The House Financial Services Committee recently passed H.R. 1815, which is the Securities and Exchange Commission Disclosure Effectiveness Testing Act.  The legislation would require that the SEC engage in investor testing of any new disclosure intended for retail investors.  The testing should include a qualitative testing in the form of one-on-one interviews with retail investors, as well as a nationwide survey of retail investors.  The testing results would be required to be made public.  It would also require that the SEC review and test the usability of its existing disclosures for retail investors, including mutual fund disclosures.  The reviews and tests would be required prior to the SEC adopting a final rulemaking.  This would seem to require, if it were passed, for the SEC to conduct testing before proposed disclosure requirements are adopted as part of a final Regulation Best Interest.  The Consumer Federation of America and other consumer groups support the legislation.

The Staff of the Division of Corporation Finance released guidance regarding the process for seeking extensions of confidential treatment.  There is a new short form application for issuers that have previously received a confidential treatment order.  Here is a link to the new short form application:  The one-page document requires that the issuer affirm that the most recently considered application continues to be true, complete and accurate regarding the information for which the applicant continues to seek confidential treatment.  The short form is an alternative to the traditional application for extensions of orders and it cannot be used to add new exhibits or to make new redactions.

With the April 2, 2019 Federal Register publication of the US Securities and Exchange Commission’s adopting release on its amendments to certain disclosure requirements of Regulation S-K and related rules and forms, the amendments regarding the redaction of confidential information in material contracts became effective. Most of the remaining amendments will become effective on May 2, 2019. In addition, the SEC staff announced guidance on the new rules and procedures for the filing of exhibits containing immaterial, competitively harmful information. This Legal Update provides further details and notes related practical considerations for companies.

In mid-March, the Securities and Exchange Commission adopted additional amendments that simplify disclosure requirements.  These amendments, which become effective in the spring, are responsive to the rulemaking mandate in the Fixing America’s Surface Transportation (FAST) Act.

During this session, David S. Bakst and Anna T. Pinedo of Mayer Brown LLP will discuss:

  • The SEC’s disclosure effectiveness initiative
  • The changes brought about by the 2018 disclosure amendments adopted in part as a result of the FAST Act
  • The latest FAST Act Amendments, including:
    • Detailed overview of the changes to existing requirements
    • Drafting MD&A in light of new flexibility and considerations relating to presentation of prior periods
    • Risk factors and materiality concepts
    • Deciding whether to omit confidential information from exhibits
  • The rulemaking proposals and concept release that are still pending and what to expect

To register, or for more information, please visit:

In a recent paper, referenced above, author JB Heaton analyzes the extent to which the ability of corporations to return capital to their shareholders through dividends and repurchases results in substantial social costs. As a result, he argues that it would be beneficial to restrict dividend payments and share repurchases.  Heaton notes that dividend and share repurchases:  dramatically increase the riskiness of corporate debt, diverting large resources into credit monitoring and speculation; require a larger bankruptcy system to process large and complex corporate failures; make firms more fragile and less resilient to financial crises; unfairly shift costs to involuntary and unsophisticated creditors; and distort the supply of securities toward riskier debt.  Heaton argues that equity holders are residual interest holders but routinely get paid before creditors and that corporate law is too permissive in allowing returns of capital.  Creditors may limit dividend payments and share repurchases through the imposition of covenant restrictions but, due to competition in the credit markets, many credit agreements and notes are “covenant-lite.”  Heaton analyzes the dividend and share repurchase issue, which has been receiving intense scrutiny of late, from a very different perspective worth adding to any discussion.

In a recent paper, “Equity Crowdfunding and Governance: Toward an Integrative Model and Research Agenda,” Douglas J. Cumming, Tom Vanacker, and Shaker A. Zahra consider the governance mechanisms in equity crowdfunded offerings.  Venture-backed companies generally have an established governance mechanism.  Public companies also have elaborate governance frameworks.  Usually, companies that rely on equity crowdfunded offerings generally attract smaller holders, who may be unsophisticated (relative to venture or private equity investors) and may not be effective in enforcing governance provisions.  Without governance mechanisms, concerns related to the quality of available information and adverse selection increase.  Venture investors generally conduct extensive due diligence before investing, negotiate for control rights to protect their investments, and may be involved actively in monitoring the progress of portfolio companies.  In crowdfunded offerings, investors generally do not meet company management, and also do not necessarily have any ties to other investors.  A premise of crowdfunded offerings was that dispersed investors would access data and that the collective wisdom of the crowd would provide a mechanism for curbing adverse selection.  However, there is no evidence that this is actually true.  Some equity crowdfunding platforms may play a role in conducting diligence and may, especially if they focus on pooled investments, have reputational concerns that would create incentives for them to monitor investments more closely.  The authors note that most crowdfunding regulations do not impose any governance requirements for companies seeking to raise capital this way, which would offer the possibility of addressing the adverse selection problem and avoiding creation of zombie firms or empty shell companies.

