Securities Regulation and Corporate Governance


D.C. Circuit Issues Conflict Minerals Decision, but Uncertainty Remains

On August 18, 2015, following a panel rehearing, the U.S. Court of Appeals for the D.C. Circuit issued an opinion affirming its April 2014 decision in National Association of Manufacturers, et al. v. SEC, et al. (“NAM”) that the conflict minerals disclosure rule violates the First Amendment to the extent it requires companies to report that any of their products have “not been found to be ‘DRC conflict free.’”  The NAM panel had granted a petition for rehearing in light of a July 2014 ruling in American Meat Institute v. U.S. Department of Agriculture (“AMI”), in which an en banc panel of the D.C. Circuit upheld the constitutionality of compelled speech in the form of Department of Agriculture rules requiring country-of-origin labeling for meat products and raised issues regarding the standard of review to be applied by the court in reviewing the First Amendment challenge in NAM.  Because the opinion also addressed the appropriate standard of review to be applied by courts in reviewing compelled speech in the regulatory arena, the NAM panel saw fit to reconsider its decision in light of AMI.

On rehearing, the panel affirmed its decision, explaining that while the AMI decision construed the Supreme Court’s opinion in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985) to expand the applicability of rational basis review to compelled disclosures for purposes other than curing consumer deception, that standard of review did not apply to the facts of NAM and therefore did not render the conflict minerals statutory provision (Section 1502 of the Dodd-Frank Act) or the SEC conflict minerals rule constitutional.  The panel also explained that the statutory provision and SEC rule would violate the First Amendment even if it applied the same analysis employed in the AMI decision.  In its opinion, the court said the government’s stated purpose for the conflict minerals disclosure rule rested on “speculation or conjecture,” that the compelled disclosure was stigmatizing, and that, although “‘[r]equiring a company to publicly condemn itself is undoubtedly a more ‘effective’ way for the government to stigmatize and shape behavior than for the government to have to convey its views itself’” that makes the disclosure requirement all the more “constitutionally offensive.”

While the D.C. Circuit has now issued its second, and possibly final, op...Read More

Council of Institutional Investors Announces Its Views on Proxy Access Best Practices

Today the Council of Institutional Investors (“CII”), a nonprofit association of corporate, public and union employee benefit funds and endowments that seeks to promote effective corporate governance practices for U.S. companies and strong shareholder rights and protections, published a report titled “Proxy Access:  Best Practices” that describes CII’s views on seven provisions that companies typically address when implementing proxy access.  The CII report is available here.


Proxy access refers to the ability of shareholders to include their director nominees in company proxy materials.  In 2010, the Securities and Exchange Commission adopted a universal proxy access rule (Rule 14a-11), which prescribed many of the provisions addressed today by CII.  Rule 14a-11 was vacated in 2011 when the DC Circuit ruled that the SEC had violated the Administrative Procedure Act in adopting the rule by failing to adequately evaluate its economic effects.  However, other rule amendments permitting proxy access shareholder proposals and allowing companies to implement proxy access mechanisms under state corporate law were not challenged and went into effect in 2011. 

Over 100 companies received proxy access shareholder proposals for consideration at 2015 meetings, making proxy access the most significant corporate governance issue during the 2015 proxy season.  Of the 84 proxy access shareholder proposals voted on thus far in 2015, 49 (58%) received majority votes.  To date, 35 companies have adopted proxy access.[1] 

CII’s Views on Proxy Access

CII views proxy access as a fundament...Read More

ISS Releases Survey for 2016 Policy Updates

Institutional Shareholder Services (“ISS”) today launched its annual global policy survey.  Each year, ISS solicits comments in connection with the review of its proxy voting policies. At the end of this process, in November 2015, ISS will announce its updated proxy voting policies applicable to 2016 shareholders’ meetings. 

