United States: SEC Offers Another Packed Agenda For Fall 2021

The SEC's new Fall reg-flex agenda is posted and, no surprise, it's packed. Here is the short-term agenda and here is the long-term version. And just as with the spring agenda, Commissioners Hester Peirce and Elad Roisman have lambasted it in a dissenting statement. The agenda is laden with major proposals that were on the Spring agenda, but didn't quite make it out the door, such as plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, Rule 14a-8 amendments and SPACs, as well as a new, already controversial, proposal to amend the definition of "holders of record." Some of the agenda items have recently been proposed, for example, new rules regarding mandated electronic filings (see this PubCo post) and amendments to the proxy rules governing proxy voting advice (see this PubCo post). Similarly, three items identified as at the "final rule stage" have already been adopted: universal proxy (see this PubCo post), filing fee disclosure (see this PubCo post) and amendments under the Holding Foreign Companies Accountable Act (see this PubCo post). The agenda also identifies a couple of topics that are still just at the pre-rule stage, such as exempt offerings (updating the financial thresholds in the accredited investor definition, amendments to Rule 701 and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda (see this PubCo post), nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.

On the Short-Term Agenda:

Proposed Rule Stage

Listing Standards for Recovery of Erroneously Awarded Compensation— Section 954 of Dodd-Frank 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. The rules to implement these clawback provisions were proposed in 2015 and then relegated to the long-term agenda. So much for legislative mandates. Now, the SEC is planning to re-propose those rules and has already re-opened the public comment period, in advance of the December timeframe given in the agenda. 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. In re-opening the comment period, one possible change suggested by the questions is a potential expansion of the concept of "restatement" to include not only "reissuance" or "Big R" restatements (which involve a material error and an 8-K), but also "revision" or "little r" restatements (or some version thereof), which have become increasingly popular. (See this PubCo post.)

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.) The agenda provides a target date of 4/22 to re-open the public comment period, a change from the last agenda, which showed this proposal at the final rule stage.

Corporate Board Diversity—Here, Corp Fin may recommend amendments to the proxy rules to enhance company disclosures 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 equity, it's no surprise that this topic has been moved up to the short-term agenda. See this PubCo post for a discussion of a study examining the representation of women and racial/ethnic communities (including Black, Asian/Pacific Islander and Hispanic persons) on public company boards among the Fortune 100 and Fortune 500 companies. The agenda provides a target date for the proposal of 4/22.

Disclosure of Payments by Resource Extraction Issuers—In December 2020, the SEC adopted final Rule 13q-1 and an amendment to Form SD to implement Section 1504 of Dodd-Frank, which relates to disclosure of payments by resource extraction issuers. As adopted, the rule requires public reporting companies that engage in the commercial development of oil, natural gas or minerals 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. 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 Congressional Review Act. When rules were adopted for the third time in December 2020, Lee dissented because the final rules permitted "payment information to be aggregated to such a degree that the resulting disclosures will obscure information crucial to anti-corruption efforts and material to investment analysis. As a result, today's rule, by the Commission's own determination, will severely restrict the transparency and anti-corruption benefits that the disclosures might provide, and thus fails to advance the statute's goals." (See this PubCo post.) But is the third time the charm? Apparently not. With a new majority on the Commission, Corp Fin is considering whether to recommend that the SEC review the rules to determine if additional amendments might be appropriate. The agenda identifies 4/22 as the target date for issuance of a proposal. 

