July 5, 2022

jdean-law

Politics and lawyers

A Jam-packed Spring 2022 Agenda For The SEC - Securities

A Jam-packed Spring 2022 Agenda For The SEC – Securities


The SEC has posted its Spring 2022 Reg-Flex agenda and it’s
crammed with pending and new rulemakings—and they’re all
going to be proposed or adopted in October! (Ok, admittedly,
that’s an exaggeration, but not much of one.) Here is the short-term agenda and here is the long-term agenda. According to SEC Chair Gary
Gensler, the “U.S. is blessed with the
largest, most sophisticated, and most innovative capital markets in
the world….But we cannot take that for granted. As SEC alum
Robert Birnbaum and his team said decades ago, ‘no regulation can be
static in a dynamic society.’ That core idea still rings true
today.” Gensler’s public policy goals for the agenda are
“continuing to drive efficiency in our capital markets and
modernizing our rules for today’s economy and
technologies.” As with recent prior agendas, SEC Commissioner
Hester Peirce has almost no kind words for the
agency’s plans—”flawed goals and a flawed method for
achieving them.” In fact, she went so far as to characterize
the agenda as “dangerous”: in her view, the agenda
represents “the regulatory version of a rip
current—fast-moving currents flowing away from shore that can
be fatal to swimmers. Just as certain wave and wind conditions can
create dangerous rip currents, the pace and character of the
rulemakings on this agenda make for dangerous conditions in our
capital markets.” There’s no dispute that the agenda is
laden with major proposals—human capital, SPACs, board
diversity. What’s more, many of these proposals—climate
disclosure, cybersecurity, Rule 10b5-1—are apparently at the
final rule stage. Whether or not we’ll see a load of public
companies submerged by the rip tide of rulemakings remains to be
seen, but there’s not much question that implementing them all
would certainly be a challenge in any case.

SideBar

Peirce’s concerns are with both substance and process. On
substance, although there are a few items on the agenda that
“contemplate pursuit of some important mission-focused
rules,” nevertheless, she contends, the agenda

“continues to shun issues at the core of our mission in
favor of shiny objects outside our jurisdiction. We used to focus
on companies’ disclosure of economically material information;
we now focus on disclosure of hot-button matters outside our remit.
We once sought to protect retail investors; we now rush to the aid
of professional investors. We once worked to help small and
emerging companies raise the funds that are their lifeblood; we now
work to increase their costs and shrink their investor base. We
once hoped to increase the ranks of public companies by making it
less costly and more beneficial to be public; we now look for ways
to force companies to go public since we are making it costlier to
go public and be public.”

In addition, she laments the waste of “precious regulatory
bandwidth” on reopening rules that were finished less than two
years ago, such as the resource extraction, proxy voting,
shareholder proposals and whistleblower rules. And what about one
of her areas of expertise—crypto?

With regard to her process concerns, she contends that the SEC
has abandoned its “careful and considered approach to altering
regulation in favor of effecting hasty and sweeping change.”
This view is evidenced by the agenda’s “relentless”
fast-tracking of “radical rulemakings,” requiring market
participants “to implement multiple complex rulemakings
simultaneously.” With many new proposals on the way, will the
public even have “time to thoughtfully consider (let alone
cogently comment on) how such changes will affect investors,
markets, or day-to-day business operations of market
participants”? Instead of occasionally extending a comment
period, she said, echoing prior statements, the SEC should provide
“more reasonable comment periods up front[, which] would
better help the public understand how to spend their time and
resources providing us with feedback.”

On the Short-Term Agenda:

Final Rule Stage

Mandated Electronic Filings—This item,
identified as at the “final rule stage,” has already been
adopted. The new amendments require electronic submission of
several forms, including glossy annual reports, that could
previously be submitted on paper (see this PubCo post).

