The SEC’s Spring 2020 RegFlex Agenda

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

With so much going on in connection with COVID-19 and its impact, it would be easy to overlook the rest of the SEC’s agenda. And it’s a lengthy one. The new Spring Regulatory Flexibility Act Agenda was published at the end of June, so it’s time to look at what’s on deck for the SEC in the coming year or so. (That reference to “on deck” may be the only sports anyone gets this year….) SEC Chair Jay Clayton has repeatedly made clear his intent to make the RegFlex Agenda more realistic, streamlining it to show what the SEC actually expects to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following 12 months. See this PubCo post and this PubCo post.) The SEC’s Spring 2020 short-term and long-term agendas reflect the Chair’s priorities as of March 31, when the agenda was compiled. What stands out here are the matters that have, somewhat surprisingly, moved up onto the final-rule-stage agenda—think universal proxy—from perpetual residence on the long-term (i.e., the maybe never) agenda.

On the Short-Term Agenda:

Final Rule Stage

Universal Proxy—Let’s get right to the most surprising finding on the short-term agenda. It may sound anodyne, but it’s still quite a hot potato. A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of dissident and management nominees using a single proxy card. In the absence of universal proxy, in contested director elections, shareholders can choose from both slates of nominees only if they attend the meeting in person. In 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections. And there it sat. And, notwithstanding development of something of a consensus at a 2018 meeting of the SEC’s Investor Advisory Committee that there could well be value in universal proxy cards (even though concerns remained that it could favor one party over the other), it had continued to sit on the long-term agenda. (See this PubCo post.) Until now, that is, when it is identified as being at the final rule stage, with a date for final action identified as October 2020. (Except as otherwise noted, all of the proposals in the final rule stage have been ascribed a date for final action of October. How serious is that date? Not entirely clear.)

Modernization and Simplification of Disclosures Regarding Description of Business, Legal Proceedings and Risk Factors—Corp Fin is considering recommending a proposal to amend Reg S-K to modernize and simplify disclosures regarding the description of business, legal proceedings and risk factors. The proposal is another component of the “Disclosure Effectiveness Initiative.” To enable each business to focus on the matters that are material to that business, the proposed amendments take a more principles-based approach to the business and risk factors disclosure requirements. With regard to legal proceedings, the proposal would “continue the current prescriptive approach because that requirement depends less on the specific characteristics of registrants.” Most interesting will be how the SEC decides to handle the current clamor for more information about “human capital.” (See, e.g., this PubCo post.) The proposal already expands the requirement to discuss human capital, providing non-exclusive examples of potentially material human capital measures and objectives. (See this PubCo post.) The proposal, however, predated the pandemic. In light of serious concerns that have arisen about workforce health and safety, as well as demand for information about workforce composition (diversity), will the SEC go further to enhance the disclosure requirement?

Procedural Requirements and Resubmission Thresholds for Shareholder Proposals Under Rule 14a-8—Corp Fin may recommend a proposal to raise the initial and resubmission threshold levels for shareholder proposals under Rule 14a-8. In addition, the proposal would provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative, and facilitate engagement with the proponent. The topic has long been highly controversial, with Clayton observing that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needs some work, and former Commissioner Jackson characterizing the proposal as swatting “a gadfly with a sledgehammer.” (See this PubCo post.)

Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice—Corp Fin is considering recommending that the SEC adopt rule amendments to address certain proxy advisors’ reliance on the proxy solicitation exemptions in Rule 14a-2(b). The proposal would codify the SEC’s previous interpretation that proxy voting advice may come within the definition of a “solicitation,” and add new disclosure and engagement requirements for proxy advisory firms, such as ISS and Glass Lewis. And, no surprise, they’re not happy about it. (See this PubCo post.) There is also talk that the SEC is abandoning the engagement component in favor of a “speed bump.” (See this PubCo post.)

Modernization and Simplification of Disclosures Regarding MD&A, Selected Financial Data and Supplementary Financial Information—Corp Fin may recommend amendments to modernize and simplify disclosures regarding MD&A, Selected Financial Data and Supplementary Financial Information. Once again, the proposal employs a more principles-based approach, describing the objectives of MD&A with the goal of eliciting more thoughtful, less rote analysis. Some of the proposed changes are fairly dramatic—such as eliminating selected financial data (Item 301), supplementary financial data (Item 302), and the table of contractual obligations, or adding a requirement to disclose critical accounting estimates—while some just address moving parts and conforming changes. Whether the proposal, if adopted, actually leads to more nuanced, analytical disclosure remains to be seen. The date for final action is identified as April 2021. (See this PubCo post.)