Rule 144 Holding Period and Form 144 Filings—In December last year, the SEC proposed amendments to Rule 144 to revise the method for determining the holding period—essentially eliminating tacking—for securities "acquired upon the conversion or exchange of certain 'market-adjustable securities.'" The proposed amendment "would not affect the use of Rule 144 for most convertible or variable-rate securities transactions." Essentially, the amendment was intended to apply to "floating priced" or "floating rate" convertibles, often referred to as "death-spiral" converts, issued by companies that do not have securities listed, or approved for listing, on a national securities exchange. The proposed amendments would also mandate electronic filing of Form 144 notices related to the resale of securities of Exchange Act reporting companies; eliminate the Form 144 filing requirement for non-reporting companies; change the filing deadline for Form 144 to coincide with the filing deadline for Form 4; and amend Forms 4 and 5 to add a check box to permit filers to indicate that a sale or purchase reported on the form was made pursuant to a transaction that satisfied Rule 10b5-1(c). The absence of mandatory electronic filing of Forms 144 has come under substantial criticism recently, particularly by those who have been attempting to track sales under 10b5-1 plans, given that some information about these plans is provided on the Form. See this PubCo post.) Now, however, Corp Fin is considering recommending that the SEC re-open the comment period on amendments to Rule 144, and rule amendments to update the electronic filing requirements applicable to Form 144. The agenda provides a target date of 4/22 for re-opening the comment period.

Rule 10b5-1—In June, SEC Chair Gary Gensler announced plans to address problems with the affirmative defense provisions of Rule 10b5-1. Rule 10b5-1 plans, he said, "have led to real cracks in our insider trading regime." A number of studies have identified problems with Rule 10b5-1 plans, and activity under these plans has actually long been suspect, but no changes had been proposed. Some of the new limitations that Gensler suggested include a four- to six-month cooling-off period after plan adoption, limitations on when and how plans can be canceled, mandatory disclosure, limits on the number of (overlapping?) 10b5-1 plans an individual can adopt and reforms related to the use of Rule 10b5-1 plans by companies to conduct share buybacks. That proposal is on the agenda for an SEC open meeting today. (See this PubCo post.)

Climate Change Disclosure—At this point, it's a bit anticlimactic to confirm that a proposal to enhance company disclosures regarding climate-related risks and opportunities is brewing at the SEC and on the short-term agenda? The Commissioners have been advertising this proposed rulemaking for months. Commissioner Allison Lee has long contended that investors are demanding "uniform, consistent, and reliable disclosure" related to climate risks and opportunities. Some disclosure has resulted from private ordering, she has recognized, but, as she has contended previously (see, e.g., this PubCo post, this PubCo post and this PubCo post), "some level of regulatory involvement [is needed] to bring consensus, standardization, comparability, and reliability." (See this PubCo post.) For Lee, "no single issue has been more pressing for [her] than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy." Because these issues are important for investors, she said, "climate and ESG are front and center for the SEC." In March, she issued a new statement requesting public comment on ESG disclosure, designed to shift the discussion from "if" to "how"—that is, what is the best approach to obtaining climate disclosure: "what data and metrics are most useful and cut across industries, to what extent should we have an industry-specific approach, what can we learn from existing voluntary frameworks, how do we devise a climate disclosure regime that is sufficiently flexible to keep up with the latest market and scientific developments? Finally, how should we address the significant gap with respect to disclosure presented by the increasingly consequential private markets?" (See this PubCo post.) At his confirmation hearing and subsequently, Gensler observed that investors, with tens of trillions in assets behind them, increasingly want to see climate risk disclosure. He also noted that issuers could benefit from standardization and the clarity of guidance. (See this PubCo post and this PubCo post ) Not to mention that the White House has issued an Executive Order expressing its policy "to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk... including both physical and transition risks." (See this PubCo post.) In a conversation with former SEC Commissioner and current NYU professor Robert Jackson, when asked about the possibility of cooperation on uniform standards that apply internationally, Gensler responded that the SEC would be inspired by international standards, such as TCFD, but that the rules would be written in the U.S. to make sense for the U.S. (See this PubCo post.) The agenda identifies 12/21 as the target date for issuance of a proposal, but based on comments from Gensler, it seems more likely to be pushed back at least to January.

Human Capital Management Disclosure—When, in August 2020, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K, the debate centered largely on whether the rule should be principles-based or prescriptive. In that instance, notwithstanding a rulemaking petition and clamor from numerous institutional and other investors for transparency regarding workforce composition, health and safety, living wages and other specifics, the "principles-based" team carried the day; the SEC limited the requirement to a "description of the registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the development, attraction and retention of personnel)." At the time, Lee argued for a more balanced approach that would have included some prescriptive line-item disclosure requirements and provided more certainty in eliciting the type of disclosure that investors were seeking. (See this PubCo post.) Subsequent reporting has suggested that companies "capitalized on the fact that the new rule does not call for specific metrics," as "[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand," such as workforce diversity data submitted to the EEOC. (See this PubCo post.) Accordingly, Corp Fin may recommend a proposal to enhance company disclosures regarding human capital management. The agenda identifies 12/21 as the target date for issuance of a proposal, but that too seems likely to be pushed off until next year.

