Securities Regulation
FINRA’s Corporate Financing Rule
By Anna Pinedo, Mayer Brown
Recently, the Financial Industry Regulatory Authority, Inc. (FINRA) refiled with the Securities and Exchange Commission proposed rule changes to its Corporate Financing Rule, which is Rule 5110. This new set of changes addresses a number of areas, including the filing requirements under the rule, the requirements applicable to shelf takedown, the items of value deemed part of underwriting compensation, the various exceptions available for venture capital exceptions, and lock-up restrictions.
SEC Disclosure Effectiveness Testing Act
By Anna Pinedo, Mayer Brown
The House Financial Services Committee recently passed H.R. 1815, which is the Securities and Exchange Commission Disclosure Effectiveness Testing Act. The legislation would require that the Securities and Exchange Commission engage in investor testing of any new disclosure intended for retail investors. The testing should include a qualitative testing in the form of one-on-one interviews with retail investors, as well as a nationwide survey of retail investors. The testing results would be required to be made public. It would also require that the SEC review and test the usability of its existing disclosures for retail investors, including mutual fund disclosures. The reviews and tests would be required prior to the SEC adopting a final rulemaking. This would seem to require, if it were passed, for the SEC to conduct testing before proposed disclosure requirements are adopted as part of a final Regulation Best Interest. The Consumer Federation of America and other consumer groups support the legislation.
Streamlined Process for Confidential Treatment Extensions
By Anna Pinedo, Mayer Brown
The staff of the SEC’s Division of Corporation Finance released guidance regarding the process for seeking extensions of confidential treatment. There is a new short form application for issuers that have previously received a confidential treatment order. The one-page document requires that the issuer affirm that the most recently considered application continues to be true, complete, and accurate regarding the information for which the applicant continues to seek confidential treatment. The short form is an alternative to the traditional application for extensions of orders, and it cannot be used to add new exhibits or to make new redactions.
Follow-Up on Regulation S-K Modernization and Simplification
By Laura Richman, Mayer Brown
The Securities and Exchange Commission adopted amendments intended to modernize and simplify certain disclosure requirements of Regulation S-K and related rules and forms. The SEC’s adopting release was published in the Federal Register on April 2, 2019. As a result, the amendments to the rules governing redaction of confidential information in material contracts became effective on that date. Most of the remaining amendments became effective on May 2, 2019.
In addition, on April 1, 2019, the staff of the SEC’s Division of Corporation Finance (Staff) announced guidance with respect to the new rules and procedures for the filing of exhibits containing immaterial, competitively harmful information.
The amendments to Item 601(b) of Regulation S-K require companies to identify the location of information that has been omitted from an exhibit by doing the following:
- Marking the exhibit index to indicate that portions of the exhibit or exhibits have been omitted;
- Including a prominent statement on the first page of a redacted exhibit that certain identified information has been excluded because it both (i) is not material and (ii) would be competitively harmful if publicly disclosed; and
- Indicating through the use of brackets where information has been omitted from the filed version.
The Staff indicated that it will be reviewing filings for compliance with the new rules. If the review is also being made in connection with a review of the related filing, the Staff will separate requests for supplemental information related to redacted exhibits from its regular filing review comments. Companies should respond separately to any requests for supplemental information with respect to compliance with the new rules regarding redacted exhibits.
In the guidance, the Staff indicated it will initiate a redacted exhibit review request by a letter requesting a paper copy of the complete exhibit that is marked to highlight the redacted information. After the Staff reviews the unredacted materials, it may ask for further substantiation of the redaction decisions. If the Staff has questions regarding potential immateriality or competitive harm, it will communicate those comments to the company separately from comments on the associated filing. The Staff will also send the company a letter confirming when its compliance review of redacted exhibits is complete. With respect to registration statements filed under the Securities Act of 1933, as amended, companies should resolve questions relating to redacted exhibits before submitting a request for acceleration of the effective date.
In terms of what is made public about the exhibit-redaction review process, the Staff’s initial request for an unredacted exhibit and the closing of review letter will be publicly posted on EDGAR. However, to avoid public disclosure of competitively harmful information, neither the Staff’s comments regarding redacted exhibits nor company responses to those comments will be posted publicly.
SEC to Host Roundtable on Short-Term/Long-Term Management of Public Companies, Our Periodic Reporting System, and Regulatory Requirements
By Rani Doyle, EY
On May 20, 2019, Securities and Exchange Commission Chair Jay Clayton announced that the SEC will host a roundtable “to explore the causes of short-termism and to facilitate conversations on what market-based initiatives and regulatory changes could foster a longer-term performance perspective in American companies.” Clayton stated that, as a result of increased life expectancy and a shift from corporate pensions to 401(k) and IRAs to fund retirement, the investing interests and needs of “Main Street investors” have changed to be more focused than ever on long-term results. Interestingly, the potential topics noted for discussion at the roundtable relate to increasing the number of IPOs, easing public company disclosure requirements – in particular for smaller reporting companies, and market practices that could drive short-term focus and pressure. To the extent the SEC engages in rulemaking on these topics, it may propose regulatory changes that are intended to increase investment opportunities for retail and other investors. In this regard, we note that the SEC continues to address a number of topics related to improving its regulations and disclosure requirements for the benefit of companies and investors, including the Division of Corporation Finance’s ongoing disclosure effectiveness/modernization and simplification initiatives, efforts to promote capital formation, and request for comment on the content and timing of earnings releases and quarterly reports, each of which involves consideration of potential regulatory relief.