Listing Standards for Recovery of Erroneously Awarded
Compensation
— Section 954 of Dodd-Frank required the
SEC to direct the national securities exchanges to adopt listing
standards requiring each listed company to develop and implement a
policy for recouping executive compensation that was paid on the
basis of erroneous financial information, the theory being that it
is compensation to which the executives were never really entitled
in the first place. Under Dodd-Frank, the policy would apply in the
event the company had to prepare an accounting restatement due to
the company’s material noncompliance with any financial
reporting requirement under the securities laws. The rules to
implement these clawback provisions were proposed in 2015 and then
relegated to the long-term agenda. So much for legislative
mandates. With the change in the majority at the Commission, the
SEC is now planning to re-propose those rules and, to that end,
reopened the public comment period in October 2021. In reopening
the comment period, one possible change suggested by the questions
was a potential expansion of the concept of “restatement”
to include not only “reissuance” or “Big R”
restatements (which involve a material error and an 8-K), but also
“revision” or “little r” restatements (or some
version thereof), which have become increasingly popular. (See this PubCo post and this PubCo post.) But just a couple of weeks
ago, the SEC again reopened the comment period to allow further
public comment in light of a new, just released DERA staff memorandum containing “additional
analysis and data on compensation recovery policies and accounting
restatements.” The new DERA memo estimates “that
‘little r’ restatements may account for roughly three times
as many restatements as ‘Big R’ restatements in 2021, after
excluding restatements by SPACs.” However, DERA also found
that “little r” restatements “may be less likely
than ‘Big R’ restatements to trigger a potential recovery
of compensation. For example, ‘little r’ restatements may
be less likely to be associated with a decline in previously
reported net income, and on average they are associated with
smaller stock price reactions.” Could the potential expansion
of the definition of “restatement” now be in question?
(See this PubCo post.) The target date identified
for final action is 10/22.

Pay Versus Performance—Another oldie but
goodie, these rules were also proposed in 2015 to implement Section
953(a) of Dodd-Frank, which required companies to disclose
executive pay for performance. The proposal would amend Reg S-K
Section 402 to add Section (v), which would require tabular
disclosure of compensation “actually paid” to the
principal executive officer and an average of the compensation
actually paid to the other named executive officers for a phased-in
five-year period. The new section would also require companies to
describe, in narrative or graphic form or both, the relationship of
the compensation actually paid to the company’s financial
performance as reflected in its TSR and to describe the
relationship of the company’s TSR to the TSR of a peer group.
(See this PubCo post.) In January, the SEC reopened
the comment period. One of the key questions asked in the reopening
release was whether additional performance metrics—not just
TSR—would better reflect Congress’s intention in
Dodd-Frank. The agenda provides a target date for final action of
10/22.

Rule 10b5-1 and Insider Trading—A number
of studies have identified problems with Rule 10b5-1 plans, and
concerns have long been expressed that 10b5-1 plans provide a
vehicle that allows insiders to opportunistically trade on the
basis of material non-public information. In June 2021, Gensler
announced plans to address problems with the affirmative defense
provisions of Rule 10b5-1. Rule 10b5-1 plans, he said, “have
led to real cracks in our insider trading regime” and called
for a proposal to “freshen up” these rules. (See this PubCo post.) In December 2021, the SEC
issued its proposal. (See this PubCo post.) In addition to enhanced
disclosure by companies, the proposed amendments would add several
new conditions to the availability of the Rule 10b5-1(c)(1)
affirmative defense, including a 120-day cooling-off period for
officers and directors after adoption or modification of a plan, a
30-day cooling-off period for companies, certifications by officers
and directors that they are adopting the plan in good faith and
that they are not aware of MNPI, prohibition on multiple
overlapping Rule 10b5-1 trading plans, limitation of only one
10b5-1 plan to execute a single trade in any 12-month period, and a
requirement that Rule 10b5-1 trading arrangements be entered into
and operated in good faith. The agenda targets 4/23 as the date for
final action.

