It’s baaaack — the Financial CHOICE Act of 2017

by Cydney Posner

A draft of the Financial CHOICE Act of 2017 (fka version 2.0), a bill to create hope and opportunity for investors, consumers, and entrepreneurs — a masterpiece of acronyming — has just been released (and weighs in at 593 pages).   The bill, sponsored by Jeb Hensarling, Chair of the House Financial Services Committee, was framed as a Republican proposal to reform the financial regulatory system and relieve the affliction of Dodd-Frank. In addition to taking aim at much of Dodd-Frank, among other things, the bill places a heavier burden on regulators and proxy advisory firms generally, eliminates a lot of studies and repeals or eases a number of regulations. A hearing in the House has been scheduled for this week. The bill never made much progress when it was originally introduced last year (as version 1.0), but with Congress and the Presidency now in Republican hands, its chances of survival in some form are immensely greater.  Of course, the Senate Dems could filibuster — assuming, that is, that the legislative filibuster survives that long — the Senate version of the bill, or threaten to do so, which could lead to some negotiation.

While the vast majority of provisions in the draft bill relate to the banking provisions of Dodd-Frank and the Consumer Financial Protection Bureau, some are related to new requirements for agency rulemaking, capital formation, compensation and corporate governance matters, and other matters of interest. Selected provisions are summarized below:

PROVISIONS RELATED TO AGENCY RULEMAKING

Sections 311-321. Required Regulatory Analyses.

  • Requires specified federal agencies, including the SEC, to conduct elaborate prescribed cost-benefit analyses (including a quantitative and qualitative assessment of anticipated direct and indirect costs and benefits as compared to a benchmark that assumes the absence of the regulation) before issuing certain notices of proposed or final rulemaking, including data from various commenters (during a 90-day comment period),  an identification and assessment of all available alternatives to the regulation, and at least six other topics. Also prohibits, in the absence of a Congressional waiver, publication of a notice of final rulemaking if the agency determines in its analysis that the quantified costs are greater than the quantified benefits.
  • 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.
  • 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. Establishes a Chief Economists Council to report on costs and benefits of regulations. and
  • Requires the SEC to submit a plan for the PCAOB, SROs and others to become subject to these requirements.

Sections 331-337. Congressional Review. If the agency classifies a rule as “major,” according to specified criteria, requires the agency to comply with a number of procedural steps, including providing specified information. The Comptroller General will then assess the agency’s compliance with procedural steps and whether the rule imposes any new limits or mandates on private-sector activity. To go into effect, the rule would require a joint resolution of Congress, unless the President finds that an emergency requires that it be effective (for 90 days). Notably, the thresholds for “major ruleness” are not high: the rule only has to be likely to result in an annual effect on the economy of $100 million or more; a major increase in costs or prices for consumers, individual industries, agencies or geographic regions; or significant adverse effects on competition, employment, investment, productivity, innovation, or on competition with foreign-based enterprises. Congress would also have the right to disapprove certain non-major rules. None of these determinations is subject to judicial review.

Section 341. Judicial Review of Agency Actions (Chevron Deference). Beginning two years after the date of enactment, in any judicial review of agency action (including action by the SEC) authorized under any provision of law, the meaning or applicability of the terms of an agency action will be determined by the reviewing court, which will decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by the agency.  

SideBar:  This provision seeks 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. Generally, the doctrine established in that case mandates that, if there is ambiguity in the language of 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 released on June 14 last year, 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. SECNational 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.

Sections 382-388. More Statements to Accompany Rules. For rules that include a Federal mandate that may result in an annual effect on State, local or tribal governments or the private sector, in the aggregate of $100,000,000 or more in any one year, requires the agency to prepare more written statements and allow those governments and sectors to provide input into the development of the rule. The agency is also required to identify regulatory alternatives and select the one that is the least costly and burdensome, unless the agency explains why that alternative was not selected.

Section 814. Application of Notice and Comment Requirements to Guidance. Applies the notice and comment requirements of the APA to any SEC “statement or guidance, including interpretive rules, general statements of policy, or rules of Commission organization, procedure, or practice, that has the effect of implementing, interpreting, or prescribing law or policy and that is voted on by the Commission.’’

