Late Friday, the SEC announced that its Spring 2021 Regulatory Flexibility Agenda—both short-term and long-term—has now been posted. And it’s a doozy. According to SEC Chair Gary Gensler, to meet the SEC’s “mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.” That’s certainly an understatement. While former SEC Chair Jay Clayton considered the short-term agenda to signify rulemakings that the SEC actually planned to pursue in the following 12 months, Gensler may be operating under a different clock. What stands out here are plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, universal proxy and SPACs. In addition, with a new sheriff in town, some of the SEC’s more recent controversial rulemakings of the last year or so may be revisited, such as Rule 14a-8. The agenda also identifies a few topics that are still just at the pre-rule stage—i.e., just a twinkle in someone’s eye—such as gamification (behavioral prompts, predictive analytics and differential marketing) and exempt offerings (updating the financial thresholds in the accredited investor definition and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda, nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
On the Short-Term Agenda:
Final Rule Stage
Universal Proxy—It may sound anodyne, but it has a long history as 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 had continued to sit on the long-term agenda. Last year, it was suddenly moved up to the short-term agenda, but no action was taken. However, in April 2021, the SEC announced that it had voted to reopen for 30 days the comment period for the universal proxy proposal. The reopening release included a long list of questions for commenters to consider, focusing in particular on the impact of developments since the publication of the proposal in 2016. (See this PubCo post and this PubCo post.) The agenda provides a final action target date of 4/22.
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.) The agenda provides a final action target date of 4/22.
Filing Fee Disclosure and Payment Methods Modernization—Corp Fin is considering recommending adoption of amendments that would “modernize filing fee disclosure and payment methods by requiring fee calculation information to be provided in a structured format and by updating the fee payment options. The amendments are intended to improve filing fee preparation and payment processing by facilitating both enhanced validation through fee structuring and lower-cost, easily routable payments.” The amendments would affect 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 amendments) to include “all required information for fee calculation in a structured format.” That means more XBRL. (See this PubCo post.) The agenda states a final action target date of 10/21.
Rule 144 Holding Period and Form 144 Filings—In December, the SEC proposed amendments to Rule 144 to revise the method for determining the holding period—essentially eliminating tacking—for securities “acquired upon the conversion or exchange of certain ‘market-adjustable securities.’” It is worth emphasizing that the proposed amendment “would not affect the use of Rule 144 for most convertible or variable-rate securities transactions.” Essentially, the amendment was intended to apply to “floating priced” or “floating rate” convertibles, often referred to as “death-spiral” converts, issued by companies that do not have securities listed, or approved for listing, on a national securities exchange. The proposed amendments would also mandate electronic filing of Form 144 notices related to the resale of securities of Exchange Act reporting companies; eliminate the Form 144 filing requirement for non-reporting companies; change the filing deadline for Form 144 to coincide with the filing deadline for Form 4; and amend Forms 4 and 5 to add a check box to permit filers to indicate that a sale or purchase reported on the form was made pursuant to a transaction that satisfied Rule 10b5-1(c). The absence of mandatory electronic filing of Forms 144 has come under substantial criticism recently, particularly by those who have been attempting to track sales under 10b5-1 plans, given that some information about these plans is provided on the Form. See this PubCo post.) The agenda provides a final action target date of 10/21.
Proposed Rule Stage
Corporate Board Diversity—This is a topic that has now been moved up from the long-term agenda, with a target date of 10/21 for issuance of a proposal. Here, Corp Fin may recommend amendments to the proxy rules to enhance company disclosures 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.) The proposal never seems to have materialized—at least not in public. In 2019, the staff issued a CDI calling for some enhanced board diversity disclosure. (See this PubCo post.) But with all the focus on diversity and racial equity, it’s no surprise that this topic has been moved up to the short-term agenda. See this PubCo post for a discussion of a new study examining the representation of women and racial/ethnic communities (including Black, Asian/Pacific Islander and Hispanic persons) on public company boards among the Fortune 100 and Fortune 500 companies.
Rule 10b5-1—Just last week, Gensler announced plans to address problems with the affirmative defense provisions of Rule 10b5-1. Rule 10b5-1 plans, he said, “have led to real cracks in our insider trading regime.” A number of studies have identified problems with Rule 10b5-1 plans, and activity under these plans has actually long been suspect, but no changes have been proposed. Some of the new limitations that Gensler suggested include a four- to six-month cooling-off period after plan adoption, limitations on when and how plans can be canceled, mandatory disclosure, limits on the number of (overlapping?) 10b5-1 plans an individual can adopt and reforms related to the use of Rule 10b5-1 plans by companies to conduct share buybacks. The agenda identifies 10/21 as the target date for issuance of a proposal. (See this PubCo post.)