Climate Change Disclosure—After many
months of hyperventilating in anticipation of the SEC’s new
climate disclosure rule, we finally got a chance to see it in
March. The WSJ called it “the biggest potential
expansion in corporate disclosure since the creation of the
Depression-era rules over financial disclosures that underpin
modern corporate statements,” and Fortune said it “could be the
biggest change to corporate disclosures in the U.S. in
decades.” The proposal was designed to require disclosure of
“consistent, comparable, and reliable—and therefore
decision-useful—information to investors to enable them to
make informed judgments about the impact of climate-related risks
on current and potential investments.” The proposal is
certainly thoughtful, comprehensive and stunningly
detailed—some might say overwhelmingly so. At over 500 pages,
the proposal would add an entire new subpart to Reg S-K and a new
article to Reg S-X. Based on the Task Force on
Climate-Related Financial Disclosures
and the Greenhouse Gas
Protocol
, the proposed new rules would require public companies
to disclose information about any material climate-related impacts
on strategy, business model, and outlook; governance of
climate-related risks; climate-related risk management; greenhouse
gas metrics in financial statements; and climate-related targets
and goals, if any. The proposal would also mandate disclosure of a
company’s Scopes 1 and 2 GHG emissions, and, for larger
companies, Scope 3 GHG emissions if material (or included in the
company’s emissions reduction target), with a phased-in
attestation requirement for Scopes 1 and 2 for large accelerated
filers and accelerated filers. The disclosures would be required
under a separate caption, “Climate-Related Disclosure,”
in registration statements and Exchange Act annual reports (with
material updates in Forms 10-Q) Compliance would be phased in, with
reporting for large accelerated filers due in 2024 (assuming
an—optimistic—effective date at the end of this year).
(See this PubCo post, this PubCo post and this PubCo post.) Opponents of the proposal
have long been plotting their litigation strategies, and there is
really no question that rules will be challenged in court. Among
other things, some contend that the proposal is beyond the
SEC’s authority. After an extension, the comment period has
just concluded. The agenda targets 10/22 as the date for final
action. Hmmm.

Cybersecurity Risk Governance—In 2018,
the SEC adopted guidance on cybersecurity disclosure. (See this PubCo post.) But not all of the
commissioners were entirely satisfied that the guidance was
adequate under the circumstances. Given the recent consternation
over hacks and ransomware, it should come as no surprise that, in
March, the SEC proposed rule amendments to enhance issuer
disclosures regarding cybersecurity risk governance. According to
Corp Fin Director Renee Jones, the SEC approached the rulemaking
from two perspectives: first, incident reporting and second,
periodic disclosure regarding cybersecurity risk management,
strategy and governance. Under the proposal, companies would be
required to disclose material cybersecurity incidents on Form 8-K
within four business days after they have determined that
they have experienced a material cybersecurity incident. In
addition, the proposal would require disclosure in periodic reports
of policies and procedures to identify and manage cybersecurity
risk, including the impact of cybersecurity risks on strategy;
management’s role and expertise in implementing the
company’s cybersecurity policies, procedures and strategies;
and the board’s oversight role and cybersecurity expertise, if
any. (See this PubCo post.) The agenda identifies 10/22
as the target date for final action on the proposal.

Proxy Voting Advice—Whether and how to
regulate proxy advisory firms, such as ISS and Glass Lewis, has
long been a contentious issue, with some arguing that their vote
recommendations are plagued by conflicts of interest and often
erroneous, while others see no reason for regulation given that the
clients of these firms are satisfied with their services. In July
2020, the SEC adopted new amendments to the proxy rules regarding
proxy advisory firms, codifying the SEC’s earlier
interpretation that proxy voting advice is subject to the proxy
solicitation rules. The intent was not, however, to cause ISS and
other proxy voting advice businesses to file a slew of proxy
statements. To address the real issue that the SEC was targeting,
the 2020 rules added to the exemptions from those
solicitation rules two significant new conditions for proxy
advisory firms—one requiring disclosure of conflicts of
interest and the second calling for proxy advisory firms to engage
with the companies that are the subjects of their advice. The
proposed 2021 amendments would rescind that second central
condition—which some might characterize as a core element, if
not the core element, of the 2020 amendments. The proposal
would also rescind a note to Rule 14a-9, adopted as part of the
2020 rules, that provided examples of situations in which the
failure to disclose certain information in proxy voting advice may
be considered misleading. (See this PubCo post.) The agenda identifies 10/22
as the target date for final action on the proposal.

