by Cydney Posner

There has been a fair amount of press regarding the Financial CHOICE Act, a new bill sponsored by Jeb Hensarling, Chair of the House Financial Services Committee. The actual bill has not yet been released, but an executive summary is available.  Most of the press attention has been devoted to the sections of the bill targeted at the provisions in Dodd-Frank regarding financial regulation. (For example, the bill would provide an “‘off-ramp’ from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that choose to maintain high levels of capital.”)  Notably, however, there are several other provisions of the bill that have not received much attention; if adopted, these provisions would undo almost the entire repertoire of corporate governance-related and specialized disclosure provisions in Dodd-Frank. But don’t start tossing out your samples, models, controls, files and conflict minerals reporting templates yet.  According to the NYT, the bill “has little chance of passing Congress this year.” And, even if it did, President Obama still holds the veto pen, at least until January. Nevertheless, Speaker Ryan has encouraged his Republican brethren to develop affirmative policies and programs, and, as the NYT suggests, this bill “may influence the presidential debate and help shape the Republican agenda in the next term.”

SideBar: You might enjoy this hysterical June 7 column by Matt Levine in Bloomberg View, complimenting the bill’s author on his “achievement in acronyming”: “Take Representative Jeb Hensarling’s proposal to overturn Dodd-Frank: The Financial Choice Act, which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, builds on longstanding efforts by House Republicans to roll back or repeal major elements of the law….The sheer art of naming something ‘Choice,’ but ‘Choice’ is an acronym that resolves to include ‘Hope’! Imagine if you could create hope by adjusting bank capital requirements. It is daring, inventive, impressive stuff.”

Thanks to our intrepid Government Analytics Practice Group, we have access to an informal summary of the bill indicating that it would, among many other things, do the following:

  • “Repeal specialized public company disclosures for conflict minerals, extractive industries and mine safety (Dodd-Frank Title XV)…. [See this PubCo post, this Cooley Alert and this Cooley Alert]
  • Expand the Sarbanes-Oxley Act Section 404(b) exemption for non-accelerated filers to include issuers with up to $250 million in market capitalization (up from the current threshold of $75 million) or $1 billion in assets for banks (Dodd-Frank Section 989G). [See this PubCo post]
  • Repeal the burdensome mandate that publicly traded companies disclose the ratio of median vs. CEO pay (Dodd-Frank Section 953(b))…. [See this PubCo post]
  • Repeal the SEC’s authority to further restrict the ability to engage in legitimate securities short selling (Dodd-Frank Section 929X)….
  • Amend the mandate on public companies to provide shareholders with a vote on executive compensation to occur only when the company has made a material change to the executive compensation package (Dodd-Frank Section 951). [See this Cooley Alert]
  • In the event of certain financial restatements, hold bad actors responsible by limiting ‘clawbacks’ of compensation to the current or former executive officers of a public company who had control or authority over the company’s financial reporting (Dodd-Frank Section 954). [See this Cooley alert]
  • To reduce the burdens on emerging growth and smaller reporting companies, repeal the reporting requirement for public companies regarding employee or board member hedging of equity securities granted as compensation (Dodd-Frank Section 955). [See this PubCo post]
  • Repeal federal financial regulators’ ability to prohibit types and features of incentive-based compensation arrangements (Dodd-Frank Section 956).
  • Repeal the SEC’s authority to issue rules on proxy access (Dodd-Frank Section 971). [See this Cooley Alert, this News Brief and this News Brief]
  • Repeal the SEC’s authority to issue rules to require disclosures regarding Chairman and CEO structures (Dodd-Frank Section 972).” [See this Cooley Alert]

SideBar: What? Nothing on pay for performance disclosure? Section 953 (See this PubCo post.)

