On August 25, 2022, the US Securities and Exchange Commission (SEC) finally adopted a “pay versus performance” rule in accordance with a Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandate that requires SEC-reporting companies to disclose in a clear manner the relationship between executive compensation actually paid and the financial performance of the company. As adopted, the rule generally requires disclosure of five years of pay versus performance data in proxy and information statements in which executive compensation information is required to be included pursuant to Item 402 of SEC Regulation S-K. The new pay versus performance disclosures must be included in proxy and information statements that are required to include such compensation information for fiscal years ending on or after December 16, 2022. Thus, the new rule will generally apply for the upcoming 2023 proxy season.

Read the complete Legal Update.

If you thought the recent price increase at your neighborhood store was inflation’s last flop, think again. The Inflation Reduction Act (“IRA”), which was signed into law by President Biden on August 16, 2022, is estimated to raise $739 billion over the decade. The IRA is financed primarily by several targeted tax increases. Revenues will go toward initiatives designed to combat climate change, reduce the nation’s debt, and, hopefully, reduce inflation. The IRA is a starkly diminished version of the proposed “Build Back Better Act,” which passed the House in 2021 but never received a vote in the Senate. Most of the tax proposals in the Build Back Better Act didn’t make it into the new bill, but a few did.

Read the complete Legal Update.

The Securities and Exchange Commission recently released for comment a draft strategic plan for fiscal years 2022 to 2026.  In the accompanying message from Chair Gary Gensler, the Chair notes that the strategic plan focuses on the following three objectives:  protecting working families against fraud, manipulation, and misconduct; developing and implementing a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and supporting a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives.

Among other things, the plan discusses:  enhanced use of data analytics, including machine learning and artificial intelligence, in connection with risk analysis; modernizing disclosures and delivery of disclosures; enhancing the transparency of the private markets; and enhancing the SEC’s expertise in, and devoting greater resources to, products beyond equities, such as crypto assets, derivatives, and fixed income.  The draft plan was prepared in accordance with the Government Performance and Results Modernization Act of 2010, which requires federal agencies to outline their missions, planned initiatives, and strategic goals for a four-year period.  See the SEC press release, draft Strategic Plan, and SEC request for comment.

Last Friday, the United States and China appear to have taken a major step towards resolving their long-standing dispute over inspections and investigations by the U.S. Public Company Accounting Oversight Board (“PCAOB”) of audit firms based in China and Hong Kong that threatens to cause the delisting of approximately $1.5 trillion in U.S.-listed securities by issuers based in China and Hong Kong. However, it remains uncertain if the deal will prove to be a durable solution.

Read the complete Legal Update.

On August 25, 2022, the Staff of the Securities and Exchange Commission (SEC) issued three Compliance and Disclosure Interpretations (C&DIs) (see the Proxy Rules and Schedules 14A/14C), 139.01, 139.02 and 139.03.  The C&DIs, which relate to the universal proxy rule, Rule 14a-19, address proxy contests and disclosure of the proxy notice deadline when a company’s advance notice bylaw imposes a deadline that is earlier than the deadline imposed by Rule 14a-19.  Below are the three new C&DIs:

Section 139. Rule 14a-19

Question 139.01

Question: Rule 14a-19(a)(1), in conjunction with Rule 14a-19(b), generally requires a dissident shareholder in an election contest to provide the registrant with notice of the names of the dissident shareholder’s nominees for whom it intends to solicit proxies at least 60 calendar days before the anniversary of the prior year’s annual meeting date. Can a dissident shareholder include in the Rule 14a-19(b) notice the names of more nominees than there are director seats up for election, without the intent of actually soliciting proxies for all of them but, instead, finalizing its slate of nominees after the Rule 14a-19(b) deadline and closer to the date of the shareholder meeting?

Answer: No. The Rule 14a-19(b) notice must contain only the names of nominees for whom the dissident shareholder intends to solicit proxies. The purpose of this requirement is to provide a definitive date by which the parties in a contested election will have the names of all nominees in order to compile a universal proxy card. See Release No. 34-93596 (Nov. 17, 2021). Knowingly submitting the names of more nominees than there are director seats up for election, with the intention of finalizing the actual slate of nominees after the Rule 14a-19(b) notice deadline, would be inconsistent with the purpose of the rule.

The staff, however, recognizes that a dissident shareholder may need to change its slate of nominees after the Rule 14a-19(b) notice deadline (for example, because a nominee withdraws from the slate or the registrant increases the number of director seats up for election). Therefore, the staff will not object if the dissident shareholder includes in its Rule 14a-19(b) notice: (1) the names of the nominees for whom it intends to solicit proxies and (2) the names of additional or alternate nominees who, in accordance with the registrant’s governing documents and state law, would be presented for election in the event of a need to change the original slate, so long as the notice clearly identifies the persons who are being presented as additional or alternate nominees. If the dissident shareholder later changes its slate to include any of the additional or alternate nominees, then it must promptly notify the registrant of the change as required by Rule 14a-19(c).

