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SEC’s Spring 2020 Reg Flex Agenda Indicates Universal Proxy Rule May Be Coming Soon

The SEC’s 2020 spring agenda of its rulemaking actions under the Regulatory Flexibility Act (RFA) has been posted. The agenda, commonly referred to as the “Reg Flex Agenda,” is published semiannually and reflects the actions the SEC Chairman anticipates the agency will complete in the short term (within a year and almost all items are listed in the “Proposed Stage” or “Final Rule Stage”) or the long term (longer than a year and the items are listed as “Long-Term Actions”).  Under Chairman Jay Clayton’s leadership the agenda is meant to be viewed as a transparency and accountability tool of the agency’s initiatives, as opposed to a list of merely aspirational goals. 
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SEC Chairman Releases Statement on Proposed Changes to Financial Reporting and Discusses Climate-Related Disclosure

Today, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted to propose amendments to certain financial disclosure requirements under Regulation S-K, specifically those requirements related to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).  In addition to these proposed amendments, the SEC issued guidance for registrants to consider when using metrics and key performance indicators in their MD&A disclosures.  The press release announcing these developments explains that the proposals are part of an overarching effort by the SEC to improve and “modernize” the disclosure regime for the benefit of both investors and issuers.

SEC Chairman Jay Clayton issued a statement in support of the proposed amendments and related guidance, a statement that largely focuses on a topic that the Chairman himself notes is “not the particular focus of today’s Commission action” – environmental and climate-related disclosures.
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Potential Replacement for SEC Commissioner Jackson is Reported

Caroline Crenshaw, a lawyer, is expected to be the nominee to fill the seat currently held by SEC Commissioner Robert J. Jackson Jr.  Ms. Crenshaw, whose potential nomination was reported by news outlets earlier this summer, currently serves as counsel to Commissioner Jackson.  She has served in this role since 2018, focusing on topics such as share buybacks and dual-class shares.

Ms. Crenshaw, who joined the SEC in 2013, also served under former SEC Democratic Commissioner Kara Stein, who left the agency this past January.  In addition to her role at the SEC, Ms. Crenshaw, a 2004 and 2009 graduate from Harvard University and the University of Minnesota Law School, respectively, holds the rank of captain in the Army Judge Advocate General’s Corps reserve.
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SEC Chairman Clayton Testifies Before Senate Banking Committee

On Tuesday, December 10, 2019, Chairman Jay Clayton testified before the Senate Committee on Banking, Housing, and Urban Affairs (Committee) on the “Oversight of the Securities and Exchange Commission.” After Committee Chairman Mike Crapo delivered his opening remarks, which were supportive of the agency, Chairman Clayton gave an overview of the agency’s initiatives over the past year. Given that most of the governance-related topics that Chairman Clayton addressed were also raised back in September before the House Financial Services Committee, which we discussed, there were no real surprises.

Nonetheless, Chairman Clayton verbally reiterated that during SEC examinations, examiners will be looking for and reviewing the nature and extent of climate change disclosures, made both inside and outside SEC filings.
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SEC’s Fall 2019 Reg Flex Agenda

The SEC’s 2019 fall agenda of its rulemaking actions under the Regulatory Flexibility Act (RFA) has been posted. The agenda, commonly referred to as the “Reg Flex Agenda,” is published semiannually and reflects the actions the Chairman anticipates the SEC will complete in the short term (within a year) and the long term (longer than a year).  As you may recall, Chairman Jay Clayton reduced the number of agenda items roughly two years ago in hopes that the agenda would be viewed more as a transparency and accountability tool of the agency’s initiatives, as opposed to merely aspirational goals.

The RFA mandates that each federal agency semiannually publish in the Federal Register an agenda identifying rules that the agency expects to consider in the next 12 months that are likely to have a significant economic impact on a substantial number of small entities.
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SEC Commissioners Testify Before House Financial Services Committee on ESG, Proxy and Other Topics

On Tuesday, September 24, 2019, SEC Chairman Jay Clayton, along with Commissioners Jackson, Lee, Peirce and Roisman, testified before the House Financial Services Committee (Committee) in a hearing titled “Oversight of the Securities and Exchange Commission, Wall Street’s Cop on the Block.” Chairwoman Maxine Waters observed that the last time all the SEC Commissioners had been before the Committee was over a decade ago, in 2007.

The SEC submitted written remarks that begin with the agency’s “tripartite mission—to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation . . . .” The remarks describe the agency’s strategic plan and highlight the 2019 initiatives in the following areas: (1) enforcement and compliance; (2) market developments and risks; (3) regulatory and policy agenda; and (4) investor education.
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U.S. House Financial Services Committee Hearing on ESG Disclosure

In a House Financial Services Committee hearing yesterday, committee members debated the merits of five draft bills that would require public companies to disclose information on several environmental, social and governance, or ESG, topics including climate change risk, political expenditures and human rights risk. Hosted by the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, the hearing included witnesses representing CalPERS, Global Reporting Initiative (GRI), Ceres, Decatur Capital Management, an investment management firm, and Patomak Global Partners, a consulting firm for which former SEC Commissioner Paul Atkins serves as CEO.

