by Cydney Posner
A just-released memo (subscription required) from Jeb Hensarling, Chair of the House Financial Services Committee, to the Committee’s Leadership Team outlines the proposed changes from the original Financial CHOICE Act, introduced last year (see this PubCo post), to be included in the Financial CHOICE Act 2.0. Of course, we won’t know precisely what the bill provides until it is actually made public. While the vast majority of proposed changes identified in the memo relate to the banking provisions and the Consumer Financial Protection Bureau, some are related to compensation and corporate governance matters, such as the following:
- Modernize the shareholder proposal and resubmission thresholds for inflation.
SideBar: Currently, to be eligible to submit a shareholder proposal, the shareholder must have continuously held, for at least one year, company shares with a market value of at least $2,000 or 1% of the voting securities. With regard to resubmission, shareholder proposals that deal with substantially the same subject matter as proposals that have been included in the company’s proxy materials within the past five years may be excluded from proxy materials for an upcoming meeting (within three years of the last submission to a vote of the shareholders) if they did not achieve certain voting thresholds, which vary depending on the number of times previously submitted: if proposed once in the last five years, the proposal may be excluded if the vote in favor was less than 3%; if proposed twice and the vote in favor on the last submission was less than 6%; and if proposed three times or more and the vote in favor on the last submission was less than 10%.
- Raise the SOX 404(b) internal control audit threshold from $250 million to $500 million.
SideBar: Version 1.0 would have amended 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. Version 2.0 would raise the threshold to $500 million.
- Require the SEC Chair to report within one year on eliminating duplication and inefficiencies among the various SROs.
- Prohibit the SEC from promulgating a rule to require the use of “universal proxies.”
SideBar: A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of dissident and management nominees using a single proxy card. The SEC issued a proposal in October last year that would mandate the use of universal proxies in all non-exempt contested elections. Currently, in contested director elections, shareholders can choose from both slates of nominees only if they attend the meeting in person. Otherwise, they are required to choose an entire slate from one side or the other. (Dissidents’ “short slates” allow shareholders to select company nominees to round out the short slates, but again, shareholders are then forced to choose between the two complete slates.) See this PubCo post and this PubCo post.
- Delay the repeal of the “Chevron deference” doctrine for two years.
SideBar: “Chevron deference” refers 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. Generally, the doctrine established in that case mandated 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. Version 1.0 provided that, 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. It appears that Version 2.0 would delay that repeal by two years. See this PubCo post.
- Modernize the Section 12(g) registration requirements for smaller companies, including increasing the revenue/shareholder thresholds, indexing the revenue test for inflation and eliminating annual verification of accredited investor status.
SideBar: Currently, under Section 12(g)(1) of the Exchange Act, companies must register if they have over $10 million in assets and either at least 2,000 holders of record of equity securities (excluding, among other things, securities held by persons who received them in exempt employee compensation plan transactions) or 500 holders of record that are not accredited investors. The Reg D definition of “accredited investor” applies to determinations of accredited investor status, which must be determined as of the last day of the fiscal year, rather than at the time of the sale of the securities. See this PubCo post.
- Increase the Rule 701 cap from $10 million to $20 million with an inflation adjustment trigger.
SideBar: 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. Under Version 1.0, the SEC would have been required 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. Version 2.0 would raise that cap from $10 million to $20 million.
- Expand provisions of Title I of the JOBS Act to apply more broadly by allowing all companies, not just emerging growth companies (EGCs), to “test the waters” and file IPO registration statements with the SEC on a confidential basis.
SideBar: The JOBS Act relaxed the “gun-jumping” restrictions for EGCs by permitting them (and any person acting on their behalf) to engage in pre-filing communications with qualified institutional buyers (QIBs) and institutional accredited investors. The JOBS Act also permitted EGCs to initiate the IPO process by submitting their IPO registration statements confidentially to the SEC for nonpublic review by the SEC staff, allowing an EGC to defer the public disclosure of sensitive or competitive information until it is almost ready to market the offering—and potentially to avoid the public disclosure altogether if it ultimately decides not to proceed with the offering. See this Cooley Alert.
- Increase the Reg A+ ceiling from $50 million to $75 million annually with an inflation adjustment trigger.
SideBar: Currently, the Tier 2 ceiling under Reg A+ is $50 million (with up to $15 million by affiliate selling shareholders). Enhanced investor protection requirements apply. See this PubCo post.
Assuming the memo correctly identifies the universe of proposed changes in Version 2.0, perhaps we can infer that the CHOICE Act would continue to include provisions repealing a number of Dodd-Frank provisions, including pay-ratio disclosure, employee and director hedging disclosure, board leadership structure disclosure and the authorization of the SEC to adopt proxy access rules, as well as specialized disclosures such as conflict minerals, mine safety and payments by resource extraction issuers. (Although Congress has taken action under the Congressional Review Act to rescind the rules requiring disclosure of payments by resource extraction issuers, elimination of the mandate itself would ultimately still require repeal of the statute. See this PubCo post.) Also apparently untouched in Version 2.0 are the requirement to solicit 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,” the elimination of the say-on-frequency vote, and the change making the Dodd-Frank no-fault clawback for erroneously awarded compensation applicable only where the “executive officer had control or authority over the financial reporting that resulted in the accounting restatement.” To be sure, even if Version 2.0 were to pass in the House, in the Senate, where a filibuster is possible, it may not pass unscathed. There has been a suggestion, however, that some aspects of the bill might be passed under “reconciliation,” which requires only a majority vote but is available only for matters with budget implications.