The views above also apply to the ability of a registrant to include in its Rule 14a-19(d) notice the names of more nominees than director seats up for election. [August 25, 2022]

Question 139.02

Question: Rule 14a-19(b) generally requires a dissident shareholder in an election contest to send a notice to the registrant with the names of its nominees. Similarly, Rule 14a-19(d) requires the registrant to provide the names of the registrant’s nominees to any person conducting a solicitation pursuant to Rule 14a-19. In a contested director election where more than one dissident shareholder intends to present a slate of director nominees, should the registrant inform each dissident shareholder of the Rule 14a-19(b) notice that the registrant received with respect to persons nominated by other dissident shareholders?

Answer: Yes. The Rule 14a-19 notification requirements are intended to provide the parties in a contested election with the names of all director nominees by a definitive date so they can compile a universal proxy card. See Release No. 34-93596 (Nov. 17, 2021). Although Rule 14a-19 does not expressly address a situation where there is more than one dissident shareholder submitting a slate of nominees, the registrant is best positioned to notify all parties of the slates submitted by the dissident shareholders as it alone receives the Rule 14a-19(b) notices that all dissident shareholders must send in a contested election. Accordingly, the registrant should notify each dissident shareholder, by the deadline prescribed in Rule 14a-19(d), of not only the names of its nominees and any nominees submitted under a “proxy access” provision but also of the names of any other persons nominated by another dissident shareholder who provided a Rule 14a-19(b) notice. This view also applies to the Rule 14a-19 requirements with respect to prompt notifications of any changes in the registrant’s and dissident shareholders’ slates of nominees. [August 25, 2022]

Question 139.03

Question: Rule 14a-19(b)(1) requires the dissident shareholder in an election contest to send notice of its director nominees generally no later than 60 calendar days before the anniversary of the prior year’s annual meeting. In addition, Rule 14a-5(e)(4) requires the registrant to disclose in its proxy statement the Rule 14a-19(b)(1) deadline for a dissident shareholder to provide notice of its director nominees for election at the next annual meeting. If the registrant’s advance notice bylaw provision imposes an earlier deadline for notice of a dissident shareholder’s nominees than Rule 14a-19(b)(1), must the registrant’s proxy statement also include disclosure of Rule 14a-19(b)(1)’s later deadline?

Answer: Rule 14a-19(b)(1) establishes a minimum, not a maximum, notice period for a dissident shareholder to inform the registrant of its intent to present its own director nominees. See Release No. 34-93596 (Nov. 17, 2021)(“Rule 14a-19’s notice requirement is a minimum period that does not override or supersede a longer period established in the registrant’s governing documents.”). Accordingly, where the registrant’s advance notice bylaw provision requires earlier notice than Rule 14a-19(b)(1), then the registrant disclosing only the earlier advance notice bylaw deadline would satisfy Rule 14a-5(e)(4).

Note, however, that Rule 14a-19(b) requires specific information to be included in the notice, such as a statement that the dissident shareholder intends to solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the election of directors. To the extent that the registrant’s advance notice bylaw provision does not require the same information as that required by Rule 14a-19(b), then the registrant’s proxy statement must clearly state the need for a dissident shareholder to comply with the additional requirements of Rule 14a-19(b). [August 25, 2022]

The Securities and Exchange Commission announced that the fees that public companies and other issuers pay to register their securities with the SEC will increase from $92.70 per million dollars to $110.20 per million dollars, effective October 1.  The new fee rate will be applicable to the registration of securities under Section 6(b) of the Securities Act of 1933, the repurchase of securities under Section 13(e) of the Securities Exchange Act of 1934, and proxy solicitations and statements in corporate control transactions under Section 14(g) of the Securities Exchange Act of 1934.  See the SEC’s press release here.

On August 25, 2022, the Securities and Exchange Commission adopted a final pay for performance rule.  The pay for performance rule implements the Dodd Frank Act rulemaking mandate contained in Section 953(a) of the Act.  That section required adoption of a rule that would mandate that public companies describe the relationship between compensation paid to executives and the companies’ financial performance.  The rule had initially been proposed in 2015 and the SEC reopened the comment period on the proposal in January 2022.

As noted in the SEC’s press release on the rule’s adoption, the amendments will require that public companies provide a table that discloses specified executive compensation and financial performance metrics for their five most recently completed fiscal years. Companies will be required to report total shareholder return, or TSR, the TSR of peer companies, net income and a financial metric of its choosing.  Using the information presented, the company will be required to describe the relationship between compensation and performance, as well as comparative information versus peers.  The final rules will become effective 30 days following publication of the release in the Federal Register. Registrants must begin to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.