Filing Fee Disclosure and Payment Methods Modernization—Corp Fin is considering recommending a proposal to modernize the processing of EDGAR filing fees by structuring fee-related information in certain SEC filings. The proposal would amend almost everything—“most fee-bearing forms, schedules, statements, and related rules”—to require each fee table and accompanying explanatory notes (which would be expanded by the proposal) to include “all required information for fee calculation in a structured format.” That means more XBRL. (See this PubCo post.)

Amending the “Accredited Investor” Definition—Corp Fin may recommend that the SEC adopt amendments to expand the definition of accredited investor under Reg D. The proposal would include as accredited investors new categories of individuals based on professional knowledge, experience or certifications, to be determined by the SEC by order (without notice and comment), as well as new categories of institutional investors. No changes were proposed to the income and wealth thresholds, which were established in 1982 (and 1988 for joint income) and have not been updated since. (See this PubCo post.)

Harmonization of Exempt Offerings—Corp Fin may recommend a proposal to harmonize and streamline the patchwork universe of private placement exemptions, to promote capital formation and “to expand investment opportunities while maintaining appropriate investor protections.” (See this PubCo post.)

Disclosure of Payments by Resource Extraction Issuers—Corp Fin is considering recommending that the SEC adopt a rule to implement Dodd-Frank section 1504 in compliance with the substantive requirements of the Congressional Review Act. These rules were supposed to have been adopted, following disapproval under the CRA, by February 2018, but obviously, that didn’t happen. You might recall that the resource extraction rules, mandated under Dodd-Frank, have had a long and troubled history. Originally adopted in 2012 at the same time as the conflict minerals rules, the resource extraction rules faced an immediate court challenge and, in a fairly scathing opinion, were vacated by the U.S. District Court. New rules were again adopted, but were subsequently tossed out under the CRA. In developing the new proposal, the staff took into account the concerns expressed by Congress, which related principally to the high costs of compliance and potential anti-competitive effect. Under the proposal, public reporting companies that engage in the commercial development of oil, natural gas or minerals would be required to disclose company-specific, project-level payments made (by the company, its subs or controlled entities) to a foreign government or the U.S. federal government. (See this PubCo post.)

Amendments to the Commission’s Whistleblower Program Rules—Also in the final rule stage are proposed amendments to the SEC’s whistleblower rules. The proposal is intended to improve the program by increasing efficiencies and providing more tools and more flexibility to the SEC, enabling the SEC to adjust, within certain limitations, the amounts payable as awards under the program. The amendments also modify the requirements for anti-retaliation protection to conform to SCOTUS’s recent decision in Digital Realty v. Somers (discussed in this PubCo post). (See this PubCo post.) A July 2020 final rule date is attributed to this proposal.

Amendments to Certain Provisions of the Auditor Independence Rules—The Office of Chief Accountant is considering recommending that the SEC adopt amendments to update certain auditor independence rules. The proposal is intended to modernize aspects of the independence rules to minimize the potential for “relationships and services that would not pose threats to an auditor’s objectivity and impartiality [to] trigger non-substantive rule breaches or potentially time consuming audit committee review of non-substantive matters.” (See this PubCo post.)

Proposed Rule Stage

Earnings Releases/Quarterly Reports—Corp Fin is considering recommending that the SEC propose amendments “to ease companies’ compliance burdens while maintaining appropriate levels of disclosure and investor protection.” In December 2018, the SEC posted a “request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies.” In particular, the request sought public input about potentially reducing the burden of quarterly reporting, as well as “how the existing periodic reporting system, earnings releases, and earnings guidance, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants (See this PubCo post. See also the discussion of the “quarterly reporting panel” in this PubCo post regarding the Corp Fin roundtable on short-termism.)

Amendments to Rule 701/Form S-8—Corp Fin may recommend amendments to Rule 701, the exemption from registration for securities issued by privately held companies pursuant to compensatory arrangements, and Form S-8, the registration statement for compensatory offerings by reporting companies. In July 2018, the SEC issued a new Concept Release requesting public comment on ways to modernize Rule 701 and Form S-8, including whether and how to modify the rules in light of the “gig” economy and evolving worker-company relationships. (See this PubCo post and this Cooley Alert.)

