Blog Posts Tagged With SEC Rulemaking

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Mr. Clayton Goes to Washington

SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed. Beyond these general areas, Clayton offered few specifics or signals as to how he might steer the Commission during his term as Chair. He did, however, discuss concerns about growing companies finding the U.S. public markets unattractive due to the burdens of being a public company. Continue Reading

Davis Polk Submits Comment Letter to the SEC on Implementation of Pay Ratio Rule

Davis Polk has submitted a comment letter on the SEC’s implementation of the pay ratio rule. We previously summarized the final rule here.

Our comment letter focuses on implementation challenges and the significant administrative and financial burdens facing companies in connection with compliance with the pay ratio rule.

Law Clerk Charlotte Fabiani contributed to the drafting of this letter. Continue Reading

Senators Object to Any Delays in Pay Ratio Disclosure Requirements

A group of senators have written to SEC Acting Chair Piwowar opposing any delay in the implementation of the pay ratio rules. The senators are “extremely troubled” by Commissioner Piwowar’s decision to seek additional comments on the rule, and his directive to the staff to reconsider the rule’s implementation, which we previously discussed here.

The senators note that the statute requiring the rule was passed nearly seven years ago, and during the proposal stage the SEC received more than 270,000 letters, including many from investors in support of having the information as a way to assess companies’ approaches to executive compensation and human capital. Continue Reading

SEC Requires Hyperlinks to Exhibits Starting in September

The SEC approved rules yesterday to require issuers to include a hyperlink to the exhibits listed in the exhibit index. This applies to registration statements and reports subject to the exhibit requirements under Item 601 of Regulation S-K, as well as Forms F-10 and 20-F. The filings must be submitted in HTML format.

The rules are effective for filings submitted on or after September 1, 2017, although the Commission encourages early compliance. Smaller reporting companies or a company that is neither a large accelerated filer or an accelerated filer, and that submits filings in ASCII, can wait an additional year to comply. Continue Reading

Acting SEC Chairman Seeks Input on Pay Ratio Rule

Acting SEC Chairman Piwowar issued a statement today asking for public comment on any “unexpected challenges” that companies have experienced as they prepared for compliance with the pay ratio rule and “whether relief is needed.”  Chairman Piwowar encourages submission of detailed comments within the next 45 days, which can be submitted here.

Chairman Piwowar’s statement indicates that he has also directed to SEC staff to reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.

The pay ratio rule, the only executive compensation rule required under the Dodd-Frank Act that is in final form, requires disclosure for companies with calendar year-end fiscal years starting with 2018 proxy statements.   Continue Reading

Reconsideration of Conflict Minerals Rule Implementation

Yesterday, Acting SEC Chairman Piwowar issued a public statement that he has directed the staff to reconsider whether the 2014 guidance on the conflict minerals rules is “still appropriate and whether any additional relief is appropriate.” He also encouraged interested parties to submit comments within the next 45 days on all aspects of the rule and guidance. Comments may be submitted here.

Directed under the Dodd-Frank Act, the rules were adopted in 2012, not without controversy. Two years later, shortly before the rules went into effect, the D.C. Circuit Court of Appeals held that the rule violates the First Amendment by requiring that companies report that any of their products have “not been found to be DRC conflict free.”

The SEC staff later instructed companies to file their first reports describing companies’ reasonable country of origin inquiry and supply-chain due diligence, but stated that companies need not characterize any products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” For products that otherwise would have merited a label other than “DRC conflict free,” the company should disclose the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.  Continue Reading

Pay Ratio Rule Leads to Local Tax Increases

We recently published a client alert describing the possibility of a rollback of the pay ratio disclosure rule under the new administration.

The pay ratio rule has already produced unforeseen consequences. Quoting economist Thomas Piketty and citing numerous statistics on income inequality and CEO compensation, the city of Portland, Oregon, recently passed an ordinance authorizing a surtax to the city’s business license tax for public companies doing business in Portland based on their pay ratio disclosure.

In addition to the current 2.2% business license tax, a surtax of 10% of base tax liability will be imposed once the disclosure is effective if a company reports a pay ratio of at least 100:1 but less than 250:1. Continue Reading

Empirical Analysis of the Impact of Universal Proxies on Proxy Contests

It seems fitting to talk about elections today, albeit of a very different kind.  Our memo on the SEC proposal to mandate universal proxies is here.

A paper by the Harvard Law School Program on Corporate Governance offers the first empirical analysis of proxy contests and the potential impact of universal proxies, and concludes that a universal proxy rule is unlikely to strongly favor either companies or dissidents.  In fact, it would have slightly favored management nominees if it had been used at the proxy contests reviewed in the paper.

Dissidents put forth competing slates at 0.5% of elections every year.  Continue Reading

Companies May No Longer Need to Mail Copies of Their Annual Reports to the SEC

A recent compliance and disclosure interpretation by the SEC staff indicated that, in lieu of mailing paper copies of a company’s annual report to the SEC or filing it on Edgar, a company may post the report electronically on its website so long as it meets the deadlines required in the proxy rules. The report must remain on the company’s website for at least a year.

