Governance & Compliance Insider

At last Friday's ABA annual meeting, Bill Hinman (with the standard disclaimer that he is speaking for himself and not on behalf of the SEC) confirmed that the SEC will not be delaying implementation of the CEO pay ratio rule, which will require most public companies to report the pay ratio in their 2018 proxy statements, for the first fiscal year beginning on or after Jan. 1, 2017.  (Foreign private issuers, MJDS filers, emerging growth companies and smaller reporting companies are exempt from the rule.)  Bill Hinman is the Director of the SEC's Division of Corporation Finance. Director Hinman also mentioned that the Division will be issuing additional guidance on the CEO pay ratio rule in the near future.  This earlier blog entry includes a summary of the SEC's previous guidance on implementing the CEO pay ratio rule. In a recent Compensation Standards survey, Liz Dunshee reported on trending practices in pay ratio preparation.

Following the 2016 election, corporate governance circles have focused intently on what will happen in the nation’s capital with regard to a potential roll back of the current regulatory regime. While attention given to Congress and the SEC for the possible direction of corporate governance is not misplaced, future changes in this arena will most likely come from investors, and they have their own agenda which is very different from that of the Trump administration. Regardless of, or perhaps in response to, any changes in the U.S. governance regulatory framework, investors and groups of investors are likely to continue to push for actions and disclosures beyond what is mandated and will use the their voting power to effect change. Public companies should also anticipate increased demand for the use of metrics and related disclosures that facilitate comparison, including in non-traditional performance areas such as certain environmental, social and governance matters where investors see a strong tie to long-term value creation. Read the full article here, as posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

The SEC's semi-annual update of its rulemaking docket was released on July 20. Overall, the SEC has cut its rulemaking agenda by about half under the Trump administration. A number of long-anticipated Dodd-Frank rulemakings on executive compensation disclosure are missing from the docket: Pay Versus Performance Listing Standards for Recovery of Erroneously Awarded Compensation (Clawbacks) Disclosure of Hedging by Employees, Officers and Directors Incentive Compensation at Financial Institutions. Likewise, the Universal Proxy rulemaking was missing. Still on the docket of proposed rulemakings: Amendments to the XBRL Program Business and Financial Disclosures required by Regulation S-K Guide 3 Bank Holding Company Disclosure Reporting of Proxy Votes on Executive Compensation and Other Matters Concept Release on Possible Revisions to Audit Committee Disclosures Rulemaking to Simplify Regulation S-K Provisions Governing Non-Financial Disclosures

One of the more utilized provisions of the Jumpstart Our Business Startups Act (JOBS Act) has been the confidential submission of IPO registration statements by Emerging Growth Companies (EGCs) to the Securities and Exchange Commission. The nonpublic nature of the SEC review process has allowed EGCs to submit IPO registration statements and respond to SEC comments outside the public eye and without having to alert the market of their intention to go public. As of July 10, 2017, all issuers will now have the ability to submit draft registration statements to the SEC on a confidential basis. Read more in our recent eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2017/07/all-issuers-eligible-to-submit-draft-ipo.

