SEC Chair Jay Clayton has streamlined the Regulatory Flexibility Act Agenda to limit it to the rulemakings that the SEC actually expects to take up in the subsequent period. Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually plans to pursue in the following 12 months. (See this PubCo post and this PubCo post.) The SEC’s Fall 2019 short-term and long-term agendas have now been posted, reflecting priorities as of August 7, the date on which the SEC’s staff completed compilation of the data. Items on the short- and long-term agendas are discussed below.
On the short-term agenda:
- Listing Standards for Recovery of Erroneously Awarded Compensation—The SEC proposed rules to implement the clawback provisions of Section 954 of Dodd-Frank…in 2015. Section 954 required the SEC to direct the national securities exchanges to adopt 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, the theory being that it is 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. So much for legislative mandates. This rule proposal has consistently been relegated to the long-term agenda, until this fall, when it was finally moved up to the short-term agenda. (See this PubCo post.)
- Amendments to Certain Provisions of the Auditor Independence Rules—The Office of the Chief Accountant is considering recommending that the SEC propose amendments to update certain auditor independence rules to “facilitate capital formation, in a manner consistent with investor protection.” While it’s not entirely clear what is contemplated, Chief Accountant Sagar Teotia has recently remarked that, in connection with the recent adoption of auditor independence amendments related to lending relationships, the SEC “also received comments on other aspects of auditor independence rules. In conjunction with that feedback, the Chairman directed the staff to formulate recommendations to the Commission for possible additional changes to the auditor independence rules for potential rulemaking. We are making significant progress on providing these recommendations….” These amendments are identified as being in the “proposed rule” stage.
- Modernization and Simplification of Disclosures Regarding Description of Business, Legal Proceedings and Risk Factors—In August, the SEC proposed amendments to modernize the descriptions of business, legal proceedings and risk factors in Reg S-K. The proposal is another component of the SEC’s “Disclosure Effectiveness Initiative.” In crafting the proposal, the SEC took into account comments received on the 2016 Concept Release on disclosure simplification and modernization (see this PubCo post), as well as Corp Fin staff experience in review of disclosures. (See this PubCo post.)
- Filing Fee Processing—Corp Fin has proposed modernizing filing fee disclosure and payment methods, which are currently manual and labor-intensive. The proposal would amend almost everything—“most fee-bearing forms, schedules, statements, and related rules”—to require each fee table and accompanying explanatory notes (which would be expanded by the proposal) to include “all required information for fee calculation in a structured format.” (See this PubCo post.)
- Disclosure of Payments by Resource Extraction Issuers—These rules were supposed to have been adopted, following disapproval under the Congressional Review Act, by February 2018, but obviously, that didn’t happen. So we’ll have to see what Corp Fin has in mind here. You might recall that the resource extraction rules, mandated under Dodd-Frank, have had a long and troubled history. Originally adopted in 2012 at the same time as the conflict minerals rules, the resource extraction rules faced an immediate challenge and, in a fairly scathing opinion, were vacated by the U.S. District Court. New rules were again adopted, but were subsequently tossed out under the CRA. (See this PubCo post and this PubCo post.)
- Harmonization of Exempt Offerings—The SEC has issued a concept release seeking public comment on ways to harmonize and streamline the patchwork universe of private placement exemptions, and the Corp Fin staff is considering recommending that the SEC propose related rule amendments. The objective would be a system that is better suited to the business life cycle of companies. As part of its efforts, the staff is looking at whether it still makes sense to retain the accredited investor definition as it currently stands—as a binary test, in which, if you do not exceed the threshold, you cannot participate at all, but if you do exceed the threshold, you can participate to any extent in the transaction. Alternatively, it might be more appropriate to scale the level of investment permitted relative to the wealth of individual. (See this PubCo post.)
