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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.
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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.
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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.
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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.
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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.

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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.
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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.
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Regulation S-K Concept Release Raises Critical Questions about Disclosure of Risk Factors, Sustainability and Public Policy Issues

As previously discussed in our prior post, the SEC concept release on Regulation S-K encourages interested parties to comment on all aspects of business and financial rules that govern companies’ periodic reporting.  Here we focus on two of those areas.

Risk Factors Disclosure.  According to the concept release, studies show companies include an average of 22 different risk factors in about 8 pages, and risk factors disclosure has increased from 2006 to 2013 by more than 85% in word count relative to the total word count in a Form 10-K.  Even though companies are only required to disclose material changes in quarterly reports, it is not unusual for companies to repeat the entire laundry list.
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SEC Concept Release on Regulation S-K Asks More Than 800 Questions in Soliciting Comments, with a 90-Day Deadline

The SEC concept release on the business and financial disclosure requirements in Regulation S-K is a whopping 341 pages.  It would be appropriate to analogize it to the size of a phone book, except that metaphor seems obsolete for this digital age.

From the time that the SEC started talking about disclosure effectiveness a few years ago, the SEC has indicated a strong interest in obtaining the views of those who create and use disclosure.  But even more daunting than the notion of reading 341 pages, without even the discussion of the cost-benefit analysis and the paperwork reduction act to break things up, is the prospect of responding to the questions asked.   
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Report Shows Activists Don’t Nominate Women, as Congress Pressures the SEC to Require More Board Diversity Disclosure for Public Companies

According to an analysis by Bloomberg, since 2011, 5 of the biggest U.S. activist funds have nominated women just 7 times in seeking 174 board seats.  Bloomberg examined Elliot Management, Icahn Associates, Pershing Square, Third Point and Value Act.

Not one of Icahn Associates’ 42 nominees to fill 94 board seats in the past five years was a woman.  Pershing Square nominated more women than any of the other funds, in recommending 3 women for 23 directorships.  At companies in the S&P 500 index, 26% of seats were filled by women over the same period.

Some members of Congress are urging the SEC to push companies to go further through public disclosure. 
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Corp Fin Raises Issues in Proposed Executive Compensation Rules and Disclosure Effectiveness Project

At SEC Speaks 2016, the Staff in the Division of Corporation Finance discussed the goal of finalizing the three proposed executive compensation rulemakings remaining under the Dodd-Frank Act and the issues that have been raised during the comment process.

On the proposed rule to disclose hedging policies, concerns have been raised about the fact that the statute, and accordingly the rule, covers directors, executives and other employees. It is possible that the disclosure requirement may be different for non-executive employees. The Staff also acknowledged that the rule is not intended to cover general portfolio diversification strategies.

With respect to pay for performance, the Staff noted that the wording of the statute seems to require stock price (total shareholder return) as the performance indicator against which pay should be measured.
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SEC Informs Court of Resource Extraction Rulemaking Schedule, as Ordered

The SEC plans to hold a vote on adopting a final resource extraction rule on or before June 27, 2016, which is within 270 days of the filing of a recent notice with the U.S. District Court in Massachusetts. The notice of proposed expedited rulemaking schedule responds to the court’s order that the SEC must promulgate rulemaking pursuant to a litigation initiated by Oxfam, which we previously discussed here. In order to meet the 270-day schedule, the Commission anticipates voting on a proposed rule before the end of the year and permitting a 45-day comment period thereafter.

The notice included several caveats explaining why the SEC could miss the timing that it has sets for itself.
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Conflict Minerals Litigation Continues

Just before the deadline on Friday, both the SEC and Amnesty International filed petitions for a review of the most recent court decision on the SEC’s conflict minerals rule. The petitions ask the U.S. Court of Appeals for the District of Columbia to reconsider the decision in August, when a three-judge panel upheld, in a 2-1 ruling, the District Court’s finding that the requirement to report that products have “not been found to be DRC conflict free” violates the First Amendment.

We previously described the August court decision and its impact on companies in a memorandum here. An April 2014 staff guidance excused companies from obtaining an independent private sector audit unless they voluntarily elected to describe products as “DRC conflict free.” Public statements from SEC staff indicate that this guidance remains in effect.
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SEC Publishes First Request for Comment on Disclosure Effectiveness Initiative, Focused on Four Distinct Regulation S-X Requirements

As has been widely mentioned by SEC Commissioners and Staff, the Staff has been undertaking a broad-based review of disclosure requirements, known as the Disclosure Effectiveness Initiative. The Staff’s initial focus is on business and financial information required in current and periodic reports. On Friday, the SEC published its first request for public comment regarding the financial disclosure requirements in Regulation S-X for certain entities other than a registrant.

