At the ICI Conference, Dalia Blass, Director of the Securities and Exchange Commission’s Division of Investment Management, provided some insights on upcoming rulemaking initiatives.  Director Blass noted that we should anticipate a proposal soon for business development company and closed-end fund offering reform, as well as recommendations for a proposal on modernizing the advertising and solicitation rules for investment advisers and a proposal for use of derivatives by investment companies.  She also noted that the Chief Counsel’s Office has been working on improvements to the Division’s exemptive application review process.

Director Blass noted a number of areas in which investment advisers may perform company-specific analysis on matters put to a shareholder vote and to that end the Division will explore ways to update its guidance in order to clarify how investment advisers should fulfill their fiduciary duty in this regard.  To that end, Director Blass noted that the Staff will consider, among other things, the following questions:

  • how to promote voting practices that are in the best interests of advisory clients, including voting on an issuer-specific basis when appropriate;
  • whether advisers are expected to vote every proxy;
  • how advisers should evaluate recommendations of proxy advisers, particularly where the issuer disagrees with the factual assumptions of the recommendation; and
  • how advisers should address conflicts of interest that a proxy adviser may have.

At the same conference, Commissioner Roisman addressed proxy voting.  The Commissioner noted practices in the asset management sector with respect to proxy voting that have raised questions, such as why some advisers aim to vote every proxy for every company in every fund’s portfolio; centralize proxy voting functions within a complex and vote uniformly across funds in the complex; rely on third-party proxy advisory firms to assist with devising and implementing voting policies.  The Commissioner noted that a fund adviser is acting in a fiduciary capacity when it is voting proxies.  Commissioner Roisman posed a number of questions regarding whether certain approaches employed by asset managers with respect to proxy voting are consistent with the exercise of their fiduciary duty.  The Commissioner also raised concerns regarding the reliance by asset managers on proxy advisory firm recommendations, the processes used by proxy advisory firms in formulating their voting recommendations, and the conflicts of interest that may affect proxy advisory firms.  Commissioner Roisman noted that it would be a good time for the Commission to consider whether guidance to asset managers would be helpful in their interactions with proxy advisory firms.

On March 28, 2019, the Securities and Exchange Commission’s Investor Advisory Committee will hold its next meeting, which will be open to the public and webcast.  The agenda items for the upcoming meeting include the following:  a discussion on investor protection; a discussion of trends relating to investment research.  The Committee also is scheduled to discuss disclosures on human capital.

At a recent Practising Law Institute conference, William Hinman, Director of the Securities and Exchange Commission’s Division of Corporation Finance, commented on the application of the Commission’s principles-based disclosure requirements to areas posing complex risks, such as Brexit.  Hinman noted that, “[p]rinciples-based disclosure requirements articulate an objective and look to management to exercise judgment in satisfying that objective by providing appropriate disclosure when necessary.”  The particular areas in which preparers of filings might consider addressing the impact of Brexit include the MD&A section and Risk Factors section of SEC filings.  To that end, Director Hinman noted that, “[a] well written MD&A allows investors to understand how management is positioning the company in the face of uncertainties, like those associated with rapidly evolving topics such as Brexit.”  Hinman reported on the Division’s review of disclosures contained in filings made by registrants across a range of industries regarding the impact of Brexit.  He noted that most companies provided only generic disclosures that are not helpful to investors.  Many of the more tailored disclosures reviewed by the Staff were prepared by foreign private issuers.  In light of this, Hinman noted that there is room for continued improvement relating to Brexit disclosures.  He urged companies to consider a number of questions, including the following:

  • How does management assess and analyze Brexit-related risks and the potential impacts on the company and its operations?
  • What is management doing to mitigate and manage these risks?
  • What is the nature of the board’s role in overseeing the management of these risks?
  • In examining the disclosures, finally, would the disclosures satisfy the curiosity of a thoughtful, deliberative board member considering the potential impact of Brexit on the company’s business, operations and strategic plans?