This week, during his opening remarks at the 2017 National Conference of the Society for Corporate Governance, SEC Commissioner Michael Piwowar remarked on prospects for repealing or delaying the CEO pay ratio rule. Under the rule, most public companies must disclose the median of the annual total compensation of all employees (including non-U.S., part-time, temporary and seasonal workers), except for the CEO; the annual total compensation of the CEO; and the ratio of the two amounts, as calculated under proxy rules. The disclosure must be prepared for fiscal years beginning on or after January 1, 2017, which would be disclosed in 2018 proxy statements. Emerging growth companies, smaller reporting companies and foreign issuers are not subject to the rule. Commissioner Piwowar expressed his support for repealing the rule, which would require Congressional action. In terms of delaying effectiveness of the rule, he stated that public commentary would determine whether that alternative is feasible in light of the associated costs and benefits of implementing the rule. Though the latest comment period on the rule has ended, he urged interested parties to continue to submit comment letters describing specific reasons why the rule is burdensome, as well as proposed fixes. During the latest comment period, the SEC received approximately 180 unique comments, with 150 of those comments in favor of the rule. Given the approaching 2018 proxy season, we advise companies not to count on a repeal or delay of the rule. Companies should continue preparing for the CEO pay ratio disclosure, and keep in mind that there is significant latitude for how the ratio may be calculated, in accordance with Item 402(u) of Regulation S-K and related guidance in C&DIs 128C.01-128C.05. In particular: The median employee, which must be identified once every three years absent a significant change, may be identified from a survey of the entire employee population, a statistical sample or other reasonable method. A de minimis exemption allows companies to exclude non-U.S. employees who account for 5% or less of their employees, including employees whose inclusion would result in a violation of foreign privacy data laws. If certain employees are excluded, then all employees from that jurisdiction must be excluded. Companies may use a consistently applied compensation measure (“CACM”) other than annual total compensation to identify the median employee, as long as the CACM reasonably reflects the annual compensation of employees. For example, total cash compensation could be a CACM unless the company also distributed annual equity awards widely among its employees. Companies may select a determination date within three months prior to the end of their fiscal year, in order to determine employee population from which to identify the median. In applying the CACM to identify the median employee, companies are not required to use a compensation period that includes the determination date. Nor are they required to use a full annual period. As an example, the SEC states that a company may use annual total compensation from its prior fiscal year so long as there has not been a change in the registrant’s employee population or employee compensation arrangements that would result in a significant change of its pay distribution to its workforce. Workers whose compensation is determined by an unaffiliated third party may be excluded from the pay ratio calculation. This population may include leased workers, independent contractors who determine their own compensation, and even workers whose minimum level of compensation is set by the company. Companies should consider testing alternative methodologies in order to assess the quality and consistency of results. While there is considerable latitude to design a pay ratio methodology, companies should let reason be their guide and be prepared to explain the decisions that they make. Companies are required to describe in their proxy statements the methodology used, as well as any material assumptions, adjustments and estimates. Not surprisingly, CEO pay ratios have varied significantly depending on the companies surveyed and the methodology. The AFL-CIO’s annual report on CEO pay calculated a CEO-to-worker-pay ratio of 347-to-1 for 2016, based on the average total compensation package for 400 of the S&P 500 CEOs of $13.1 million last year, and the average annual cash income only (excluding fringe benefits) for America’s 100,525,000 rank-and-file workers of $37,632. In contrast, a 2016 Mercer study found the ratio among respondents to be less than 200-to-1.

On March 31, 2017, the Securities and Exchange Commission (SEC) issued final rules regarding inflation adjustments and other technical amendments under Title I and III of the Jumpstart Our Business Startups (JOBS) Act. Under the inflation adjustments, the SEC adjusted the gross revenue threshold for an issuer to lose its status as an Emerging Growth Company (EGC) from $1.0 billion to $1.07 billion, a $70 million dollar increase. Further, the SEC adjusted the Regulation Crowdfunding thresholds, increasing among other thresholds the maximum amount an issuer can raise under Regulation Crowdfunding from $1 million to $1.07 million. In relation to the various exemptions and scaled disclosure permitted to EGCs under the JOBS Act, the SEC also adopted technical amendments to certain rules and to certain forms, adding check boxes to the cover pages for companies to indicate if they are an EGC and whether they have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the Exchange Act). Forms and rules amended include Forms C, S-1, S-3, S-4, S-8, S-11, F-1, F-3 and F-4 under the Securities Act of 1933; Rule 12b-2, Rule 14a-21 and Forms 10, 8-K, 10-Q, 10-K, 20-F and 40-F under the Exchange Act; Rule 2-02 and Rule 3-02 of Regulation S-X; Rule 100 and Rule 201 of Regulation Crowdfunding; and Items 301, 303, 308, 402 and 1101 of Regulation S-K to reflect these reporting accommodations. The new rules and changes in the forms will take effect upon publication in the Federal Register, which is currently scheduled to take place on April 12, 2017. Issuers should take note of these changes in the form cover pages in preparing their next periodic reports to the SEC.

