by Cydney Posner
A discussion draft for the Financial CHOICE Act is now publicly available. Many of the provisions of interest from a corporate standpoint are in Title IV—Capital Markets Improvements and Title X—Unleashing Opportunities for Small Business, Innovators, and Job Creators by Facilitating Capital Formation. (It doesn’t exactly unleash opportunities for any acronyming.)
In the discussion accompanying the bill prepared by the House Financial Services Committee, the draft bill is framed as a Republican Proposal to Reform the Financial Regulatory System that is necessary to undo the burdens of Dodd-Frank: “Unfortunately, the Dodd-Frank Act’s answer to the financial crisis was to burden the SEC with myriad responsibilities, many of which were unrelated to its statutory mission. Former SEC Commissioner Daniel Gallagher has pointed out that these additional Dodd-Frank-imposed mandates prevent the SEC from engaging in ‘basic ‘blocking and tackling,’ the fundamentals of our regulatory mission stemming from our threefold statutory mission.’ Because these extraneous responsibilities make it harder for the SEC to meet its statutory responsibilities, Congress has the responsibility to either amend or repeal the provisions in the Dodd-Frank Act that not only divert the SEC from its statutory mission but also force the SEC to expend valuable resources on activities that do not benefit capital markets or investors.”
The proposal also takes particular aim at regulatory agencies: “In far too many instances in recent years, federal courts have refused to fulfill their Constitutional responsibility to interpret and apply the laws as Congress has written them, contributing to the unchecked expansion of federal agencies’ powers….This is why Congress must eliminate the Chevron doctrine [see below] and hold the judicial branch to its Constitutional responsibilities. Unelected bureaucrats now decide what and who they can regulate, and how to regulate, with only the flimsiest of limitations on how far they can go in stretching and torturing the meaning of the laws written by Congress. The courts and Congress must begin holding them accountable again.”
As noted in this PubCo post. the NYT forecasts “little chance” of passage this year, but suggests that the bill “may influence the presidential debate and help shape the Republican agenda in the next term.”
Select provisions are summarized below:
SEC. 443. FREQUENCY OF SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION. Amends the Exchange Act to require say-on-pay votes only in those years “in which there has been a material change to the compensation of executives of an issuer from the previous year.” Eliminates the say-on-frequency vote.
SEC. 445. SMALL ISSUER EXEMPTION FROM INTERNAL CONTROL EVALUATION. Amends Section 404(c) of SOX to exempt from SOX 404(b) (the requirement to have an auditor attestation and report on management’s assessment of internal control over financial reporting) any issuer with a total market cap of less than $250 million (up from the current threshold of $75 million in public float) and any depository institution with assets of less than $1 billion.
SEC. 447. RESTRICTION ON RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION. Amends the Exchange Act to change the Dodd-Frank no-fault clawback for erroneously awarded compensation to apply only where the “executive officer had control or authority over the financial reporting that resulted in the accounting restatement.”
SEC. 449. REPEALS. Repeals a slew of Dodd-Frank provisions, including pay-ratio disclosure, employee and director hedging disclosure, the authorization of the SEC to adopt proxy access rules and board leadership structure disclosures.
SEC. 452. DEFINITION OF ACCREDITED INVESTOR. Amends the definition of “accredited investor” in the 1933 Act to include the Reg D income and net worth tests (including the exception for primary residence/mortgage) for natural persons, and to provide for inflation adjustments to the specified thresholds every five years. Also includes as accredited investors licensed or registered brokers and investment advisers.
SEC. 455. REPEAL. Repeals another slew of Dodd-Frank provisions, including Section 1502, conflict minerals; Section 1503, mine safety disclosure; and Section 1504, disclosure of payments by resource extraction issuers.