According to the informal summary, the bill would also incorporate several bills that have already passed the House or the Committee, including the following cherry-picked examples:

  • H.R. 1675, the Encouraging Employee Ownership Act (Rep. Hultgren) Amends SEC Rule 701, originally adopted in 1988 under Section 3(b) of the Securities Act of 1933 (Securities Act) and last updated in 1999. The legislation requires the SEC to increase that threshold from $5 million to $10 million and index the amount for inflation every five years.
  • H.R. 1965, the Small Company Disclosure Simplification Act (Rep. Hurt) Provides a voluntary exemption for all Emerging Growth Companies and other issuers with annual gross revenues under $250 million from the SEC requirements to file financial statements in an interactive data format known as eXtensible Business Reporting Language (XBRL)….
  • H.R. 2187, the Fair Investment Opportunities for Professional Experts Act (Rep. Schweikert) Amends the definition of accredited investor under the Securities Act to expand the pool of eligible investors in private securities offerings.
  • H.R. 2357 the Accelerating Access to Capital Act (Rep. Wagner) Amends the SEC’s Form S-3 registration statement (a simplified registration form for companies that have met prior reporting requirements) for smaller reporting companies that have a class of common equity securities listed and registered on a national securities exchange….
  • H.R. 3798, the Due Process Restoration Act (Rep. Garrett) Responds to the increased use of administrative proceedings by the SEC and ensures fairness and protects the due process rights of defendants in SEC enforcement matters….
  • H.R. 4139, the Fostering Innovation Act (Rep. Sinema) Extends the time period in which Emerging Growth Companies must comply with Section 404(b) of the Sarbanes-Oxley Act (SOX). Section 404 requires the management of a company to assess the effectiveness of the company’s internal controls for financial reporting and mandates that a public company’s auditor attest to, and report on, the management’s assessment. The significant compliance costs associated with Section 404(b) disproportionately harm small companies, diverting resources from growth to regulatory costs….
  • H.R. 4852, the Private Placement Improvement Act (Rep. Garrett) Prohibits the SEC from issuing regulations that would frustrate Title II of the JOBS Act, which lifted the ban on general solicitation or advertising for Reg D Rule 506 private offerings….
  • H.R.5311, the Corporate Governance Reform and Transparency Act of 2016 (Rep. Duffy) Defines a proxy advisory firm for purposes of federal securities laws and requires such firms to register with the SEC.
  • H.R. 5421, the National Securities Exchange Regulatory Parity Act of 2016 (Rep. Royce) Amends Section 18 of the Securities Act of 1933 to provide a ‘blue sky’ exemption for any security listed on a ‘national securities exchange’ that is registered with and whose listing standards are approved by the SEC.”

With regard to litigation and SEC enforcement, the informal summary indicates that the bill would “[s]treamline SEC enforcement authorities to ensure that individuals and registered entities receive fair treatment during the course of SEC investigations by:

  • Instituting a formalized/expedited process for closing cases (vs. leaving them open in perpetuity);
  • Establishing an Enforcement Ombudsman to review and evaluate complaints about the Enforcement process and behavior of Enforcement staff;
  • Prohibiting the use of unproven legal theories (i.e., “collective scienter”) to overstep existing legal boundaries;
  • Allowing certain defendants to appear before the SEC Commissioners after receiving a Wells Notice (before Commission votes to bring an action); and
  • Requiring the SEC to approve and publish an updated Enforcement Manual to ensure transparency and uniform application…”

The bill would also

  • “Require the SEC – in connection with voting to approve a civil money penalty against an issuer – to make written findings, supported by an analysis of the Division of Economic and Risk Analysis and certified by the Chief Economist, and which shall be made part of the publicly available order of the Commission, that the alleged violation(s) resulted in direct economic benefit to the issuer and that the penalties imposed do not harm the issuer’s shareholders;
  • Amend federal securities laws to ensure that the SEC has greater discretion in applying certain disqualifications, so as to uncouple automatic disqualifications from enforcement actions and settlements;
  • Consistent with H.R. 3798, the Due Process Restoration Act, provide an immediate right of removal to federal court for respondents in SEC administrative proceedings (Dodd-Frank Section 929P);
  • Eliminate the authority of the SEC to obtain officer and director bars in administrative proceedings; and
  • Require GAO to submit a report to the Committee on Financial Services and the Committee on Banking, Housing and Urban Affairs on the SEC use of its authority to impose or obtain civil monetary penalties for violations of the securities laws beginning on June 1, 2010.”

There are a number of others provisions in the bill related to private placements, crowdfunding and other matters. We have been advised that discussion draft legislative text is expected next week.




Posted by Cydney Posner