The SEC’s Fall 2022 Reg-Flex Agenda—according to the preamble, compiled as of October 6, 2022, reflecting “only the priorities of the Chair”—has just been posted, and it looks like the SEC will have another frenetic year ahead dealing with new and pending proposals—and so will we. Describing the new agenda, SEC Chair Gary Gensler said that it “reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets. Our ability to meet our mission depends on having an up-to-date rulebook—consistent with our mandate from Congress, guided by economic analysis, and shaped by public input.” Here are the short-term and long-term lists, which show all Corp Fin agenda items scheduled for action by either April or October 2023, with the first four months looking especially jam-packed. There’s no dispute that the agenda is laden with major proposals, and many of these proposals—climate disclosure, cybersecurity, SPACs, share buybacks—are apparently at the final rule stage. Implementing all of these proposals, if adopted, would likely represent a challenge for many companies; whether overwhelmingly so remains to be seen.
The agenda includes a number of proposals that were on the Spring 2022 agenda, but didn’t quite make it out of the starting gate, such as plans for disclosure regarding corporate board diversity and human capital, as well as a plan to amend the definition of “holders of record.” And a couple of major proposals—such as climate change disclosure and share repurchases—that were identified on the last agenda as targeted for final action were not considered for adoption on the schedule planned and reappear on the current calendar with later target dates. It’s worth noting that final consideration of some major proposals may have been delayed because their comment periods were reopened in October last year as a result of an SEC “technical glitch.” (See this PubCo post). In addition, two items identified on the agenda as at the “final rule stage” have already been adopted: listing standards for recovery of erroneously awarded compensation, or compensation clawbacks (see this PubCo post) and Rule 10b5-1 and insider trading (see this PubCo post). What’s not on the agenda? Topics such as “gamification” (behavioral prompts, predictive analytics and differential marketing)—identified on a prior agenda as at the pre-rule stage—have disappeared from the agenda altogether, and, notably, political spending disclosure is, once again, not identified on the agenda. That’s because Section 633 of the latest omnibus budget bill once again prohibits the SEC from using any of the funds appropriated “to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”
On the Short-Term Agenda:
Final Rule Stage
Climate Change Disclosure—After many months of hyperventilating in anticipation of the SEC’s new climate disclosure proposal, we finally got a chance to set eyes on the behemoth in March 2022. The WSJ called it “the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements,” and Fortune said it “could be the biggest change to corporate disclosures in the U.S. in decades.” The proposal was designed to require disclosure of “consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.” The proposal is certainly thoughtful, comprehensive and stunningly detailed—some might say overwhelmingly so. At over 500 pages, the proposal would add an entire new subpart to Reg S-K and a new article to Reg S-X. Based on the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol, the proposed new rules would require public companies to disclose information about any material climate-related impacts on strategy, business model, and outlook; governance of climate-related risks; climate-related risk management; greenhouse gas metrics in financial statements; and climate-related targets and goals, if any. The proposal would also mandate disclosure of a company’s Scopes 1 and 2 GHG emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company’s emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 for large accelerated filers and accelerated filers. The disclosures would be required under a separate caption, “Climate-Related Disclosure,” in registration statements and Exchange Act annual reports (with material updates in Forms 10-Q) Compliance would be phased in. (See this PubCo post, this PubCo post and this PubCo post.) Of course, we’ll have to wait to see what survives in the final rule, as provisions such as the Scope 3 mandate have received a fair amount of pushback (see this PubCo post). Opponents of the proposal have long been plotting their litigation strategies, and there is really no question that the rules will be challenged in court. Among other things, some contend that the proposal is beyond the SEC’s authority, especially in light of SCOTUS’s decision in West Virginia v EPA, which, although not directly addressing the SEC’s climate proposal, sure seemed to put a bull’s eye on it. (See this PubCo post.). The previous agenda originally targeted October 2022 as the date for final action, which I characterized at the time as a “hmmm.” In October, Bloomberg confirmed that “hmmm,” writing that the “SEC is months away from finalizing expansive new climate disclosure requirements as the agency juggles investor demands for more transparency, tech glitches and a tough Republican legal threat.” (See this PubCo post.) The new agenda sets a target date of April 2023 for final action.
