Securities Regulation

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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.

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:  https://www.sec.gov/news/speech/hinman-applying-principles-based-approach-disclosure-031519.

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.

Wednesday, November 14, 2018
1:00 PM – 2:00 PM Eastern

During this webinar, we will explore the proposed Regulation Best Interest rule and related developments. Topics include:

  • Overview of the proposed regulation;
  • Principal areas of comment;
  • What we can anticipate in terms of timeline and process and what firms can do now;
  • FINRA’s proposed amendments to quantitative suitability; and
  • State fiduciary rules.

Wolters Kluwer will provide CLE credit. For more information, or to register for this session, please visit the event website.

November 7–9, 2018

Location
The Roosevelt Hotel
45 East 45th Street
New York, NY 10017

Celebrating its 50th anniversary, PLI’s annual Institute on Securities Regulation will bring together the nation’s leading securities and corporate legal experts to deliver practical information, insights and real-word strategies and solutions to the challenges facing you and your clients today.

Partner Anna T. Pinedo will speak on the “Financing Issues Facing Late-Stage Private Companies and Smaller Reporting Companies” panel on day one of the conference. Topics will include:

  • Securities law issues in venture rounds and late-stage financings;
  • Liquidity issues for private companies;
  • Advising the IPO candidate on dual-class stock structure;
  • Public and private financings by smaller reporting companies; and
  • Alternative offering options and reverse mergers.

For more information or to register, please visit the event website.