Mandatory or Voluntary Disclosure? The committee memorandum prepared by the majority staff prior to the hearing stated that “investors have increasingly been demanding more and better disclosure of ESG information from public companies.”
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California Imposes Climate Risk Disclosure Requirements on the U.S.’s Two Largest Pension Funds

Citing concerns of climate change’s impact on the financial sector, California passed SB 964 last week requiring the country’s two biggest pension funds to publicly disclose and analyze their climate-related investment risks. Under the new law, The California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) must review and report “climate related financial risks” that are “material” to the stability of their public market portfolios. Such “climate-related financial risks” include “intense storms, rising sea levels, higher global temperatures, economic damages from carbon emissions, and other financial and transition risks due to public policies to address climate change, shifting consumer attitudes, changing economics of traditional carbon-intense industries.”
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Investors Petition the SEC to Develop ESG Reporting Requirements

A group of investors representing more than $5 trillion in assets under management petitioned the U.S. Securities and Exchange Commission on October 1, 2018 to develop a comprehensive framework that would require public companies to disclose environmental, social and governance (ESG) aspects relating to their operations.  Petitioners include CalPERS, the New York State Comptroller and the U.N. Principles for Responsible Investment.  The 19-page petition, available here, cites increasing demands by certain investors for information to better understand the long-term performance and risk management strategies of public companies. The petition notes that the voluntary “sustainability reports” that some companies have produced in response to these demands are insufficient and instead, an SEC-mandated comprehensive framework for clearer, more consistent and more fulsome, reliable and decision-useful ESG disclosure (above and beyond existing SEC disclosure requirements) would meet this demand. 
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First Wave of Pay Ratio Disclosures Filed

U.S. public companies recently began disclosing their CEO-to-median employee pay ratios, as required by the Dodd-Frank Act and Item 402(u) of Regulation S-K.  It is still too early to draw conclusions, but this memorandum outlines some preliminary observations based on our review of the pay ratio disclosure included in 35 SEC filings through February 2018, including the range of pay ratios and calculation methodologies disclosed.

Read the Full Memo
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SEC Issues Updated Cybersecurity Guidance

On February 21, the Securities and Exchange Commission released updated interpretive guidance on cybersecurity disclosure, reaffirming staff guidance issued in 2011, providing more detailed guidance on disclosure of cybersecurity risks and incidents, advising companies to ensure that their disclosure controls and procedures take account of cybersecurity risks and noting the implications of cybersecurity incidents for insider trading prohibitions and Regulation FD compliance.

The interpretive guidance lends the Commission’s imprimatur to the previously issued staff guidance and underscores the importance for a company to be attuned to securities law obligations when responding to or managing for cyber risks and incidents.

Read Full Newsflash
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Senator Pushes SEC Commissioner Nominees on Activism, Buybacks and Executive Pay, and May Delay Confirmation Process

Senator Tammy Baldwin (D., Wis.) has placed a hold on the nomination of Robert Jackson and Hester Peirce as commissioners to the SEC, pending their responses to the questions she raised in her letters to each of them. According to news reports,  the senator’s actions may delay the confirmation process for the two candidates, who were expected to be confirmed by expedited votes.

The letters she sent to Jackson and Peirce are identical except for questions related to an academic paper that Jackson, a law school professor, was involved with in 2011 that argued against shortening the 10-day window under Rule 13D , concluding that it would discourage shareholders from buying large blocks of stock that in turn imposes discipline on management.
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Spending Bill Prohibits SEC from Any Political Contributions Disclosure Rulemaking

The congressional spending proposal that has dominated the news maintains the SEC budget for fiscal 2017, allowing the SEC to operate with the same funding since the last fiscal year ended September 30, 2016.

Similar to prior appropriations bills, this proposal continues to prohibit the SEC from using any funds to issue rules or regulations regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations. Unlike the CHOICE Act, the bill does not stop the SEC from continuing its work on any of the Dodd-Frank mandated rulemaking.

According to Bloomberg, the SEC is bracing for future budget cuts and has imposed a hiring freeze in some departments while eliminating some contract positions.
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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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Acting SEC Chair on Possible SEC Initiatives and Upcoming SEC Open Meeting

During a recent speech on SEC initiatives, Acting SEC Chairman Piwowar invoked the “Forgotten Investor,” as the person who is “dragged” into and “victimized” by someone else’s social reform efforts and must bear those costs.