Commissioner Peirce dissented, noting in her comments that the approach taken by the SEC was a “sweeping and complex prescriptive approach that is not required under the statute.”  The Commissioner pointed out that “[o]f greater concern than the specific compliance costs, this rulemaking could distort how public companies compensate executives and how investors evaluate companies’ compensation decisions. Shining a spotlight on specific performance measures could drive compensation decisions instead of simply informing investors about how companies make those decisions. Companies may feel compelled to tie their executive pay to the prescribed financial performance measures or to incorporate non-financial performance measures, such as environmental, social, and governance metrics. The highlighting of particular metrics also might influence how investors analyze the relationship between pay and performance.”  A detailed client alert will follow. See the SEC press release, the fact sheet, and the final rule.

September 7, 2022 Webinar

3:00pm – 4:00pm EDT

Register here.

Many SPACs and former SPACs, as well as other mid-cap public companies, are considering financing through equity line financing arrangements. Equity line transactions are similar in many ways to the more common at-the-market offering structure but distinct in important respects. During this briefing hosted by PLI, Mayer Brown partners David S. Freed, Steffen Hemmerich and Brian D. Hirshberg, as well as Nikolai Utochikin of Nasdaq, Inc. will discuss the following:

  • Basic structure of an equity line
  • SEC’s analysis of private equity lines
  • Registration of securities sold in private equity line transactions
  • Application of stock exchange rules to equity line financings
  • Overview of recently launched equity line financings by SPACs and former SPACs
  • Issues for financial institution purchasers to consider

August 17, 2022 Webinar

1:00pm – 2:00pm ET

Register here.

This PLI briefing will provide an overview of a December 2021 SEC clarification that it would begin applying Rule 15c2-11 to broker-dealer quotations for fixed income securities, including securities traded under Rule 144A among QIBs. This “clarification” would require private “Rule 144A” issuers to make financial and other information publicly available before broker-dealers could provide quotations for their securities. 

Mayer Brown partner, Eddie Best, and Citigroup Global Markets Director, Adam D. Bordner, will cover the following topics:

  • The basics of Rule 15c2-11
  • The SEC’s new clarification applying the rule to fixed income securities
  • How this new clarification affects both primary and secondary markets for investment grade and high yield securities
  • How issuers can comply with Rule 15c2-11
  • Initiatives to lobby the SEC to reverse its clarification

On July 27, 2022, SEC Chair Gary Gensler gave remarks at the Center for Audit Quality entitled “Sarbanes-Oxley at 20: The Work Ahead.”

Chair Gensler highlighted, among other things, impacts on auditing standards, accounting standards, and auditor independence.  He noted that at the time of enactment of Sarbanes-Oxley in 2002, the new Public Company Accounting Oversight Board (PCAOB), tasked with setting enhanced auditing standards, was permitted to continue to use the old American Institute of Certified Public Accountants (AICPA) on an interim basis.  Sarbanes-Oxley was trying to solve a conflict-of-interest problem:  AICPA is a professional association, funded by auditing firms, which was writing rules for the firms funding it.  Unlike AICPA, PCAOB is independently funded and is subject to SEC oversight.  Sarbanes-Oxley similarly provided independent funding for the Financial Accounting Standards Board (FASB), the accounting standards-setter, which, prior to passage of the act, was also primarily industry-funded.  Twenty years later, the PCAOB is still using most of the AICPA interim standards.  Chair Gensler believes the PCAOB has been too slow in updating auditing standards.  The PCAOB provided an update in May 2022, announcing that it plans to update almost all of the remaining interim standards.

On auditor independence, Chair Gensler mentioned that, initially, Sarbanes-Oxley had the effect of causing a number of firms to spin out their consulting businesses.  He noted, however, that in the 20 years since, many firms have rebuilt their consulting businesses and PCAOB inspections continue to identify independence issues.  As a result, Chair Gensler has asked the PCAOB to consider adding updates for auditor independence standards to its agenda and suggested that the SEC may need to re-evaluate its auditor independence rules as well.

Chair Gensler also commented on the impact of Sarbanes-Oxley on foreign issuers.  He pointed out that more than 50 jurisdictions have complied with the requirement that PCAOB inspect audit firms of U.S.-listed companies based within their borders, with the exception of China.  Under the Holding Foreign Companies Accountable Act of 2020 (HFCAA), recently affirmed by Congress, if the PCAOB cannot inspect registered public accounting firms located in foreign jurisdictions, then issuers using those firms for three consecutive years will face prohibitions on their securities trading in the United States.  The SEC and PCAOB have been negotiating a Statement of Protocol with the Chinese authorities that would govern inspections of registered public accounting firms in China and Hong Kong, but an agreement on a Statement of Protocol has not yet been reached.  Chair Gensler noted that this Statement of Protocol will need to be signed very soon to allow any inspections to be completed by year’s end, which is especially important as Congress may accelerate the HFCAA’s timeline from three years to two years.  See the full text of Chair Gensler’s remarks here.