The staff of the Securities and Exchange Commission (SEC) continues to encourage companies to provide useful disclosure to investors with regard to the new revenue recognition standard that will apply for reporting periods beginning after December 15, 2017. The new standard not only changes the method for measuring revenue and the timing of revenue recognition, but also requires expanded disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This will mean considerably more disclosures in the first quarter of 2018, or sooner for companies that choose to adopt early. Of more immediate concern, companies should be reviewing their Form 10-Q disclosures this quarter and for the balance of the year to make sure that they have addressed the SEC staff’s transitional disclosure requirements set forth in Staff Accounting Bulletin No. 74 regarding the expected impact of the new revenue recognition rules. If a company does not know, or cannot reasonably estimate, the expected financial statement impact of the new rules, that fact should be disclosed. In that case, however, as noted in a recent speech by the SEC’s Chief Accountant, Wesley Bricker, the SEC staff expects a qualitative description of the effect of the new accounting standard, and a comparison to the company’s current accounting, to aid investors in understanding the anticipated impact. Mr. Bricker said that companies “should also disclose the status of its implementation process and significant implementation matters yet to be addressed.” Based on a preliminary look at disclosures in SEC filings to date, Mr. Bricker reported that a number of companies have enhanced their transition disclosures, while for others “there is still more work to do.” Mr. Bricker also advised caution for companies that conclude in their transitional disclosures that the impact of the new revenue recognition standard is not expected to be material. Because the new standard includes comprehensive new disclosures about contracts with customers and related judgments made by companies, he warned that “the basis of any statement that the impact of the new standard is immaterial should reflect consideration of the full scope of the new standard, which covers recognition, measurement, presentation and disclosure for revenue transactions.”

On March 22, 2017, the Securities and Exchange Commission adopted an amendment to Rule 15c6-1(a) to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions.  Currently, the standard settlement cycle for these transactions is three business days, known as T+3.  The amended rule shortens the settlement cycle to two business days, T+2. The amended rule will take effect on September 5, 2017. The SEC stated that the amended rule is “designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.” To assist in the preparation for the implementation of the new, shortened settlement cycle, the SEC has established an e-mail address – T2settlement@sec.gov – for the submission of inquiries to SEC staff.  Issuers will want to consider and be prepared for the impact of the shortened settlement cycle in relation to closing and settlement of public securities offerings.

On March 1, 2017, the United States Securities and Exchange Commission (SEC) published the taxonomy for the eXtensible Business Reporting Language (XBRL) for financial statements prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (IFRS). Accordingly, foreign private issuers that prepare their financial statements in accordance with IFRS may immediately begin submitting their financial statements in SEC filings in the XBRL format. While Rule 405 of Regulation S-T would require foreign private issuers that prepare their financial statements in accordance with IFRS to submit financial data in XBRL upon publication of the taxonomy, the SEC has stated that such foreign private issuers are only required to submit financial data in XBRL with their first annual report on Form 20-F or 40-F for a fiscal period ending on or after December 15, 2017. Therefore, foreign private issuers who prepare their financial statements in accordance with IFRS are not required to submit XBRL data for the fiscal year ended December 31, 2016. The full text of the SEC’s release can be found at the following link: https://www.sec.gov/rules/other/2017/33-10320.pdf See our previous postings on the topic here: SEC delays XBRL compliance for foreign private issuers that prepare their financial statements in accordance with IFRS SEC Mandates Use of XBRL for Financial Statements

We reported in September 2016 on proposed Securities and Exchange Commission rules requiring the use of hyperlinks to exhibits in most registration statements and periodic and current reports. On March 1, 2017, the SEC adopted final rules, largely in line with the proposed rules, amending Item 601 of Regulation S-K and Rules 102 and 105 of Regulation S-T. Read more in our eUpdate here: https://www.dorsey.com/newsresources/publications/client-alerts/2017/03/sec-adopts-use-of-exhibit-hyperlinks-in-filings

