Securities Regulation and Corporate Governance


SEC August 21 Open Meeting To Address Issues Related To Proxy Advisory Firms

The SEC announced that it will hold an open meeting on Wednesday, August 21, 2019 at 10:00 AM eastern time.  There are two matters on the agenda, available here, which, although not specifically referring to proxy advisory firms, appear to address reliance on voting recommendations issued by such firms, and the conditions such firms must satisfy to rely on an exemption from the proxy rules. 

The first agenda item is a Division of Investment Management matter captioned “Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers.”  The SEC’s notice describes this matter as follows: 

The Commission will consider whether to publish guidance regarding the proxy voting responsibilities of investment advisers under Rule 206(4)-6 under the Investment Advisers Act of 1940, and Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940.

The second agenda item is a Division of Corporation Finance matter captioned “Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice.”  The notice describes this matter as follows: 

The Commission will consider whether to publish an interpretation and related guidance regarding the applicability of certain rules, which the Commission has promulgated under Section 14 of the Securities Exchange Act of 1934, to proxy voting advice.

This item appears related to the rulemaking addressed in the SEC’s most recent Reg Flex agenda, which stated that the Division of Corporation Finance “is considering recommending t...

SEC Proposes to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors

​On August 8, 2019, the Securities and Exchange Commission (“SEC") announced that it voted to propose amendments to Regulation S-K (available here) seeking to modernize and simplify the required disclosures by public companies, investment advisors, and investment companies (the “Proposed Amendments").  The Proposed Amendments form part of the SEC's ongoing efforts to simplify disclosure requirements, and, with the exception of Legal Proceedings, emphasize a more flexible, principles-based approach as opposed to prescriptive requirements.  “The world economy and our markets have changed dramatically in the more than 30 years since the adoption of our rules for business disclosures by public companies.  Today's proposal reflects these significant changes, as well as the reality that there will be changes in the future," said Chairman Jay Clayton.  “I applaud the staff for their efforts to modernize and improve our disclosure framework, including recognizing that intangible assets, and in particular human capital, often are a significantly more important driver of value in today's global economy.  The proposals reflect a thoughtful mix of prescriptive and principles-based requirements that should result in improved disclosures and the elimination of unnecessary costs and burdens."

The Proposed Amendments include the following proposals:

  • Description of the general development of the business (Item 101(a))

    The Proposed Amendments would take a principles-based approach to the Business section disclosure by revising this Item to provide a non-exclusive list of the types of information a registrant may need to disclose, requiring disclosure of a topic only to the extent it is material to the understanding of a registrant's business, and eliminating the prescribed five-year timeframe for disclosure.  In addition, the Proposed Amendments would eliminate year-over-year redundancy in the Business section by permitting a registrant, in filings made after the registrant's initial filing, to provide only an update of the general development of the business that focuses on material developments in the reporting period, so long as the update is accompanied by an active hyperlink to the registrant's most recent filing that, together with the update, would contain the full discussion of the general development of the registrant's business.
  • Narrative description of the business (Item 101(c))

    The Proposed Amendments would revise this Item to include human capital resources as a disclosure topic, such as measures that address attraction, development and retention of personnel to the extent such objectives are material to the un...
Technical Points to Keep in Mind When Filing Upcoming Forms 10-K, 10-Q, and 8-K

​As we discussed in a prior client alert (available here), in March 2019, the Securities and Exchange Commission (the “SEC") adopted a number of changes to modernize and simplify disclosure requirements (the “Final Rules").  While many of these changes went into effect on May 2, 2019, the SEC adopted phased compliance dates for the requirements to tag data on the cover pages of Forms 10-K, 10-Q, 8-K, 20‑F, and 40-F in Inline XBRL.  The Final Rules set forth the following compliance dates (which mirror the compliance dates for operating companies to implement the general Inline XBRL requirements):

Operating CompaniesCompliance Date
Large accelerated filers that prepare their financial statements in accordance with U.S. GAAPReports for fiscal periods ending on or after June 15, 2019
Accelerated filers that prepare their financial statements in accordance with U.S. GAAPReports for fiscal periods ending on or after June 15, 2020
All other filersReports for fiscal periods ending on or after June 15, 2021

As companies implement the new data tagging requirements, there are a number of technical issues to bear in mind.

EDGAR Upgrade Fixes Entity Registrant Name “Warning" Message

For large accelerated filers with a calendar year-end, the first periodic report subject to Inline XBRL and cover page tagging is the Form 10-Q for the quarter ended June 30, 2019.  Many companies that already filed found that a warning message would pop up during the EDGAR submission process if the “Exact name of registrant as specified in its charter" on a company's Form 10-Q cover page did not mirror exactly the company's name as recorded in the EDGAR database.  Due to technical limitations and idiosyncrasies of EDGAR, many companies have a name in the EDGAR database that does not match the company's actual name.

