SEC Rulemaking

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SEC Rulemaking Petition Advocates for Retail Investors to Provide Standing Voting Instructions for Corporate Election in Order to Increase Voter Participation

Retail investors own about 30% of shares but only vote 29% of the time, compared to institutional investors voting 91% of the shares they own, according to a rulemaking petition to the SEC by the American Business Conference (ABC) that asks the Commission to facilitate advanced voting instructions (AVI), also known as client directed voting or standing voting instructions. According to its website, ABC was founded in 1981 by Arthur Levitt and is focused on advocating for mid-sized companies.

ABC laments that the views of retail shareholders are not adequately represented even as corporate ballots contain increasingly contentious governance issues.
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SEC Cybersecurity Guidance and Commissioner Comments in the Context of an SEC Cybersecurity Enforcement Case Related to Insider Trading

The SEC cybersecurity guidance, which we discuss in this client memo, reminds companies that their directors, officers and “other corporate insiders” should be aware that they may violate securities laws if they trade company securities while possessing knowledge of a company’s cybersecurity risks and incidents before that becomes public information.

The guidance address some specific actions to review to mitigate the risks of insider trading. It encourages companies to consider (a) how their codes of conduct and insider trading policies take into account and prevent trading on the basis of material nonpublic information about cybersecurity matters; (b) whether and when it may be appropriate to implement restrictions on trading during investigations of cybersecurity incidents before breaches are made publicly known; and (c) adopting “prophylactic measures” through policies and procedures to protect against insider trading in these cases.
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Chairman Clayton’s Roadmap to Finishing the Dodd-Frank Mandates, Including the Executive Compensation Disclosures

In a recent speech, Chairman Clayton discussed completing the rulemaking mandates under Dodd-Frank, in light of his mission to allocate the SEC’s resources to both fulfilling statutory requirements and meeting day-to-day needs. The complexity of the mandates coupled with “mission-critical demands” are key variables that influence the objective of finishing the rules.

In terms of how the SEC should proceed on the remaining Dodd-Frank rules, Clayton declared that the executive compensation rules were particularly challenging, in part because “we are writing on an already very colorful canvas and different constituencies see the rules as serving different, and sometimes inconsistent, goals.”
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SEC’s Fall Regulatory Flex Agenda Is Utterly Familiar

Chairman Clayton had previously stated that the SEC’s regulatory flex agenda, when issued, will provide meaningful insight into his objectives for the Commission.

The Fall 2017 agenda was released late last week with a list of 26 items divided into two stages of rulemaking:  proposed rules and final rules.  There are no surprises for corporate issuers in the modest agenda.  It does not include any changes to existing disclosure rules that have not already been suggested by the prior administration and does not address issues like shareholder proposals, proxy plumbing, or more dramatic overhauls to encourage more capital formation.

The final rules include:

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SEC Approves PCAOB Rule Requiring Disclosure of Critical Audit Matters

The SEC has approved the PCAOB proposal to adopt AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, largely as proposed.  Our memo on the proposed rules is here and we will issue an update shortly.

The rule is controversial primarily for requiring the auditor to communicate in the auditor’s report any critical audit matters (CAMs) arising from the current period’s audit, or state in that report that the auditor determined that there are no CAMs.  The staggered effective date reflects the debate surrounding CAMs, so that:

  • For all paragraphs, except the paragraphs related to CAMs:  all audits of fiscal years ending on or after December 15, 2017; and
  • For all paragraphs related to CAMs:
    • For audits of large accelerated filers: fiscal years ending on or after June 30, 2019; and
    • For audits of all other companies to which the requirements apply: fiscal years ending on or after December 15, 2020.

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Seven Key Ways the SEC’s Disclosure Proposal May Affect Your Periodic Reporting

On Wednesday, the SEC proposed amendments to its disclosure requirements for public companies based on recommendations in the staff’s FAST Act Report and as part of a broader review of the disclosure system.  The comment period is open for sixty days.

The WSJ fairly characterized the changes as “modest and technical,” and Commissioner Piwowar is quoted as saying the amendments are intended to be incremental.  Our client memo describing all of the proposed reforms will be issued shortly.  The main areas that would impact periodic reporting and do not relate to securities offerings include:

You may not need to describe any properties
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Keeping Track of the SEC Disclosure Effectiveness Projects as They Gain Traction

Through the SEC open meeting announcement and Chairman Clayton’s recent testimony, it appears that the SEC is ramping up efforts to modernize public disclosure and finally implement the disclosure effectiveness initiatives for which the prior administration started laying the groundwork two years ago.

Even those who are fairly informed of recent developments may be unable to recall the different proposals that the SEC has issued. As the SEC’s own webpage on disclosure effectiveness shows, myriad staff reports, proposed and final rules, requests for comments and concept releases all touch on different, and sometimes similar or even overlapping, requirements under Regulation S-K and Regulation S-X. 
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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.”
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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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