United States: What's On The SEC's New RegFlex Agenda?

SEC Chair Jay Clayton has repeatedly made a point of his intent to take the Regulatory Flexibility Act Agenda "seriously," streamlining it to show what the SEC actually expected to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following twelve months. See this PubCo post and this PubCo post.) The SEC's Spring 2019 short-term and long-term agendas have now been posted, reflecting the Chair's priorities as of March 18, when the agenda was compiled. What stands out is not so much the matters that show up on the short-term agenda—although there are plenty of significant proposals to keep us all busy—but rather the legislatively mandated items that have taken up protracted residency on the long-term (i.e., the maybe never) agenda.

On the short-term agenda:

• Extending the Testing the Waters Provision to Non-Emerging Growth Companies—Corp Fin is considering recommending that the SEC adopt amendments to extend the test-the-waters provision to non-emerging growth companies. These amendments were proposed in February and are now considered to be in the final rule stage. New Rule 163B would allow a company (and its authorized representatives, including underwriters) to engage in oral or written communications, either prior to or following the filing of a registration statement, with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors to determine whether they might be interested in the contemplated registered offering. The proposed new rule was designed to allow the company to gauge market interest in the deal before committing to the time-consuming prospectus drafting and SEC review process or incurring many of the costs associated with an offering. (See this PubCo post.)
• Amendments to the Commission's Whistleblower Program Rules— Also in the final rule stage are proposed amendments to the SEC's whistleblower rules. The proposal is intended to improve the program by increasing efficiencies and providing more tools and more flexibility to the SEC, enabling the SEC to adjust, within certain limitations, the amounts payable as awards under the program. The amendments also modify the requirements for anti-retaliation protection to conform to SCOTUS's recent decision in Digital Realty v. Somers (discussed in this PubCo post). (See this PubCo post.)
• Amendments to Financial Disclosures About Acquired Businesses—The SEC has proposed amendments to Reg S-X (Rule 3-05 and Article 11) intended to improve the disclosure requirements for financial statements relating to acquisitions and dispositions of businesses. (See this PubCo post.)
• Modernization and Simplification of Disclosures Regarding Description of Business, Legal Proceedings and Risk Factors—Corp Fin is considering recommending a proposal to amend Reg S-K to modernize and simplify disclosures regarding the description of business, legal proceedings and risk factors. The proposal would apparently relate back to the 2016 Concept Release, part of the Disclosure Effectiveness Initiative. (See this PubCo post.)
• Filing Fee Processing—Corp Fin is considering recommending a proposal to modernize the processing of EDGAR filing fees by structuring fee-related information in certain SEC filings.
• Disclosure of Payments by Resource Extraction Issuers—These rules were supposed to have been adopted, following disapproval under the Congressional Review Act, by February 2018, but obviously, that didn't happen. So we'll have to see what Corp Fin has in mind here. You might recall that the resource extraction rules, mandated under Dodd-Frank, have had a long and troubled history. Originally adopted in 2012 at the same time as the conflict minerals rules, the resource extraction rules faced an immediate challenge and, in a fairly scathing opinion, were vacated by the U.S. District Court. New rules were again adopted, but were subsequently tossed out under the CRA. (See this PubCo post and this PubCo post.)
• Amendments to Rule 701/Form S-8—Corp Fin may recommend amendments to Rule 701, the exemption from registration for securities issued by privately held companies pursuant to compensatory arrangements, and Form S-8, the registration statement for compensatory offerings by reporting companies. In July last year, the SEC issued a new Concept Release requesting public comment on ways to modernize Rule 701 and Form S-8, including whether and how to modify the rules in light of the "gig" economy and evolving worker-company relationships. (See this PubCo post and this Cooley Alert.)