Proxy Process Amendments—Corp Fin may recommend that the SEC propose amendments to the proxy rules to facilitate improvements in the shareholder voting and communication process, otherwise referred to as proxy plumbing issues. There has been substantial criticism of the current byzantine system of share ownership and intermediaries that has accreted over time. Shareholder voting is viewed as fundamental to keeping boards and managements accountable, and the current system of proxy plumbing has been criticized as inefficient, opaque and, all too often, inaccurate. Proxy plumbing was discussed at length at a 2018 meeting of the Investor Advisory Committee and then at the proxy process roundtable. (See this PubCo post and this PubCo post.) The question is whether the SEC will undertake the comprehensive analysis and overhaul that appears to be required or settle for grabbing only the low-hanging fruit? My bet is on the low-hanging fruit. Even though the matter is only in the proposed rule stage, it has also been ascribed a final action date of October, which could signify that the SEC may be planning to take it up at the same time as the other proxy/shareholder meeting proposals.

Mandated Electronic Filings—Corp Fin may recommend amendments to Reg S-T that would mandate additional electronic filings.

Listing Standards for Recovery of Erroneously Awarded Compensation—The SEC has proposed rules to implement the clawback provisions of Section 954 of Dodd-Frank. Section 954 required the SEC to direct the national securities exchanges to adopt listing standards requiring each listed company to develop and implement a policy for recouping executive compensation that was paid on the basis of erroneous financial information, the theory being that it is compensation to which the executives were never really entitled in the first place. Under Dodd-Frank, the policy would apply in the event the company had to prepare an accounting restatement due to the company’s material noncompliance with any financial reporting requirement under the securities laws. These rules were proposed in 2015 and relegated to the long-term agenda. So much for legislative mandates. But now the proposal has been moved up to the short-term agenda, with final action date given as October 2020. Will it happen? (See this PubCo post.)

On the long-term (maybe never) agenda:

Conflict Minerals Amendments—Way too long a saga to go through here. But know that the federal courts held that the statute and rules violated the First Amendment to the extent they required companies to report that any their products “have not been found to be ‘DRC conflict free.’” (For background on the case, see this PubCo post.) Corp Fin guidance issued in 2014, and currently in effect, requires companies to make the mandated filing without including a statement as to the conflict-free status of the products that could be deemed to violate the First Amendment. (See this PubCo post.) In 2017, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule that provided that Corp Fin would not recommend that companies face enforcement if they filed only a Form SD and did not prepare and file a conflict minerals report. (See this PubCo post.) Nevertheless, companies have continued to file CMRs at about the same rate as prior to the Updated Statement. As a long-term item, Corp Fin is considering recommending rules that would address the effect of the court decision. If ever….

Pay Versus Performance—Another oldie but goodie, these rules were also proposed in 2015 to implement Section 953(a) of Dodd-Frank, which required companies to disclose executive pay for performance. The proposal would amend Reg S-K Section 402 to add Section (v), which would require tabular disclosure of compensation “actually paid” to the principal executive officer and an average of the compensation actually paid to the other named executive officers for a phased-in five-year period. The new section would also require companies to describe, in narrative or graphic form or both, the relationship of the compensation actually paid to the company’s financial performance as reflected in its TSR and to describe the relationship of the company’s TSR to the TSR of a peer group. (See this PubCo post.)

Corporate Board Diversity—Corp Fin may recommend amendments to the proxy rules to require additional disclosure about the diversity of board members and nominees. This idea was championed by former SEC Chair Mary Jo White, who announced in 2016 that the Corp Fin staff was preparing a proposal to require “more meaningful” disclosure in proxy statements about board members and nominees where the directors elect to report that information. The current rule, she believed, just did not cut it: “[o]ur lens of board diversity disclosure needs to be re-focused in order to better serve and inform investors.” (See this PubCo post.) The proposal never seems to have materialized—at least not in public. In 2019, the staff issued a CDI calling for some enhanced board diversity disclosure. (See this PubCo post.) But with all the focus on diversity and racial equality, it’s somewhat surprising that a topic like this has not been expanded and moved up on the agenda.

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