Cybersecurity Risk Governance—In 2018, the SEC adopted guidance on cybersecurity disclosure. (See this PubCo post.) But not all of the commissioners were entirely satisfied that the guidance was adequate under the circumstances. Given the continuing consternation over hacks and ransomware, in March, the SEC proposed rule amendments to enhance issuer disclosures regarding cybersecurity risk governance. According to Corp Fin Director Renee Jones, the SEC approached the rulemaking from two perspectives: first, incident reporting and second, periodic disclosure regarding cybersecurity risk management, strategy and governance. Under the proposal, companies would be required to disclose material cybersecurity incidents on Form 8-K within four business days after they have determined that they have experienced a material cybersecurity incident. In addition, the proposal would require disclosure in periodic reports of policies and procedures to identify and manage cybersecurity risk, including the impact of cybersecurity risks on strategy; management’s role and expertise in implementing the company’s cybersecurity policies, procedures and strategies; and the board’s oversight role and cybersecurity expertise, if any. (See this PubCo post.) The agenda retains the target date of April 2023 for final action on the proposal.
Special Purpose Acquisition Companies—In remarks in 2021 before the Healthy Markets Association, SEC Chair Gary Gensler emphasized the need to treat like cases alike, contending that a de-SPAC transaction is functionally “akin to a traditional IPO.” He pointed to the need to level out information asymmetries, guard against misleading information and fraud and mitigate conflicts among parties that may have different incentives. If we are going to treat like cases alike, he said, then “investors deserve the protections they receive from traditional IPOs.” (See this PubCo post.) In March, the SEC proposed new rules and amendments regarding SPACs, shell companies, the use of projections in SEC filings and a rule addressing the status of SPACs under the Investment Company Act of 1940. The proposal would add new Subpart 1600 of Reg S-K setting forth specialized disclosure requirements for SPAC IPOs and de-SPAC transactions. In particular, the proposal would impose additional disclosure requirements regarding SPAC sponsors, conflicts of interest, dilution and financial statements, among other things; standards around marketing practices, such as the use of financial projections; and gatekeeper and issuer obligations, including expanded potential underwriter liability and potential liability by the target company and its signing persons for a de-SPAC registration statement. Under the proposal, the safe harbor for forward-looking statements under the PSLRA would not be available to SPACs. The proposal also includes a new safe harbor from the obligation to register under the Investment Company Act of 1940 for SPACs that meet the safe harbor’s requirements. (See this PubCo post.) In May 2022, the SEC’s Small Business Capital Formation Advisory Committee discussed the SPAC proposal, with one presenter contending that aspects of the proposal have had a chilling effect, leading market participants to question whether the SPAC alternative should still be considered a viable strategy. (See this PubCo post.) The agenda identifies April 2023 as the target date for final action.
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. Then-SEC Chair Jay 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.) Then, with a new majority in place, in November 2021, Corp Fin issued new SLB 14L, which outlined Corp Fin’s most recent interpretations of the ordinary business and the economic relevance exceptions under Rule 14a-8, and rescinded three earlier SLBs—SLBs 14I, 14J and 14K. Generally, new SLB 14L presented its approach as a return to the perspective that historically prevailed prior to the issuance of the three rescinded SLBs. (See this PubCo post.) The effect of SLB 14L was to make exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies, smoothing the glide path for inclusion of proposals submitted by climate and other activists. In July 2022, the SEC proposed amendments to Rule 14a-8 designed to “promote more consistency and predictability in application.” The proposal would revise three of the substantive bases for excluding a shareholder proposal under the rule: substantial implementation, specifying that a proposal may be excluded as substantially implemented if “the company has already implemented the essential elements of the proposal”; duplication, providing that a proposal constitutes a “substantially duplication” if it “addresses the same subject matter and seeks the same objective by the same means”; and resubmission, providing that a shareholder proposal would constitute a “resubmission”—and therefore could be excluded if, among other things, the proposal did not reach specified minimum vote thresholds—if it “substantially duplicates” a prior proposal by “address[ing] the same subject matter and seek[ing] the same objective by the same means.” (See this PubCo post.) The agenda identifies October 2023 as the target date for final action.
