You might remember that the first piece of legislation signed into law by the then-new (now outgoing) administration in 2017 was, according to the Washington Post, a bill that relied on the Congressional Review Act to dispense with the resource extraction payment disclosure rules. (See this PubCo post.) Under the CRA, any rules that were recently finalized by the executive branch and sent to Congress could be jettisoned by a simple majority vote in Congress and a Presidential signature. According to the Congressional Research Service, before the current outgoing administration took up the cudgel in 2017, “[o]f the approximately 72,000 final rules that [had] been submitted to Congress since the [CRA] was enacted in 1996, the CRA [had] been used to disapprove one rule: the Occupational Safety and Health Administration’s November 2000 final rule on ergonomics, which was overturned using the CRA in March 2001.” That’s because the stars are rarely in proper alignment: generally, the CRS indicated, for successful use, there will have been a turnover in party control of the White House and both houses of Congress will be majority–controlled by the same party as the President. That was the case in 2017, and, as of January 9, 2020, the CRA had been used to overturn a total of 17 rules, according to the CRS. Well, the stars are in proper alignment now. To observe that the new Congress and new administration have a lot on their plates is quite an understatement. Will they use the CRA to scrap any of the SEC’s “midnight regulations”?
Ordinarily, reversing a final regulation that has been published in the Federal Register requires compliance with the lengthy notice-and-comment process under the Administrative Procedure Act. The CRA, however, allows both houses of Congress to nullify a recently adopted rule by passing a joint resolution that is signed by the president. The CRA is applicable to rules (and even some guidance) that were finalized by the executive branch and sent to Congress in the previous 60 “legislative days.” However, there is also a reset mechanism that comes into play if Congress adjourns its annual session with fewer than 60 legislative days left; in that event, the 60-day clock for acting on a disapproval resolution “resets” for a new 60 legislative days in the next session of Congress. Although it can be a tricky calculation and, according to the CRS, the official definitive date is set in a formal opinion issued by the House and Senate Parliamentarians, experts at the GW Regulatory Studies Center have reported that the final lookback date under the CRA for fast-track disapproval of regulations adopted by the current administration is August 21, 2020, that is, regulations published in the Federal Register and sent to Congress after August 21 are subject to nullification under the CRA. The CRS has indicated that even provisions that have become effective would be retroactively negated if disapproved under the CRA. One consideration in employing the CRA is that, once a rule has been disapproved under the CRA, the agency may not issue a new rule in “substantially the same form” without subsequent statutory authorization. As we learned in connection with the SEC’s recently adopted new rules for disclosure of payments by resource extraction issuers, where the SEC acknowledged its struggle with the limitation (see this PubCo post), the statute does not define “substantially the same form,” and there is no case law or guidance as to the meaning of that term. What’s more, the CRS states that the “CRA is also silent on the question of who would make the determination as to whether a new rule is ‘substantially the same’ as a disapproved rule.”
So what might the new Congress consider the most tempting SEC candidates for disapproval under the CRA? The Coalition for Sensible Safeguards has identified the new shareholder proposal rule (published in the Federal Register on 11/04/2020) and the new proxy advisor rule (published in the Federal Register on 9/03/2020) as candidates within the CRA lookback window. Both of these rulemakings were the subject of strong dissents from the Democratic SEC Commissioners. For example, Commissioner Allison Lee viewed the shareholder proposal rule as the “capstone in a series of policies that will dial back shareholder oversight of management at the companies they own,” putting “a thumb on the scale for management in the balance of power between companies and their owners.” (See this PubCo post.) With regard to the rulemaking on proxy advisory firms, Lee objected to the rule changes as “unwarranted, unwanted, and unworkable.” According to Lee, the new rules will “increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations. The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.” (See this PubCo post.) And as discussed in this PubCo post, the SEC’s Investor Advocate recommended reversal of both of these rulemakings.
