Securities Regulation
SEC Issues New Staff Accounting Bulletin 119 to Update Credit Losses Guidance
By Alan J. Wilson, WilmerHale
In connection with the impending effectiveness for many calendar-year companies of ASC Topic 326, Financial Instruments – Credit Losses, FASB’s new current expected credit losses (CECL) standard, the SEC staff issued Staff Accounting Bulletin 119 (SAB 119) on November 19, 2019 to update its current loan loss accounting guidance. SAB 119 becomes effective for public business entities that are an SEC filer upon their adoption of ASC Topic 326, which became effective for fiscal years beginning after December 15, 2019, other than for entities eligible to be smaller reporting companies, for which the standard becomes effective for fiscal years ending after December 15, 2022.
Similar to the guidance it replaces, SAB 119 covers a number of implementation questions, including with respect to documentation requirements:
- Measuring current expected credit losses, generally.
- The development, governance, and documentation of a systematic methodology, including the factors or elements that the staff normally would expect registrants to consider when developing (or subsequently performing an assessment of) their methodology for determining their allowance for credit losses under GAAP, the staff’s expectations for documenting a registrant’s allowance for credit losses methodology, and the staff’s expectations for written policies and procedures to cover a registrant’s allowance for credit losses internal accounting controls and methodology.
- Documenting the results of a systematic methodology, including expected support for a registrant’s allowance for credit losses for loans under ASC Topic 326 and for reporting in its financial statements.
- Guidance for validating, and documenting the validation of, a registrant’s systematic methodology used to estimate allowance for credit losses.
SAB 119 makes clear that “[w]hile different registrants may use different methods, there are certain common elements that the staff would expect in any methodology:” Similar to other principles-based standards, with respect to CECL, “[i]t is critical that allowance for credit losses methodologies incorporate management’s current judgments about the credit losses expected from the existing loan portfolio, including reasonable and supportable forecasts about changes in credit quality of these portfolios, on a disciplined and consistently-applied basis.” That said, SAB 119 includes a number of factors that the SEC staff expects to be considered in the development of assumptions underlying each registrant’s credit loss measurements.
SEC Proposes Amendments to Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8
By Alan J. Wilson, WilmerHale
On November 5, 2019, the SEC proposed amendments affecting three primary areas of its proxy rules in Exchange Rule 14a-8:
- Ownership Requirements. Most notably, Rule 14a-8(b) would be amended to update the criteria that a shareholder must satisfy for a shareholder proposal to be included in a company’s proxy statement. The 1% ownership threshold would be eliminated, while the requirement to continuously own $2,000 of the company’s securities would remain but would require continuous ownership for at least three years, rather than the current one-year requirement. Shareholder-proponents would also be able to satisfy the ownership eligibility requirement by continuously holding $15,000 of the company’s securities for at least two years or $25,000 of the company’s securities for at least one year.
Amendments to Rule 14a-8(b) would also insert other procedural requirements, including requiring (i) certain documentation for when shareholder-proponents elect to use a representative for the purpose of submitting a shareholder proposal and (ii) shareholder-proponents to provide contact information and availability to meet with the company to discuss the shareholder proposal between 10 and 30 days after submission.
- “One Proposal” Rule. Rule 14a-8(c) would be updated to limit “each person” to submitting one shareholder proposal for the same annual meeting, as opposed to “each shareholder.” The update would eliminate scenarios where the same shareholder representative submits multiple proposals for the same meeting on behalf of more than one shareholder.
- Resubmission Thresholds. Rule 14a-8(i)(12) would be amended to increase the resubmission thresholds for excluding a shareholder proposal that was previously submitted to shareholders in the prior five years without generating significant shareholder support:
Times Proposal Was Voted on During Past 5 Years |
Current Threshold Based on Last Submission |
Proposed Threshold Based on Last Submission |
Once |
3% |
5% |
Twice |
6% |
15% |
Three or More |
10% |
25%, or if the proposal (i) received less than 50% of the votes cast and (ii) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote |
NYSE Proposes Rule Change Allowing Companies to Raise Capital in Direct Listings
By Brian Hirshberg, Mayer Brown
On November 26, 2019, the New York Stock Exchange (“NYSE”) filed with the SEC a proposed rule change that would allow companies to simultaneously go public through a direct listing and raise cash from public market investors as an alternative to a traditional initial public offering. The proposed change would allow a company that has not previously had its shares registered under the Securities Act to list its shares on the NYSE at the time of effectiveness of a registration statement pursuant to which the company will sell shares in the opening auction on the first day of trading on the NYSE. In the recent past, companies with sufficient capital (such as Spotify and Slack) have opted to pursue a direct listing in order to provide their existing shareholders with liquidity without issuing new shares. The NYSE’s proposed rule change seeks to incorporate an option to raise capital into the existing direct listing alternative and provide companies with a new pathway to access public markets.