Cybersecurity Risk Governance—In 2018, the SEC adopted long-awaited guidance on cybersecurity disclosure. The guidance addressed disclosure obligations under existing laws and regulations, cybersecurity policies and procedures, disclosure controls and procedures, insider trading prohibitions and Reg FD and selective disclosure prohibitions in the context of cybersecurity. The guidance built on Corp Fin's 2011 guidance on this topic (see this Cooley News Brief), adding in particular new discussions of policies and insider trading. While the guidance was adopted unanimously, some of the Commissioners were not exactly enthused about it, viewing it as largely repetitive of the 2011 guidance—and hardly more compelling. (See this PubCo post.) Given the recent consternation over hacks and ransomware, it should come as no surprise that the SEC may propose rule amendments to enhance issuer disclosures regarding cybersecurity risk governance. The agenda identifies 4/22 as the target date for issuance of a proposal. 

Special Purpose Acquisition Companies—In testimony before a House subcommittee, Gensler observed that we are "witnessing an unprecedented surge" in SPACs, which, to him raised several policy questions, including whether investors are being adequately protected and receiving "the appropriate and accurate information they need at each stage—the first blank-check IPO stage and the second target IPO stage." In remarks last week before the Healthy Markets Association, Gensler emphasized the need to treat like cases alike, contending that a de-SPAC transaction is functionally "akin to a traditional IPO." He pointed to the need to level out information asymmetries, guard against misleading information and fraud and mitigate conflicts among parties that may have different incentives. As policy tools, he identified providing full and fair disclosure on a timely basis, prohibiting the use of sales tactics to "condition the market" before the required disclosure reaches investors, imposing obligations on various gatekeepers (such as auditors, brokers and underwriters) "to stand behind and be responsible for basic aspects of their work" and the efforts of Enforcement as the "federal cop on the beat." If we are going to treat like cases alike, he said, then "investors deserve the protections they receive from traditional IPOs." Gensler indicated that, "to reduce the potential for such information asymmetries, conflicts, and fraud," he has "asked staff for proposals for the Commission's consideration around how to better align the legal treatment of SPACs and their participants with the investor protections provided in other IPOs, with respect to disclosure, marketing practices, and gatekeeper obligations." (See this PubCo post.) The agenda identifies 4/22 as the target date for issuance of a proposal. 

Rule 14a-8 Amendments—In October 2020, the SEC adopted amendments to Rule 14a-8 to modify the eligibility criteria for submission of shareholder proposals, as well as the resubmission thresholds; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibit aggregation of holdings for purposes of satisfying the ownership thresholds; facilitate engagement with the proponent; and update other procedural requirements. The rulemaking generated an energetic—some might say heated—discussion among the commissioners in the course of the long meeting, as well as substantial pushback through the public comment process, discussed in more detail in this PubCo post and this PubCo post. Then-SEC Chair Jay Clayton observed that a "system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders" needed some work, and former Commissioner Jackson characterized the proposal as swatting "a gadfly with a sledgehammer." (See this PubCo post.) Now, with a new majority in charge, Corp Fin may propose new amendments regarding shareholder proposals under Rule 14a-8. The agenda identifies 4/22 as the target date for issuance of a proposal.

Disclosure Regarding Beneficial Ownership and Swaps—The Divisions of Corp Fin and Trading and Markets are considering recommending that the SEC propose amendments to enhance market transparency, including disclosure related to beneficial ownership or interests in security-based swaps and options. The agenda identifies 4/22 as the target date for issuance of a proposal.