The Investor Advocate also recommended reversal of the rulemaking to “harmonize” various Securities Act exemptions. (See this PubCo post.) He expressed concern about the continued shift of capital-raising from public markets—and the protections to the public that it provides—to private markets, facilitated by the “ever-expanding exemptions that allow companies to raise increasing amounts of capital with less and less public disclosure. As a practical matter, a company can now raise as much money as it wants from as many people as it wants for as long as it wants, without ever having to go through the registration process. We view the ‘harmonization’ rulemaking…as a further step toward making registration entirely voluntary.” In particular, the Advocate contends that the integration doctrine was “nearly eviscerate[d]” and points to the failure of the SEC “to provide a balanced analysis of the potential ramifications for investors who are being given greater access to private offerings,” such as limited information and illiquidity of shares. This rulemaking was just published in the Federal Register on 1/14/21. (Remember too that this rulemaking included amendments to Reg S-K Item 601 to “adjust” the exhibit filing requirements related to confidential treatment by removing the competitive harm requirement in light of the SCOTUS decision in Food Marketing Institute v. Argus Leader Media. See this PubCo post.) This rulemaking also earned two dissents from the Democratic SEC Commissioners. For example, Commissioner Caroline Crenshaw was concerned about the potential for the amendments to increase the wealth divide: “the rule fails to address the fact that in the private markets, the rich and well-connected typically have better access to the most promising companies, while retail investors get the leftovers—too often, unfortunately, the losers. Instead of providing retail investors access to that elusive high return rate, the majority’s steady march of expanding the private markets will only further entrench the country’s increasing and concerning economic divide.” In her view, currently, “high growth companies are increasingly deciding to remain private, benefitting groups of experienced and well-funded professional investors.” But the amendments “do not fix that problem.” Instead, the amendments simply permit investment in these markets by “a class of investors who do not have the capital to survive one or two failed ventures. This approach will serve only to further widen the wealth and access gaps between investors who start rich and those who don’t.” In this column on Bloomberg, former SEC Chair Arthur Levitt also urged rescission, characterizing the new rules as a “rule permitting private placement of opaque investments with financially unsophisticated investors.”
Levitt also advocated rescission of recent amendments to the auditor independence rules, which he said “watered down” the “post-Enron standards for auditor independence….The next SEC chair must resist this slow-drip destruction of the regulatory wall protecting the audit process. The first such effort would rescind a recent rule that would allow audit firms to determine for themselves whether their independence was compromised.” In a joint dissent to adoption of those amendments, Commissioners Lee and Crenshaw argued that, with these amendments, the SEC was replacing “a clear standard with one that provides auditors greater discretion when assessing their own independence and presents greater risk of mistaken or inconsistent application of that standard. What’s more, under the final rules, there is no mechanism for ensuring that the SEC and the investing public have visibility into how effectively auditors are making these assessments. And, as has too often been the case in recent years, these changes are disfavored by investors—those who actually rely on auditor assurances.” (See this PubCo post.) The amendments were published in the Federal Register on 12/11/2020.
Lee and Crenshaw also objected to the SEC’s approval in December of the NYSE rule change that will allow companies going public to raise capital through a primary direct listing. They suggested that, while the proposal “could have been a promising and innovative experiment,” instead it failed “to address very real concerns regarding protections for investors.” Their “most urgent concern” with the approval order was the absence of underwriters, which, in their view, meant the loss of an important gatekeeper—incented by potential strict liability under Section 11 and Section 12(a)(2) as well as reputational risk—who seeks to ensure the accuracy of disclosures. They were also concerned about the traceability problem, which they contended is exacerbated in direct listings. Most significantly, however, they worried about actions by the SEC that have “chipped away at the public securities market year after year,” loosening exemptions and allowing—even incenting—companies to stay private. The result is “far fewer investment opportunities for retail investors in the public markets, where there is a more level playing field and where information asymmetries and other power imbalances are alleviated.” There was also substantial opposition to this rule change from investors. (See this PubCo post.) This order was published in the Federal Register on 12/29/2020/
The amendment to the accredited investor definition (see this PubCo post) also falls within the lookback window. Lee and Crenshaw criticized that rule change for “leaving in place 38-year old wealth thresholds, declining to index the thresholds to inflation, and declining to provide economic analysis to show how the failure to index will affect American investors—the bulk of whom are seniors—going forward.” They expressed concern regarding the SEC’s action to continue “a steady expansion of the private market, affording issuers of unregistered securities access to more and more investors without due regard for the risks they face, and without sufficient data or analysis to ensure that our policy choices are grounded in fact rather than supposition.” Those changes were published in the Federal Register on 10/9/2020.