Modernization of Beneficial Ownership Reporting—In February 2022, the SEC proposed to amend the complex beneficial ownership reporting rules. Gensler described the amendments as an update designed to modernize reporting requirements for today’s markets, including reducing “information asymmetries,” and addressing “the timeliness of Schedule 13D and 13G filings.” The proposal would accelerate the filing deadlines for Schedule 13D beneficial ownership reports from 10 days to five days and require amendments to be filed within one business day (as opposed to “promptly”). For Schedules 13G, the filing deadline would be accelerated to five business days after the end of the month for qualified institutional investors and exempt investors, and would allow five days for passive investors to file. The proposal would also expand the application of Reg 13D-G to certain derivative securities and clarify the definition of “group.” (See this PubCo post.) The agenda retains the date of April 2023 as the target date for final action on the proposal.
Share Repurchase Disclosure Modernization—In December 2021, the SEC proposed new amendments to modernize share repurchase disclosure. The proposal would require daily repurchase disclosure on a new Form SR before the end of the first business day following the day on which the company executes a share repurchase. The proposal would also amend Reg S-K Item 703 to require additional detail regarding a company’s repurchase programs, including disclosure of the company’s objective or rationale for its share repurchases, the process or criteria used to determine the amount of repurchases, any policies and procedures relating to purchases and sales by officers and directors during a repurchase program, and whether the repurchases were made under a Rule 10b5-1 plan or in reliance on Rule 10b-18. (See this PubCo post.) The agenda delays the target date for final action on the proposal from October 2022 to April 2023.
Proposed Rule Stage
Corporate Board Diversity—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 at one point 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 seems to have never 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 the recent focus on diversity and racial equity, this topic was moved up to the short-term agenda a couple of years ago with a target date for a proposal of April 2022. That obviously didn’t happen. (See this PubCo post for a discussion of a study by ISS examining racial and ethnic diversity on boards and this PubCo post for a discussion of a study of board diversity by The Conference Board.) Then, last year, the target date was moved to April 2023 and now, in this latest agenda, the target date for a proposal was delayed further to October 2023.
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 Congressional Review Act. When rules were adopted for the third time in December 2020, then-SEC Commissioner Allison Herren 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. In light of changes 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 previously identified April 2023 as the target date for issuance of a proposal, but the new agenda pushes that date out to October 2023.
Rule 144 Holding Period—In December 2020, 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.’” The proposed amendments “would not affect the use of Rule 144 for most convertible or variable-rate securities transactions.” Essentially, the amendments were 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 have mandated electronic filing of Form 144 notices related to the resale of securities of Exchange Act reporting companies; eliminated the Form 144 filing requirement for non-reporting companies; changed the filing deadline for Form 144 to coincide with the filing deadline for Form 4; and amended 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). (See this PubCo post.) In June, the SEC separately adopted amendments mandating electronic submission of a number of forms, including Forms 144, but indicated that it was not taking any action concerning the remaining aspects of the proposal in the Rule 144 proposing release, and, in particular, it was not adopting the proposal to eliminate the Form 144 filing requirement for the sale of securities of companies that are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. (See this PubCo post and this PubCo post.) In addition, the new amendments to Rule 10b5-1 require checkboxes on Forms 4 and 5 stating that a reported transaction is pursuant to a plan that is “intended to satisfy the affirmative defense conditions” of Rule 10b5-1(c). Now, Corp Fin is considering recommending that the SEC repropose amendments to Rule 144. The target date for this proposal has been moved back in the latest agenda from October 2022 to October 2023.