Climate Change Disclosure—At this point, it’s a bit anticlimactic to confirm that a proposal to enhance company disclosures regarding climate-related risks and opportunities is brewing at the SEC and on the short-term agenda? The Commissioners have been advertising this proposed rulemaking for months. Commissioner Allison Lee has long contended that investors are demanding “uniform, consistent, and reliable disclosure” related to climate risks and opportunities. Some disclosure has resulted from private ordering, she has recognized, but, as she has contended previously (see, e.g., this PubCo post, this PubCo post and this PubCo post), “some level of regulatory involvement [is needed] to bring consensus, standardization, comparability, and reliability.” (See this PubCo post.) For Lee, “no single issue has been more pressing for [her] than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy.” Because these issues are important for investors, she said, “climate and ESG are front and center for the SEC.” In March, she issued a new statement requesting public comment on ESG disclosure, designed to shift the discussion from “if” to “how”—that is, what is the best approach to obtaining climate disclosure: “what data and metrics are most useful and cut across industries, to what extent should we have an industry-specific approach, what can we learn from existing voluntary frameworks, how do we devise a climate disclosure regime that is sufficiently flexible to keep up with the latest market and scientific developments? Finally, how should we address the significant gap with respect to disclosure presented by the increasingly consequential private markets?” (See this PubCo post.) At his confirmation hearing, Gensler observed that investors, with tens of trillions in assets behind them, increasingly want to see climate risk disclosure. He also noted that issuers could benefit from standardization and the clarity of guidance. (See this PubCo post.) Not to mention that the White House has issued an Executive Order expressing its policy “to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk… including both physical and transition risks.” (See this PubCo post.) The agenda identifies 10/21 as the target date for issuance of a proposal.
Human Capital Management Disclosure—When, in August 2020, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K, the debate centered largely on whether the rule should be principles-based or prescriptive. In that instance, notwithstanding a rulemaking petition and clamor from numerous institutional and other investors for transparency regarding workforce composition, health and safety, living wages and other specifics, the “principles-based” team carried the day; the SEC limited the requirement to a “description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).” At the time, Lee argued for a more balanced approach that would have included some prescriptive line-item disclosure requirements and provided more certainty in eliciting the type of disclosure that investors were seeking. (See this PubCo post.) Subsequent reporting has suggested that companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand,” such as workforce diversity data submitted to the EEOC. (See this PubCo post.) Accordingly, Corp Fin may recommend a proposal to enhance company disclosures regarding human capital management. The agenda identifies 10/21 as the target date for issuance of a proposal.
Cybersecurity Risk Governance—In 2018, the SEC adopted long-awaited guidance on cybersecurity disclosure. The guidance addressed disclosure obligations under existing laws and regulations, cybersecurity policies and procedures, disclosure controls and procedures, insider trading prohibitions and Reg FD and selective disclosure prohibitions in the context of cybersecurity. The guidance built on Corp Fin’s 2011 guidance on this topic (see this Cooley News Brief), adding in particular new discussions of policies and insider trading. While the guidance was adopted unanimously, some of the Commissioners were not exactly enthused about it, viewing it as largely repetitive of the 2011 guidance—and hardly more compelling. (See this PubCo post.) Given the recent consternation over hacks and ransomware, it should come as no surprise that the SEC may propose rule amendments to enhance issuer disclosures regarding cybersecurity risk governance. The agenda identifies 10/21 as the target date for issuance of a proposal.
Special Purpose Acquisition Companies—In testimony before a House subcommittee, Gensler observed that we are “witnessing an unprecedented surge” in SPACs, which, to him raised several policy questions, including whether investors are being appropriately protected and receiving “the appropriate and accurate information they need at each stage—the first blank-check IPO stage and the second target IPO stage.” Recently, Acting Corp Fin Director John Coates questioned the common assertion that SPACs involve lower securities law liability risk, raising the fundamental issue of whether the level of liability should be determined by the form of the IPO pathway, rather than the substance of the entire transaction. (See this PubCo post.) Similarly, at a separate House hearing, the witnesses agreed that, to prevent regulatory arbitrage, all IPO vehicles, whether traditional IPOs or SPACs, should operate on a level playing field and be subject to the same type of regulation of disclosure and liability. (See this PubCo post.) Although the staff have issued warnings about SPAC warrants (see this PubCo post) and substantial guidance reading SPAC disclosure (see this PubCo post and this PubCo post), Gensler testified that he had “asked staff to consider what recommendations they would make to the Commission for possible rules or guidance in this area.” The agenda identifies 4/22 as the target date for issuance of a proposal.
