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.

There are a number of legislative proposals making their way through the House and the Senate that would affect public reporting companies and are gathering some momentum, so they bear watching.  Here are a few highlights:

  • Diversity Disclosure Requirements:  H.R. 970, which has been reintroduced in the House of Representatives, titled the “Improving Corporate Governance Through Diversity Act,” would amend Section 13 of the Exchange Act in order to require each issuer that is required to file an annual report to disclose data on the racial, ethnic and gender composition of the board of directors and the C-level executives of the issuer.  C-level executives would include the most senior executive officer, information officer, technology officer, financial officer, compliance officer, or security officer of the issuer.
  • Rule 10b5-1 Plans:  We have previously blogged about this one, which has been in the news recently.  House Financial Services Committee Chair Waters and Congressman McHenry reintroduced legislation, “The Promoting Transparent Standards for Corporate Insiders,” H.R. 624, which would require the SEC to review Rule 10b5-1 and to study gaps in coverage, consider whether to limit trading to issuer-adopted trading windows, curb the use of multiple trading plans, mandate a delay between adoption of a plan and the first trade pursuant to the plan, restrict an insider’s ability to modify or cancel a plan, require companies and insiders to make certain filings with the SEC, and mandate that boards adopt policies to monitor compliance with trading plans. The SEC would be required to issue a report on its study one year following enactment of the measure and promptly undertake necessary rulemaking.  The Council of Institutional Investors has written to Waters and McHenry supporting H.R. 624.
  • Stock Buyback Bill(s)?  Senator Sanders has indicated he plans to introduce legislation that would limit stock buybacks unless companies provide more extensive benefits to workers, such as an increased minimum wage and paid sick leave as well as satisfy certain pay ratios.  The text of the legislation would appear to track bills introduced in prior sessions of Congress (see, for example, S. 3640 introduced in November 2018 in the Senate and a companion bill, H.R. 7145, introduced in the House also in November 2018) although it has not been made available.  There was a recent op-ed piece in The New York Times, co-authored by Senators Schumer and Sanders (see: relating to their views.  In the meantime, Senator Rubio has outlined plans on share buybacks as part of a more comprehensive paper published by the US Senate Committee on Small Business and Entrepreneurship.
  • Corporate Political Disclosures:  Representative Carbajal has introduced legislation, titled the Corporate Political Disclosure Act 2019 (H.R. 1053), which would mandate disclosure of a company’s political activities during the prior year in its annual report and on its Internet website, which must be accessible to shareholders and to the public.

In December 2018, Bill 3718 (the “Bill”) was introduced in the Senate and referred to Committee. The Bill, or the “Ban Conflicted Trading Act,” prohibits members of Congress and senior congressional staff from trading individual stocks and other investments while in office. Specifically, the Bill prohibits such covered persons from (1) purchasing or selling any security, commodity, future, or derivative and (2) entering into a transaction that creates a net short position in any security. Additionally, the Bill prohibits any covered person from serving as an officer or member of any board of any for-profit association, corporation, or other entity. Certain exceptions are set forth for investments that were held before taking office. Investments in diversified mutual funds or exchange-traded funds would still be allowed. On a case-by-case basis, the Select Committee on Ethics may authorize a covered person to place their securities holdings in a qualified blind trust approved by the Committee. Under the Bill, all members would have six months after enactment to divest their shares. New members would get six months from their entry into Congress to divest. Those who fail to comply with the Act would be subject to a civil penalty. Similar measures have been introduced in prior sessions of Congress; however, in light of recent enforcement activity, it’s fair to predict that this measure may be adopted. The Bill can be found in full here.

On December 10, 2018, Representative K. Michael Conway introduced H.R. 7234, a new bill entitled “Holding Foreign Companies Accountable Act” that seeks to amend the Sarbanes-Oxley Act of 2002.  The bill requires each “covered issuer” to disclose annually to the SEC the (1) provisions of laws or rules in foreign jurisdictions that prevent the PCAOB from performing its inspections of auditors located in such foreign jurisdictions and (2) date when such provisions no longer prevent said PCAOB inspections.  A “covered issuer” is a reporting company with a registered public accounting firm that (i) is located in a foreign jurisdiction and (ii) the PCAOB is unable to inspect because of the applicability of laws or rules of such foreign jurisdiction.  If the PCAOB is prevented from carrying out an inspection of the auditor for three consecutive years, the SEC is authorized to prohibit the covered issuer’s securities from being traded on a national securities exchange, unless such covered issuer certifies to the SEC that it will retain a registered public accounting firm that the PCAOB is able to inspect.

The bill follows a joint statement issued earlier this month by SEC Chairman Jay Clayton, SEC Chief Accountant Wes Bricker and PCAOB Chairman William Duhnke that highlighted the significant challenges the SEC and the PCAOB currently face in overseeing the financial reporting for U.S.-listed companies whose operations are based in China.  See our earlier post on this topic here.

A copy of H.R. 7234 is available here.

Shortly following the SEC’s proxy roundtable, Senators Reed, Perdue, Heitkamp, Gillis, Jones and Kennedy introduced a new bill, S. 3614, which would amend the Investment Advisers Act in order to require proxy advisory firms to register as advisers.  The bill is referred to as the Corporate Governance Fairness Act.  In addition to requiring registration under the Advisers Act, the bill would require periodic inspections by the Commission of the activities of proxy advisory firms to examine compliance with policies and procedures designed to address conflicts of interest as well as other matters such as knowingly making false statements or omitting to state a material fact that would be necessary not to render a proxy advisory firm’s statements not misleading.  Finally, the bill would require the Commission to deliver a report to Congress every five years assessing the effectiveness of the regulation of proxy advisory firms.