Hinman provided a number of examples of disclosure topics related to the impact of Brexit that companies across a range of industries might consider as they prepare more tailored disclosures.  Hinman also commented on sustainability disclosures and noted that he believes there are still evolving views regarding the utility and materiality of sustainability disclosures.  In light of this, Hinman seemed to favor reliance on principles-based disclosure requirements, rather than new prescriptive sustainability disclosure requirements.  He reminded the audience that in 2010 the Commission had published an interpretive release that considered how disclosure requirements may pertain to climate-related issues for some companies.  The full text of the Director’s remarks are available here:

On February 28, 2019, the staff of the Securities and Exchange Commission’s Division of Investment Management issued a no-action letter to the Independent Directors Council permitting board members of a business development company to vote by telephone, video conference or other remote means in certain circumstances.  This modernized position softens, but does not eliminate, the unnecessary burden for BDCs and their boards to adhere to certain in-person voting requirements.  For example, the Investment Company Act of 1940 and rules thereunder provide that the approval or renewal of an advisory contract requires the vote of directors at an in-person board meeting.  The no-action relief may be relied upon if a director is unable to meet at an in-person board meeting as a result of unforeseen or emergency circumstances.  Such circumstances could include illness or death, including of family members, weather events or natural disasters, acts of terrorism and disruptions in travel that prevent some or all directors from attending an in-person board meeting.  Additionally, either no material changes may be proposed at the board meeting to the existing contract, plan or arrangement or the material aspects of the proposed new contract, plan or arrangement must have been previously discussed at a prior in-person board meeting (without a vote).  If relying upon the no-action relief, the directors are required to ratify the prior approval at the next in-person board meeting.  A copy of the no-action letter may be found using the following link:

In a recent article, Edward Knight, the global chief legal and policy officer at Nasdaq Inc., offered his own views on reforms that would contribute to greater resiliency for the US capital markets.  Knight suggests that greater retail participation in the stock markets should be encouraged.  He looks to Sweden’s investment savings accounts, which provide for investments to be made in various securities, with tax liability assessed based on the value of the account, as a means of encouraging more active participation.  Knight notes that the introduction of investment savings accounts in Sweden can be shown to have some correlation with an increase in IPO activity.  While an interesting idea, it is not clear that we would see more companies choose to go public (rather than remain private and finance at attractive valuations or sell at attractive valuations) if there were a higher retail participation rate or that direct retail participation rather than participation through funds would make a difference.  Knight also suggests that Congress and the Securities and Exchange Commission address market structure issues that may impair liquidity for smaller companies.  He also recommends more transparency relating to reporting of ownership positions.  Knight advocates regulations that would mandate that holders of short positions be subject to reporting.  Knight also calls for a merger of the Securities and Exchange Commission and the Commodity Futures Trading Commission into a single agency in order to eliminate regulatory overlaps and redundancies.  A number of these reforms have been advanced through proposed bills in prior sessions of Congress.  Just this week, the US Senate advanced a handful of capital markets related measures for further consideration.  It will be interesting to see whether some of these suggestions find their way into a JOBS Act 3.0.

Earlier this week, Commissioner Peirce addressed a number of topics with the Council of Institutional Investors.  Commissioner Peirce noted that the Securities and Exchange Commission remains focused on refining the securities offering and disclosure regime.  She pointed to the Commission’s proposed extension of the test-the-waters provision, as well as to the amendments to Regulation A making the exemption available to Exchange Act reporting companies.  Commissioner Peirce noted that the Division of Corporation Finance continues to examine ways to streamline the disclosure process—presumably as part of the disclosure effectiveness initiative.  She expressed reluctance in interfering in a company’s selection of dual-class share structures and commented favorably on the CII’s joint op-ed with the Business Roundtable on stock buybacks, suggesting that she would advocate reliance on market forces to reward or penalize companies that engaged in stock repurchases.  Commissioner Peirce also tackled mandatory arbitration provisions, as to which she also suggests that the public should decide whether to invest in a company the charter provisions of which contain mandatory arbitration provisions.  Finally, Commissioner Peirce raised concerns regarding the CII’s push for new types of disclosures, including information about board members’ personal characteristics.  As we had previously blogged, the Commission Staff had released C&DIs on disclosures regarding director qualifications.  Commissioner Peirce expressed concerns that ”making directors’ personal characteristics an item of expected disclosure may have unintended consequences, among them invasion of board members’ privacy and an undue focus on personal features that may have little relation to talent as a director.”  She also noted that the focus on ESG disclosures by a number of groups may be at odds with the Commission’s focus on materiality as a guidepost to disclosure requirements.  The full text of the Commissioner’s remarks may be found here:

In recent years, the Staff of the Securities and Exchange Commission (the “SEC”) has been providing comments regarding companies’ presentations of non-GAAP financial measures in public filings.  We surveyed and discussed the non-GAAP comments issued by the Staff to REITs, which can be found here.  In the period since the publication of the survey, based on a review of comment letters issued in the last six to nine months, we note that the SEC Staff continues to comment on the use of non-GAAP financial measures.  The comments issued in more recent periods relate largely to the improper labeling of non-GAAP financial measures and the failure to reconcile a non-GAAP financial measure used with its GAAP counterpart.