SideBar: The discussion accompanying the bill provided by the Republican House proponents argues that “[s]ince 2010, the SEC has devoted thousands of man-hours and millions of dollars to finish rules mandated by the Dodd-Frank Act that neither address the causes of the financial crises nor advance the SEC’s statutory mission. For example, rather than devote time and resources to rules that would protect investors or facilitate capital formation, the SEC has instead focused its efforts on rules to require public companies to make confusing and immaterial disclosures relating to, for example, conflict minerals, resource extraction, and CEO pay ratios. The Dodd-Frank Act has accelerated a troubling trend in which the securities laws have been hijacked by those more interested in scoring political points than enhancing capital markets or investor protection….As an initial matter, Dodd-Frank’s conflict minerals provisions are explicitly designed to achieve foreign policy objectives, and bear no relation to the underlying purpose of the securities laws, which is to protect investors by providing them with information that is material to their investment decisions, and promote the formation of capital. Indeed, by imposing enormous compliance costs on public companies, Section 1502 impedes the ability of those firms to innovate, grow, and create jobs, while at the same time lowering the returns they can offer their investors.” The bill’s proponents also contend that the law has actually been harmful to the region: “Section 1502’s constitutional and procedural deficiencies have been compounded by the damage it has done to the citizens of Central Africa, the very region it purports to help. Critics, many from the region itself, argue that Section 1502 has led to a de facto embargo on the region’s minerals, further impoverishing Africans while leaving local militias unaffected….In addition to the harm inflicted on Africans, research has shown that the SEC’s rule has not illuminated companies’ sourcing of conflict minerals to any meaningful degree. According to the GAO, initial company disclosures revealed little: 67 percent of companies reported not being able to determine their minerals’ country of origin, and another 3 percent did not provide a clear determination. No company in GAO’s sample could determine whether its minerals financed armed groups.” (Note that not everyone agrees that the rules have harmed the region. See, for example, this PubCo post.)
SEC. 612. REQUIRED REGULATORY ANALYSIS. Requires specified federal agencies, including the SEC, to conduct an elaborate prescribed cost-benefit analysis before issuing certain notices of proposed or final rulemaking, including data from various commenters (during a 90-day comment period), and prohibits publication of a notice of final rulemaking if the agency, in its analysis, determines that the quantified costs are greater than the quantified benefits. Requires the SEC to develop plans to subject the PCAOB and the exchanges to these requirements.
SoapBox: Of course, it’s unclear how this provision would apply if Congress mandates that the SEC adopt rules, but there are no clearly quantifiable benefits. Think, e.g., conflict minerals.
SEC. 616. RETROSPECTIVE REVIEW OF EXISTING RULES. One year after adoption, and every five years thereafter, the agencies, including the SEC, would be required to review rules adopted to see if they could be made more effective or less burdensome in achieving the regulatory objectives.
SEC. 617. JUDICIAL REVIEW. During the first year after adoption, an aggrieved person could bring an action for judicial review of the rule, and the court could stay effectiveness of the rule.
SEC. 631. CONGRESSIONAL REVIEW. If the agency classified a rule as “major,” according to specified criteria, the rule would require a joint resolution of Congress to go into effect, unless the President finds that an emergency requires that it be effective (for 90 days). Congress would also have the right to disapprove certain non-major rules.
SEC. 641. SCOPE OF JUDICIAL REVIEW OF AGENCY ACTIONS. In any action for judicial review of agency action (including action by the SEC) authorized under any provision of law, the reviewing court shall determine the meaning or applicability of the terms of an agency action and decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by an agency.
SideBar: This provision appears to represent an effort to repeal by statute the so-called “Chevron doctrine.” That is a reference to the well-worn two-step test for determining whether deference should be accorded to federal administrative agency actions interpreting a statute, first articulated by SCOTUS in 1984 in Chevron v. Natural Resources Defense Council. The discussion accompanying the draft bill describes the doctrine established in that case as mandating that, if there is ambiguity in how to interpret a statute, courts must accept an agency’s interpretation of a law unless it is arbitrary or manifestly contrary to the statute. For example, in a decision just released on June 14, Monica Lindeen v. SEC, the D.C. Circuit applied Chevron to uphold the SEC’s rules adopted under Reg A+ against a challenge by two state securities regulators. And, as another example, the D.C. District Court applied Chevron in initially upholding the SEC’s conflict minerals rules in 2013 in Nat’l Ass’n of Mfrs. v. SEC. National Association of Manufacturers v SEC, which was subsequently reversed on other grounds. If adopted, this type of provision could facilitate the types of regulatory challenges frequently mounted by the U.S. Chamber of Commerce, Business Roundtable and others.