The rules require mailing to the SEC no later than the date on which the report is first sent to security holders. This guidance also applies to companies furnishings annual reports to the SEC pursuant to Section 15(d) of the Exchange Act if required under Form 10-K. Continue Reading

SEC Proposes Rules on Universal Ballots and Proxy Disclosure for All Director Elections

At the SEC open meeting today, the Commission proposed changes to require the use of universal proxy cards in contested proxy elections and rules to specify clearly the applicable voting options and standards in all director elections. Chair White and Commissioner Klein approved the proposed amendments, while Commissioner Piwowar declined.

This summary is based on statements at the open meeting. The proposed rule is not yet available. We will issue a client memorandum about the proposed rules in the near term.

Universal ballot.  Today, a shareholder voting by proxy in a contested election cannot replicate the vote that they could cast at an in-person meeting. Continue Reading

SEC Staff Issues Interpretative Guidance on Pay Ratio Disclosure Rules

Yesterday, the Staff released five questions and answers regarding compliance with the pay ratio disclosure rules, including responses to:

  • Use of a consistently applied compensation measure (CACM).  The rules permit companies to use CACM instead of annual total compensation to identify the median employee, such as information derived from tax and/or payroll records. The Staff noted that the appropriateness of any CACM will depend on a company’s particular facts and circumstances. One example the Staff uses is that total cash compensation could be a CACM unless the company also distributed annual equity awards widely among its employees. It is not expected that CACM would necessarily identify the same median employee as if a company used annual total compensation instead.
Continue Reading

Public Officials Weigh in on SEC Regulation S-K Concept Release

Current and former holders of political office are among the many who wrote in to the SEC with comments on its Regulation S-K concept release. Former New York City Mayor Bloomberg, current chair of the Sustainability Accountability Standards Board (SASB) weighed in, favoring disclosure about sustainability and climate risks, particularly sector-specific standards.

Three U.S. senators (Senators Whitehouse, Markey and Boxer) urged the Commission to provide investors with more information about the risks associated with climate change. Another letter signed by six Congressmen (Cartwright, Lieu, Lowenthal, Pocan, Ellison, Tonko) echoed this view. In addition, thirteen U.S. senators, led by Senator Franken, want the SEC to require large public companies to include country-by-country reporting of certain financial, tax and operational data in their annual reports, primarily to provide enhanced tax disclosure that would make more clear the amount of corporate profits residing in other countries. Continue Reading

GAO Offers Bleak Assessment on Achieving Goal of Conflict Minerals Disclosure Rules

Most companies filing reports on their use of conflict minerals remain unable to confirm their origin or whether those minerals financed or benefited armed groups, concluded a GAO report released last week.  The GAO is required under Dodd-Frank to study annually the effectiveness of the SEC rule on conflict mineral disclosure in promoting peace and security in the DRC.  The United Nations has indicated that armed groups continue to generate significant revenue from the control or looting of conflict minerals.

The GAO randomly sampled 100 reports from the population of 1,283 filed in 2015, met with a range of stakeholders and visited processing facilities in Asia as part of its fieldwork.  Continue Reading

SEC Requests Comments on Subpart 400 of Regulation S-K, Including Governance and Executive Compensation Disclosures

The SEC released an 8-page request for comments to ask for input on Subpart 400 of Regulation S-K, including Item 401 (director and officer information), Item 402 (executive compensation), Item 404 (related person transactions) and Item 407 (corporate governance disclosures).

In contrast to the over 300-page Regulation S-K concept release issued earlier this year (see Davis Polk’s comment letter here), which contained detailed discussions and alternative proposals, this simple release reiterates the requirement under the FAST Act for the SEC to examine Regulation S-K generally and (a) determine how best to modernize and simplify the disclosure in a way that provides material information while reducing costs for issuers; (b) figure out how to permit a company-specific approach that still allows comparability of information across issuers and avoids boilerplate and (c) evaluate how disclosure is presented to discourage repetition and immaterial information. Continue Reading

SEC Charges Two Companies’ Severance Agreements Violate Commission’s Whistleblower Program

The SEC this month has brought two actions for violation of whistleblower rules. According to a SEC cease-and-desist order released on August 10, at one company in 2011 to the present the vast majority of non-management employees who received severance payments signed agreements that prohibited an employee from sharing with anyone confidential information that the employee had learned during his employment, unless compelled otherwise by law. If required by law, the confidentiality provisions dictated that employees must either provide written notice to the company or obtain written consent from the legal department before providing such information. The SEC order alleged that the agreements did not contain any exemptions permitting an employee to provide information voluntarily to the SEC or other regulatory or law enforcement agencies, and between September 2011 and mid-2013, approximately 18 employees signed agreements that included one of these provisions. Continue Reading

SEC to Propose Rules to Eliminate Duplicative and Redundant Disclosure

At an SEC open meeting today, the Staff of the SEC recommended to the Commission what Chair White characterized as part of its “modest but important work” toward the disclosure effectiveness project.

