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:

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:

Author Yuliya Guseva in her paper titled “The SEC and Foreign Private Issuers: A Path to Optimal Enforcement,” reviews SEC enforcement actions against foreign private issuers between 2005 and 2016 and considers developments following the Supreme Court’s Morrison decision.  Guseva notes that following Morrison, federal courts have narrowed the application of Exchange Act Section 10 to instances involving securities listed on US exchanges and domestic transaction wherein either title to the securities passes in the United States or the parties become irrevocably bound to purchase the securities in the United States.   It is unclear how courts will react to the Tenth Circuit decision in Traffic Monsoon.  In the immediate aftermath of Morrison, the author notes a decline in the number of class actions filed against foreign issuers.  Guseva also looks at SEC proceedings in the five years before and roughly five years since the Morrison decision.  During this period, there were 151 actions brought against foreign issuers.  Approximately 8% of these involved Exchange Act Section 10(b) and Securities Act Section 17 violations, and delinquent filing violations accounted for 77% of the actions brought.  During this time period, the SEC may have referred to foreign regulators’ enforcement matters, which would not be reflected in the statistics cited in the paper and above.

In 2010, the US Supreme Court in Morrison v. National Australia Bank established a new standard, a transactional test, for determining the extraterritorial application of Section 10(b), which replaced the prior conduct-and-effects test.  Following the Morrison decision, Dodd-Frank Act Section 929P(b) provided US courts with jurisdiction in cases brought by the SEC or the US government that involved conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors or conduct occurring outside the United States that has a foreseeable substantial effect within the United States.  It was not clear whether the Dodd-Frank Act had, in effect, overcome the limits set by Morrison.

The Tenth Circuit Court of Appeals court date considered this question in a recent case, SEC v. Scoville and Traffic Monsoon. The Tenth Circuit considered whether the SEC had authority to bring a civil enforcement action under the federal securities antifraud provisions in a securities transaction outside of the United States.  The Court applied the conduct-and-effects test which took the view that was reinstated by the Dodd-Frank Act in order to allow an action brought by the SEC to proceed.  However, private actions under the antifraud provisions would continue to be governed by the Morrison transactional test.

Consistent with our prior posts on this topic (see our posts “Mandatory Arbitration”, “Coalition of State Treasurers Oppose Mandatory Arbitration” and “Mandatory Arbitration Provisions”) the Securities and Exchange Commission appears to be deferring taking any view on the inclusion of mandatory arbitration provisions in public company bylaws.  Chair Clayton’s recent comments on mandatory arbitration provisions came in the context of an inquiry from a company that sought guidance from the Staff of the Division of Corporation Finance regarding excluding a shareholder proposal from its proxy statement.  Under Rule 14a-8(i)(2), the company sought to omit from its proxy statement the shareholder proposal and the company argued that the proposal, were it to be adopted, would result in a violation of both federal and state law.  In this particular instance, the Division stated it would not recommend enforcement action if the company were to exclude the proposal based on its arguments that it would violate applicable (New Jersey) state law.  However, the Staff of the Division expressly noted that it was not opining on whether the proposal, if implemented, would violate federal law.  Chair Clayton reaffirmed his belief that “any SEC policy decision on this subject should be made by the Commission in a measured and deliberative manner.”  See his remarks here.

Since the Jumpstart Our Business Startups (JOBS) Act was enacted in 2012, emerging growth companies (EGCs) have benefited from the opportunity to test the waters with investors and gauge interest in a potential offering. Title I of the JOBS Act amended Section 5 of the Securities Act of 1933 (the Securities Act) in order to provide that certain communications made by EGCs or persons acting on their behalf with institutional accredited investors and qualified institutional buyers (QIBs), either prior to or following the filing of a registration statement, would not constitute “gun jumping.”

Now, the US Securities and Exchange Commission (Commission) has proposed a new rule under the Securities Act that would extend the ability to test the waters to all issuers. This has been highly anticipated.

For more, read our Legal Update.

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.

The Securities and Exchange Commission took the long-awaited step of proposing rules for comment that would extend the ability to test the waters beyond emerging growth companies, or EGCs.  This topic, of extending the test the waters communications, had been the subject of proposed legislation in the last session of Congress and had made its way into the package of legislative reforms that were referred to as “JOBS Act 3.0.”

As proposed, test the waters would be available to all prospective issuers, not just EGCs. Proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering.  Under the proposed rule there would be no filing or legending requirements; test-the-waters communications may not conflict with material information in the related registration statement; and issuers subject to Regulation FD would need to consider whether any information in a test the waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

The proposal will have a 60-day public comment period following its publication in the Federal Register.  A Mayer Brown Legal Update will follow shortly.