On February 14, 2017, President Trump approved a joint resolution of Congress that disapproves the SEC’s rule requiring specific disclosures by resource extraction issuers, effectively repealing the rule. The rules required resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments, including foreign subnational governments, for the commercial development of oil, natural gas or minerals. Compliance under the rules for resource extraction issuers would have begun for fiscal years ending on or after September 30, 2018. The quick death of these rules are somewhat ironic given the time and energy taken to adopt them in the first place. Consider the timeline: 2010 - Dodd-Frank Wall Street Reform and Consumer Protection Act enacted, which mandated the implementation of the resource extraction rules 2012 - First set of rules adopted 2013 - Rules vacated by the U.S. District Court for the District of Columbia 2015 - After Oxfam America Inc. brought suit in an effort to expedite the long-delayed rules, a federal judge held that the SEC had “unlawfully withheld” agency action by failing to promulgate final rules on this topic 2015 - SEC re-proposes rules 2016 - SEC adopts final rules 2017 - Rules disapproved under the Congressional Review Act While the mandate to implement these rules still exists under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Congressional Review Act bars the enactment of a new rule that is substantially in the same form as the repealed rule. These rules, like the conflict minerals rules, attempted to further social policy through public company disclosure requirements. The aim here was to promote and support “global efforts to improve transparency in the extractive industries . . . to help combat global corruption and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.” While the goal is a worthy one, it was unclear whether the disclosure required by these rules would effectively and efficiently advance that goal. Congress and the White House were concerned with the regulatory burden and competitive disadvantage that these rules imposed. The White House’s Statement of Administration Policy noted that the “rule would impose unreasonable compliance costs on American energy companies” and could put American resource extraction issuers at a “competitive disadvantage in cases where their foreign competitors are not subject to similar rules.” Reducing the regulatory burden on public companies is both useful and necessary. However, there is one unfortunate aspect of this repeal. The rules provided for alternative reporting, so that issuers could comply with SEC disclosure obligations with a report complying with the requirements of an alternative reporting regime, such as Canada’s Extractive Sector Transparency Measures Act and the EU Accounting Directive and the EU Transparency Directive. For companies with operations in multiple jurisdictions, the recognition of an alternative reporting regime was a welcome attempt to address concerns of duplicative reporting requirements and implement mandated rules in a more efficient and cost-effective way for many issuers. This allowance was similar in concept to the Canadian Multi-Jurisdictional Disclosure System (the MJDS), a widely used alternative reporting regime for certain types of Canadian issuers. Successful implementation and use under an alternative reporting regime under the repealed rules by a wide variety of resource extraction issuers might have nudged the SEC to consider broader use of alternative reporting systems. On the whole, the repeal of resource extraction issuers is a positive development. Now if we could just eliminate the conflict minerals disclosure rules and the CEO pay ratio rules...

On January 6, 2017, the SEC Staff granted no-action relief that would allow companies to exclude shareholder proposals preventing management or the board from accessing preliminary voting results on uncontested matters prior to the annual meeting, including a running tally of votes for and against, and using that information to solicit votes. See, The Boeing Company, Ferro Corporation, Honeywell International Inc., L-3 Communications Holdings, Inc., NiSource Inc., and Praxair, Inc. Under the shareholder proposals, this enhanced confidential voting requirement would apply to management or board-sponsored resolutions seeking approval of executive pay or for other purposes, including votes mandated under applicable stock exchange rules; proposals required by law, or the company’s bylaws, such as say-on-pay votes; and Rule 14a-8 shareholder proposals included in the proxy. The proposals would not apply to director elections, or contested proxy solicitations, except at the board’s discretion, and they would not prevent companies from monitoring voting for purposes of achieving a quorum.  In its no-action letters, the companies cited a history of relief granted for shareholder proposals that seek to restrict management’s access to preliminary voting results, to manage the conduct of annual shareholder meetings, and to restrict a company’s solicitation of its shareholders. The Staff concluded that the companies may rely on the “ordinary business” basis for exclusion under Rule 14a-8(i)(7), and noted that each proposal “relates to the monitoring of preliminary voting results with respect to matters that may relate to [the company’s] ordinary business.”  The Staff does not conclude that the monitoring of preliminary voting results and the solicitation of votes per se are part of ordinary business operations, which leaves open the question of whether the proposals would survive if they were limited to matters that the Staff deems unrelated to the company’s ordinary business.  This series of no-action letters represents the latest volley in the debate over the disparity between boards and management versus shareholder proponents, in terms of their ability to access voting information and to communicate with shareholders on proposals. As described in the 1998 amendments to Rule 14a-8, the underlying policy of the “ordinary business” basis for exclusion is “to confine the resolution of ordinary business problems to management and board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” There are two frequently cited considerations for evaluating whether an activity is within the ken of “ordinary business”: (1) whether the tasks are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight,” and (2) whether the proposals seek to “micro-manage” the company by “probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”