Modernization of Beneficial Ownership
Reporting
—In February, the SEC proposed to amend the
complex beneficial ownership reporting rules. Gensler described the
amendments as an update designed to modernize reporting
requirements for today’s markets, including reducing
“information asymmetries,” and addressing “the
timeliness of Schedule 13D and 13G filings.” The proposal
would accelerate the filing deadlines for Schedule 13D beneficial
ownership reports from 10 days to five days and require amendments
to be filed within one business day (as opposed to
“promptly”). For Schedules 13G, the filing deadline would
be accelerated to five business days after the end of the month for
qualified institutional investors and exempt investors, and would
allow five days for passive investors to file. The proposal would
also expand the application of Reg 13D-G to certain derivative
securities and clarify the definition of “group.” (See this PubCo post.) The agenda identifies 4/23 as the
target date for final action on the proposal.

Share Repurchase Disclosure
Modernization
—In December 2021, the SEC proposed new
amendments to modernize share repurchase disclosure. The proposal
would require daily repurchase disclosure on a new Form SR
before the end of the first business day following the day on
which the company executes a share repurchase
. The proposal
would also amend Reg S-K Item 703 to require additional detail
regarding a company’s repurchase programs, including disclosure
of the company’s objective or rationale for its share
repurchases, the process or criteria used to determine the amount
of repurchases, any policies and procedures relating to purchases
and sales by officers and directors during a repurchase program,
and whether the repurchases were made under a Rule 10b5-1 plan or
in reliance on Rule 10b-18. (See this PubCo post.) The agenda identifies 10/22
as the target date for final action on the proposal.

Amendments to the Commission’s Whistleblower Program
Rules
—In September 2020, the SEC adopted changes to
the rules governing its whistleblower program, enabling the SEC to
adjust, within certain limitations, the amounts payable as awards
under the program. The amendments also modified the requirements
for anti-retaliation protection to conform to SCOTUS’s recent
decision in Digital Realty v. Somers (discussed in this PubCo post). The changes were intended to
increase efficiencies and provide more tools and more flexibility
to the SEC, but not all the Commissioners saw it that way. One of
the amendments “clarified”—a term that, in the view
of some of the commissioners, might be doing a lot of
work—the SEC’s “broad discretion” when applying
the award factors set forth in the whistleblower rules.
Commissioner Allison Herren Lee dissented principally because of
the treatment in the new rules regarding SEC use of discretion if
the dollar amount of an award is too high. (See this PubCo post.) In August last year, Gensler
issued a statement indicating that he had directed the
SEC staff to revisit the whistleblower rules, in particular, two of
the amendments that had been adopted in 2020. (See this PubCo post.) Gensler observed that
concerns had been raised, including by whistleblowers as well as by
Lee and Commissioner Caroline Crenshaw, that those amendments
“could discourage whistleblowers from coming forward.” In
February, the SEC proposed two amendments to the whistleblower
program relating to “award claims for related actions that
would be otherwise covered by an alternative whistleblower
program,” and affirming the SEC’s “authority to
consider the dollar amount of a potential award for the limited
purpose of increasing an award but not to lower an award.”
According to Gensler, the “first proposed rule change is
designed to ensure that a whistleblower is not disadvantaged by
another whistleblower program that would not give them as high an
award as the SEC would offer. Under the second proposed rule
change, the SEC could consider the dollar amounts of potential
awards only to increase the whistleblower’s award.” (See
this PubCo post.) The agenda identifies 10/22
as the target date for final action.

Proposed Rule Stage

Corporate Board Diversity—Corp Fin may
recommend amendments to the proxy rules to enhance company
disclosures about the diversity of board members and nominees. This
idea was championed by former SEC Chair Mary Jo White, who
announced in 2016 that the Corp Fin staff was preparing a proposal
to require “more meaningful” disclosure in proxy
statements about board members and nominees where the directors
elect to report that information. The current rule, she believed,
just did not cut it: “[o]ur lens of board diversity disclosure
needs to be re-focused in order to better serve and inform
investors.” (See this PubCo post.) The proposal seems to have
never materialized—at least not in public. In 2019, the staff
issued a
CDI
calling for some enhanced board diversity disclosure. (See

this PubCo post
.) But with all the recent focus on diversity
and racial equity, this topic was moved up to the short-term agenda
last year with a target date for a proposal of 4/22. That obviously
didn’t happen. (See this PubCo post for a discussion of a study
examining the representation of women and racial/ethnic communities
(including Black, Asian/Pacific Islander and Hispanic persons) on
public company boards among the Fortune 100 and
Fortune 500 companies.) The new target date for the
proposal is 4/23.