Listing Standards for Recovery of Erroneously Awarded Compensation—The SEC has already issued a proposal to implement the clawback provisions of Section 954 of Dodd-Frank, but the SEC is now planning to re-propose those rules. 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. These rules were proposed in 2015 and relegated to the long-term agenda. So much for legislative mandates. But now the proposal has been moved up to the short-term agenda, with a suggested re-proposal target date of 4/22. (See this PubCo post.)
Rule 14a-8 Amendments—In October 2020, the SEC adopted amendments to Rule 14a-8 to modify the eligibility criteria for submission of shareholder proposals, as well as the resubmission thresholds; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibit aggregation of holdings for purposes of satisfying the ownership thresholds; facilitate engagement with the proponent; and update other procedural requirements. The rulemaking generated an energetic—some might say heated—discussion among the Commissioners in the course of the long meeting, as well as substantial pushback through the public comment process, discussed in more detail in this PubCo post and this PubCo post. Clayton observed that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needed some work, and former Commissioner Jackson characterized the proposal as swatting “a gadfly with a sledgehammer.” (See this PubCo post.) Now, with a new majority in charge, Corp Fin may propose new amendments regarding shareholder proposals under Rule 14a-8. In March, Senator Sherrod Brown introduced a resolution to disapprove these rules under the Congressional Review Act, but the resolution was not adopted. (See this PubCo post.) The amendments, which became effective on November 2, will apply to any proposal submitted for an annual or special meeting to be held on or after January 1, 2022. The agenda identifies 4/22 as the target date for issuance of a proposal.
Proxy Voting Advice—In July 2020, the SEC adopted new amendments to the proxy rules regarding proxy advisory firms, codifying the SEC’s interpretation that made proxy voting advice subject to the proxy solicitation rules. In addition, the SEC adopted two new conditions to the exemptions from those rules for proxy advisory firms, which required disclosure of conflicts of interest and adoption of principles-based policies to make proxy voting advice available to the subject companies and to notify clients of company responses. Compliance with the new conditions was not required prior to December 1, 2021. (See this PubCo post). No surprise, the proxy advisors—and a number of institutional investors—were not happy about it. (See this PubCo post.) In June 2021, Gensler directed the staff to consider whether to recommend further regulatory action regarding proxy voting advice. In his statement, Gensler highlighted his direction that the staff consider “whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.” As a result, Corp Fin issued a Statement indicating that “it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area.” (See this PubCo post.) Accordingly, proposed amendments governing proxy voting advice are now on the short-term agenda with a target date of 4/22 for issuance of a proposal.
Disclosure of Payments by Resource Extraction Issuers—In December 2020, the SEC adopted final Rule 13q-1 and an amendment to Form SD to implement Section 1504 of Dodd-Frank, which relates to disclosure of payments by resource extraction issuers. As adopted, the rule requires public reporting companies that engage in the commercial development of oil, natural gas or minerals to disclose company-specific, project-level payments made (by the company, its subs or controlled entities) to a foreign government or the U.S. federal government. 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 court 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. When rules were adopted for the third time in December 2020, Lee dissented because 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.” (See this PubCo post.) But is the third time the charm? Apparently not. With a new majority on the Commission, Corp Fin is considering whether to recommend that the SEC review the rules to determine if additional amendments might be appropriate. The agenda identifies 4/22 as the target date for issuance of a proposal.
Amendments to the Commission’s Whistleblower Program Rules—In September, the SEC adopted changes to the rules governing its whistleblower program, enabling the SEC to adjust, within certain limitations, the amounts payable as awards under the program. The changes were intended to increase efficiencies and provide more tools and more flexibility to the SEC, but not all the Commissioners saw it that way. The changes adopted included a new provision allowing awards with a statutory maximum of less than $5 million (which historically have represented nearly 75% of all whistleblower awards) to qualify for a presumption that they will receive the maximum statutory percentage award of 30%, subject to the absence of whistleblower culpability or other negative award criteria. According to the press release, other larger awards “will continue to be evaluated consistent with past practice.” The amendments also “clarified”—a term that, in the view of some of the Commissioners, might be doing a lot of work—the SEC’s “broad discretion” when applying the award factors set forth in the whistleblower rules, including the discretion to consider the award factors in percentage terms, dollar terms or some combination. Commissioner Allison Lee dissented principally because of the treatment in the new rules regarding SEC use of discretion if the dollar amount of an award is too high. The amendments also modified 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.) The SEC is now considering additional amendments to the rules governing the Whistleblower Program. The agenda identifies 10/21 as the target date for issuance of a proposal.
