Securities Regulation and Corporate Governance


SEC Proposes to Substantially Lighten Financial Disclosures for Issuers and Guarantors of Registered Debt

On July 24, 2018, the Securities and Exchange Commission (the “Commission") proposed amendments to Rules 3-10 and 3-16 of Regulation S-X (available here) in an effort to “simplify and streamline" the financial disclosures required in offerings of certain guaranteed debt and debt-like securities (collectively referred to as “debt securities"), as well as offerings of securities collateralized by securities of an affiliate of the registrant, registered under the Securities Act of 1933, as amended (the “Securities Act"). These proposed changes would, if implemented, facilitate greater speed to market for such public offerings, significantly reducing the Securities Act disclosure burdens for such registrants, as well as reducing the registrant's disclosure obligations in its subsequent annual and interim reports required under Securities Exchange Act of 1934, as amended (the “Exchange Act"). Taken together, the proposed changes represent a significant liberalization of the current disclosure requirements. 

We discuss the proposed changes in greater detail and provide a “before and after" comparison chart in our Client Alert (available here).

The proposed amendments to Rule 3-10 of Regulation S-X would:

  • replace the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company's consolidated financial statements (e.g., joint ventures controlled or majority-owned by an issuer), which would mean more subsidiaries would be eligible for disclosure exceptions;​
  • replace condensed consolidating financial information with certain proposed financial and non-financial disclosures, including summarized financial information which may be presented on a combined basis over fewer periods and expanded qualitative disclosures about the guarantees, issuers and guarantors (as further described below), which would reduce general disclosure requirements;
  • permit the proposed disclosures to be provided outside the footnotes to the parent company's audited annual and unaudited interim consolidated financial statements in the registration statement covering the offer and sale of the subject securities and any related prospectus, and instead in certain Exchange Act reports filed shortly thereafter;
  • require the proposed disclosures be included in the footnotes to the parent company's consolidated financial statements for annual and quarterly reports beginning with the annual report for the fiscal year during which the first bona fide sale o...
SEC’s Division of Corporation Finance Issues Guidance Regarding the Voluntary Filing of Notices of Exempt Solicitation under Exchange Act Rule 14a-6(g)

​As we first noted in our March 2018 blog post, available here, and further discussed in our July 2018 client alert discussing shareholder proposals submitted to public companies during the 2018 proxy season, available here, both institutional and individual investors increasingly have used Notices of Exempt Solicitations under Exchange Act Rule 14a-6(g) as a means of publicizing shareholder proposals or addressing other matters being voted on at annual meetings. Rule 14a-6(g) requires a person who owns more than $5 million of a company's stock and who conducts an exempt solicitation of the company's shareholders (in which the person does not seek to have proxies granted to them) to file with the Securities and Exchange Commission (the “Commission") all written materials used in the solicitation.

As we have previously discussed, Notices of Exempt Solicitation, which appear on a company's EDGAR page as a PX14A6G filing, can be confusing to shareholders and other stakeholders because the Division of Corporation Finance (the “Staff") of the Commission has not previously addressed whether such filings must include a cover page containing information about the filer that clearly demonstrates that the notice was not filed by the company (in contrast to, for example, Schedule 13Gs and 13Ds). Moreover, filers have not been required to provide basic information in the notice, such as what interest they may have in the matter they are soliciting on or their share ownership in the company (or even to demonstrate that they are, in fact, a shareholder).

On July 31, the Staff released two new Compliance and Disclosure Interpretations (“C&DIs"), available here, providing guidance on the use of Notices of Exempt Solicitations.

The first C&DI, Question 126.06, confirms that “voluntary" Notices of Exempt Solicitations can be filed. Accordingly the Staff will continue to permit filers who do not own more than $5 million of a company's securities to use EDGAR as a means to draw attention to their views on various matters. However, under the Staff's new guidance, the filer must specifically state that its Notice of Exempt Solicitation is a voluntary filing. As a result, observers who know the intricacies of the securities laws will be informed that the filer owns $5 million or less of the company's stock.

The second C&DI, Question 126.07, clarifies that each Notice of Exempt Solicitation, whet...

House of Representatives Adopts Bipartisan Financial Reform – JOBS Act 3.0

On July 17, 2018, the U.S. House of Representatives overwhelmingly passed, by a vote of 406-4, bipartisan financial reform legislation titled the “JOBS and Investor Confidence Act of 2018," frequently referred to as JOBS Act 3.0.  The JOBS Act 3.0 builds upon the 2012 Jumpstart Our Business Startups (“JOBS") Act, and on the Fixing America's Surface Transportation Act (the “FAST Act"), which was enacted in 2015 and is commonly referred to as JOBS Act 2.0. 