A recent comment related to improper labeling reads as follows:

“We note your calculation of EBITDA contains adjustments for items other than interest, taxes, depreciation and amortization.  Please revise in future filings to ensure that measures calculated differently from EBITDA are not characterized as EBITDA and have titles that are distinguished from ‘EBITDA’, such as ‘Adjusted EBITDA’.  Reference is made to Question 103.01 of the Compliance & Disclosure Interpretations for Non-GAAP Financial Measures.” (SEC Comment Letter (November 7, 2018)).

Another recent comment addresses the lack of reconciliation of the measure used with its most on-point GAAP counterpart:

“We note you provide guidance for PGRE’s share of Cash NOI and NOI.  In future supplemental packages, please reconcile your non-GAAP guidance to the most directly comparable GAAP guidance.  Please refer to Item 10(e)(1)(i)(B) of Regulation S-K and Question 102.10 of the updated Non-GAAP Compliance and Disclosure Interpretations issued on May 17, 2016.” (SEC Comment Letter (September 4, 2018)).

While these are samples, they are representative of the comments that should be taken into account going forward this earnings season.

Global REIT IPOs decreased dramatically – down 47 percent – from 49 REIT IPOs in 2017 to 26 REIT IPOs in 2018. This decrease reflects a difficult capital-raising market, with pressures from rising interest rates and a softening real estate market in the United States, and signals changes in future REIT fundraising activities.

Download the REIT IPO Market Update from Bloomberg Law® to understand recent changes in the REIT IPO landscape, including:

  • Shifts in the way REITs opt to raise capital – leaning more on late-stage private funding vs. public markets;
  • Factors contributing to the substantial increase in the value of REIT M&A transactions in 2018 – with the total value of REIT transactions at $81 billion in 2018 compared to $67 billion in 2017;
  • Analysis of REIT sector performance, including warehouse/industrial, shopping center, health care, mortgage, and non-listed REITs; and
  • Implications of the impact of the new tax law on REITs and a look at the growth of international REITs.

Last week, Intelligize published The Unicorn IPO Report, which analyzes IPOs from 2016 through 2018.  In 2016, the report notes that the AppDynamics IPO was days away from completion prior to its acquisition by Cisco for $3.7 billion.  There were 13 unicorn IPOs in 2017 and 20 in 2018.  Despite the increase in number of deals in 2018, the size of the Snap IPO ($3.4 billion) in 2017 skewed the average offering size for 2017 IPOs.


From 2016 through 2018, the ten largest unicorn IPOs were as follows:  Snap Inc. ($3.4 billion), Dropbox Inc. ($756 million), DocuSign Inc. ($629.3 million), Moderna Inc. ($604.3 million), Switch Inc. ($531.3 million), Allogene Therapeutics Inc. ($324 million), Pluralsight Inc. ($310.5 million), Blue Apron Holdings Inc. ($300 million), Bloom Energy Corp. ($270 million), and Anaplan Inc. ($263.5 million). The report provides statistics on the underwriting fees for unicorn IPOs; a 7% fee remained the norm for all but seven offerings. This is interesting given that an SEC Commissioner’s comments on underwriting fees has raised concern and interest among legislators that smaller and medium-sized companies were paying higher fees.

About 30% of the unicorn IPO issuers had multi-class share structures.

The survey also reports on governance and other trends.

Last week, the US Senate Banking Committee held a hearing on legislation introduced in the prior session of Congress relating to capital formation in order to assess whether any would garner bipartisan support.  In the case of quite a number of bills that had been introduced in, and been passed in, the House of Representatives, this was the first hearing in the Senate.

The bills considered include the following:

  • Corporate Governance Fairness Act: this would require proxy advisory firms to register with the SEC as advisers, and would require the SEC to conduct periodic inspections of proxy advisory firms.
  • The Brokaw Act: which would amend Section 13(d) reporting rules in order to shorten filing deadlines, require disclosure of short positions, and expand the definition of beneficial ownership.
  • The HALOS Act: which would clarify whether certain communications should be considered “general solicitation.”
  • Encouraging Public Offerings Act: would expand the ability to test the waters and would be consistent with the recently SEC proposed rule amendments.
  • Crowdfunding Amendments Act: would allow crowdfunding to be available for pooled vehicles.
  • Fair Investment Opportunities for Professional Experts: would expand the “accredited investor” definition to include certain licensed individuals.
  • Modernizing Disclosures for Investors Act: would require a study of quarterly reporting requirements.
  • The Middle Market IPO Underwriting Cost Act:would require a study on underwriting fees.