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November 27, 2023

Actions in the Federal Courts – Month in Review Newsletter – November 2023

SEC Rule to Protect Investors by Providing Transparency on Buybacks Hangs in the Balance

Chamber of Commerce v. SEC, No. 23-60255 (5th Cir.). In May this year, the SEC issued a rule requiring companies to provide more detailed information about their share repurchases.  As we explained in our comment letter, the rule was designed to help investors understand whether the buybacks were in the best interest of the company and its shareholders or instead a maneuver intended to increase executive compensation.  The Chamber of Commerce and its allies promptly challenged the rule in the Fifth Circuit.  On October 31, 2023, the Court issued its decision with mixed results.  The Court rightly rejected claims that the rule violated the First Amendment limits on compelled disclosure, as we urged in our amicus brief.  It also correctly held that the SEC had offered a sufficient public comment period.  It nevertheless found that the rule was “arbitrary and capricious” in violation of the Administrative Procedure Act (APA) because the SEC had failed to respond to issues raised by commenters and had thereby failed to conduct a proper cost-benefit analysis.

However, in a positive turn, the Court concluded there was “at least a serious possibility” that the Commission could cure the defects that the Court identified. Therefore, instead of wiping the rule off the books (“vacating” it), it remanded the rule to the SEC for 30 days to address the problems.  Thus, while the Court’s holding imposes additional and unwarranted burdens on the SEC during the rulemaking process, the rule can still go into effect for the benefit of investors if the SEC successfully addresses the Court’s concerns.

Republican Attorneys General Attempt to Limit Consideration of  ESG Factors in Selecting Investments for Retirement Plans.

State of Utah v. Walsh, No. 23-11097 (5th Cir.).  In 2022, the Department of Labor issued a rule clarifying that those who manage retirement plans may consider environmental, social, and governance (ESG) factors in deciding which investments to offer retirement savers.  In January 2023, a group of state attorneys general challenged the rule in court, alleging that the rule violated the applicable statutory requirements and was arbitrary and capricious in violation of the APA.  But in a well-reasoned decision, the district court rightly rejected the plaintiffs’ arguments.  On October 30, 2023, the attorneys general filed a notice of appeal to the Fifth Circuit. We will continue to monitor the case to see how it fares before a notoriously ideological and conservative appellate court.  The fact is that investors want access to ESG investments based on their risk/return features, not only due to their role in advancing important social policy goals.

KalshiEx, LLC, Sues CFTC Over Its refusal to Allow Political Gambling Contracts.

KalshiEx, LLC v. CFTC, No. 1:23cv3257 (D.D.C.).  On September 22, 2023, the Commodity Futures Trading Commission (CFTC) rejected a petition from KalshiEx, LLC (Kalshi) seeking approval for “congressional control contracts” that would allow wagering on the outcome of Congressional elections.  The controversial petition attracted considerable attention, including a comment letter and other materials in staunch opposition from Better Markets.  On September 22, 2023, the CFTC issued its long-awaited decision denying KalshiEx’s application.  The CFTC concluded that it would involve impermissible “gaming,” that it would constitute activity that is unlawful under state law, and that it would be contrary to the public interest.  On November 1, 2023, Kalshi filed suit against the CFTC in the U.S. District Court for the District of Columbia, alleging that the CFTC’s September order exceeds the CFTC’s statutory authority, is contrary to law, and is arbitrary and capricious. Democracy and elections are foundational principles for the country and are not appropriate subjects for gambling and betting. As Better Markets has explained the stakes are high, as the last thing the country needs is another threat to the integrity of our elections.

You can find more cases we’re tracking here.

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