For public companies whose fiscal year is the calendar year, the 10-K season is quickly approaching. One technical change to Form 10-K this year is the addition of new Item 16 (Form 10-K Summary). As you may recall, the Fixing America's Surface Transportation Act, more commonly known as the FAST Act, which became law in December 2015, was primarily a transportation bill, but also contained a number of changes to the federal securities laws. One of the FAST Act’s securities law provisions instructed the SEC to issue regulations, within 180 days of the FAST Act’s enactment, that would permit issuers to submit a summary page on Form 10-K, but only if each item on that summary page included a cross-reference (by electronic link or otherwise) to the material contained in the Form 10-K to which that item related. Accordingly, in June 2016, the SEC adopted an interim final rule that expressly allowed issuers to include, at their option, a summary page in their Form 10-Ks. As noted in the SEC’s adopting release, prior to the enactment of the FAST Act, nothing prohibited issuers from voluntarily including a summary page in their Form 10-Ks. And, because both the FAST Act and the interim final rule required that any summary page included in a Form 10-K meet certain specified requirements, an issuer actually had more flexibility regarding the content of any summary page it chose to include in its Form 10-K prior to the SEC’s adoption of the interim final rule. In any event, historically, most issuers have not included a summary page in their Form 10-Ks, and we do not expect this to change in the near term. However, as a technical matter, when issuers file their Form 10-Ks this year, they should remember to include new Item 16 (Form 10-K Summary) at the end of Part IV. Most of the issuers that have thus far included new Item 16 in their Form 10-K filings, but that have not included a summary page, have inserted “none” for this item.

