turn, have an effect on the costs and benefits analysis contained within the proposed release.
In order for the Commission to fulfill the statutory rulemaking obligations that are placed on it, it is necessary for the Commission to have a comprehensive understanding of the qualitative and quantitative impacts that the excise tax will have on share repurchase activity as well as the costs and benefits of the proposed rulemaking.
I want to express my gratitude to the staff of DERA for their efforts to address these issues in the memorandum that they prepared, as well as to the staff of the Divisions of Corporation Finance and Investment Management for their efforts to prepare the reopening release.
Although I agree that the DERA memorandum should be included in the public comment file and that the comment period should be reopened in general, I do not agree that the public should have 30 days to comment on the proposal and provide their feedback. This thirty-day period is especially problematic because it begins not long before significant holidays that will occur later this month and will overlap with those holidays.
One might wonder: what exactly is the point of the opportunity to provide feedback? Is it merely a box that needs to be ticked off in order to satisfy the Administrative Procedures Act’s bare minimum requirement for a satisfactory level of process? Or is it an essential part of a conversation that takes place between a regulatory body and the general public in order to gain a deeper comprehension of the implications of a proposed rule, particularly in the context of a different set of facts? The second possibility seems more likely to me.
If the period were longer—for example, 45 days—there is a better chance that the Commission would receive responses that demonstrated greater consideration. Even for those commenters who are able to provide feedback within the 30-day period, the additional time would likely be appreciated so that they could fine-tune their analysis while continuing their regular responsibilities and spending quality time with their families and friends during the holidays.
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