Institutional investors continue to express concerns regarding dual class share structures.  The Council of Institutional Investors has petitioned the Nasdaq Stock Market to change its listing rules in order to require that Nasdaq-listed companies with dual share classes incorporate a sunset provision in their charter.  The CII letter cites a growing consensus in favor of sunset provisions.  The letter also cites an increasing number of companies that had time-based sunset provisions. The CII letter recommends a sunset of seven years or less.  Also, the CII letter offers as a compromise that the Nasdaq consider permitting a mechanism that would allow the shareholders of a listed company, with each class voting separately on a one-share, one-vote basis, to extend the multi-class structure for another term of seven years or less.  In the meantime, index providers continue to consult on the eligibility for index inclusion of the shares of companies that have multi-class share structures.  Recently, SEC Commissioner Jackson expressed concern for “governance by index,” noting that excluding certain companies from indices had the unintended effect of depriving holders of index-tracking funds from investing in such companies.  The Commissioner appeared to call on the SEC and Delaware to take a more proactive role in addressing multi-class share structures.

The PCAOB recently published Staff guidance that sets out the Staff’s views relating to implementing the critical audit matters (CAMs) requirement.  In its piece, “Implementation of Critical Audit Matters: the Basics,” the Staff notes that for large accelerated filers the CAMs requirement will become effective for audits of fiscal years ending on or after June 30, 2019.  The requirements will apply to all other companies for audits for fiscal years ending on or after December 15, 2020.  CAMs are not required for audits of EGCs or audits of investment companies other than BDCs.  A CAM is required to relate to the accounts or disclosures that are material to the financial statements.  The standard provides a list of non-exclusive factors to be taken into account by auditors in assessing CAMs. Each CAM must be identified, the auditors must explain why the matter involves a complex judgment, and must describe how the CAM was addressed.  Auditors also must document their communications with the audit committees and the considerations that led the auditors to conclude a matter was a CAM.  In the Staff’s related paper, “Implementation of Critical Audit Matters: A Deeper Dive on the Determination of CAMs,” the Staff focuses on factors that may be taken into account in determining whether a matter is a CAM, and provides various questions and answers that may be helpful to audit committees.  In the last paper, “Implementation of Critical Audit Matters: Staff Observations from Review of Audit Methodologies,” the Staff assesses materials submitted by ten audit firms relating to their methodologies for CAMs compliance and offers some observations for audit firms.

The PCAOB recently released its 2019 Staff Inspections Outlook for Audit Committees.  During its 2019 inspections, the PCAOB has said that its inspections will focus on among other things:

  • Technological developments affecting audits, including the use of software audit tools, and responses to risks associated with cybersecurity breaches;
  • Audit firm responses to past inspection findings; and
  • Audit procedures on new accounting standards, including internal control effects related to revenue recognition and lease accounting.

The Staff outlook also offers sample questions that audit committees may consider asking their auditors relating to key areas, such as auditor response to identified risks, changes in the auditor’s report, including relating to CAMs dry runs, observations relating to the company’s implementation of new accounting standards, and auditor independence.

On March 20, 2019, the Securities and Exchange Commission (“SEC”) approved a New York Stock Exchange (“NYSE”) rule modifying the price requirements that companies must meet to avail themselves of certain exceptions from the NYSE shareholder approval requirements.  Shareholder approval was not previously required if an issuance of securities was made at a price at least as great as each of the book and market value of an issuer’s common stock.  The new NYSE rule replaces this “market value” test with a “minimum price” test.  Minimum price is defined as the lower of (i) the closing price of the issuer’s common stock immediately before the execution of the transaction agreement and (ii) the average closing price of the issuer’s common stock during the five days immediately preceding the transaction agreement.  The five-day average closing price formulation is meant to avoid unanticipated and inequitable results that may occur if there is unexpected price volatility.  Shareholder approval is required for transactions that are priced below the minimum price.  The NYSE rule eliminates the requirement for shareholder approval of issuances at a price less than book value but greater than market value.  The NYSE does not believe book value is a meaningful measure of whether a transaction is dilutive or should otherwise require shareholder approval.  The changes align with Nasdaq’s recent amendments.  The new NYSE rule may be found here.