2016 was a busy year for securities law developments, with the SEC adopting and proposing new rules and issuing significant interpretations that will affect SEC reporting companies in the coming years. We have highlighted a few of these recent developments in this post as companies prepare for the upcoming reporting cycle. With the new incoming U.S. administration it is important to note that some of the rules that were adopted by the SEC in the past few years may be repealed or amended, and some of the rules that are currently being finalized by the SEC may not be adopted or may be further modified or delayed. New Rules and Interpretations Proxy Cards – “Clear and Impartial” On March 22, 2016, the SEC released a proxy card interpretation, which serves as a reminder that proxy cards must “clearly and impartially” identify each item to be voted on by shareholders. The full text of the SEC’s interpretation can be found here: https://www.sec.gov/divisions/corpfin/guidance/exchange-act-rule-14a-4a3-301.htm Paper Copies of Annual Reports On November 3, 2016, the SEC released an interpretation which stated that companies may post an electronic version of its annual report to shareholders on its corporate web site by the dates specified in Rule 14a-3(c), Rule 14c-3(b) and Form 10-K, respectively, in lieu of mailing paper copies or submitting it on EDGAR. The report must remain accessible for at least one year after posting. See our previous post on this topic here: http://governancecomplianceinsider.com/sec-staff-makes-life-a-little-easier-for-reporting-companies-by-permitting-annual-reports-to-shareholders-to-be-posted-on-company-websites/ NASDAQ Golden Leash On July 1, 2016, the SEC approved a change to the NASDAQ Listing Rules that will require NASDAQ listed companies to publicly disclose “golden leash” arrangements. “Golden leash” arrangements are generally defined as agreements or arrangements made by activist shareholders to pay a director or director nominee in connection with his or her service on, or candidacy for, a company’s board of directors, usually in connection with a proxy fight. The final rules for “Golden Leash Arrangements” are described further in our complete summary here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/07/disclosure-of-golden-leash-arrangements Form 10-K Summary Disclosure On June 1, 2016, in accordance with the Fixing America’s Surface Transportation Act (the “FAST Act”), the SEC issued an interim final rule amending Form 10-K by adding a new Item 16 to permit companies to provide certain summary disclosure in the annual report, provided that each item in the summary includes a cross-reference by hyperlink to the related more detailed disclosure in the report to which the item relates. The new summary section is not required and the SEC has provided issuers with flexibility on how best to prepare the summary. The full text of the SEC’s interim final rule can be found at the following link: https://www.sec.gov/rules/interim/2016/34-77969.pdf The FAST Act is further described in our summary here: https://www.dorsey.com/newsresources/publications/client-alerts/2015/12/fast-act-company-disclosure-capital-markets-access Non-GAAP financial measures On May 17, 2016, the SEC issued new interpretations regarding the use of non-GAAP financial information by public companies. The new interpretations provide specific guidance for certain types of non-GAAP financial information including providing examples on how to describe GAAP measures with equal or greater prominence and how to avoid making non-GAAP measures misleading. See our summary here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/05/tighten-use-of-non-gaap-financial-measures Pay Ratio Disclosure Most public companies will be required to make the pay ratio disclosure following their first full fiscal year beginning on or after January 1, 2017. For a typical, calendar-year reporting company, the first pay ratio disclosure would be made in its proxy statement for its 2018 annual meeting. The SEC released an interpretation on October 19, 2016 to provide additional guidance on the upcoming disclosure requirements. For a summary of the interpretations see our discussion here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/10/new-cdis-help-issuers For a discussion of the final rules see our summary here: https://www.dorsey.com/newsresources/publications/client-alerts/2015/08/sec-issues-final-rule-for-pay-ratio-disclosure Disclosure of Government Payments by Resource Extraction Issuers On June 27, 2016, the SEC adopted rules requiring disclosure of government payments by resource extraction issuers.  The rules will require resource extraction issuers to disclose payments made to the U.S. federal government or foreign governments, including foreign subnational governments, for the commercial development of oil, natural gas or minerals. Resource extraction issuers are required to comply with the new rules starting with their fiscal year ending no earlier than September 30, 2018.  A resource extraction issuer with a December 31 fiscal year end will be required to file its first resource extraction payment report no later than 150 days after December 31, 2018, which is May 30, 2019. The full text of the final rules are found here: https://www.sec.gov/rules/final/2016/34-78167.pdf Proposed Rules Mining Disclosure Rules The SEC proposed new rules relating to disclosure by companies engaged in material mining operations in SEC reports. The proposed rules were subject to a comment period that was extended to September 26, 2016. The SEC is in process of reviewing the comments and we anticipate that new proposed rules or final rules will be released in 2017. The proposed rules are summarized here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/07/new-mining-disclosure-rules Clawback Policies On July 1, 2015, the SEC proposed rules regarding clawback policies and disclosure, requiring the recovery of incentive-based compensation of officers in cases of material non-compliance with accounting reporting requirements. The SEC received comments on the proposed rules and the SEC is in the process of drafting new rules. We anticipate that new rules will be adopted in 2017. The proposed rules are summarized here: https://www.dorsey.com/newsresources/publications/client-alerts/2015/07/sec-issues-proposed-rules-for-clawback-policies Proxy Cards – Universal Ballots On October 26, 2016, the SEC proposed the mandated use of universal ballots in contested director elections at annual meetings. A universal ballot or proxy card is a single proxy card that includes the names of both management and dissident nominees. The universal ballot would allow shareholders to vote for any combination of director nominees using one proxy card. The proposed rules are summarized here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/10/sec-proposes-universal-ballots

The SEC recently issued a no-action letter to Morgan Stanley that will streamline the process for its wealth management clients to participate in IPOs. The SEC said it would not object to Morgan Stanley’s proposed use of conditional offers to buy shares (“COBs”) prior to the effectiveness of IPO registration statements under specific conditions. The no-action request and the SEC’s letter confirm that COBs, if properly implemented, may be used in registered offerings, and when read together, outline detailed procedures to follow in order to use COBs. Read more in our eUpdate here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/12/sec-endorses-use-of-conditional-offers

