On November 14, 2023, the U.S. Securities and Exchange Commission (SEC), with two Commissioners dissenting, announced settled charges against Charter Communications Inc. (Charter) for violating internal accounting controls requirements relating to its share repurchase programs. Charter will pay a $25 million penalty to settle the SEC’s claims.
The SEC’s order alleged that when Charter’s board authorized the repurchases, the authorizations were predicated on the company’s use of trading plans that conform to Rule 10b5-1. However, the SEC concluded that from 2017 to 2021, many of Charter’s trading plans did not meet the requirements of Rule 10b5-1 because the plans contained “accordion” provisions that allowed the company to retain discretion over the amount and timing of share repurchases taking place. For example, the amount of share repurchases under the plans would increase if the company elected to complete certain debt offerings, and the company retained discretion over whether and when to conduct such offerings. The SEC alleged that these provisions were inconsistent with the requirements of Rule 10b5-1 and, consequently, inconsistent with the board’s authorizations.
Although Charter had internal accounting controls in place designed to obtain share repurchase authorization from the board, to stay within the board’s financial parameters and guidelines, and to confirm that its share repurchases were accurately reflected in its accounts and ledgers, the SEC claimed that the company did not have “a reasonable process to ensure that its trading plans were adequately reviewed for conformity with the requirements of Rule 10b5-1 prior to adoption.”
This enforcement action focused on insufficient internal accounting controls, but is part of a recent series of actions where the SEC has settled charges relating to deficiencies in other types of company controls, including internal controls over financial reporting (see here) and disclosure controls and procedures (see here). The dissent by Commissioners Peirce and Uyeda focused on this point, stating:
The fundamental flaw in the Order is its failure to distinguish between internal accounting controls and other types of internal controls. . . . Controls designed to answer a legal question—compliance with the regulatory conditions necessary to qualify for an affirmative defense—are simply not internal accounting controls within [the] scope [of the federal securities laws].
Share repurchase programs may be under increased scrutiny as the SEC’s new share repurchase disclosure rules come into effect early next year. Companies should evaluate their internal controls over any share repurchases and ensure that the controls provide reasonable assurances that the repurchases are executed within the parameters set forth in the board’s authorization. These could include legal and accounting concepts, such as:
- Aggregate repurchase limits (which could be dollar or share limits)
- Maximum repurchase price, if any
- Surplus requirements pursuant to the Delaware General Corporations Law Sections 154 and 160 and related solvency concerns
- Rule 10b-18 and Rule 10b5-1 requirements, if applicable
 In an opinion issued on October 31, 2023, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit found that the SEC acted “arbitrarily and capriciously” in adopting the share repurchase disclosure rule, remanded the rule, and directed the SEC to correct the defects in the rule within 30 days (i.e., November 30, 2023). See our previous post, Share Repurchase Rules: Fifth Circuit Directs SEC to Correct Defects, for more information.