ISS will publish the results from the policy survey and use them to inform its voting policy review.  The survey includes questions on a variety of governance and compensation topics relevant to U.S. companies, including: 


  • the types of restrictions in a board-adopted proxy access provision that should be viewed as not sufficiently responsive to a majority vote on a proxy access shareholder proposal (e.g., ownership thresholds, ownership duration, aggregation limits below 20 shareholders, limit on number of nominees, more restrictive advance notice requirements, re-nomination restrictions and restrictions on compensation of proxy access nominees);
  • whether ISS should extend the period of time it recommends votes “against” directors when a board unilaterally adopts bylaw/charter amendments that “materially diminish shareholder rights” and, if so, for how long (e.g., until the rights are restored) and in what circumstances (e.g., increasing advance notice requirements);
  • whether boards of IPO companies should be held accountable for adopting pre-IPO bylaw amendments that “materially diminish shareholder rights”;
  • when non-executive directors and directors who are active CEOs should be considered “overboarded” (the current ISS policy permits service on six and three public company boards, respectively) and whether overboarding limits should apply to directors with “demanding full-time jobs (e.g., CFOs, law firm partners, etc.)”;
  • when the five-year “cooling off” period should start before former executives serving on the board may be considered independent, and whether a similar “cooling off period” should apply to former service providers to the company (e.g., auditor or outside counsel);
  • the impact of controlled company status on investors’ proxy voting decisions and degree of engagement;
  • the company financial metrics and ratios that, if included in ISS reports, would be helpful to investors in assessing capital allocation decisions, including share buybacks, and the efficacy of board stew...Read More
FINRA FAQs on Research Conflict of Interest Rules

On May 27, 2015, FINRA issued a set of FAQs on its research conflict of interest rules.  These FAQs further expand upon views expressed by FINRA in settlement agreements entered into by FINRA in December 2014 with ten investment banks in connection with the 2010 proposed IPO by Toys “R” Us (the “Settlement Agreements”). 

Under NASD Rule 2711(c)(4), research analysts are prohibited from participating in a bank’s efforts to solicit investment banking business.  Under NASD Rule 2711(e), banking firms may not make promises of favorable research coverage during their efforts to obtain investment banking business.  In the Settlement Agreements, FINRA took a broad view of the concepts of soliciting investment banking business and promising favorable research. 

Toys “R” Us had notified the ten banks that their research analysts should separately present their views on a number of topics, including valuation, and that the analyst presentations would be considered as part of the selection process.  The company also asked all but one of the firms to present the unified view of their investment banks and equity research on valuation, which they were expected to stand behind if they were selected as underwriters. Toys “R” Us awarded mandates for roles in the proposed offering but did not proceed with the IPO.  In the Settlement Agreements, FINRA viewed the separate presentations given by the banks’ research analysts as well as the valuation confirmations given by those analysts to Toys “R” Us as impermissible solicitation activity in furtherance of investment banking business and impermissible promises of positive post-IPO research coverage. 

In the FAQs, FINRA presented its views on three distinct periods prior to an investment banking transaction and the attendant risks for violating the research conflict of interest rules with respect to each of these periods: (1) the solicitation period, (2) the pre-IPO period, and (3) the post-mandate period. In FINRA’s view, the risk of violating the research conflict rules is greatest during the solicitation period.  However, even in the pre-IPO period and the post-mandate period, care needs to be exercised so as to not run afoul of Rule 2711. Among other things, FINRA has not created any safe harbors for conduct in these periods and it may not always be clear as to when one period ends and another begins.  Accordingly, the determination for whether there has been a Rule 2711 violation will always be facts-and-circumstances specific.

What follows is a discussion of FINRA’s views with respect to each of the three periods.

Solicitation Period

In FINRA’s view, the greatest risk of violating the research conflict rules exists during the solicitation period for an IPO. FINRA defines the ...Read More

SEC Proposes Rules Regarding Clawbacks

The Securities and Exchange Commission (the “SEC”) today voted, 3-2, to issue proposed rules implementing the mandate in Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that the SEC require national securities exchanges and associations to adopt a listing standard that requires listed companies to adopt and enforce a clawback policy.  

This summary is based on information provided at the SEC's open meeting and therefore may not reflect nuances that appear in the official text of the proposals.  The proposing release is available here. The proposed rules will be subject to a 60-day comment period following publication in the Federal Register.

SEC Chair Mary Jo White and Commissioners Kara Stein and Luis Aguilar voted to propose the rules and Commissioners Daniel Gallagher and Michael Piwowar dissented.  Statements made by the Commissioners today regarding the proposal are on the SEC website and available here

Section 954 of the Dodd-Frank Act mandates that the SEC adopt rules requiring national securities exchanges and associations to establish listing standards that require listed companies to develop and implement a policy providing that, in the event of a financial restatement due to material noncompliance with financial reporting standards, the listed company will recover any incentive-based compensation that is more than what would have been paid but for the financial reporting error.