Share Repurchase Disclosure Modernization—At today's open meeting, the SEC will consider whether to propose amendments to modernize share repurchase disclosure, including mandating more detailed and more frequent disclosure about issuer share repurchases and requiring issuers to present the disclosure using structured data. The target date for this proposal is December, so the SEC is right on schedule.

Reg D and Form D Improvements—Corp Fin is considering recommending that the SEC propose amendments to Reg D and Form D. The target date for a proposal if 10/22.

Revisions to the Definition of Securities Held of Record—Corp Fin is considering recommending that the SEC propose amendments to the definition of "held of record" for purposes of section 12(g) of the Exchange Act. Commissioner Lee has recently raised concerns about the "explosive growth of private markets." Currently, under the Exchange Act, a company that reaches either 2,000 holders of record or 500 holders of record that are not accredited investors, whichever first occurs, is required to register under the Exchange Act. (And persons are also excluded from the definition of "held of record" if they hold only securities issued to them pursuant to an employee compensation plan in transactions exempted from the registration requirements of the Securities Act.) Today, Lee points out, most shares in U.S. markets are held in street name, with the result that "record ownership has plummeted and in most cases has no meaningful relationship to the number of actual investors." According to Lee, "[e]ven some of the largest and most widely traded issuers do not have enough record owners (as that term is currently defined) to meet the requirements of Section 12(g). Under current guidance, in counting holders, companies look through record ownership only to banks and brokers, not to beneficial owners. Should that still be the case? Lee advocates that "we should consider whether to recalibrate the way issuers must count shareholders of record under Section 12(g) (and Rule 12g5-1) in order to hew more closely to the intent of Congress and the Commission in requiring issuers to count shareholders to begin with. In other words, it's time for us to reassess what it means to be a holder of record under Section 12(g)." (See this PubCo post.) The target date for a proposal is 10/22.

Market Structure Modernization—The Division of Trading and Markets may recommend a proposal to modernize rules related to equity market structure such as order routing, best execution, conflicts of interest, market concentration and the disclosure of best execution statistics. Gensler has observed that the rules governing markets were "mostly adopted 16 years ago" and "do not fully reflect today's technology." (See this PubCo post.) The agenda identifies 4/22 as the target date for issuance of a proposal. 

Amendments to the Commission's Whistleblower Program Rules—In September last year, the SEC adopted changes to the rules governing its whistleblower program, enabling the SEC to adjust, within certain limitations, the amounts payable as awards under the program. The changes were intended to increase efficiencies and provide more tools and more flexibility to the SEC, but not all the Commissioners saw it that way. The changes adopted included a new provision allowing awards with a statutory maximum of less than $5 million (which historically have represented nearly 75% of all whistleblower awards) to qualify for a presumption that they will receive the maximum statutory percentage award of 30%, subject to the absence of whistleblower culpability or other negative award criteria. The amendments also "clarified"—a term that, in the view of some of the commissioners, might be doing a lot of work—the SEC's "broad discretion" when applying the award factors set forth in the whistleblower rules, including the discretion to consider the award factors in percentage terms, dollar terms or some combination. Commissioner Lee dissented principally because of the treatment in the new rules regarding SEC use of discretion if the dollar amount of an award is too high. The amendments also modified 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.) In August this year, Gensler issued a statement indicating that he had directed the SEC staff to revisit the whistleblower rules, in particular, two of the amendments that had been adopted in 2020. (See this PubCo post.) Gensler observed that concerns have been raised, including by whistleblowers as well as by Lee and Commissioner Caroline Crenshaw, that those amendments "could discourage whistleblowers from coming forward." The SEC then issued a policy statement advising how the SEC will proceed in the interim while changes to those rules are under consideration. (See this PubCo post.) The agenda identifies 12/21 as the target date for issuance of a proposal.

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 and recommendations for the SEC to update the Conflict Minerals rules. If ever....

Proxy Process Amendments—Corp Fin may recommend that the SEC propose amendments to the proxy rules to facilitate improvements in the proxy system with respect to the distribution of proxy materials, pre-voting reconcilement, processing of shareholder votes (including proxy vote confirmation) and shareholder communications, 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. Next action "undetermined."