On July 29, 2019, the SEC announced EDGAR Release 19.2.1, which provides that certain “Entity Registrant Name" tag mismatches no longer result in a warning.  For example, differences in spacing or punctuation (including hyphens) and EDGAR-imposed abbreviations (e.g., “CORPORATION&q...

Reporting Companies Are Strongly Encouraged to Review SEC Statement On LIBOR Transition

​On July 12, 2019, the Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant of the Securities and Exchange Commission (the “Staff") issued a joint statement (the “Statement") (available here) regarding the expected discontinuation of LIBOR and transition to alternative reference rates.  The Statement reminds readers that the discontinuation of LIBOR could have a significant impact on financial markets and may present a material risk for market participants, including public companies, investment advisers, investment companies, and broker-dealers.  The Statement encourages market participants to proactively manage their transition away from LIBOR and outlines several areas that may warrant increased attention.  As noted by the Staff, “[f]or many market participants, waiting until all open questions have been answered to begin this important work likely could prove to be too late to accomplish the challenging task required."  We encourage anyone who may be impacted by the LIBOR transition to review the Statement, which outlines ways market participants can think through potential transition risks and provides helpful guidance on related disclosure obligations and risk management efforts. 

The Statement provides general guidance to all market participants, as well as division-specific guidance focusing on the particular impacts to specific categories of registrants.  Of particular importance to reporting companies is the Division of Corporation Finance's identification of four areas of disclosure that may be impacted by the transition:  risk factors, management's discussion and analysis, board risk oversight, and financial statements.  Among other things, the Statement encourages companies to consider the following guidance when deciding what disclosures are relevant and appropriate:

  • “The evaluation and mitigation of risks related to the expected discontinuation of LIBOR may span several reporting periods.  Consider disclosing the status of company efforts to date and the significant matters yet to be addressed."
  • “When a company has identified a material exposure to LIBOR but does not yet know or cannot yet reasonably estimate the expected impact, consider disclosing that fact."
  • “Disclosures that allow investors to see this issue through the eyes of management are likely to be the most useful for investors.  This may entail sharing information used by management and the board in assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company.  This could include qualitative disclosures and, when material, quantitative disclosures, suc...
SEC to Host Roundtable on Short-Termism on July 18

The Securities and Exchange Commission has announced (available here) that it will hold a roundtable on July 18, 2019, to hear from investors, issuers and other market participants about short-termism’s impact on capital markets and whether the reporting system or other SEC regulations should be changed to address those concerns. The event will begin at 12:30 

SEC Seeks to Simplify and Harmonize Private Offering Exemptions

On June 18, 2019, the Securities and Exchange Commission issued a concept release (available hereannouncing that it isseeking comment on “possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.”

The regulatory regime that permits offerings of securities without registration under the Securities Act of 1933, as amended, is a multifaceted and sometimes difficult to navigate system, particularly for small businesses and emerging companies. The current registration 

SEC To Propose Shareholder Proposal and Proxy Advisory Firm Rule Amendments

​On May 22, 2019 the SEC released its Spring 2019 Regulatory Flexibility Agenda (Reg Flex Agenda), available here.   The Reg Flex Agenda identifies rulemaking projects that the SEC expects to address, and classifies those projects as being either in the “Proposed & Final Rule Stages," which reflects those that the SEC expects to propose over the coming year, and “Long-Term Actions," which includes those that the SEC is more likely to address over a longer timeframe. 

Notably, the Reg Flex Agenda for the first time now identifies the following four rulemaking projects as among those that the SEC expects to address over the coming year:

  • Proposing rule amendments regarding the thresholds for shareholder proposals under Rule 14a‑8;
  • Proposing rule amendments to address certain advisors' reliance on the proxy solicitation exemptions in Rule 14a-2(b);
  • Proposing rule amendments to modernize and simplify disclosures regarding Management's Discussion & Analysis (MD&A), Selected Financial Data and Supplementary Financial Information; and
  • Proposing rule amendments to Securities Act Rule 701, the exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements, and Form S-8, the registration statement for compensatory offerings by reporting companies (previously listed as a longer term project.).

As is typical, the SEC did not provide any additional guidance for these items, but it is generally expected that the SEC rule proposals will include increasing the ownership and resubmission thresholds for Rule 14a-8 shareholder proposals. The SEC's current ownership thresholds are (i) a holding period of one year and (ii) ownership of at least $2,000 in market value of a company's shares.[1] The SEC's current resubmission thresholds allow a company...

