Securities Regulation and Corporate Governance


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...

New Twist for Old Shareholder Proposal Tactic

Each year some public pension funds and other institutional shareholders voluntarily file with the U.S. Securities and Exchange Commission (SEC) a Notice of Exempt Solicitation under Exchange Act Rule 14a-6(g).  This rule requires a person who owns more than $5 million of a company’s securities 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 SEC all written materials used in the solicitation.  However, these funds also file these Notices, which appear on EDGAR as “PX14A6G” filings, typically to respond to a company’s statement in opposition to a shareholder proposal included in the proxy statement or to otherwise encourage (but not solicit proxies from) shareholders to vote a specific way on shareholder proposals, say on pay proposals and in “vote no” campaigns. 

In a new twist, this week John Chevedden (the most prolific individual shareholder proponent given that he submits them in his own name and by using “proposal by proxy” to submit proposals for other shareholders) filed his first Notice of Exempt Solicitation.  Chevedden’s Notice addresses a proposal included in the AES Corp. proxy materials to ratify the company’s existing 25% special meeting ownership threshold.  The SEC staff previously concurred that AES could exclude from its proxy materials Chevedden’s shareholder proposal requesting a 10% special meeting threshold pursuant to Rule 14a-8(i)(9) because the company’s ratification proposal and the shareholder proposal conflicted.  See The AES Corp. (avail. Dec. 19, 2017). 

Chevedden’s filing consists of a “Shareholder Memo” to AES shareholders that criticizes the AES special meeting ratification proposal, includes a link to the SEC no-action letter concurring with the exclusion of Chevedden’s proposal, and urges shareholders to vote “against” the AES ratification proposal.  Chevedden’s Notice is available here.  (Chevedden subsequently filed a similar, but lengthier, notice at CF Industries Holdings, Inc. even before the company filed its definitive proxy statement, which is available here.)

Chevedden likely does not own more than $5 million in AES stock.  In fact, his broker letter provided to AES states that he owned “no fewer than” 250 AES shares as of October 13, 2017.  (Assuming he owned 250 shares, the value of those shares based on the closing price on that date was less than $2,900.)  However, the SEC has not to date restricted shareholders owning less than $5 million of a company’s stock from making...

S&P 500 Pay Ratio Disclosures: Emerging Trends

As the 2018 proxy season is now gaining full speed, the first group of the required CEO-to-median employee pay ratio disclosures have made their eagerly-awaited debut.  Gibson Dunn has been tracking all required pay ratio disclosures by S&P 500 and Fortune 100 companies and, while still early, there are a number of key observations and emerging trends from the filings to date.

Background.  In August 2015, the SEC adopted final rules implementing Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rules, set forth in Item 402(u) of Regulation S-K, require pay ratio disclosures for fiscal years beginning on or after January 1, 2017. The central components of the required disclosure are (1) the median employee’s annual total compensation, (2) the CEO’s annual total compensation, (3) the ratio of these two figures, and (4) additional narrative disclosure addressing topics such as the date and method used to identify the company’s median compensated employee. Generally, the rules permit the use of several exemptions and adjustments to the pay ratio calculation in order to reduce compliance costs for companies. In addition, as emphasized in the SEC’s September guidance, the new rules grant reporting companies wide flexibility on the method used for identifying the median employee.

Emerging Trends and Data as of March 9, 2018

Overview.  As of March 9, 2018, 61 S&P 500 companies have reported required pay ratios, most commonly in a definitive proxy statement.  The average pay ratio among these companies is 204:1, ranging from a high of 935-to-1 to a low of 12-to-1.

Location in the Filing.  The majority of disclosures (or 77%) have appeared in proxy statements after the tabular disclosure required by Item 402 of Regulation S-K for named executive officer compensation (the “Compensation Tables”).  Most of the rest of the disclosures have appeared in the CD&A, among the Compensation Tables or between those two sections.  The specific location of the disclosure may depend on the organization of a company’s proxy statement sections, as well as other factors such as the visibility a company intends for the disclosure and its desire to separate the disclosure from other sections (such as the say-on-pay proposal).

Going Public Without an IPO: New NYSE Rules that Expand Options for Direct Listings Create Opportunity and Raise Questions

On February 2, 2018, the Securities and Exchange Commission approved a change to the New York Stock Exchange’s (Exchange) listing rules that permit companies to use “direct listings” to list their shares on the Exchange based on having a minimum independent valuation of $250 million and without having completed an underwritten initial public offering (IPO) or having their shares first traded on a private market.  Direct listing will continue to be at the NYSE’s discretion and require that the company have an effective resale registration statement on file with the SEC for at least some amount of its outstanding shares. Direct listings provide an option by which private companies can accomplish three goals without requiring an IPO: (a) make their shares a more attractive currency for merger and acquisition activity, (b) provide greater liquidity for existing shareholders, and (c) increase the value of their shares and employee stock options. The SEC approval comes in the wake of recent commentary by SEC Chairman Jay Clayton that he believes more IPOs are needed, noting they are generally beneficial to the retail investor community to the extent they provide investors with more investment alternatives, more opportunities to invest, and greater liquidity.