Disclosure of Payments by Resource Extraction
Issuers
—In December 2020, the SEC adopted final Rule
13q-1 and an amendment to Form SD to implement Section 1504 of
Dodd-Frank, which relates to disclosure of payments by resource
extraction issuers. As adopted, the rule requires public reporting
companies that engage in the commercial development of oil, natural
gas or minerals to disclose company-specific, project-level
payments made (by the company, its subs or controlled entities) to
a foreign government or the U.S. federal government. You might
recall that the resource extraction rules, mandated under
Dodd-Frank, have had a long and troubled history. Originally
adopted in 2012 at the same time as the conflict minerals rules,
the resource extraction rules faced an immediate court challenge
and, in a fairly scathing opinion, were vacated by the U.S.
District Court. New rules were again adopted, but were subsequently
tossed out under the Congressional Review Act. When rules were
adopted for the third time in December 2020, Lee dissented because
the final rules permitted “payment information to be
aggregated to such a degree that the resulting disclosures will
obscure information crucial to anti-corruption efforts and material
to investment analysis. As a result, today’s rule, by the
Commission’s own determination, will severely restrict the
transparency and anti-corruption benefits that the disclosures
might provide, and thus fails to advance the statute’s
goals.” (See this PubCo post.) But is the third time the
charm? Apparently not. Given the new majority on the Commission,
Corp Fin is considering whether to recommend that the SEC review
the rules to determine if additional amendments might be
appropriate. The agenda identifies 4/23 as the target date for
issuance of a proposal.

Rule 144 Holding Period—In December 2020,
the SEC proposed amendments to Rule 144 to revise the method for
determining the holding period—essentially eliminating
tacking—for securities “acquired upon the conversion or
exchange of certain ‘market-adjustable securities.'”
The proposed amendments “would not affect the use of Rule 144
for most convertible or variable-rate securities
transactions.” Essentially, the amendment was intended to
apply to “floating priced” or “floating rate”
convertibles, often referred to as “death-spiral”
converts, issued by companies that do not have securities listed,
or approved for listing, on a national securities exchange. The
proposed amendments would have mandated electronic filing of Form
144 notices related to the resale of securities of Exchange Act
reporting companies; eliminated the Form 144 filing requirement for
non-reporting companies; changed the filing deadline for Form 144
to coincide with the filing deadline for Form 4; and amended Forms
4 and 5 to add a check box to permit filers to indicate that a sale
or purchase reported on the form was made pursuant to a transaction
that satisfied Rule 10b5-1(c). (See this PubCo post.) In June, the SEC separately
adopted amendments mandating electronic submission of a number of
forms, including Forms 144, but indicated that it was not taking
any action concerning the remaining aspects of the proposal in the
Rule 144 proposing release, and, in particular, it was not adopting
the proposal to eliminate the Form 144 filing requirement for the
sale of securities of companies that are not subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act.
(See this PubCo post.) Now, Corp Fin is considering
recommending that the SEC repropose amendments to Rule 144. The
agenda provides a target date of 10/22 for a proposal.