SideBar: While this provision would probably not apply to most run-of-the-mill guidance, such as CDIs — because the SEC typically does not vote on them — it would apply to guidance on which the SEC does vote.  Past examples would likely have included the Reg S-K concept release (see this PubCo post), the 2010 interpretive release on climate change disclosure  (see this Cooley Alert) and the 2008 guidance regarding the use of company websites (see this News Brief).

 PROVISIONS RELATED TO COMPENSATION, CAPITAL FORMATION AND CORPORATE GOVERNANCE

 Section 406. Increased Threshold for Rule 701 Disclosures.  Requires the SEC, within 60 days after enactment, to raise the Rule 701(e) cap — which, if exceeded, requires certain disclosures — from $5 million to $20 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.

SideBar: Rule 701 provides an exemption for offers and sales under certain compensatory benefit plans and contracts. 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.  This version would raise the ceiling to $20 million.

Sections 411-413. Exemption from XBRL Requirements for Emerging Growth Companies and Other Smaller Companies.    Exempts 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.

SideBar. Interestingly, this possible retrenchment in the use of XBRL (eXtensible Business Reporting Language) comes at the same time as the SEC is proposing to expand its use.  In March, the SEC voted to propose the mandatory use of Inline XBRL for financial statement information. The proposal is intended to facilitate “improvements in the quality and usefulness of XBRL data and, over time, decreas[e] filing costs by decreasing XBRL preparation costs.” Currently, companies are required to provide the financial statements  and schedules accompanying their Exchange Act reports and Securities Act registration statements in “structured,” i.e., machine-readable, format using XBRL, but they provide this XBRL data as an exhibit to their filings and are required to keep it posted on their websites for at least 12 months. Inline XBRL allows data tagging to be embedded directly in the text of an HTML document, eliminating the need for separate exhibits for the XBRL data and, the SEC believes, reducing the likelihood of inconsistencies.  (See this PubCo post.)

Section 426. 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 securities exchange.  Also, removes the requirement that the registrant have a class of common listed on a national securities exchange to be eligible to use General Instruction I.B.6 (limited primarily offering by certain other registrants).

 Section 431.  Certain Accredited Investor Transactions. Modifies the prior FAST Act codification of the 4(a)(1½ ) exemption to allow non-issuer (secondary) transactions so long as each purchaser is an accredited investor and, if offers are made through a general solicitation, all sales are made through a platform available only to accredited investors.

SideBar: Currently, the exemption prohibits any general solicitation and requires that a number of conditions be met, including information requirements and bad actor disqualifications. It also states that the securities would be “restricted securities.” Many of these conditions appear to be eliminated under the new bill.

Section 441. 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 was 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 exceeded $50 million, or the date on which it became a large accelerated filer. (See this PubCo post.)

Sections 451-452. Clarification of General Solicitation. Requires the SEC to amend Reg D to clarify that the prohibition on general solicitation would not apply to certain types of presentations, such as before an angel investor group, trade association or venture capital forum, so long as information about a specific offering is not advertised or, with certain exceptions, communicated and the event sponsor does not provide investment advice or charge for attendance (other than administrative fees).

Section 461. Micro-Offerings. Provides an exemption for micro-offerings of less than $500,000 in a 12-month period sold to no more than 35 purchasers with pre-existing relationships. Also exempt from state regulation as “covered securities.”

Section 466. Revisions to Reg 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 and prohibits the SEC from requiring submission of general solicitation materials unless expressly requested.

Section 477. Exclusion of Crowd-Funding Investors from Shareholder Cap. For purposes of the requirement to register under the Exchange Act,  excludes from definition of “held of record” under Section 12(g)(5) investors who purchased the securities in certain crowdfunding transactions under Securities Act Section 4(a)(6).

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.

Section 482.  Registration of Proxy Advisory Firms. Provides for the registration of proxy advisory firms, including 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 that companies be provided with a reasonable opportunity to comment on the firm’s draft recommendations and that an ombudsman be employed to resolve complaints. 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, proxy votes and vote recommendations where the issuer is not a proponent or where the proxy advisory firm provides advisory services. Also requires the SEC 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.

Section 497. Shareholder Threshold for Registration. For purposes of Exchange Act registration, indexes the asset test for inflation every five years and allows non-bank companies to terminate registration for a class of securities held by fewer than 1,200 persons, an increase from 300 persons.

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. See this PubCo post. The JOBS Act allowed a bank, bank holding company or savings and loan holding company to terminate registration of a class of equity securities under the Exchange Act if the securities were held of record by fewer than 1,200 persons, but left the threshold for termination of non-bank companies at 300 shareholders. (Better bank lobbyists?) This provision treats non-bank companies in the same way.