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).” (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.) In June last year, a rulemaking petition was submitted by a group of academics requesting that the SEC require more qualitative and quantitative disclosure of financial information about human capital. (See this PubCo post.) And subsequently, the SEC’s Investor Advisory Committee held two meetings addressing the issues of accounting standards for human capital disclosure (see this PubCo post) and labor-related performance data metrics (see this PubCo post). The FASB also moved forward with a proposal for disaggregation of some specific costs related to human capital. (See this PubCo post.) Corp Fin is now considering recommending a proposal to enhance company disclosures regarding human capital management. The agenda identifies April 2023 as the target date for issuance of a proposal, a delay from the previous target of October 2022.
Reg D and Form D Improvements—Corp Fin is considering recommending that the SEC propose amendments to Reg D, including updates to the accredited investor definition and to Form D. The target date for a proposal is April 2023, a delay from the prior target date of October 2022.
Revisions to the Definition of Securities Held of Record—Corp Fin is considering recommending that the SEC propose amendments to the definition of “held of record” for purposes of section 12(g) of the Exchange Act. Lee had previously raised concerns about the “explosive growth of private markets.” Currently, under the Exchange Act, a company that reaches either 2,000 holders of record or 500 holders of record that are not accredited investors, whichever first occurs, is required to register under the Exchange Act. (And persons are also excluded from the definition of “held of record” if they hold only securities issued to them pursuant to an employee compensation plan in transactions exempted from the registration requirements of the Securities Act.) Currently, Lee pointed out, most shares in U.S. markets are held in street name, with the result that “record ownership has plummeted and in most cases has no meaningful relationship to the number of actual investors.” According to Lee, “[e]ven some of the largest and most widely traded issuers do not have enough record owners (as that term is currently defined) to meet the requirements of Section 12(g). Under current guidance, in counting holders, companies look through record ownership only to banks and brokers, not to beneficial owners. Should that still be the case? Lee advocated that “we should consider whether to recalibrate the way issuers must count shareholders of record under Section 12(g) (and Rule 12g5-1) in order to hew more closely to the intent of Congress and the Commission in requiring issuers to count shareholders to begin with. In other words, it’s time for us to reassess what it means to be a holder of record under Section 12(g).” (See this PubCo post.) The target date for a proposal is delayed in the new agenda from October 2022 to April 2023.
Amendments to Requirements for Filer Validation and Access to the EDGAR Filing System—The EDGAR Business Office is considering recommending that the SEC propose rules and amendments to modernize and enhance access to EDGAR, including new validation requirements for EDGAR filers and their representatives. The agenda identifies October 2023 as the target date for 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 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 providing 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, for a variety of reasons, 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 recommendations that would update the Conflict Minerals rules. However, the agenda indicates that the next action on this rulemaking is “undetermined.”
Proxy Process Amendments—Corp Fin may recommend that the SEC propose amendments to the proxy rules to facilitate improvements in the proxy system with respect to the distribution of proxy materials, pre-voting reconcilement, processing of shareholder votes (including proxy vote confirmation) and shareholder communications, 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.) In this Bloomberg article, Gensler is quoted at a Society for Corporate Governance conference in 2022 as advising companies that are “unhappy with the shareholder voting mechanics” to “suggest fixes to the SEC.” The SEC apparently hasn’t finished proposals related to proxy plumbing and “would benefit from hearing from companies about how to improve proxy plumbing, even if the agency isn’t ready to propose changes.” According to the article, Gensler urged companies not to “wait for the proposal,” but rather to “engage.” Whenever the SEC does get around to a proxy plumbing proposal, the question is whether it 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—if anything. Next action “undetermined.”