Four rules being considered.  Regulation S-X contains disclosure requirements that dictate the form and content of financial statements to be included in filings with the Commission. The discrete subset of the Regulation S-X disclosure requirements being evaluated for possible amendment include:

  • Rule 3-05, Financial Statements of Businesses Acquired or to be Acquired (requires issuers to provide pre-acquisition and pro forma financial statements if an acquisition is deemed significant through a series of investment, asset and income tests);
  • Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons (requires issuers to provide financial statements of entities that they own 50% or less of, if those entities are significant, based on investment and income tests);
  • Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered (permits issuers to provide more limited disclosure under certain conditions, such as when the subsidiary issuer and guarantor is “100% owned” by the parent company and the guarantees are “full and unconditional”); and
  • Rule 3-16, Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered (requires issuers to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral for any class of securities, as if the affiliate were a separate issuer). 

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Court Orders SEC to Issue Resource Extraction Rules

Oxfam America scored a recent victory when the U.S. District Court in the District of Massachusetts decided that the SEC must file with the Court an expedited schedule for promulgating a final rule on resource extraction disclosure within 30 days of the decision. The Court intends to monitor the schedule and ensure compliance. We previously discussed Oxfam’s complaint here and our memo on the original resource extraction rules is here.

Section 1504 of Dodd-Frank requires publicly traded oil and gas companies to annually disclose payments made to foreign governments or the federal government for the commercial development of oil, natural gas or minerals.
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The Latest in Conflict Mineral Reporting

Our memo on the court’s decision upholding its ruling on the SEC’s conflict minerals disclosure is here.

EY’s recent analysis of the second year of conflict minerals reporting concludes that companies are reluctant to conduct additional due diligence amidst an uncertain regulatory environment, so that disclosure did not change much from the prior year.

In 2015, over 1,200 companies filed a Form SD, a slight decline from the year before, with 88% of the companies based in North America. The average Form SD remained at 3.4 pages while the CMR exhibits lengthened from 4.8 to 6.4 pages due to additional disclosure about the due diligence process.
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Asserting APA Violations in Dissenting on Pay Ratio Rule Adoption

“Remember what we learned in school. Acquiescing to bullies only gives them more ammunition and makes it worse.”

Those were part of Commissioner Piwowar’s passionate remarks during the SEC open meeting adopting the final pay ratio rule, or, as he said, the “name and shame” rulemaking from the “Big Labor playbook.” He also questioned the timing of the vote as “peculiar” since some members of Congress have recently introduced bills to repeal the pay ratio provision and were heading into recess. He urged the Commission to “stand up to the bullies” because they “will be back for more,” perhaps in the form of political spending disclosure or share buyback prohibitions.
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Adoption of SEC Pay Ratio Rule Expected in Near Term

The WSJ reports that the SEC will likely adopt a pay ratio rule next week.  Amidst intense speculation over whether the final rule will provide any flexibility to companies regarding counting non-U.S. and part time or temporary workers when determining the median employee, the article states that the SEC intends to allow companies to exclude 5% of its overseas workforce.

A June 4 memorandum by the SEC Division of Economic and Risk Analysis, which we previously discussed here, found that the exclusion of 5% of employees may cause the pay ratio estimate to decrease by up to 3.4% or increase by up to 3.5%. 
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Rulemaking Petitions on Voting Standards to Elect Directors

CII filed a rulemaking petition asking that the SEC require companies to clarify the voting standards for the election of directors.  In their view, companies that use the state law default plurality rule, coupled with a policy that requires the director to submit a resignation if the director does not receive a majority of votes in favor (which CII calls “plurality-plus”), should not be permitted to state that their directors are elected by majority voting standards.  In addition, their proxy cards should only allow for the ability to “withhold” instead of voting “against”.  

CII believes companies’ disclosures about the votes necessary to elect directors are often confusing. 
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Davis Polk Comment Letter to the SEC on the Pay Versus Performance Rule Proposal

Davis Polk has submitted a comment letter on the SEC proposal for companies to disclose pay versus performance. We previously summarized the rule proposal here.

Our comment letter focuses on alternative performance measures to be disclosed, the requirement to use company and peer group TSR as the performance measures, the executive officers covered by the disclosure, vesting date requirements and XBRL formatting.
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SEC Issues Concept Release on Audit Committee Disclosures

The SEC is seeking public comment through a concept release (Possible Revisions to Audit Committee Disclosures) that it issued yesterday on whether the disclosure of the role of the audit committee should be expanded.

The SEC believes that current disclosures do not describe how the audit committee executes its responsibilities, particularly related to the oversight of the auditors. The Commission is interested in determining whether additional information would help investors make voting decisions about auditor ratification and election of audit committee members. The concept release is seeking comments on a wide variety of topics, as noted below.

Audit committee’s oversight of the auditor:

1. 
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Chair White Focuses on Alternative Resolutions to Shareholder Proposals and Director Elections

We previously discussed two elements of Chair White’s keynote speech on proxy matters at the National Conference of the Society of Corporate Secretaries and Governance Professionals here. In its reporting, the Wall Street Journal has characterized her talk as an admonition to companies to “act like grown-ups,” and instead of seeking regulatory solutions, to “figure it out yourselves.”

Shareholder proposals was another topic in the speech. She believes that shareholders were not confused by being offered both a management proposal and a shareholder proposal on proxy access at seven companies this season, which occurred after the SEC suspended the availability of Rule 14a-8(i)(9).
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