• Accelerated Filer Definition—The SEC has proposed changes to the "accelerated filer" definition in Rule 12b-2 that would have the effect of reducing the number of companies subject to the SOX 404(b) auditor attestation requirement. The proposal provides a narrow carve-out from these definitions for companies that qualify as smaller reporting companies and reported less than $100 million in annual revenues in the most recent fiscal year for which audited financial statements were available. (See this PubCo post.)
• Modernization and Simplification of Disclosures Regarding MD&A, Selected Financial Data and Supplementary Financial Information—Corp Fin may recommend amendments to modernize and simplify disclosures regarding MD&A, Selected Financial Data and Supplementary Financial Information. Although it's not entirely clear, this proposal may perhaps also arise out of the 2016 Concept Release. That Release asked whether the selecteds or quarterlies add anything to the mix or should they be limited or eliminated? While no one was suggesting that MD&A be eliminated, the SEC wondered if there was a way to "encourage" registrants to do more than just recite the amounts of changes from year to year, which are readily computable from their financial statements, instructions to the contrary notwithstanding? Should a high-level executive overview be required that is not just duplicative, but addresses the most important themes, opportunities and challenges? Should disclosure be required regarding management's significant judgments and assumptions underlying its use of critical accounting estimates? (See this PubCo post.)
• Rule 14a-8 Amendments—Corp Fin may recommend a proposal to amend Rule 14a-8, addressing the controversy centered around the propriety of the initial and resubmission threshold levels for shareholder proposals. As reported in thedeal.com, in 2017, Chair Clayton had indicated that the SEC would be taking a hard look at the shareholder proposal rules, remarking that it is "very important to ask ourselves how much of a cost there is....how much costs should the quiet shareholder, the ordinary shareholder, bear for idiosyncratic interests of other [investors]." And, you may recall that the Financial CHOICE Act of 2017 (which was not passed in the Senate), included a provision to raise the eligibility and resubmission thresholds for shareholder proposals to levels that would have effectively curtailed the process altogether for all but the very largest holders. On one side of the controversy, some argue that the low thresholds for submitting and resubmitting shareholder proposals allow a few holders to attempt to impose on companies their personal policy priorities, but involve costs that are borne by all shareholders. Moreover, they say, the low thresholds allow a small subset to override majority will, and the shareholder proposal process is one of the factors driving companies away from IPOs. On the other side, some view shareholder proposals as an essential tool that has, over time, resulted in important changes in corporate governance that are now well-accepted. In addition, they contend, the thresholds were intentionally set low to allow small investors the opportunity to participate; big institutional investors can pick up the phone and engage directly with the company on their issues and don't need the shareholder proposal process. (See this PubCo post and this PubCo post.)
• Rule 14a-2(b)—The Division of Trading and Markets may recommend an amendment to address certain advisors' reliance on the proxy solicitation exemptions in Rule 14a-2(b). I wasn't sure what this was about, but thecorporatecounel.net suggested that this reference concerns the ability of proxy advisors to rely on the Rule 14a-2(b)(3) exemption from the proxy solicitation rules. Proxy advisory firms have lately come under renewed scrutiny, as some view them as having too much unaccountable power over proxy votes. (See this PubCo post.)
• Harmonization of Exempt Offerings—The SEC expects to issue a concept release seeking public comment on ways to harmonize and streamline the patchwork universe of private placement exemptions. The objective would be a system that is better suited to the business life cycle of companies. As part of that review, the staff is looking at whether it still makes sense to retain the accredited investor definition as it currently stands—as a binary test, in which, if you do not exceed the threshold, you cannot participate at all, but if you do exceed the threshold, you can participate to any extent in the transaction. Alternatively, it might be more appropriate to scale the level of investment permitted relative to the wealth of individual. This matter is at an early pre-rule stage. (See this PubCo post.)