He criticized the Dodd-Frank Act for imposing numerous burdens to extract “non-material disclosures,” citing as examples the rules related to conflict minerals, pay ratio and resource extraction provisions. For that reason, he noted that in recent weeks he has directed the SEC staff to begin reconsideration of both the conflict minerals and pay ratio rules. Although the current rule on resource extraction disclosure was repealed, the statutory mandate remains.
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SEC Continues Enforcement Actions Based on Nondisparagement Language in Severance Agreements

Late last year, the SEC issued two orders after finding companies violated its whistleblower rules due to certain language in their severance agreements, including clauses that prohibit employees from disparaging the companies in communications with regulators unless authorized in writing or otherwise required by law.  See our client memo >
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A Snapshot of the SEC Whistleblower Office

Andrew Ceresney, the director of the Division of Enforcement at the SEC, gave a speech recently about the success of the SEC whistleblower program. It contained some interesting data that provides a sense of the SEC’s efforts:

  • The SEC has paid out over $107 million to 33 whistleblowers involving case with more than $550 million ordered in sanctions.
  • 18 dedicated staff members at the SEC are responsible for the initial review and intake of tips, as well as tracking them and evaluating award claims.
  • There has been a 30% increase in tips since inception, from 3,001 in fiscal 2012 to nearly 4,000 last year.

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SEC Proposes Requiring Hyperlinks to Exhibits Filed with Registration Statements and Exchange Act Reports

Yesterday, the SEC proposed rules that would require companies to include a hyperlink to each exhibit listed in registration statements and periodic and current reports, including among others Forms S-1, S-3, S-4, S-8, S-11, 8-K, 10-Q and 10-K. The rules would also apply to filings by foreign private issuers made on Forms F-1, F-3, F-4 and 20-F, but not Form 6-K. Since ASCII cannot support functional hyperlinks, exhibits must be submitted in HTML format. 99% of filings made in 2015 were in HTML format.

Currently, anyone trying to access an exhibit that has been incorporated by reference instead of filed with the document must first review the exhibit index to determine which company filing includes a particular exhibit, and then search through the company’s Edgar history to find the exhibit.
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SEC Staff Issues FAQ on Naming Shareholder Proposals in Proxy Cards

The SEC Division of Corporation Finance issued a rare FAQ on a proxy rule yesterday, making clear that companies must provide details when listing shareholder proposals on proxy cards. The FAQ cites Rule 14a-4(a)(3), which requires that the form of proxy must “identify clearly and impartially” each matter to be voted on, “whether proposed by the registrant or by security holders.”

The SEC staff appears to believe that companies are being too general in naming proposals on proxy cards. According to the FAQ, just as it would not be appropriate to describe a management proposal to amend a company’s charter to increase the number of authorized shares as “a proposal to amend our articles of incorporation,” it is also not permissible for a company to describe a shareholder proposal to amend a company’s bylaws to allow for 10% or more shareholders to call a special meeting as “a shareholder proposal on special meetings.”
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Corp Fin Considers Universal Proxies and Warns Companies to Be Clear About the Voting Standards for Director Elections

This is the first of a multipart series on SEC updates related to corporate governance areas discussed during the recent SEC Speaks conference.

The SEC Staff in Corporation Finance is considering recommending rulemaking on universal proxies. A universal proxy means that both management and dissident candidates would be named on the same proxy card. It would allow shareholders to vote the way they could if they actually attend the annual meeting.

The Staff emphasized that the goal is to view the issue from the shareholder’s perspective, not to provide companies or dissident candidates with any advantages. It is unclear which party would benefit in any case, and it may depend on individual situations.
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Climate-Related Disclosure Less of an SEC Priority

A recent GAO report concluded that the SEC has no plans to require more climate-related disclosure.

In guidance issued in 2010, the SEC staff identified four categories of climate-related topics that could cause disclosure: impacts of legislation and regulation; the impact of international accords; indirect consequences of regulation or business trends and physical changes, such as the effect of severe weather. The guidance was issued when Congress was considering legislation that would have limited greenhouse gas emissions by establishing a cap-and-trade program, but it was never enacted.

At the time the guidance was issued, the SEC and its Investor Advisory Committee indicated that they would determine whether further guidance or rulemaking was necessary by monitoring the impact of the guidance, holding a roundtable and putting it on the agenda for the Investor Advisory Committee.
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Court Dismisses Suit to Compel SEC to Adopt Political Spending Rule

A complaint to force the SEC to adopt rules requiring public companies to disclose the use of corporate funds for political activities was dismissed by the U.S. District Court for the District of Columbia. The Plaintiff and Citizens for Responsibility and Ethics in Washington (CREW) submitted a petition for rulemaking to the SEC in May 2014, and about a year later sued the SEC under the Administrative Procedure Act (APA) to challenge the agency’s inaction as arbitrary, capricious, and contrary to law, as well as to compel the SEC to act.

The Plaintiff claims that without regulation to provide transparency, he cannot determine whether corporate political contributions are in the best interest of companies and therefore is unable to fulfill his duties as a shareholder.
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NYSE Proposes Expansion of Listed Companies’ Requirements to Provide Notification of Material News and Circumstances When It Can Halt Trading

NYSE listed companies are currently required to notify the Exchange before disseminating material news so that it can halt trading if needed. Now the NYSE has proposed, in a rule filing with the SEC, to expand the pre-market hours during which companies are required to notify the Exchange, the circumstances under which it can stop trading and also provide guidance related to the release of material news after the close of trading.

Currently, Section 202.06 requires listed companies to notify the Exchange at least ten minutes in advance of releasing material news shortly before trading opens or during trading hours (9:30 a.m.
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