The SEC’s proposed new Rule 10D-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), directs the exchanges and associations to adopt listing standards that would require each listed company to adopt, comply with and disclose a compensation recovery policy that complies with the following parameters: 

  • If during the last completed fiscal year, the company was required to prepare an accounting restatement to correct a material error, the company would be required to seek recovery from current and former “executive officers” who received “excess incentive-based compensation” during the three fiscal years preceding the date of the restatement;
  • “Executive officers” would include all Section 16 office...Read More
SEC Publishes Interpretations regarding “Regulation A+”

On June 23, 2015, the Staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) published several new Compliance and Disclosure Interpretations (“Interpretations”) relating to rules and forms under the Securities Act of 1933, as amended (the “Securities Act”).  These Interpretations address questions and considerations relating to “Regulation A+”, which was adopted by the SEC on March 25, and became effective last Friday, June 19.

Gibson Dunn’s client alert regarding the adoption of Regulation A+ is available at the following link: ($50Million.aspx)

The key Interpretations are summarized below:

  1. Confidential Filings.  If an issuer elects to have its offering statement reviewed confidentially by the Staff, and at the time it first files its offering statement makes public on EDGARLink all prior draft offering statements, it need not refile such drafts as an exhibit to the publicly filed Form 1–A. It will be required, however, to file any non-public correspondence as an exhibit to its public offering statement (Question 182.01).
  2. Confidential Treatment Requests.  If an issuer elects to have its offering statement reviewed confidentially by the Staff, and submits correspondence relating to that offering statement, it may request confidential treatment of information in its correspondence pursuant to Rule 83 under the Securities Act, in a manner similar to the review process in a typical registered offering. When the issuer subsequently makes its public filing of the offering statement and files any correspondence relating to the review in accordance with the requirements of Regulation A+, it would redact the confidential information from the filed correspondence exhibit, include the required legends and redaction markings and submit a request to the SEC for confidential treatment in accordance with Securities Act Rule 406. The SEC will act on the confidential treatment request prior to qualifying the offering statement (Question 182.02).
  3. Principal Place of Business.  An issuer will be considered to have its “principal place of business” in the United States or Canada for Regulation A+ eligibility purposes if the issuer’s activities are primarily directed, controlled and coordinated from those countries (i.e., the issuer’s headquarters are located within the United Stat...Read More
New Investor Guide on Engaging With Public Companies and Others on ESG Issues

On May 28, 2015, BlackRock and Ceres released a guide for investors on engaging with public companies, asset managers and policymakers on environmental, social and governance (“ESG”) sustainability matters.  The guide, titled “21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions,” includes sections written by BlackRock and Ceres as well as AFL-CIO, California Public Employees Retirement System (“CalPERS”), California State Teachers Retirement System (“CalSTRS”), Council of Institutional Investors (“CII”), International Corporate Governance Network (“ICGN”), the Office of  New York City Comptroller, New York State Common Retirement Fund, North Carolina Department of State Treasurer, PGGM, State Board of Administration of Florida, TIAA-CREF, T. Rowe Price and UAW Retiree Medical Benefits Trust. 

The topics addressed in the guide include engaging with boards of directors, how to prepare and submit shareholder proposals, how to write effective letters, engaging with asset managers and government agencies, launching “vote no” campaigns, collaborating with other investors to promote sustainability initiatives, and when investors should consider divestment as opposed to further engagement.  The guide also includes a section co-authored by representatives of Cornerstone Capital Group and the Sustainability Accounting Standards Board that proposes ESG-related questions institutional investors and analysts should ask companies in specific industries. Industries covered include: Oil, Gas and Mining; Banking and Finance; Insurance; Information Technology; Electric Utilities; Apparel and Retail; Transport; Food and Beverage; and Healthcare and Pharmaceuticals.

NASDAQ Issues FAQ Relaxing Historical Position on Net Share Settled Convertible Securities

In a change that we believe has gotten little attention to date, in March 2015 NASDAQ updated its publicly available “Frequently Asked Questions” relating to the application of NASDAQ’s shareholder approval rules to net share settled convertible securities issued in private placements.

Under NASDAQ Rule 5635(d), shareholder approval is required prior to the issuance by a NASDAQ listed company of securities in connection with a transaction other than a public offering involving, among other things, the sale, issuance or potential issuance by an issuer of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of the book or market value of the stock (the “20% Rule”).