This post is based solely on the remarks made at the open meeting. The SEC has not yet issued a press release or the proposal. Commissioner Stein agreed with the objective of the proposal but criticized the Staff for the proposal’s 500-page length and “hyper-technical nature,” noting her concern that this means the proposal is not accessible to the ordinary public and would therefore limit the nature and type of comments. Continue Reading

House Attempts to Prevent Efforts by SEC to Propose Universal Ballots

The House voted 243-180 yesterday to add language to a fiscal year spending bill that would bar the SEC from writing rules to require universal ballots in proxy contests. The spending bill passed late Thursday.

Introduced by Representative Scott Garrett (R–N.J.), the text of the amendment states that none of the funds may be used by the SEC to propose, issue, implement, administer, or enforce any requirement that a proxy solicitation or other authorization to vote in a director election can be made using a single ballot that lists both candidates nominated by the company and those nominated by other proponents and would permit shareholders to select among the individuals listed. Continue Reading

Chair White Speaks on the SEC’s Role in Corporate Governance, Focusing on Board Diversity, Non-GAAP Measures and Sustainability Reporting

Chair White’s speech before the International Corporate Governance Network (ICGN) discussed the SEC’s role in U.S. public company governance and focused on the agency’s efforts on board diversity, non-GAAP reporting and sustainability disclosure.

Contrary to shareholders in many European companies, the state law-based governance framework for U.S. companies makes it more challenging for investors to play a large role in corporate governance, according to Chair White. Shareholders outside the U.S. may be surprised to discover that corporate governance in the U.S. is a “patchwork” driven by state law and supplemented by federal law, including SEC regulations.

Investors have a range of private ordering options that they can exercise, such as directly engaging with boards, using shareholder proposals or voting against directors. Continue Reading

Senators Criticize Chair White on Disclosure Effectiveness and Political Spending Disclosure

A hearing on SEC oversight held by the Senate Banking, Housing and Urban Affairs Committee where Chair White testified and took questions covered a range of topics, but two senators turned the proceedings into a forum for their complaints on the SEC’s efforts to reform disclosure and the absence of mandatory disclosure of political contributions.

Senator Warren criticized the SEC’s disclosure effectiveness project through a series of what appeared to be questions to Chair White, but were instead a stream of quotable accusatory statements. She admonished that “the SEC’s job is to look out for investors not for big companies,” and in her view, instead of completing the mandatory Dodd-Frank rulemaking, “you’ve headed in the opposite direction” by dedicating SEC resources to “a project you invented and called the Disclosure Effectiveness Initiative” which is intended to fix “something you call ‘information overload.’”

Senator Warren berated Chair White, “What evidence [do] you have that this is a real problem that investors have come to you and said, we’re worried about getting too much information,” and ultimately challenged that “I cannot find, and you have not produced, a single investor who has complained to the SEC about receiving too much information.”

Without giving Chair White much an opportunity to respond, Senator Warren concluded that “Investors don’t want less information about the companies where they put their money. Continue Reading

Ten Things to Know About the SEC’s Rules on the Form 10-K Summary

  1. New Item 16 in the Form 10-K would expressly allow issuers to do something that is already permissible – provide a summary in the Form 10-K.
  1. Each summary topic must be hyperlinked (a footnote or cross-reference is not sufficient) to the related detailed disclosure in the Form 10-K.
  1. The only specific requirements are that the summary must be brief and must present the information fairly and accurately.
  1. There is no prescribed length to the summary, no requirement as to what should be covered (issuers can decide which 10-K items to include) or even where the summary must appear in the Form 10-K.
Continue Reading

Dodd-Frank Update: Incentive Compensation for Financial Institutions

On Monday, May 2, 2016, the Federal Reserve and, on Friday, May 6, 2016, the SEC issued their versions of a reproposed rule to regulate incentive compensation at the financial institutions under their purview, as required by Section 956 of the Dodd-Frank Act. These issuances follow the releases in the prior weeks of the proposed rule by the National Credit Union Administration, the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Housing Finance Agency. We reported on the release of the proposed rule in our visual memorandum released last Monday.

As a reminder, Section 956 of Dodd-Frank generally requires that these agencies jointly issue rules that:

(1) prohibit incentive compensation that encourages inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss; and

(2) require those financial institutions to disclose information concerning incentive compensation to the appropriate federal regulator. Continue Reading

SEC Concept Release Considers Format and Delivery Changes for Periodic Reporting

In our prior posts here and here, we considered certain aspects of the SEC concept release that asks for comments on changes to Regulation S-K disclosure. In this last post, we look at the options to amend the way disclosure is presented and delivered.

The concept release evaluates different ways to provide information with the goal of improving the “readability and navigability” of disclosure, as well as discourage repetition and disclosure of immaterial information. Much of the focus is on how to take advantage of the Internet. This section provides the greatest opportunity for innovation, but there is a strain of caution that stems from being aware that SEC rules do not lend itself to an overhaul that would make reading SEC documents akin to perusing the Wall Street Journal. Continue Reading