SEC. 801. ENHANCEMENT OF CIVIL PENALTIES FOR SECURITIES LAWS VIOLATIONS et seq. Increases the penalties for a number of violations.
SEC. 1006. INCREASED THRESHOLD FOR DISCLOSURES RELATING TO COMPENSATORY BENEFIT PLANS. Generally, Rule 701(e) requires an issuer to provide certain disclosures to an investor if the aggregate sales price or amount of securities sold under the Rule during any consecutive 12-month period exceeds $5 million. This provision would require the SEC, within 60 days after enactment (yeah right!), to raise the Rule 701(e) cap from $5 million to $10 million, indexed for inflation every five years to reflect the change in the Consumer Price Index for All Urban Consumers, rounding to the nearest $1 million.
SEC. 1011. EXEMPTION FROM XBRL REQUIREMENTS FOR EMERGING GROWTH COMPANIES AND OTHER SMALLER COMPANIES. Exempts emerging growth companies (EGCs) from the requirement to use XBRL for financial statements and periodic reports, although EGCs may elect to use it. Also exempts companies with total annual gross revenues of less than $250 million until five years after the date of enactment or two years after a determination by the SEC, after conducting a detailed cost/benefit analysis as prescribed in the bill, that the benefits of the requirements to issuers outweigh the costs, but no earlier than three years after enactment. Also requires the SEC, within 60 days, to revise its rules to reflect these exemptions and to report to Congress in a year.
SEC. 1026. EXPANDED ELIGIBILITY FOR USE OF FORM S–3. Requires the SEC, within 45 days after the date of the enactment, to revise Form S–3 to permit securities to be registered under General Instruction I.B.1. (primary offerings by certain registrants) if the registrant has either at least $75 million in market value of common equity held by non-affiliates or a class of common listed on a national exchange. Also, removes the requirement that the registrant have a class of common listed on a national exchange to be eligible to use General Instruction I.B.6. (limited primarily offering by certain other registrants).
SEC. 1041. TEMPORARY EXEMPTION FOR LOW-REVENUE ISSUERS. The JOBS Act exempted EGCs from the requirement in SOX 404(b) to have an auditor attestation and report on management’s assessment of internal control over financial reporting. (Note, however, that management’s annual report on internal control is still required.) This provision would extend that exemption for an additional five years for any issuer that ceased to be an EGC on the last day of the fiscal year after the fifth anniversary of its IPO, had average annual gross revenues of less than $50 million as of its most recently completed fiscal year, and is not a large accelerated filer. The issuer would become ineligible for the exemption at the earliest of the last day of its fiscal year following the tenth anniversary of its IPO, the last day of its fiscal year when its average annual gross revenues exceed $50 million, or the date on which it becomes a large accelerated filer. (See this PubCo post.)
SEC. 1066. REVISIONS TO SEC REGULATION D. Requires the SEC to reduce the need to file multiple Forms D under Rule 506. Prevents the SEC from conditioning the availability of any exemption under Rule 506 on filing of a Form D.
SEC. 1082. REGISTRATION OF PROXY ADVISORY FIRMS. Provides for the registration of proxy advisory firms, which could include disclosure of information regarding the firms’ adequacy of internal resources, codes of ethics, conflicts of interest and related policies to address and manage conflicts. Requires the SEC to issue rules to prohibit, or require the management and disclosure of, any conflicts of interest relating to the offering of proxy advisory services, such as those that may arise out of compensation by clients, the provision of consulting services or business relationships or personal interests with clients, transparency around the formulation of proxy voting policies, the execution of proxy votes and making vote recommendations where the issuer is not a proponent or where the proxy advisory firm provides advisory services. The SEC is also required to issue rules prohibiting conduct such as conditioning or modifying a vote recommendation based on the purchase of services or products. Requires annual reporting by registered proxy advisory firms. Precludes a private right of action. Directs the SEC staff to withdraw two no-action letters related to the circumstances under which a proxy voting firm could be an independent third party for purposes of making proxy voting recommendations for an investment adviser’s clients.