On the long-term agenda:

• Listing Standards for Recovery of Erroneously Awarded Compensation—The SEC has proposed rules to implement the clawback provisions of Section 954 of Dodd-Frank. Section 954 required the SEC to direct the national securities exchanges to adopt listing standards requiring each listed company to develop and implement a policy for recouping executive compensation that was paid on the basis of erroneous financial information, the theory being that it is compensation to which the executives were never really entitled in the first place. Under Dodd-Frank, the policy would apply in the event the company had to prepare an accounting restatement due to the company's material noncompliance with any financial reporting requirement under the securities laws. These rules were proposed in 2015 and relegated again to the long-term agenda. So much for legislative mandates. (See this PubCo post.)
• Pay Versus Performance—Another oldie but goodie, these rules were also proposed in 2015 to implement Section 953(a) of Dodd-Frank, which required companies to disclose executive pay for performance. The proposal would amend Reg S-K Section 402 to add Section (v), which would require tabular disclosure of compensation "actually paid" to the principal executive officer and an average of the compensation actually paid to the other named executive officers for a phased-in five-year period. The new section would also require companies to describe, in narrative or graphic form or both, the relationship of the compensation actually paid to the company's financial performance as reflected in its TSR and to describe the relationship of the company's TSR to the TSR of a peer group. (See this PubCo post.)
• Universal Proxy—It may sound anodyne, but it's still quite a hot potato. A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of dissident and management nominees using a single proxy card. In the absence of universal proxy, in contested director elections, shareholders can choose from both slates of nominees only if they attend the meeting in person. In 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections. And there it sat. And, notwithstanding development of something of a consensus at a 2018 meeting of the SEC's Investor Advisory Committee that there could well be value in universal proxy cards (even though concerns remained that it could favor one party over the other), it continues to sit on the long-term agenda. (See this PubCo post.)
• Simplification of Disclosure Requirements for Emerging Growth Companies and Forward Incorporation by Reference on Form S-1 for Smaller Reporting Companies—The SEC adopted interim final rules in 2016 that revised Forms S-1 and F-1 as required under the FAST Act to permit EGCs to omit financial information for certain historical periods and revised Form S-1 to permit forward incorporation by reference for smaller reporting companies. The idea here would be to make final the interim final rules. (See this PubCo post.)
• Form 10-K Summary—Remember this one? In 2016, the SEC adopted an interim final rule implementing a provision of the FAST Act that expressly allowed a company, at its option, to include a summary in its Form 10–K, provided that each item in the summary included a hyperlink cross-reference to the related material in the Form 10–K. Not that companies couldn't have included a summary before. Again, the idea would be to make the interim final rule finally final. (See this PubCo post.)
• Corporate Board Diversity—Corp Fin may recommend amendments to the proxy rules to require additional disclosure about the diversity of board members and nominees. This idea was championed by former SEC Chair Mary Jo White, who announced in 2016 that the Corp Fin staff was preparing a proposal to require "more meaningful" disclosure in proxy statements about board members and nominees where the directors elect to report that information. The current rule, she believed, just did not cut it: "[o]ur lens of board diversity disclosure needs to be re-focused in order to better serve and inform investors." (See this PubCo post.) The proposal never seems to have materialized—at least not in public. All I've seen from the SEC on the topic is a 2019 CDI on board diversity disclosure. (See this PubCo post.)
• Conflict Minerals Amendments—Way too long a saga to go through here. But know that the federal courts held that the statute and rules violated the First Amendment to the extent they required reporting that any of their products "have not been found to be 'DRC conflict free.'" (For background on the case, see this PubCo post.) Corp Fin guidance issued in 2014, and currently in effect, requires companies to make the mandated filing without including a statement as to the conflict-free status of the products that could be deemed to violate the First Amendment. (See this PubCo post.) In 2017, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule that provided that Corp Fin would not recommend that companies face enforcement if they filed only a Form SD and did not prepare and file a conflict minerals report. (See this PubCo post.) Nevertheless, companies have continued to file CMRs at about the same rate as prior to the Updated Statement. As a long-term item, Corp Fin is considering recommending rules that would address the effect of the court decision.
• Mandated Electronic Filings—Corp Fin may recommend amendments to Reg S-T that would mandate additional electronic filings.
• Proxy Process Amendments—Corp Fin may recommend amendments to the proxy rules, perhaps to address some of the proxy plumbing issues—particularly the current byzantine system of share ownership and intermediaries that has accreted over time. Proxy plumbing was discussed at length at the proxy process roundtable. Unlikely that the proposal would reinvent the system, but would more likely address some of the low-hanging fruit. (See this PubCo post.)
• Accredited Investor Definition—Corp Fin may recommend amending the definition of "accredited investor" under Reg D. Note the SEC could take up revisions to the definition as part of a future proposal to harmonize the private placement exemptions. The related concept release is on the short-term agenda. As discussed above, the staff is looking at whether to revise the current binary definition in favor of a more complex, but nuanced definition. (See this PubCo post.)
• Earnings Releases/Quarterly Reports—In December 2018, the SEC posted a "request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies." As Chair Clayton noted, the request highlighted questions regarding "mandated quarterly reporting and the prevalence of optional quarterly guidance. The request also asked for comments on whether and how our reporting system may be causing companies to disproportionally focus their time and resources on short-term results." (See this PubCo post.) This Corp Fin item may be contemplating a proposal arising out of the Request and perhaps also asd a result of the planned roundtable on the "impact of short-termism on our capital markets and whether our reporting system, or other aspects of our regulations, should be modified to address these concerns." (See this PubCo post.)
• Revisions To Audit Committee Disclosures—In 2015, the SEC published this concept release regarding possible revisions to the requirements for audit committee disclosures in Item 407 of Reg S-K. The concept release related primarily to disclosures related to the audit committee's responsibilities with respect to its oversight of the independent auditor. (See this PubCo post.)

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