- Accredited Investor Definition—Corp Fin may recommend amending the definition of “accredited investor” under Reg D. Note the SEC would probably take up revisions to the definition as part of a future proposal to harmonize the private placement exemptions. As discussed above, the staff is looking at whether to revise the current binary definition in favor of a more complex, but nuanced definition. (See this PubCo post.)
- Amendments to Rule 701/Form S-8—Corp Fin may recommend amendments to Rule 701, the exemption from registration for securities issued by privately held companies pursuant to compensatory arrangements, and Form S-8, the registration statement for compensatory offerings by reporting companies. In July last year, the SEC issued a new Concept Release requesting public comment on ways to modernize Rule 701 and Form S-8, including whether and how to modify the rules in light of the “gig” economy and evolving worker-company relationships. (See this PubCo post and this Cooley Alert.)
- Earnings Releases/Quarterly Reports—In December 2018, the SEC posted a “request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies.” As Chair Clayton noted, the request highlighted questions regarding “mandated quarterly reporting and the prevalence of optional quarterly guidance. The request also asked for comments on whether and how our reporting system may be causing companies to disproportionally focus their time and resources on short-term results.” (See this PubCo post.) This Corp Fin item may be contemplating a proposal arising out of the Request and the roundtable on the “impact of short-termism on our capital markets and whether our reporting system, or other aspects of our regulations, should be modified to address these concerns.” (See this PubCo post.) The proposed amendments would be designed to “ease companies’ compliance burdens while maintaining appropriate levels of disclosure and investor protection.”
- Modernization and Simplification of Disclosures Regarding MD&A, Selected Financial Data and Supplementary Financial Information—Corp Fin may recommend amendments to modernize and simplify disclosures regarding MD&A, Selected Financial Data and Supplementary Financial Information. Although it’s not entirely clear, this proposal may perhaps also arise out of the 2016 Concept Release. That Release asked whether the selecteds or quarterlies add anything to the mix or should they be limited or eliminated? While no one was suggesting that MD&A be eliminated, the SEC wondered if there was a way to “encourage” registrants to do more than just recite the amounts of changes from year to year, which are readily computable from their financial statements, instructions to the contrary notwithstanding? Should a high-level executive overview be required that is not just duplicative, but addresses the most important themes, opportunities and challenges? Should disclosure be required regarding management’s significant judgments and assumptions underlying its use of critical accounting estimates? (See this PubCo post.)
- Rule 14a-8 Amendments—Corp Fin has proposed amendments to Rule 14a-8 to “modernize” the shareholder proposal rules by modifying the criteria for eligibility and resubmission of shareholder proposals; providing that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; and facilitating engagement with the proponent. (See this PubCo post.)
- Rule 14a-2(b)—The SEC has proposed amendments to address proxy advisory firms’ reliance on the proxy solicitation exemptions in Rule 14a-2(b). The proposal would, among other things, codify the SEC’s interpretation of “solicitation” and condition the exemptions from “solicitation” in Rule 14a-2(b) on disclosure by proxy advisory firms of conflicts of interest and implementation of a review-and-feedback process for companies regarding the firms’ proxy voting advice. (See this PubCo post.)
- Amendments to Financial Disclosures About Acquired Businesses—The SEC has proposed amendments to Reg S-X (Rule 3-05 and Article 11) intended to improve the disclosure requirements for financial statements relating to acquisitions and dispositions of businesses. This proposal is described as being in the “final rule stage.” (See this PubCo post.)
- Amendments to the Financial Disclosures for Registered Debt Security Offerings—The SEC has proposed amendments to Reg S-X (Rule 3-05) that affect the disclosure of financial information about guarantors and issuers of guaranteed securities and affiliates the securities of which collateralize a registrant’s securities. This proposal is also described as being in the “final rule stage.”
- Accelerated Filer Definition—The SEC has proposed changes to the “accelerated filer” definition in Rule 12b-2 that would have the effect of reducing the number of companies subject to the SOX 404(b) auditor attestation requirement. The proposal provides a narrow carve-out from these definitions for companies that qualify as smaller reporting companies and reported less than $100 million in annual revenues in the most recent fiscal year for which audited financial statements were available. For those anxious to see this proposal implemented, it is described as being in the “final rule stage.” (See this PubCo post.)