SEC Rejects NYSE Proposal to Allow Fundraising in Direct Listings
By Brian Hirshberg, Mayer Brown
On December 6, 2019, the SEC rejected the proposal submitted by the NYSE to allow companies to simultaneously go public through a direct listing and raise cash from public market investors. The NYSE’s proposed rule would have incorporated an option to raise capital into the existing direct listing alternative. The SEC did not provide a public comment on its rejection of the NYSE’s proposal. However, following the rejection, the NYSE released a statement that it expects to continue to work with the SEC on the initiative. On December 12, 2019, the NYSE submitted a revised proposal.
SEC Approves NASDAQ Direct Listings
By Bella Zaslavsky, K&L Gates LLP
On December 3, 2019, the SEC approved the proposal by Nasdaq Stock Market LLC to allow secondary direct listings on The Nasdaq Global Market and The Nasdaq Capital Market. Following the approval, direct listings with Nasdaq are no longer limited to listings on The Nasdaq Global Select Market.
SEC Proposal to Expand “Accredited Investor” Definition
By Bella Zaslavsky, K&L Gates LLP
On December 18, 2019, the SEC voted to propose amendments to the definition of “accredited investors.” Accredited investors have greater access to private placements and potentially riskier investments in the United States. The proposal expands the list of individuals and institutions that qualify as accredited investors to include additional criteria based on experience, professional knowledge or certain certifications. The amendment is open to public comment for sixty days following its publication in the Federal Register, the official government record.
SEC Proposes Rules to Enhance Transparency in the Proxy Advisory Process
By Lisa R. Stark, K&L Gates LLP
In November, the SEC proposed amendments to its rules governing proxy solicitations to enhance the quality of disclosures concerning material conflicts of interest possessed by proxy advisory firms. The proposed rules would amend Rule 14a-1(l) to codify the interpretation and guidance released by the SEC in August 2019 that proxy advisor vote recommendations are considered solicitations under the securities laws and thus are prohibited by the anti-fraud provisions of Rule 14a-9 from containing any materially false or misleading statement.
The proposed rules would also revise Rule 14a-2(b), which provides exemptions for proxy advisors from the information and filing requirements of the proxy rules. In order to continue to rely on these exemptions, proxy advisory firms must: (1) disclose material conflicts of interest in their proxy voting advice, along with the policies and procedures that they have in place to identify and address these conflicts, (2) provide an opportunity for issuers and investors engaged in non-exempt solicitations (such as those conducting a proxy fight) to identify factual errors or methodological weaknesses in proxy advisor reports before they are published, and (3) if requested by the issuer, include in the final proxy advisor report a hyperlink that allows clients to access the written views of the requesting party as to the proxy voting report as published.
Private Equity and Venture Capital
Private Equity Funds Avoid PENSION FUND Liability
By Melissa Sanders, Fox Rothschild LLP
In Sun Capital Partners III et al. vs. New England Teamsters & Truck Industry Pension Fund, the First Circuit Court of Appeals held that two affiliated private equity funds did not constitute a partnership-in-fact which would subject them to liability for a portfolio company’s underfunded pension plan. In a reversal of the district court decision, the court held that the test for finding a partnership-in-fact set forth in Luna vs. Commissioner was not met. The court noted that the funds had structured the investment vehicle as a limited liability company, indicating an intent not to create a partnership. The lack of overlap in the investors in the two funds and the separateness of operations of the funds also factored into the court’s decision. Although the court did not find the two funds at issue to constitute a partnership-in-fact, the court stated that the decision does not preclude application of controlled group liability on private equity funds in other factual situations.