Proposed Rule Changes Receive Mixed Reaction from SEC Commissioners Due to Impact on Auditor Attestation Requirement

​On May 9, 2019, the Securities and Exchange Commission announced (available here) proposed changes to the accelerated filer and large accelerated filer definitions..  The proposed rules (available here) are intended to promote capital formation for smaller reporting issuers by modifying the types of issuers that are categorized as accelerated and large accelerated filers.  While the proposed changes would result in more lenient filing deadlines for some issuers, a potentially more significant impact is that, by increasing the number of non-accelerated filers, the changes would increase the number of issuers that are exempt from the requirement to have an auditor attest to management's assessment of internal control over financial reporting (ICFR).

The proposed amendments would:

(1) exclude from the accelerated and large accelerated filer definitions an issuer that (a) is eligible to be a smaller reporting company, and (b) had an annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available;

(2) increase the transition thresholds for accelerated and large accelerated filers becoming non-accelerated filers from $50 million to $60 million;

(3) increase the transition thresholds for exiting large accelerated filer status from $500 million to $560 million; and

(4) add a revenue test to the transition thresholds for existing both accelerated and large accelerated filer status.

As a result of the proposed amendments, smaller reporting companies with less than $100 million in revenues would not be required to obtain an attestation of their assessment of ICFR from an independent outside auditor.  Such issuers would still be required to establish, maintain, and assess the effectiveness of their ICFR, though.  The proposed amendments would also not change other key protections from the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements and the CEO and CFO certifications of financial reports.

In a public statement of dissent (available here), Commissioner Robert J. Jackson Jr. argued that the proposal to roll back the requirement that auditors attest to the adequacy of certain companies' internal controls had “no apparent basis in evidence," alleging that the analysis of the costs of attestation was based on data over a decade old.  He also criticized the proposal for not attempting to assess the investor-protection benefits of gatekeepers in the market.

In separa...

SEC Tweaks Revised Form 8-K and 10-Q Cover Pages

As a result of amendments adopted by the Securities and Exchange Commission (SEC) on March 20, 2019 (available here, and discussed in our client alert available here), several SEC form cover pages were changed, effective May 2, 2019, including:  Form 10-K, Form 10-Q, Form 8-K, Form 20-F, and Form 40-F.

Just prior to the May 2 effective date, the SEC released updated PDFs of these forms on its website (available here).  To the surprise of most practitioners, the Form 8-K and Form 10-Q cover pages originally published by the SEC included the newly required information about securities registered pursuant to Section 12(b) of the Exchange Act at or near the bottom of the cover pages, which differed from where the Section 12(b) information has historically been included in the Form 10-K. 

In the past day or two, the SEC revised the Form 8-K and Form 10-Q cover pages to bring them into closer alignment with the organization of the Form 10-K cover page. Specifically:

  • In the Form 8-K, the table showing the “Title of each class," “Trading Symbol(s)," and “Name of each exchange on which registered" appears immediately after the checkbox for “Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))"; and
  • In the Form 10-Q, the table showing the “Title of each class," “Trading Symbol(s)," and “Name of each exchange on which registered" appears immediately after the line “(Former name, former address and former fiscal year, if changed since last report)."
​Links to commonly used forms are provided below for your convenience:
SEC Proposes to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses

​On May 3, 2019, the Securities and Exchange Commission announced (available here) proposed changes to existing disclosure requirements in connection with acquisitions and dispositions of businesses.  The proposed rules (available here) are intended to: (1) improve financial disclosures regarding the acquisition and disposition of businesses, (2) facilitate more timely access to capital, and (3) reduce the complexity and compliance costs related to such disclosures.

The proposed rules, if adopted, would represent a modest but welcome change for registrants that are involved in M&A activity.  A registrant is required to file financial statements of the target business and pro forma financials of the registrant if the acquisition is deemed “significant" under one of three tests set forth in Rule 1-02(w) of Regulation S-X: an investment test, an asset test and an income test.  At times, these tests have resulted in a technical requirement to prepare and file financial statements of an acquired business even when the acquisition may not be material under other applicable analysis, such as when there is an anomaly in financial results in a particular year.  Registrants have also struggled with providing three years of audited financial statements for target businesses that are not subject to SEC reporting requirements.  Although the Staff has frequently granted waivers that alleviate this burden on a showing of cause, the proposed rules would significantly reduce the circumstances in which the time-consuming and uncertain waiver request process is undertaken.  The proposed amendments to the significance tests are intended to reflect more accurately the relative significance to the registrant of the acquired business.

The following is a summary of some of the key changes proposed by the SEC:

Proposed Changes to Significance Tests

  • Revise the “Investment Test" under Rule 1-02(w) to compare the investment in, and advances to, the acquired business against the aggregate worldwide market value of the registrant's voting and non-voting common equity, including shares held by affiliates, measured as of the last day of the registrant's most recent fiscal year, as opposed to the existing carrying value of the registrant's total assets (unless the registrant has no such equity value (such as a pre-IPO registrant), in which case the existing asset-based test would continue to apply);
  • revise the “Income Test" under Rule 1-02(w) to add a new revenue component and t...
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