The proposed JOBS Act 3.0, which had the backing of House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Ranking Member Maxine Waters (D-CA), still must be approved by the U.S. Senate.  The legislation includes 32 individual bills that already passed the House Financial Services Committee or the House during this congressional term.  Key provisions include: 

 1.     Encouraging Public Offerings Act of 2017 (H.R. 3903) (Further Extension of JOBS Act IPO “On-Ramp").  Sponsored by Rep. Tedd Budd (R-NC) and Rep. Gregory Meeks (D-NY), this bill would amend the Securities Act of 1933 (Securities Act) to permit all companies to submit confidential draft registration statements for their initial public offerings (IPOs) to the Securities and Exchange Commission (SEC) for SEC staff review, as well as for securities offerings within one year of an IPO.  Additionally, this bill would allow all companies to engage in “test-the-waters" activities with qualified institutional buyers and other institutional accredited investors in connection with securities offerings.  The Securities Act currently permits an “emerging growth company" (EGC) to confidentially submit a registration statement in connection with its IPO and to engage in “test-the-waters" activities in connection with its securities offerings, although in June 2017 the SEC adopted a policy permitting non-EGCs to also confidentially submit registration statements for their IPOs and permitting all issuers to confidentially submit registration statements in connection with securities offerings within one year of an IPO.  The text of H.R. 3903 can be found here.

2.     Main Street Growth Act (H.R. 5877) (Creation of Venture Exchanges).  Sponsored by Rep. Tom Emmer (R-MN), this bill would amend the Exchange Act of 1934 (Exchange Act) to allow for the creation of venture exchanges registered with the SEC to provide trading venues more tailored to the needs of small and emerging companies.  Securities of “early stage growth companies" exempt from registration pursuant to Regulation...

SEC Amends “Smaller Reporting Company” Definition to Expand Access to Scaled Disclosure Accommodations

On June 28, 2018, the United States Securities and Exchange Commission (the “SEC") approved amendments to the definition of a “smaller reporting company" (a “SRC").  These amendments will expand the number of registrants qualifying for SRC scaled disclosure accommodations in their SEC filings.  These scaled disclosure accommodations include, among other things, reduced required business, financial and executive compensation disclosures.  A chart  briefly summarizing the SRC disclosure accommodations is attached as Exhibit A.

The amendments should benefit a number of public companies with less than $250 million of public float, as well as public companies with revenues of less than $100 million and less than $700 million of public float. One industry sector that may benefit from the amendments is the biotechnology and life sciences sector, where we believe a significant number of additional companies will now be able to qualify for SRC status. But companies across all industry sectors should benefit from these amendments.  The SEC estimates 966 additional reporting companies will be eligible for SRC status in the first year under the amended definition, and approximately 48.8% of SEC registrants will now qualify as SRCs (as compared to approximately 35.7% currently).[1]  

We provide a summary of the SEC's SRC amendments below and the full text of the SEC's adopting release is available here.

As revised, Rule 12b-2 under the Exchange Act of 1934, as amended (the “Exchange Act"), Rule 405 of the Securities Act of 1933, as amended, and Item 10(f) of Regulation S-K, define a “Smaller Reporting Company" as an issuer that is not an ...

The SEC Identifies Priorities in Draft Strategic Plan Through 2022

On June 19, 2018, the Securities and Exchange Commission (the “SEC") published a draft strategic plan outlining the SEC's priorities through 2022 (the “2018 Plan"). In the 2018 Plan, the SEC elected to pursue three goals, emphasizing investors, innovation and performance, each of which is summarized below. The 2018 Plan focuses on the “Main Street" investor, responds to new market developments, such as the growth of cryptocurrencies, and improves the regulator's use of data and analytics.

In his cover letter, SEC Chairman Jay Clayton stated, “The Plan provides a forward-looking framework for making the SEC even more effective, focusing on the most important goals and initiatives that will best position the SEC to fulfill our mission.... For the investing public and the various market participants and regulatory authorities who interact with the SEC, we hope this Strategic Plan will inspire your full confidence in our ability to innovate in response to evolving markets."

The 2018 Plan was drafted pursuant to the Government Performance and Results Modernization Act of 2010, "which requires federal agencies to outline their missions, planned initiatives, and strategic goals for a four year period." The SEC has opened the public comment period for investors and other market participants to share their concerns and suggestions. Comments on the draft 2018 plan are due July 25, 2018 and may be submitted by e-mail to, or through written correspondence to Nicole Puccio, Branch Chief, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549–2521.