The 20% Rule frequently is in play in private offerings of convertible securities by smaller NASDAQ listed companies. However, because the conversion price of convertible securities is often at a premium to the greater of the book or market price of the underlying stock (particularly in Rule 144A offerings, where a conversion premium of at least 10% to market is required)[1], the 20% Rule often is not an issue for physically settled convertible securities.[2] This has not been the case, however, for net share settled convertible securities (whether mandatory net share settled or flexible net share settled)[3], which NASDAQ has treated differently from physically settled convertible securities.  NASDAQ historically has viewed both types of net share settled convertible securities as being issued with a conversion price below the greater of the book or market value of the underlying stock because of the ability of the issuer to settle conversions in whole or in part in cash (effectively treating the cash payment as a return of principal and reducing the conversion price).  This NASDAQ position has often resulted in the 20% Rule being applicable to an offering for smaller companies issuing net share settled convert...Read More

SEC Proposes Rules On "Pay Versus Performance" Disclosures

To Our Clients and Friends:

On April 29, 2015, the Securities and Exchange Commission ("SEC" or "Commission") voted, 3-2, to issue proposed rules implementing the pay-versus-performance disclosure requirement in Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").  In summary, the proposed rules would require proxy statements or information statements setting forth executive compensation disclosure to include (1) a new compensation table setting forth for each of the five most recently completed fiscal years, the "executive compensation actually paid" (as defined in the proposed rules), total compensation as disclosed in the Summary Compensation Table, total shareholder return (TSR), and peer group TSR, and (2) based on the information set forth in the new table, a clear description of the relationship between executive compensation actually paid to the company's named executive officers and the company's TSR, and a comparison of the company's TSR and the TSR of a peer group chosen by the company.

Statements made by the SEC Commissioners during the open meeting regarding the proposed rules are available here, and the SEC's proposing release is available here.  The comment period for the proposed rules will expire 60 days after the proposed rules are published in the Federal Register.  Set forth below is a summary of the proposed rules, highlights from the Commissioners' statements, and considerations for companies. 

Summary of the Proposed Rules

New Tabular Disclosure under Item 402(v) of Regulation S-K.  Section 953(a) of the Dodd-Frank Act instructs the Commission to adopt rules requiring companies to provide "a clear description of … information that shows the relationship between executive compensation actually paid and the financial performance of the issuer."  To address this mandate, proposed Item 402(v) would require companies to include a new table (in the format set forth below...Read More

SEC Votes Unanimously to Overhaul and Expand Regulation A; “Regulation A+” to Serve as an Exemption for Offerings up to $50 Million

The Securities and Exchange Commission (SEC) voted unanimously on March 25, 2015 to expand significantly the ability of certain issuers to raise capital in transactions exempt from the registration requirements of the Securities Act of 1933. This new regime, commonly referred to as “Regulation A+,” is intended to create additional opportunities for companies to raise capital without having to comply with the more burdensome aspects of the traditional registration process. The adopting release, including text of the final rules, is available at

The rules adopted by the SEC, as discussed by the Commissioners and SEC staff at the open Commission meeting, are similar to the rules initially proposed in December 2013, with some modifications. Significant aspects of Regulation A+ as adopted include:

  • Offering limits / Two tier system. Issuers will be able to choose between two “tiers” of offering sizes under Regulation A+. Issuers electing to sell securities under Tier 1 will be limited to raising $20 million within a 12-month period, while those electing to sell under Tier 2 will be limited to $50 million within a 12-month period. 
  • Selling stockholders. Selling stockholders will be permitted in Regulation A+ offerings, and securities sold by selling stockholders will count towards the $20 million Tier 1 and $50 million Tier 2 annual limits. However, in an issuer’s first Regulation A+ offering or any subsequent Regulation A+ offering within twelve months of such first offering, securities sold by selling stockholders, whether or not affiliates, may not in the aggregate constitute more than 30% of the aggregate offering amount with respect to any such offering. In addition, at no time may aggregate sales by affiliates in any 12-month period under Regulation A+ be more than $6 million in the case of Tier 1 offerings or more than $15 million in the case of the Tier 2 offerings.   
  • Ineligible issuers. Regulation A+ will be limited to companies organized in and with their principal place of business in the United States or Canada. Companies that are not eligible to use the Regulation A+ exemption include reporting companies subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), companies that have failed to comply with their Regulation A+ reporting obligations at any time within the past two years, blank check companies, investment companies registered or required to be registered under the Investment Company Act of 1940...Read More
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