|ISS Proposes and Opens Comment on Draft 2021 Voting Policy Updates|
Last week, Institutional Shareholder Services (“ISS") proposed and published for comment voting policy changes for the 2021 proxy season. These include three proposed updates that would apply to U.S. companies.
The proposed U.S. policy changes are available here and are summarized below. Comments on the proposals can be submitted by e-mail to firstname.lastname@example.org until 5 p.m. ET on October 26, 2020. ISS will take the comments into account as part of its policy review and expects to release final changes to its voting policies during the first half of November 2020. It is important to note that ISS's final 2021 proxy voting policies may reflect additional changes, beyond those on which ISS is soliciting comment. The final voting policies will apply to shareholder meetings held on or after February 1, 2021, except for policies subject to transition periods.
Comments submitted to ISS may be published on its website, unless requested otherwise.
For companies in the S&P 1500 and Russell 3000 indices, ISS is proposing a change to its director elections policy to address boards “with no apparent racial and/or ethnic diversity." Under the proposed policy, beginning in 2022, ISS would generally recommend “against" or “withhold" votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) where a board “has no apparent racially or ethnically diverse members" and there are no “mitigating factors" disclosed. Mitigating factors would include the presence of a diverse director on the board at the prior annual meeting and a firm commitment to appoint a least one diverse director.
In 2021, ISS would highlight boards that lack racial and ethnic diversity (or disclosure on this topic) in its proxy voting analyses to help investors identify companies where it may be appropriate to engage about diversity. ISS would not issue negative voting recommendations in 2021 based on a lack of diversity. ISS has specifically requested feedback on whether the one-year transition period for this proposed policy is too short or too long.
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|Regulation S-K Amendments to Items 101, 103, and 105 to go Effective November 9, 2020|
The amendments to Items 101, 103, and 105 of Regulation S-K that were adopted by the SEC on August 26, 2020 (discussed in our previous client alert, available here) were published in the Federal Register today, October 8, 2020. As a result, the amendments will go into effect on Monday November 9, 2020 (the first business day following 30 days after publication in the Federal Register). November 9 is also the last day for calendar companies that are large accelerated filers or accelerated filers to file the Q3 10-Q.
Despite some arguments that S-K Item 105 does not apply to Part II, Item 1A of Form 10-Q, pending any interpretive guidance from the SEC staff, registrants filing a Form 10-Q on or after November 9, 2020 that voluntarily repeat all their risk factors in each Form 10-Q should consider complying with Item 105's new requirements for risk factors. This means that risk factors should be grouped under relevant headings and any risk factor discussion exceeding 15 pages should include a “a series of concise, bulleted or numbered statements that is no more than two pages" summarizing the principal risk factors.
|SEC Provides New Option for Extending Confidential Treatment|
The SEC just made it a little easier to maintain the confidentiality of sensitive information that is the subject of a soon-to-expire confidential treatment order. As discussed below, under the SEC's latest guidance a company can now use the simplified confidential treatment process available for new exhibits when seeking to extend confidential treatment of previously filed exhibits.
Previously, on March 20, 2019, the SEC amended its exhibit filing requirements to allow companies to omit immaterial, competitively harmful information without having to submit a full-blown confidential treatment request detailing the basis for the omission of information and requesting staff approval of the omissions. Shortly thereafter, the Division of Corporation Finance took the position that, in situations where a confidential treatment order obtained under either Rule 406 or Rule 24b-2 was about the expire, “[r]efiling the redacted exhibit in the manner specified by the recently adopted redacted exhibit rules will not provide confidential treatment for the previously filed CTR information." See the announcement here and our discussion of the announcement here.
Subsequently, on September 9, 2020, the Division formally changed its position by updating CF Disclosure Guidance Topic No. 7 (Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b-2) (available here) to provide companies with the ability to transition to the new redaction rules under certain circumstances. As updated, Topic 7 states:
If it has been more than three years since the initial confidential treatment order was issued, and if the contract continues to be material, companies have the option to transition to compliance with the requirements set out in Regulation S-K Item 601(b)(10) and other parallel rules, referred to here as the redacted exhibit rules. The redacted exhibit rules allow for the filing of redacted exhibits without submitting an explanation or substantiation to the SEC, or providing an unredacted copy of the exhibit, except upon request of the staff.