Focus on Retail Investors

The SEC's first enumerated goal in the 2018 Plan centers around preserving long-term investor interests. Primarily, the SEC acknowledges the challenges associated with retirees' increased life expectancy and their reliance on investments as a source of income. Additionally, the SEC highlights common problems faced by investors such as a lack of clarity in deciphering the difference between investment professionals who merely sell securities and those poised to give advice, as well as the decline in companies raising capital through securities. In order to combat decreased opportunities for investors, the SEC proposes five initiatives:

(1) Access. The SEC plans to enhance its understanding of channels used by retail and institutional investors to access capital markets in order to tailor access initiatives.

(2) Diverse Guidance. Because not all investors, businesses and markets are the same, the SEC plans to enhance its outreach efforts to diverse investors.

(3) Misconduct Deterrence. With an increasingly connected m...

The SEC Continues to Modernize and Adapt to the Times

​The Securities and Exchange Commission (“the Commission") recently adopted two rule amendments in its latest effort to synchronize Commission policies with the rapidly developing digital age.

The first set of amendments (effective May 14, 2018) available here includes minor revisions to Regulation S-T and the Description of Exchange Act Forms (17 CFR parts 232 and 249) to remove items in certain SEC forms (e.g., Forms Funding Portal, MA, MA-I, MSD, and Instructions for the Form MA series)[1] requiring filers to disclose personal information, such as their date of birth or social security number. The updated forms address the ever‑increasing cybersecurity risk faced by filers disclosing personal identifying information. Specifically, the Commission notes the potential cost to filers “in the event of unauthorized access or release of certain sensitive [personal information,]" including “ongoing identity protection and monitoring, reputation costs, operational costs, and losses from theft[.]" This string of minor amendments will help filers protect their personal information and avoid the unnecessary risks and costs all too common in an era of continuous large-scale data breaches.

The second amendment (effective June 1, 2018) available here relates to the Commission's Rules of Practice (17 CFR parts 200 and 201) and addresses the shifting technological preferences of its stakeholders. Specifically, the amendment eliminates publication of the “SEC Docket," a weekly compilation of relevant SEC actions. All of the information currently compiled in the weekly Docket is available in digital form on the Commission's website at the time of publication. As justification for the Docket's elimination, the Commission noted “the Docket generally receives less than 0.01% of all SEC website traffic" but requires “approximately 600 staff hours" to prepare each year.  

Together these amendments evidence the Commission's willingness to actively review internal policies and procedures and make changes where appropriate. These recent amendments protect filers providing information, but they also better serve investors relying on the SEC for information – all while minimizing unnecessary burdens and costs.

Thanks to Collin Metcalf in the Houston office for the summary above.

   [1]   The Securities Act of 1934 (as amended) created these forms as a registration requirement for crowdfundi...

The SEC's Proposed Transaction Fee Pilot for US Equity Securities

In March 2018, the Securities and Exchange Commission ("SEC") issued a proposed rule, Rule 610T of Regulation NMS (the "Proposal"), which would create a Transaction Fee Pilot for National Market System ("NMS") stocks (the "Pilot").  The Pilot recently received renewed attention as a result of an email sent by the New York Stock Exchange ("NYSE") to listed issuers expressing concerns the NYSE has regarding the Pilot.

As explained in the Proposal, the Pilot's purpose would be to study the effects that potential changes to transaction-based fees and rebates that are paid by exchanges to broker-dealers/market makers may have on order routing behavior, execution quality, and market quality more generally.  The Pilot is designed to generate data to help inform the SEC, market participants, and the public about the effects, if any, of such fees, thereby facilitating an evaluation of the need for regulatory action in this area.

The Pilot would apply to equities exchanges, but not alternative trading systems or other non-exchange trading centers, and would last one year unless extended to two years by the SEC.  As proposed, the Pilot would require the creation of three test groups of 1,000 listed stocks, each of which would be subject to different levels of allowable access fees and rebates.  The listed stocks not selected for one of the three groups would comprise a control group, which would be subject only to the access fee cap imposed by existing rules.

By way of background, the predominant fee model in the U.S. equities markets is the "maker-taker" model, in which an exchange or other trading center pays its broker-dealer participants a per share rebate to provide (i.e., "make") liquidity in securities and assesses them a fee to remove (i.e., "take") liquidity.  An alternative model is the "taker-maker" model (or inverted model), where the trading center charges a fee to the provider of liquidity and pays a rebate to the taker of liquidity.  Market participants and others have expressed concern about the maker-taker model, arguing that it may pose a conflict of interest for broker-dealers, who must pursue the best execution of their customers' orders while facing potentially conflicting economic incentives to avoid fees or earn rebates.  Others have expressed concern that access fees may undermine market transparency, introduce unnecessary market complexity, and increase market fragmentation.  At the same time, others have contended that the maker-taker model has positive effects on the market, such as enabling exc...