Human Capital Management Disclosure—When,
in August 2020, the SEC adopted a new requirement to discuss human
capital as part of an overhaul of Reg S-K, the debate centered
largely on whether the rule should be principles-based or
prescriptive. In that instance, notwithstanding a rulemaking
petition and clamor from numerous institutional and other investors
for transparency regarding workforce composition, health and
safety, living wages and other specifics, the
“principles-based” team carried the day; the SEC limited
the requirement to a “description of the registrant’s
human capital resources, including the number of persons employed
by the registrant, and any human capital measures or objectives
that the registrant focuses on in managing the business (such as,
depending on the nature of the registrant’s business and
workforce, measures or objectives that address the development,
attraction and retention of personnel).” (See this PubCo post.) Subsequent reporting has
suggested that companies “capitalized on the fact that the new
rule does not call for specific metrics,” as
“[r]elatively few issuers provided meaningful numbers about
their human capital, even when they had those numbers at
hand,” such as workforce diversity data submitted to the EEOC.
(See this PubCo post.) And just this month, a new
rulemaking petition was submitted by a group of
academics requesting that the SEC require more qualitative and
quantitative disclosure of financial information about human
capital. (See this PubCo post.) Corp Fin is now considering
recommending a proposal to enhance company disclosures regarding
human capital management. The agenda identifies 10/22 as the target
date for issuance of a proposal.

Special Purpose Acquisition Companies—In
remarks last year before the Healthy Markets Association, SEC Chair
Gary Gensler emphasized the need to treat like cases alike,
contending that a de-SPAC transaction is functionally “akin to
a traditional IPO.” He pointed to the need to level out
information asymmetries, guard against misleading information and
fraud and mitigate conflicts among parties that may have different
incentives. If we are going to treat like cases alike, he said,
then “investors deserve the protections they receive from
traditional IPOs.” (See this PubCo post.) In March, the SEC
proposed new rules and amendments regarding SPACs, shell companies,
the use of projections in SEC filings and a rule addressing the
status of SPACs under the Investment Company Act of 1940. The
proposal would add new Subpart 1600 of Reg S-K setting forth
specialized disclosure requirements for SPAC IPOs and de-SPAC
transactions. In particular, the proposal would impose additional
disclosure requirements regarding SPAC sponsors, conflicts of
interest, dilution and financial statements, among other things;
standards around marketing practices, such as the use of financial
projections; and gatekeeper and issuer obligations, including
expanded potential underwriter liability and potential liability by
the target company and its signing persons for a de-SPAC
registration statement. Under the proposal, the safe harbor for
forward-looking statements under the PSLRA would not be available
to SPACs. The proposal also includes a new safe harbor from the
obligation to register under the Investment Company Act of 1940 for
SPACs that meet the safe harbor’s requirements. (See this PubCo post.) The agenda does not identify
any target date for further action.

Rule 14a-8 Amendments—In October 2020,
the SEC adopted amendments to Rule 14a-8 to modify the eligibility
criteria for submission of shareholder proposals, as well as the
resubmission thresholds; provide that a person may submit only one
proposal per meeting, whether as a shareholder or acting as a
representative; prohibit aggregation of holdings for purposes of
satisfying the ownership thresholds; facilitate engagement with the
proponent; and update other procedural requirements. The rulemaking
generated an energetic—some might say heated—discussion
among the commissioners in the course of the long meeting, as well
as substantial pushback through the public comment process,
discussed in more detail in this PubCo post and this PubCo post. Then-SEC Chair Jay Clayton
observed that a “system in which five individuals accounted
for 78% of all the proposals submitted by individual
shareholders” needed some work, and former Commissioner
Jackson characterized the proposal as swatting “a gadfly with
a sledgehammer.” (See this PubCo post.) With a new majority in
place, in November 2021, Corp Fin issued new SLB 14L, which
outlined Corp Fin’s most recent interpretations of the ordinary
business and the economic relevance exceptions under Rule 14a-8,
and rescinded three earlier SLBs—SLBs 14I, 14J and 14K.
Generally, new SLB 14L presented its approach as a return to the
perspective that historically prevailed prior to the issuance of
the three rescinded SLBs. (See this PubCo post.) The effect of SLB 14L was to
make exclusion of shareholder proposals—particularly
proposals related to environmental and social issues—more of
a challenge for companies, smoothing the glide path for inclusion
of proposals submitted by climate and other activists. Now, the
agenda indicates, the SEC may propose new amendments regarding
shareholder proposals under Rule 14a-8. Although the substance of
the potential amendments is unclear, this article in Law 360 quotes Jones as advising a
conference that Corp Fin is “considering ways to add clarity
and to reduce ambiguity surrounding the application of certain
provisions in the rule….Thus, we are considering recommending
amendments that would make the process more efficient and more
predictable for all parties involved.” The agenda identifies
10/22 as the target date for issuance of a proposal.