In order to transition to the redacted exhibits rules in these situations, a company would only be required to refile the material contract in redacted form and comply with the legend and other requirements of the applicable redacted exhibit rule, most commonly Item 601(b)(10)(iv) of Regulati...
|NYSE's Attempt to Allow Primary Offerings in Direct Listings Hits a Snag|
Direct listings have emerged as one of the new innovative pathways to the U.S. public capital markets, thought to be ideal for entrepreneurial companies with a well-recognized brand name or easily understood business model. We have also found it attractive to companies that are already listed on a foreign exchange and are seeking a dual listing in the United States. Because direct listings are currently limited to secondary offerings by existing shareholders, they are not an attractive option for companies seeking to raise new capital in connection with a listing.
On August 26, 2020, the SEC approved a proposed rule change by the NYSE that, when effective, would permit primary offerings in connection with a direct listing for the first time (available here). This primary option is expected to increase the number of companies that find direct listings attractive, although it will not serve as a replacement for IPOs generally.
On August 31, the Council of Institutional Investors (CII) notified (available here) the Securities and Exchange Commission of its intention to file a petition for the SEC's Commissioners to review the August 26 order approving the NYSE's proposed rule change. In prior letters to the SEC, CII objected to the proposals to allow primary offerings, arguing that they would limit investors' legal recourse for material misstatements in the prospectus for the offering and would not generate sufficient liquidity for a trading market in the securities to develop after the listing.
In response to CII's objection, on September 1, the SEC stayed its approval of the NYSE's proposed rule changes until the SEC orders otherwise (available here). An NYSE spokesperson stated shortly thereafter the exchange's intention to ask the SEC to lift the stay of its approval immediately. CII must file a petition for review, pursuant to the SEC's Rules of Practice, containing further information within five days of its notice to the SEC.
Primary offerings through direct listings pose new challenges and questions, but nonetheless have potential to expand access to the U.S. public markets. Any company considering a direct listing is encouraged to carefully consider the risks and benefits in consultation with counsel and financial advisors. Members of the Gibson Dunn Capital Markets team are available to discuss strategy, options and considerations as the rules and practice concerning direct listings evolve. Gibson Dunn will also update its Current Guide To Direct Listings (avai...
|SEC Reduces Filing Fee Rate Effective October 1, 2020|
On August 26, 2020, the Securities and Exchange Commission announced that starting October 1, 2020, the fees that public companies and other issuers must pay to register securities with the SEC will be set at $109.10 per million dollars of securities registered. This is a reduction from the rate for 2020 of $129.80.
The securities laws require the SEC to make annual adjustments to the rates for fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e) and 14(g) of the Securities Exchange Act of 1934. The SEC must set rates for the fees paid under Section 6(b) to levels that the SEC projects will generate collections equal to annual statutory target amounts. The SEC's projections are calculated using a methodology developed in consultation with the Congressional Budget Office and the Office of Management and Budget. As directed by the statute, the SEC determined the statutory target amount for fiscal year 2021 to be $709,554,300 by adjusting the fiscal year 2020 target collection amount of $705 million for the rate of inflation. The annual adjustment to the fee rate under Section 6(b) also sets the annual adjustment to the fee rates under Sections 13(e) and 14(g).