SEC Commissioner Hester Peirce Remarks on Lack of Transparency in SEC Guidance
By Bella Zaslavsky, K&L Gates LLP
On April 8, 2019, Securities and Exchange Commission Commissioner Hester Peirce gave a speech focusing on guidance provided by the SEC and its staff. In her speech, she highlighted the lack of transparency and accountability that surrounds SEC guidance. Ms. Peirce expressed a specific concern that while SEC staff guidance helps ensure that the SEC is responsive to market participants, such guidance is often treated as binding even though it does not undergo judicial or, in some cases, SEC review. The result, in her view, is that the SEC is able to create a secret body of law without following the mandated rules around transparency and fairness. In giving her remarks, Ms. Peirce made sure to emphasize that the views expressed were her own and not those of the SEC.
SEC Proposes to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses
By Anna Pinedo, Mayer Brown
As part of the Disclosure Effectiveness initiative, the Securities and Exchange Commission proposed amendments to address the financial disclosure requirements in connection with acquisitions and dispositions. The SEC proposed amendments to the requirements in Rules 3-05, 3-14, and Article 11 of Regulation S-X, as well as related rules and forms, for financial statements of businesses acquired or to be acquired and for business dispositions. The SEC also proposed new Rule 6-11 of Regulation S-X and amendments to Form N-14 for financial reporting of acquisitions involving investment companies. The proposed changes are intended to improve for investors the financial information about acquired and disposed businesses, facilitate more timely access to capital, and reduce the complexity and cost to prepare the disclosure. The proposed amendments would update the accounting significance tests, among other things.
Senate Democrats Introduce a Bill to Curb Stock Repurchases
By Anna Pinedo, Mayer Brown
In March, Democratic Senator Tammy Baldwin introduced a bill to ban open-market stock buybacks. Under the bill, corporations would no longer be able to repurchase their own shares on the open market. Additionally, the bill would require public companies to allow their workers to elect one-third of their board of directors. Baldwin also released a report that examines the impact of stock buybacks on workers, companies, and the economy.
PCOAB Staff Outlines Plans for Communications with Audit Committees About Inspections
By Thomas White, Retired Partner, WilmerHale
In its Strategic Plan adopted in late 2018, the Public Company Accounting Oversight Board (PCAOB) identified as a top priority enhanced engagement and proactive communication with outside stakeholders, including audit committees. On March 14, 2019, the PCAOB Staff released a 2019 Staff Inspections Outlook for Audit Committees (Release). The Release provided information about the PCAOB’s key areas of focus in its 2019 inspections of public company audits and relevant topics for audit committees to consider discussing with their auditors throughout the audit.
The Release also noted that during 2019, the Staff intended to engage in a dialogue with audit committee chairs of certain companies whose audits are subject to inspection. According to the Release, “[t]he purpose of the audit committee dialogue is to provide further insight into our process and obtain their views.”
On March 30, 2019, George Botic, Director of the PCAOB’s Division of Registration and Inspections, spoke at the spring meeting of the Business Law Section Law and Accounting Committee. Mr. Botic elaborated on the Staff’s plans for communications with audit committee chairs. He noted that the Staff has interviewed audit committee chairs as part of audit inspections since the inception of the PCAOB’s inspection program, and this initiative expands that part of the process. Interviews will be conducted for a sample of inspections and will include audits by more firms than in the past. The Staff contemplates a dialogue with the committee chair about the inspection process and obtaining the chair’s perspective on the company’s audit. The interview will cover topics such as the committee’s understanding of the auditor’s audit approach, the auditor’s required communications and the results of the audit, audit quality indicators, the impact of technology on the audit, and the committee’s observations about the audit firm’s culture and other factors. Mr. Botic emphasized that the focus of the interview with the audit committee chair was the company’s audit and auditor, not the performance of the audit committee itself.
Private Equity and Venture Capital
IRS Issues Additional Guidance on Qualified Opportunity Zones
By Melissa Sanders, Fox Rothschild LLP
On April 17, 2019, the Internal Revenue Service and Department of Treasury issued a second set of proposed regulations related to Qualified Opportunity Zones. Many of the regulations will be of interest to private equity funds investing in Qualified Opportunity Funds (QOFs). In particular, the regulations clarify that an interest in a QOF given in exchange for services will not be treated as a qualifying investment. Other provisions provide safe-harbor periods related to working capital limitations and the gross income tests for QOFs. The regulations also clarify that short-term and long-term capital gains may be deferred. The complete proposed regulations can be found here. The regulations may be further modified prior to being finalized.