Section 498. Reg A+ Exemption. Increases the Reg A+ ceiling from $50 million to $75 million annually with an inflation adjustment trigger every two years.

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.

Section 499. Expansion of “Testing the Waters” and Confidential Submissions. Expands provisions of Title I of the JOBS Act to apply more broadly by allowing all companies, not just 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.

Section 843. 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.

SideBar: Currently, companies are required to ask shareholders to vote, on an advisory basis, on how frequently they would like to be able to vote on executive compensation—every one, two or three years.  The overwhelming favorite has been annual voting.

 Sections 844-845. Shareholder Proposals. Requires the SEC to revise the eligibility requirements for shareholder proposals to eliminate the dollar threshold entirely and provide eligibility only where the shareholder holds 1% of company’s voting shares (or a higher threshold if the SEC so determines).  Also increases the required eligibility holding period for shares from one year to three years. In addition, requires the SEC to raise the resubmission thresholds (see the SideBar below) as follows: if proposed once in the last five years, the proposal could be excluded if the vote in favor was less than 6%; if proposed twice and the vote in favor on the last submission was less than 15%; and if proposed three times or more and the vote in favor on the last submission was less than 30%. And prohibits an issuer “from including in its proxy materials a shareholder proposal submitted by a person in such person’s capacity as a proxy, representative, agent, or person otherwise acting on behalf of a shareholder.’’ Notably, John Chevedden a prolific proponent, often handles shareholder proposals on behalf of his associates and interacts with Corp Fin as their representative. 

SideBar: If adopted, this provision could dramatically curtail the use of the shareholder proposal process. (See this PubCo post.) The substantially higher eligibility threshold, which could run to billions of dollars for some larger companies, stands to preclude many currently prolific proponents, such as some pension funds and environmental, social and governance (ESG) activists, from submitting proposals at all. 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%.

Section 845. Universal Ballot. Prohibits 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.

Section 847. 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 $500 million (up from the current threshold of $75 million in public float) and any depository institution with assets of less than $1 billion.

SideBar: Version 1.0 would have amended Section 404(c) of SOX to increase the market cap ceiling to less than $250 million.

Section 849. Restriction on Recovery of Erroneously Awarded Compensation. Modifies 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.”

SideBar:  Dodd-Frank required the SEC to direct the national securities exchanges to adopting listing standards requiring each listed company to develop and implement a policy for recouping executive compensation that was paid on the basis of erroneous financial information, regardless of fault, the theory being that it was compensation to which the executives were never really entitled in the first place. Under Dodd-Frank, the policy would apply in the event the company had to prepare an accounting restatement due to the company’s material noncompliance with any financial reporting requirement under the securities laws. The policy must provide that the company will recover from any current or former executive officer an amount of incentive-based compensation (including options awarded as compensation) equal to the excess, if any, of the amount that was paid to the executive officer, in the three years preceding the date on which the company was required to prepare the restatement, over the amount that would have been paid to the executive officer based on the accurate financial data. The SEC proposed rules in 2015, but they have never been adopted. (See this Cooley Alert.)

 Section 857. 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.  The requirement for disclosure of pay versus performance remains (although, notably, the proposed rules have never been adopted).

SideBar: As you probably recall, the Dodd-Frank pay-ratio provision mandated that the SEC require most public companies to disclose, in a wide range of their SEC filings, the ratio of the median of the annual total compensation of all employees of the company to the annual total compensation of the CEO. Of the non-bank related mandates imposed by Dodd-Frank, the requirement to disclose pay-ratio information was among the provisions that seemed to elicit the greatest ire from the business community. In February, Acting SEC Chair Michael Piwowar issued a statement directing the Corp Fin staff to revisit the pay-ratio disclosure rules, based on his “understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.” However, until action is taken either by the SEC or by Congress and the President, the requirement continues in effect. (See this Cooley Alert, this PubCo post and this PubCo post.)

The rules requiring proxy statement disclosure of whether employees or directors are permitted to hedge equity securities of the company were proposed but never adopted. (See this PubCo post.) Rules requiring disclosure of board leadership structure — that is, the reasons why the issuer has chosen one person to serve in the combined roles of CEO and board chair or two different persons to serve in those roles — were already in place prior to Dodd-Frank.