By law, the annual rate changes for fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e) and 14(g) of the Securities Exchange Act of 1934 must take effect on the first day of the government's fiscal year. Therefore, effective October 1, 2020, the Section 6(b) fee rate applicable to the registration of securities, the Section 13(e) fee rate applicable to the repurchase of securities, and the Section 14(g) fee rates applicable to proxy solicitations and statements in corporate control transactions will decrease to $109.10 per million dollars from $129.80 per million dollars. The Section 6(b) rate is also the rate used to calculate the fees payable with the Annual Notice of Securities Sold Pursuant to Rule 24f-2 under the Investment Company Act of 1940.
|SEC Expands the Definitions of “Accredited Investor” and “Qualified Institutional Buyer”|
Of particular interest as private capital markets activity continues to grow, the “accredited investor" definition is one of the principal tests for determining who is eligible to participate in investment opportunities presented by the private capital markets. On August 26, 2020, the SEC announced that it adopted amendments to the definitions of “accredited investor" in Rule 501, as well as the definition of “qualified institutional buyer" in Rule 144A, each under the Securities Act of 1933. These amendments are part of the SEC's ongoing efforts to simplify, harmonize and improve the framework for securities offerings that are not registered with the SEC under the Securities Act (for more information on this initiative, see our prior Monitor post here).
The definition of an “accredited investor" is utilized to determine whether a securities offering qualifies under Securities Act Regulation D as a private offering that does not require filing and clearing a registration statement with the SEC. But the definition is also widely used outside of the Regulation D context for assessing private offerings. Currently, the test for an individual to qualify as an accredited investor relies almost exclusively on that individual's income and net worth, regardless of their financial sophistication, an approach that SEC Chairman Jay Clayton called “unsatisfactory" in a public statement regarding the changes. The amendments update this framework, which had remained substantially unchanged for over 35 years, by revising the definition to include individuals with specified knowledge and expertise, in addition to those who meet the original tests. “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication," said Chairman Clayton.
The amendments were approved by a 3-2 vote, with Commissioner Allison Herren Lee and new Commissioner Caroline Crenshaw dissenting. In a joint statement, Commissioners Lee and Crenshaw, both members of the Democratic party, voiced their disappointment that the Commission failed to index for inflation the existing net worth and income thresholds in the definition of accredited investor or to take additional steps to protect investors, particularly seniors, from fraud in the less transparent private capital...
|SEC To Consider Adopting Changes to Regulation S-K and Definitions of Qualified Investors in Private Placements: Public Meeting on August 26|
What are you doing at lunchtime on August 26? The SEC has announced that it will hold a webcast public meeting to discuss its broader efforts to (1) modernize and improve the SEC's disclosure framework in light of the changes in our capital markets and domestic and global economy, and (2) simplify, harmonize, and improve the exempt offering framework under the Securities Act to promote capital formation and expand investment opportunities while maintaining and enhancing appropriate investor protections.
More specifically, the SEC will consider:
1. Whether to adopt amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These disclosure items, which have not undergone significant revisions in over 30 years, would be updated to account for developments since the rules' adoption or last revision, to improve disclosure for investors, and to simplify compliance for registrants. Specifically, the amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material. These changes to Items 101, 103 and 105 of S-K were proposed in August 2019 (see our prior Monitor post here). Of particular interest is whether the proposals to use a “principles-based approach" to the Business section and to add “human capital" disclosures will be addressed.
2. Whether to adopt amendments to the definition of “accredited investor" in Commission rules and the definition of “qualified institutional buyer" in Rule 144A under the Securities Act to update and improve the definition to identify more effectively investors that have sufficient financial sophistication to participate in certain private investment opportunities. The changes to these definitions were proposed in December 2019 by a 3-2 vote of the SEC (see proposed rules announcement here) following a concept release published in June 2019 (see our prior Monitor post here). The proposed amendments to the “accredited investor" definition would expand the number of investors eligible for that status by allowing individuals to qualify based on their professional knowledge, experience or certifications. The proposed amendments also would expand the type of entities that qualify as accredited investors. Chairman Jay Clayton has commented that “The current test for individual accredited investor sta...
|SEC Issues Guidance Regarding Submission of Supplemental Materials and Confidential Treatment Requests in Light of COVID-19 Concerns|
On August 4, 2020, the Division of Corporation Finance (the “Division") of the Securities and Exchange Commission (the “SEC") issued guidance relating to the submission of supplemental materials and information subject to Rule 83 confidential treatment requests in light of COVID-19 concerns (available here). The Division is providing a temporary secure file transfer process for the submission of supplemental materials pursuant to Securities Act Rule 418 and Exchange Act Rule 12b-4, including supplemental materials subject to a Rule 83 confidential treatment request. This secure file transfer process is a temporary accommodation to the SEC's rules and procedures for receiving confidential information (as discussed in a prior client alert, available here), due to ongoing health and safety concerns related to COVID-19.