Reg D and Form D Improvements—Corp Fin is
considering recommending that the SEC propose amendments to Reg D,
including updates to the accredited investor definition, and to
Form D. The target date for a proposal is 10/22.

Revisions to the Definition of Securities Held of
Record
—Corp Fin is considering recommending that the
SEC propose amendments to the definition of “held of
record” for purposes of section 12(g) of the Exchange Act. Lee
has previously raised concerns about the “explosive growth of
private markets.” Currently, under the Exchange Act, a company
that reaches either 2,000 holders of record or 500 holders of
record that are not accredited investors, whichever first occurs,
is required to register under the Exchange Act. (And persons are
also excluded from the definition of “held of record” if
they hold only securities issued to them pursuant to an employee
compensation plan in transactions exempted from the registration
requirements of the Securities Act.) Today, Lee points out, most
shares in U.S. markets are held in street name, with the result
that “record ownership has plummeted and in most cases has no
meaningful relationship to the number of actual investors.”
According to Lee, “[e]ven some of the largest and most widely
traded issuers do not have enough record owners (as that term is
currently defined) to meet the requirements of Section 12(g). Under
current guidance, in counting holders, companies look through
record ownership only to banks and brokers, not to beneficial
owners. Should that still be the case? Lee advocates that “we
should consider whether to recalibrate the way issuers must count
shareholders of record under Section 12(g) (and Rule 12g5-1) in
order to hew more closely to the intent of Congress and the
Commission in requiring issuers to count shareholders to begin
with. In other words, it’s time for us to reassess what it
means to be a holder of record under Section 12(g).” (See this PubCo post.) The target date for a
proposal is 10/22.

On the long-term (maybe never)
agenda:

Conflict Minerals Amendments—Way too long
a saga to go through here. But know that the federal courts held
that the statute and rules violated the First Amendment to the
extent they required companies to report that any of their products
“have not been found to be ‘DRC conflict free.'”
(For background on the case, see this PubCo post.) Corp Fin guidance issued in
2014, and currently in effect, requires companies to make the
mandated filing without including a statement as to the
conflict-free status of the products that could be deemed to
violate the First Amendment. (See this PubCo post.) In 2017, Corp Fin issued an
Updated Statement on the Effect of the Court of
Appeals Decision on the Conflict Minerals Rule
that provided
that Corp Fin would not recommend that companies face
enforcement
if they filed only a Form SD and did not prepare
and file a conflict minerals report. (See
this PubCo post
.) Nevertheless, for a variety of reasons,
companies have continued to file CMRs at about the same rate as
prior to the Updated Statement. As a long-term item, Corp Fin is
considering recommending rules that would address the effect of the
court decision and recommendations for the SEC to update the
Conflict Minerals rules. Note that, as indicated in this release, the conflict minerals rules are among
the list of rules identified for review by the SEC under the
Regulatory Flexibility Act. Will that make a difference?

Proxy Process Amendments—Corp Fin may
recommend that the SEC propose amendments to the proxy rules to
facilitate improvements in the proxy system with respect to the
distribution of proxy materials, pre-voting reconcilement,
processing of shareholder votes (including proxy vote confirmation)
and shareholder communications, otherwise referred to as proxy
plumbing issues. There has been substantial criticism of the
current byzantine system of share ownership and intermediaries that
has accreted over time. Shareholder voting is viewed as fundamental
to keeping boards and managements accountable, and the current
system of proxy plumbing has been criticized as inefficient, opaque
and, all too often, inaccurate. Proxy plumbing was discussed at
length at a 2018 meeting of the Investor Advisory Committee and
then at the proxy process roundtable. (See this PubCo post and this PubCo post.) The question is whether the
SEC will undertake the comprehensive analysis and overhaul that
appears to be required or settle for grabbing only the low-hanging
fruit? My bet is on the low-hanging fruit—if anything. Next
action “undetermined.”

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