And, of course, the SEC has never taken advantage of Dodd-Frank’s express authorization to adopt mandatory proxy access rules, instead leaving the decision regarding proxy access to each individual company and its shareholders. Following the failed efforts by the SEC at instituting proxy access in 2003 and 2007, the SEC finally adopted mandatory proxy access rules in 2010, but, when challenged in court, the rules went down in flames, as the court concluded that the SEC had acted “arbitrarily and capriciously” in issuing the rule when it failed to provide an adequate cost/benefit analysis. Instead of reproposing new proxy access rules, the SEC implemented changes to Rule 14a-8 to allow shareholder proposals for proxy access to go forward, in effect permitting each company and its shareholders to make the decision on proxy access — and the applicable standards for proxy access — on an individual basis (so-called “private ordering”). (See this Cooley Alertthis PubCo post and this PubCo post.)

Section 860. Definition of Accredited Investor.  Amends the definition of “accredited investor” in the Securities 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.

Section 862. Repeals. Repeals the “specialized disclosure” provisions of Dodd-Frank, including Section 1502, conflict minerals (even as the European Parliament has just approved new conflict minerals rules for the EU (see this PubCo post)); Section 1503, mine safety disclosure; and Section 1504, disclosure of payments by resource extraction issuers.

SideBar: Originally adopted in 2012 at the same time as the conflict minerals rules, the resource extraction rules have had a long and troubled history. Following adoption, the rules were vacated, in a fairly scathing opinion, by the U.S. District Court, contending that the SEC had fundamentally “misread” the requirements of the statute and, once again, was “arbitrary and capricious.” The SEC declined to appeal the ruling, accepting the conclusion that it would need to rewrite the rules.  The final Resource Extraction Disclosure Rules were not adopted until June 27, 2016. Then, in February of this year, a bill was signed into law tossing out the SEC’s resource extraction payment disclosure rules. The bill relied on the rarely used Congressional Review Act, under which any rules that became final after May 31, 2016, could be jettisoned by a simple majority vote in Congress and a Presidential signature.  However,  this article in the WSJ indicates that, in the absence of repeal of the Dodd-Frank mandate, the SEC has a year to issue a new rule on the same topic because the regulation was mandated by Congressional statute. (See this PubCo post and this PubCo post.)

SideBar: The discussion regarding conflict minerals accompanying CHOICE 1.0 provided by the Republican House proponents argued 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 contended 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 had no benefit for the region.  See, for example, this PubCo post and this PubCo post reporting on testimony before a recent Senate Subcommittee hearing.)

Earlier this month, the D.C. District Court entered final judgment in National Association of Manufacturers v. SEC, holding that Section 1502 of Dodd-Frank and Rule 13p-1 and Form SD, Conflict Minerals, violate the First Amendment to the extent that the statute and the rule require regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’”  (For background on the case, see this PubCo post.)  In light of the entry of final judgment, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule, which provides that companies will not face enforcement if they perform only a reasonable country-of-origin inquiry, file only a Form SD and do not conduct detailed supply-chain due diligence or prepare and file a conflict minerals report (Item 1.01(c) of Form SD) or have an audit performed — even if they would otherwise be required to do so under the rule. In a separate Statement, Acting SEC Chair Michael Piwowar commented that the “primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional. In light of the foregoing regulatory uncertainties, until these issues are resolved, it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.” (See this PubCo post.)

SEC PENALTIES

Section 211-216. SEC Penalties Modernization. Increases civil money penalties for various securities law violations, including for controlling persons in connection with insider trading, and provides that monetary sanctions should be used for relief of victims. 

Section 824. Certain Findings Required to Approve Civil Money Penalties. Prohibits the imposition by the SEC of civil penalties unless the text of the order contains findings, supported by a DERA analysis certified by the Chief Economist, of whether the violation resulted in direct economic benefit to the issuer and whether the penalty will harm the issuer’s shareholders.

Section 825. Repeal of SEC Authority to Impose Officer and Director Bars. Repeals SEC authority to impose officer and director bars in cease-and-desist proceedings under Section 8A of the Securities Act and Section 21C of the Exchange Act. 

Section 828. Denial of Award to Culpable Whistleblowers.  Prohibits awards to any whistleblower who is responsible for, or complicit in, the securities law violation about which the whistleblower provided information.

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