In addition, the Division has designated alternative procedures for the submission of Rule 83 confidential treatment requests, by which persons submitting information may request confidential treatment for portions of that information where no other confidential treatment process applies. While such requests must ordinarily be submitted in paper format, the secure file transfer process allows for electronic submission to the Division of Rule 83 confidential treatment requests together with the confidential information during this temporary accommodation. A copy of the request for confidential treatment (but not the confidential information itself) must also be submitted to the Commission's Office of FOIA Services (“OFS"). In light of COVID-19 concerns, OFS is now accepting confidential treatment requests via email to Rule83CTRs@sec.gov (as provided here).
Persons and entities wishing to submit supplemental information or information subject to a Rule 83 confidential treatment request should contact the staff member associated with the related matter to request the initiation of a secure file transfer. Contact information for the Division can be found here. Alternatively, submitters may continue to send supplemental materials and information subject to a Rule 83 confidential treatment request to the SEC mailroom. There will, however, be delays in the processing of such documents.
We would like to thank Rodrigo Surcan in our New York office and Chris Connelly in our Orange County office for their work on this article.
|SEC Staff provides additional disclosure guidance related to COVID-19 impact|
Due to the ongoing assessment of the impact of COVID-19 on companies' operations, liquidity and capital resources and overall economic and market conditions, companies should take special care in preparing for their quarterly reporting. To aid in this effort, the staff (the “Staff") of the Securities and Exchange Commission (“SEC") has posted a new set of questions that companies should consider in evaluating whether certain disclosures should be included in their earnings release and, in light of its potential materiality, in the management discussion and analysis (“MD&A") included in the periodic reports (e.g., the Form 10-Q for second quarter 2020).
On June 23, 2020, the Division of Corporation Finance of the SEC issued disclosure guidance in the form of CF Disclosure Guidance: Topic No. 9A (“Topic 9A") providing additional views regarding operations, liquidity, and capital resources disclosures that companies should consider with respect to business and market disruptions related to COVID-19. This complements CF Disclosure Guidance: Topic No. 9 (“Topic 9") published on March 25, 2020 (which was addressed on our previous post, available here).
Separately, on June 23, 2020, the SEC Chief Accountant issued a Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19, highlighting the Office of the Chief Accountant's recent work to promote high-quality financial reporting, and its engagement with the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, the International Accounting Standards Board, the International Organization of Securities Commissions, the International Federation of Accountants, and the Public Interest Oversight Board. This complements the Chief Accountant's previous Statement on the Im...
|Key Considerations for Issuers and Auditors Regarding Going-Concern Analysis|
Issuers in the United States and their auditors have related, but distinct, obligations to evaluate on a periodic basis whether there is substantial doubt about the issuer's ability to continue as a going concern. In normal times, this evaluation, conducted with an appropriate level of diligence, results as to almost all major public companies in the conclusion that there is no substantial doubt about the entity's ability to meet its obligations in the months to come.
But these are not normal times. As the COVID-19 crisis takes an ever-greater toll on the American economy, and as multiple well-known companies declare bankruptcy, the going-concern assessment has taken on new relevance for issuers, auditors, and others in the financial-reporting community. As a result, the number of issuer filings that contain a going-concern disclosure appears to have substantially increased.
our recent client alert, we review some of the significant considerations that apply to the going-concern analysis from both the issuer's and the auditor's perspectives.
Summary of Issues
Financial Accounting Standards Board (“FASB") accounting standards and Public Company Accounting Oversight Board (“PCAOB") auditing standards both require an assessment of whether there is substantial doubt about the issuer's ability to continue as a going concern, including evaluating concrete management plans to address the circumstances giving rise to the reasonable doubt. The auditor is required to make an independent assessment, not simply evaluate manag...
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