Other possible candidates are the new MD&A rules, which were just published in the Federal Register on Monday and the S-K modernization rules, which were published in the Federal Register on 10/08/2020. With regard to the MD&A changes, although Lee and Crenshaw objected to some of the specific aspects of the rules, such as the elimination of the Table of Contractual Obligations, for the most part, their dissent focused on what the rulemaking did not address—ESG, especially climate risk, disclosure. (See this PubCo post.) Likewise, with regard to S-K modernization, their most strenuous objections were to what this rulemaking did not address rather than what it did: the absence of any prescriptive requirements that would have more certainly elicited disclosure regarding diversity and climate risk. (See this PubCo post.) Accordingly, just a guess, but these rules seem less likely to be given the ax under the CRA; a more likely approach may be the adoption of an ESG disclosure framework that would address the perceived gap. Both Lee and Crenshaw have advocated that the SEC establish “an internal task force and ESG Advisory Committee that is dedicated to building upon the recommendations of leading organizations, such as the Task Force on Climate-Related Financial Disclosures, and defining a clear plan to address sustainable investing.” And the Investor Advocate viewed that idea as eminently sensible.
Another rulemaking that surprisingly falls in the lookback window are the amendments to the requirements for financial statements relating to acquisitions and dispositions of businesses, which just went into effect on January 1. (See this PubCo post.) These amendments modified the rules for determining whether an acquisition or disposition is significant and required companies to file the financial statements of acquired businesses for only up to the two most recent fiscal years, instead of three. In addition, the adjustment criteria for pro forma financial statements were replaced with simplified requirements to depict the accounting for the transaction and, in response to some controversy over the proposal, provide the option to “depict synergies and dis-synergies of the acquisitions and dispositions for which pro forma effect is being given.” In her dissent, Lee expressed concern that the amendments did not adequately assess the costs and risks of M&A activity “in two significant regards: the risk to investors of less transparency regarding the economics of an acquisition, and the risk of increasing economic concentration, which is heightened at present where large companies that are better positioned to weather the current economic conditions may pursue predatory takeovers of smaller, struggling businesses.” Just over the cut-off line, these rules were published in the Federal Register on 8/31/2020, although they have not generated quite the level of antipathy of some of the other rulemakings identified above.
And, wouldn’t it be ironic? Of course, we can’t forget the newest rules requiring disclosure of payments by resource extraction issuers—rules mandated under Dodd-Frank that required disclosure of certain payments made to the federal and foreign governments by resource extraction issuers in connection with commercial development of oil, gas and mineral rights. Those rules were recently adopted—again—and (update) were just published in the Federal Register on January 15, 2021. (See this PubCo post.) Originally adopted in 2012 under Section 1504 of Dodd-Frank at the same time as the conflict minerals rules, the resource extraction rules faced an immediate challenge in litigation brought by the American Petroleum Institute and the Chamber of Commerce, and were quickly vacated by the Court. A new version of the rules was adopted in June 2016, but, as noted above, relying on the rarely used CRA, Congressional Republicans took the ax to the new rules in 2017. The SEC finally adopted the most recent set of rules, which were roundly criticized by Lee and Crenshaw, this past December. Lee objected that the final rules permitted “payment information to be aggregated to such a degree that the resulting disclosures will obscure information crucial to anti-corruption efforts and material to investment analysis. As a result, today’s rule, by the Commission’s own determination, will severely restrict the transparency and anti-corruption benefits that the disclosures might provide, and thus fails to advance the statute’s goals.” Crenshaw objected that the final rules did not require “sufficiently granular disclosure to meet the objectives of Section 1504 of Dodd-Frank and, notably, [depart] from the Commission’s previous findings on this subject without an adequate and reasoned basis.” In addition, she argued, “we should be moving toward a more uniform global disclosure approach that will allow for comparability across issuers operating in the same country.” Will these rules be the first to be jettisoned under the CRA twice?