The revised NYSE listing rules went into effective on February 2, 2018.  The revised rules are Section 102.01B of the NYSE Listed Company Manual, which can be found here, and NYSE Rules 15, 104 and 123D, which can be found here.  The SEC’s Adopting Release can be found here.  The NYSE proposal, as amended, can be found here.


Companies have traditionally listed on the Exchange in connection with a firm-commitment underwritten IPO, a transfer from another market, or a spin-off. However, since 2008, under Section 102.01B of the NYSE Listed Company Manual, the Exchange has had the discretion, on a case-by-case basis, to allow companies that have not previously had their common equity securities registered under the Exchange Act, but which have sold common equity securities in a private placement and traded in a private market to list their common equity securities o...

Federal Court Rejects Section 16(b) “Short-Swing Profits” Claim Challenging Share Withholding To Satisfy Taxes

A federal court in Oklahoma today issued a precedent-setting decision in favor of Gibson Dunn client WPX Energy, Inc., in Olagues v. Muncrief, No. 17-cv-153 (N.D. Okla. Jan. 26, 2018), ECF No. 42.  In the decision, the court held that pre-approved tax withholding dispositions made in connection with the vesting of equity grants are exempt from Section 16(b)’s prohibition on short-swing profits under Exchange Act Rule 16b-3(e)—even when an employee otherwise subject to the short-swing trading restrictions purchased the company’s shares during the six-month period preceding or following the tax withholding disposition.  This is the first time that a federal court has substantively addressed these types of short-swing trading claims, which have been serially raised by a small group of investors—first in the form of litigation demands and then, absent a payout to the investors, in litigation—during the last sixteen months.  A number of companies have refused the investors’ settlement demands, which has resulted in Section 16(b) cases against the companies’ executives in federal courts in California, Colorado, Delaware, Florida, Massachusetts, North Carolina, Ohio, Oklahoma, Tennessee, Texas, and Washington state. 

In Olagues v. Muncrief, the plaintiff alleged that dispositions of shares that WPX Energy performed on behalf of two covered officers to settle the officers’ tax withholding obligations associated with the vesting of restricted stock units constituted “sales” that could be matched with the officers’ unrelated open-market stock purchases, thereby resulting in short-swing profits in violation of Section 16(b).  In June 2017, the court dismissed the plaintiff’s claims as procedurally improper because the plaintiff had filed his complaint pro se and was not entitled to pursue Section 16(b) claims on behalf of the company in a pro se capacity.  Slip Op. at 5.  The plaintiff subsequently retained counsel and filed an amended complaint.  Id.  The defendants moved to dismiss the amended complaint, arguing that the tax withholding dispositions could not be “matched” with the officers’ open-market purchases because, among other reasons, the tax withholding dispositions were exempt from Section 16(b)’s prohibition on short-swing profits under Exchange Act Rule 16b-3(e).

The court today granted judgment in the defendants’ favor, holding that “plaintiff cannot show that defendants violated §16(b)” because “the tax withholding transactions are exempt [from coverage under Section 16(b)] and cannot be used to show that a prohibited short-swing transaction occurred.”  Id. at 14.   The court explained that under SEC Rule 16b-3, transactions with the issuer—including withholding t...

Potential SEC Shutdown Coming - Where to Call Should the Lights Go Out
This morning the SEC posted an update regarding the potential for a government shut-down in the days and weeks ahead providing information on the Commission's operating plan during any such shut-down. 

The post indicates the Commission will remain open for a few days into any government shut-down.  While this news provides a glimmer of hope that registrants with '33 Act filings in progress, or urgent questions on interpretive matters can obtain some guidance from the Staff, the assistance may be short-lived.  Should the SEC eventually shut-down, a list of phone numbers for emergency personnel is provided via the link in the SEC's posting below.

SEC Operating Status

Should there be a federal government shutdown after January 19, the SEC will remain open for a limited number of days, fully staffed and focused on the agency's mission.

Any changes to the SEC's operational status will be announced here. In the event that the SEC does shut down, we will pursue the agency's plan for operating during a shutdown. As that plan contemplates, we are currently making preparations for a potential shutdown with a focus on the market integrity and investor protection components of our mission.

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Current thoughts on development and trends in securities regulation, corporate governance and executive compensation published by Gibson Dunn.

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