Share Repurchase Disclosure Modernization—Corp Fin is considering recommending that the SEC propose amendments to modernize disclosure of share repurchases, including Item 703 of Reg S-K, with 4/22 as the target date for issuance of a proposal.
Mandated Electronic Filings—Corp Fin may recommend amendments to Reg S-T that would mandate additional electronic filings. The agenda identifies 10/21 as the target date for issuance of a proposal.
Trading Prohibitions Under the Holding Foreign Companies Accountable Act and Enhanced Listing Standards—In December 2020, the Holding Foreign Companies Accountable Act was signed into law. As you may recall, the HFCAA amends SOX to impose certain requirements on a public company identified by the SEC as a company that files in its periodic reports financial statements audited by a registered public accounting firm with a branch or office located in a foreign jurisdiction and that the PCAOB is “unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.” The Division of Trading and Markets is considering recommending rule amendments under which the SEC would implement and remove trading prohibitions required by the HFCAA, as well as rule amendments to enhance listing standards of U.S. exchanges to prohibit the initial and continued listing of issuers that are subject to these trading prohibitions. (See this PubCo post and this PubCo post.) The agenda identifies 4/22 as the target date for issuance of a proposal.
Amendments to the Securities Transaction Settlement Cycle—The Division of Trading and Markets is considering a proposal to amend Exchange Act Rule 15c6-1(a) to shorten the standard settlement cycle. Gensler believes that reducing the standard settlement cycle from T+2 can lower costs and risks. (See this PubCo post.) “T+evening,” anyone? The agenda identifies 10/21 as the target date for issuance of a proposal.
Market Structure Modernization—The Division of Trading and Markets may recommend a proposal to modernize rules related to equity market structure such as payment for order flow, best execution (amendments to Rule 605), market concentration and other practices. Gensler has observed that the rules governing markets were “mostly adopted 16 years ago” and “do not fully reflect today’s technology.” (See this PubCo post.) The agenda identifies 4/22 as the target date for issuance of a proposal.
Short Sale Disclosure Reforms—Dodd-Frank Section 929X(a) amended Section 13(f) of the Exchange Act to require the SEC to prescribe rules providing for the monthly (at least) public disclosure of the name of the issuer, the aggregate amount of the number of short sales of each security and other information. The Division of Trading and Markets is considering recommending that the SEC propose rules to implement Section 929X(a). The agenda identifies 11/21 as the target date for issuance of a proposal.
On the long-term (maybe never) agenda:
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 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 that 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. Corp Fin is considering recommendations for the SEC to update the Conflict Minerals rules. If ever….
Proxy Process Amendments—Corp Fin may recommend that the SEC propose amendments to the proxy rules to facilitate improvements in the shareholder voting (including proxy vote confimation) and communication process, otherwise referred to as proxy plumbing issues. There has been substantial criticism of the current byzantine system of share ownership and intermediaries that has accreted over time. Shareholder voting is viewed as fundamental to keeping boards and managements accountable, and the current system of proxy plumbing has been criticized as inefficient, opaque and, all too often, inaccurate. Proxy plumbing was discussed at length at a 2018 meeting of the Investor Advisory Committee and then at the proxy process roundtable. (See this PubCo post and this PubCo post.) The question is whether the SEC will undertake the comprehensive analysis and overhaul that appears to be required or settle for grabbing only the low-hanging fruit? My bet is on the low-hanging fruit. Next action “undetermined.”
Modernization of Rules and Forms for Compensatory Securities Offerings and Sales—Corp Fin may recommend (or not) adoption of 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. Notably, this proposed rulemaking has been moved to the long-term agenda. In July 2018, 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.) In November 2020, the SEC proposed amendments, on a temporary five-year trial basis, that would allow a company to provide equity compensation to a slice of “gig” workers—specifically only “platform workers” who provide services through the company’s technology-based platform—subject to percentage limits (no more than 15% of annual compensation), dollar limits (no more than $75,000 in three years) and other conditions. The proposal was structured as temporary to allow the SEC an opportunity to assess whether issuances were being made for legitimate compensatory purposes and not for capital-raising purposes, whether the issuances benefitted companies, platform workers and other investors in the “gig economy,” and whether there were any unintended consequences. To help with that assessment, looking toward an evaluation of whether to make the rule permanent, the SEC would require participating companies to furnish certain information to the SEC at six-month intervals. Second, the SEC proposed amendments to Rule 701 and Form S-8 designed to modernize the framework for compensatory securities offerings in light of the significant evolution in compensatory offerings and composition of the workforce since the SEC last substantively amended those regulations. (See this PubCo post.) Next action “undetermined.”