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SEC Open Meeting to Consider Proposed Rules to Largely Technical Regulation S-K Changes Recommended by SEC Staff Under the FAST ACT

The SEC will hold an open meeting on Wednesday, October 11 at 10:00 a.m. to consider whether to propose amendments based on the recommendations in the staff’s Report on Modernization and Simplification of Regulation S-K.  The report was required by the FAST Act and issued in November 2016.  Some of the suggestions are fairly technical, and some have been incorporated in the recent adoption of the requirements to include hyperlinked exhibits.  Others, including those related to MD&A disclosure, are more meaningful.  A brief summary of the main points are set forth below, with the relevant rules listed.


  • Permit incorporation by reference of documents that have been on file with the Commission for more than five years, but require specific descriptions of the locations of such documents and a hyperlink to the incorporated document on EDGAR. 

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Chairman Clayton Suggests Potential for Shareholder Proposal Rule Reform, Invoking the Quiet Shareholder, as the Chamber of Commerce Makes Specific Recommendations

The Center for Capital Markets Competitiveness, part of the Chamber of Commerce, issued seven recommendations for shareholder proposal reform.  On the same day, SEC Chairman Jay Clayton spoke to the Chamber about a range of issues.  He questioned the viability of continuing to load up on the disclosure system, likening it to a football coach giving the ball to a good running back over and over because he can, and whether increased amounts of disclosure corresponds to useful disclosure.

He spoke about the proxy advisory firms, noting that while he does not have a definitive view at this point, he recognizes that some entities have a “fair amount of influence” on public company governance, and developments that have an impact on the markets are something regulators should examine.  
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Comparing the SEC’s Rulemaking Agendas Indicates Potential for Less Rulemaking, but Significant Disclosure Initiatives Remain

Like other federal agencies, the SEC recently released its regulatory agenda. The agenda is published by the Office of Information and Regulatory Affairs at the Office of Management and Budget within the Executive Office of the President (OMB) and purports to reflect the rulemaking initiatives for the coming year. In the past, the agenda was generally not predictive of the rules the SEC ended up either proposing or adopting, but in light of the new administration’s deregulatory objectives, there is increased focus whether the agenda fulfills that mandate.

Mick Mulvaney, the Director of OMB, personally emphasized the importance of the unified regulatory agenda for all agencies on the day it was released.
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SEC Chairman Clayton on His Agenda

SEC Chairman Jay Clayton gave his first public address yesterday, with some meaningful remarks directed at public company regulations.

The long-term interest of the Main Street Investor (the term is not defined but capitalized in his speech) is the cornerstone of how the SEC will measure whether it is being true to its mission regarding the protection of investors, facilitating capital formation and maintaining markets properly. The Main Street Investor is also characterized as “Mr. and Ms. 401(k)” and it is the SEC’s primary responsibility to ensure that they are informed and have the right opportunities to invest in their future.
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Investor Group Petitions SEC to Require Disclosure on Human Capital Management

The Human Capital Management Coalition has submitted a rulemaking petition to the SEC to require all public companies to disclose information about its workforce. The petition is signed by Meredith Miller from the UAW Retiree Medical Benefits Trusts, and a list of members is available here.

While the success of any efforts to mandate disclosure through the SEC seems fairly uncertain, the petition represents increasing demands on companies for ESG-related information. The requests, usually in the form of surveys to fill out, may come directly from investors or just as often if not more, from data providers that use whatever information they can gather to assess and rate companies for investors.
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SEC Emphasizes Role of Audit Committee in New Developments and Continuing Trends in Auditor Oversight

A recent speech by the SEC Chief Accountant provided guidance for audit committees on several key areas of responsibilities in new developments, and on perennial issues of auditor evaluation and independence.

New Revenue Recognition StandardAudit committees should understand management’s implementation plans and the status of the progress on the new revenue recognition standards, including any required updates to internal control over financial reporting. The audit committee should also communicate with auditors about any concerns the auditors may have regarding management’s application of the standard.

Auditor IndependenceAudit committees should “own” the selection of the audit firm, including making final decisions in the negotiation of audit fees.
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Congressional Lawmakers Push SEC Chairman to Focus on Board Diversity Disclosure

Two letters from members of the House of Representatives directed Chairman Clayton to continue his predecessor’s efforts toward requiring companies to provide more information on the diversity composition of their boards.

Citing research that found that only half of S&P 100 companies referenced gender when disclosing their board diversity, Representatives Carolyn Maloney (D-NY) and Donald Beyer (D-VA) asked Clayton to consider the SEC staff’s review of the existing rule previously ordered by former SEC Chair White. In March, Representative Maloney reintroduced a bill on board gender diversity that would require the SEC to establish a group to study and make recommendations on ways to increase gender diversity on boards.
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Will the Pay Ratio Disclosure Affect U.S. Competition?

Among the commenters who responded to then Acting Commissioner Piwowar’s request to examine the pay ratio disclosure rules, one company declared that the rule “is one more nail in the coffin for U.S. manufacturers…who are already at a significant disadvantage to competitors overseas.”

Companies and their representatives stressed the cost burdens associated with putting together the data. Besides the direct costs of hiring consultants and advisers, companies cited internal man hours spent locating and compiling the information, and facing multiple unforeseen complications. Equally burdensome and no less challenging will be the additional time and effort after the ratio is disclosed in managing both external and employee communications, with many concerned about employee morale.
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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.
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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.
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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.
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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.
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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.  
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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. 
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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.
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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. 
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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.
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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.
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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.

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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.
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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. 
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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.
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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.
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