- Amendments to the Commission’s Whistleblower Program Rules—Still in the “final rule stage” are proposed amendments to the SEC’s whistleblower rules. The proposal is intended to improve the program by increasing efficiencies and providing more tools and more flexibility to the SEC, enabling the SEC to adjust, within certain limitations, the amounts payable as awards under the program. The amendments also modify the requirements for anti-retaliation protection to conform to SCOTUS’s recent decision in Digital Realty v. Somers(discussed in this PubCo post). (See this PubCo post.)
On the long-term agenda:
- Pay Versus Performance—Another oldie but goodie, these rules were also proposed in 2015 to implement Section 953(a) of Dodd-Frank, which required companies to disclose executive pay for performance. The proposal would amend Reg S-K Section 402 to add Section (v), which would require tabular disclosure of compensation “actually paid” to the principal executive officer and an average of the compensation actually paid to the other named executive officers for a phased-in five-year period. The new section would also require companies to describe, in narrative or graphic form or both, the relationship of the compensation actually paid to the company’s financial performance as reflected in its TSR and to describe the relationship of the company’s TSR to the TSR of a peer group. (See this PubCo post.)
- Universal Proxy—It may sound anodyne, but it’s still quite a hot potato. 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. In the absence of universal proxy, in contested director elections, shareholders can choose from both slates of nominees only if they attend the meeting in person. In 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections. And there it sat. And, notwithstanding development of something of a consensus at a 2018 meeting of the SEC’s Investor Advisory Committee that there could well be value in universal proxy cards (even though concerns remained that it could favor one party over the other), it continues to sit on the long-term agenda. (See this PubCo post.) However, I thought I heard Chair Clayton comment that he fully intended to take up the issue (along with a proxy process rulemaking).
- Corporate Board Diversity—Corp Fin may recommend amendments to the proxy rules to require additional disclosure about the diversity of board members and nominees. This idea was championed by former SEC Chair Mary Jo White, who announced in 2016 that the Corp Fin staff was preparing a proposal to require “more meaningful” disclosure in proxy statements about board members and nominees where the directors elect to report that information. The current rule, she believed, just did not cut it: “[o]ur lens of board diversity disclosure needs to be re-focused in order to better serve and inform investors.” (See this PubCo post.) However, the proposal never seems to have materialized—at least not in public. In 2019, Corp Fin posted this CDI on board diversity disclosure. (See this PubCo post.)
- Conflict Minerals Amendments—Way too long a saga to go through here. But know that the federal courts held that the statute and rules violated the First Amendment to the extent they required companies to report that any of their products “have not been found to be ‘DRC conflict free.’” (For background on the case, see this PubCo post.) Corp Fin guidance issued in 2014, and currently in effect, requires companies to make the mandated filing without including a statement as to the conflict-free status of the products that could be deemed to violate the First Amendment. (See this PubCo post.) In 2017, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule, which provided that Corp Fin would not recommend that companies face enforcement if they filed only a Form SD and did not prepare and file a conflict minerals report. (See this PubCo post.) Nevertheless, companies have continued to file CMRs at about the same rate as prior to the Updated Statement. As a long-term item, Corp Fin is considering recommending rules that would address the effect of the court decision.
- Mandated Electronic Filings—Corp Fin may recommend amendments to Reg S-T that would mandate additional electronic filings.
- Proxy Process Amendments—Corp Fin may recommend amendments to the proxy rules to address some of the proxy plumbing issues—particularly the current byzantine system of share ownership and intermediaries that has accreted over time. Proxy plumbing was discussed at length at the proxy process roundtable. It is unlikely that the proposal would reinvent the system, but may very well address some of the low-hanging fruit. (See this PubCo post.)