SEC Corp Fin Staff Releases New Compliance and Disclosure Interpretations on Proxy Rules and Schedules 14A/14C

On May 11, the Division of Corporation Finance (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) released new Compliance and Disclosure Interpretations (“C&DIs”) regarding the proxy rules and Schedules 14A and 14C. These C&DIs replace the Staff’s previous interpretations published in the Proxy Rules and Schedule 14A Manual of Publicly Available Telephone Interpretations and the March 1999 Supplement to the Manual of Publicly Available Telephone Interpretations (collectively, the “Telephone Interpretations”).

Substantive Changes

As noted in the introductory language accompanying the guidance, C&DIs 124.01, 124.07, 126.02, 151.01, 161.03 and 163.01 reflect substantive changes to the Telephone Interpretations. These substantive changes are outlined below:

  • Discretionary Authority to Cumulate Votes 

C&DI 124.01 addresses the manner in which a proxy may confer discretionary authority to cumulate votes for director nominees. Under Rule 14a-4(b)(1), a proxy may confer discretionary authority for matters as to which a shareholder did not specify a choice if the form of proxy states how the proxy holder will vote where no choice is specified. The Telephone Interpretations stated that the authority of a proxy holder to exercise its discretion to cumulate votes among directors did not need to be printed on the proxy card pursuant to Rule 14a-4(b)(1) as ...

Strengthening U.S. Public Capital Markets – Recommendations from SIFMA Report

On April 27, 2018, the Securities Industry and Financial Markets Association (“SIFMA”), the leading industry group representing broker-dealers, banks and asset managers, along with other securities industry related groups, released a report called “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public” (the “Report”).  In response to the decline in the number of IPOs and the number of public companies generally in the United States over the last twenty years, the Report provides recommendations aimed at reducing perceived impediments to becoming and remaining a public company. As the Report notes, the United States is now home to only about half the number of public companies that existed 20 years ago.  This decline is believed to have had adverse repercussions for the American economy generally, and the jobs market specifically.  In addition, the growth of private capital markets at the expense of public capital markets has raised concerns that individual investors are being marginalized.  More specifically, as many of the most innovative companies in the U.S. stay private longer and raise significant amounts of capital privately, the returns generated by such companies appear to accrue disproportionally to institutional, high net worth and other similar investors. 

The Report makes recommendations in five areas:

1. enhance several provisions of the Jumpstart Our Business Startups Act (the “JOBS Act”);

2. encourage more research on emerging growth companies (“EGCs”) and other small public companies;

3. improve certain corporate governance, disclosure, and other regulatory requirements;

4. address concerns relating to financial reporting; and

5. tailor the equity market structure for small public companies.

Details and analysis of these five recommendations from the Report are provided in the Gibson Dunn client alert here.

Since at least 2012, the Securities and Exchange Commission (“SEC”) and Congress have proposed various reforms aimed at improv...

SEC Expands Prior Guidance on Non-GAAP Financial Forecasts in the M&A Context

As discussed in our October 17, 2017 post, the SEC’s Division of Corporation Finance (the “Staff”) addressed an open question as to whether the disclosure of forecasted financial measures used in connection with a business combination transaction is subject to Item 10(e) of Regulation S-K and Regulation G.

In Compliance and Disclosure Interpretation (“C&DI”) 101.01, the Staff made clear that disclosures of forward-looking financial measures in the M&A context are not non-GAAP financial measures (and thus do not need to be reconciled to GAAP), so long as they are:

(1) provided to financial advisors for the purpose of preparing an opinion that is materially related to the transaction; and

(2) being disclosed in order to comply with federal securities laws or other applicable laws governing disclosure of the financial advisor’s analysis.

While the Staff’s guidance late last year resolved some ambiguities regarding non-GAAP reconciliation requirements in the M&A context, it left some doors open as to how broadly and to whom this exemption might apply, as financial forecasts are often shared with other key players  (in addition to a party’s financial advisor) during the transaction process. 

In response, last week the Staff released C&DIs 101.02 and 101.03, which extended the exemption to financial forecasts that are exchanged between the parties or provided to a party’s board of directors or board committee in a business combination transaction.  The Staff  made clear that when forecasts are “material” and disclosure is required to comply with federal securities laws, then the information “would be excluded from the definition of non-GAAP financial measures and therefore not subject to Item 10(e) of Regulation S-K and Regulation G.”

One additional aspect left unaddressed by the C&DIs is whether the particular placement of the disclosure in a public filing is critical for reliance on the Staff’s interpretations.  Luckily, this question was posed to Michele Anderson (Corporation Finance Associate Director) at the “SEC Speaks” conference sponsored by PLI earlier this year.  Ms. Anderson suggested the location of the disclosure “doesn’t matter,” so long as the purpose of...

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