On November 18, 2016, the SEC’s Division of Corporation Finance issued a set of compliance and disclosure interpretations (“C&DIs”) pertaining to abbreviated debt tender offers, which were the subject of an SEC no-action letter in early 2015. The new C&DIs offer important clarifications regarding abbreviated debt tender offers and the previous no-action letter guidance. Read more in our full summary here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/11/guidance-provided-by-sec

On November 17, 2016, the SEC issued a new interpretation stating that a company may conduct a generally solicited offering of securities under Rule 506(c) immediately following a completed securities offering made in reliance upon Rule 506(b), without invalidating the prior offering.  The SEC’s new interpretation will give companies more flexibility in their financing plans, allowing them to potentially take advantage of the best of both exemptions.  Many investors and companies prefer to participate in Rule 506(b) offerings, because these offerings do not require the investor to provide the company with detailed tax or other financial information in order to verify that the investor is an accredited investor, and do not require the company to due diligence the investor’s claim of accredited investor status.  However, companies may not always be able to raise sufficient funds from investors that are already known to the company.  Under the new interpretation, a company could complete tranche 1 of a financing with known investors, without engaging in general solicitation, in reliance upon Rule 506(b), relying on representations from the investors that they are accredited investors, and then following the closing of that tranche, begin to generally solicit investors that are not already known by the company, for tranche 2 of the financing in reliance upon Rule 506(c), requiring only the investors in tranche 2 to provide the more detailed tax or financial information required to verify their claim of accredited investor status.  The company would still need to satisfy the other requirements of Rule 506(c), and would need to consider whether any offerings subsequent to the Rule 506(c) offering could potentially be “integrated” with the Rule 506(c) offering. The full text of the SEC’s interpretation is provided below: Question 256.34 Question: An issuer has been conducting a private offering in which it has made offers and sales in reliance on Rule 506(b). Less than six months after the most recent sale in that offering, the issuer decides to generally solicit investors in reliance on Rule 506(c). Are the factors listed in the Note to Rule 502(a) the sole means by which the issuer determines whether all of the offers and sales constitute a single offering? Answer: No. Under Securities Act Rule 152, a securities transaction that at the time involves a private offering will not lose that status even if the issuer subsequently decides to make a public offering. Therefore, we believe under these circumstances that offers and sales of securities made in reliance on Rule 506(b) prior to the general solicitation would not be integrated with subsequent offers and sales of securities pursuant to Rule 506(c). So long as all of the applicable requirements of Rule 506(b) were met for offers and sales that occurred prior to the general solicitation, they would be exempt from registration and the issuer would be able to make offers and sales pursuant to Rule 506(c). Of course, the issuer would have to then satisfy all of the applicable requirements of Rule 506(c) for the subsequent offers and sales, including that it take reasonable steps to verify the accredited investor status of all subsequent purchasers. [November 17, 2016]

On November 3, 2016, in a new C&DI, the SEC Staff stated they will not object if a company posts an electronic version of its annual report to shareholders on its corporate web site by the dates specified in Rule 14a-3(c), Rule 14c-3(b) and Form 10-K, respectively, in lieu of mailing paper copies or submitting it on EDGAR. The report must remain accessible for at least one year after posting.  This new C&DI provides some relief as previously companies had to mail seven hard copies of their annual report to shareholders to the SEC or submit it on EDGAR.  Prior to this new staff interpretation, the annual report to shareholders was one of the few documents still filed in hard copy with the SEC. The NYSE still requires three hard copies of the proxy materials (including the proxy card) to be filed no later than the date on which the materials are released to shareholders.  However, the NYSE does not expect hard copies of the annual report to shareholders.  NASDAQ companies are not subject to a similar requirement to provide hard copies of proxy materials or the annual report. Reporting companies should consider updating their annual meeting and proxy season procedures and checklists to take advantage of the new interpretation.

On October 26, 2016, in a split vote, the SEC proposed the mandated use of universal ballots in contested director elections at annual meetings. The proposed rules were controversial even before they were proposed – the House of Representatives approved a spending bill this summer that included a provision prohibiting the SEC from proposing or implementing the use of the universal ballots in contested elections. We expect the comments on the proposed rule to be voluminous and varied. The press release and fact sheet on the proposed rules can be found here, and the proposed rule release can be found here. The rules are described further in our complete summary here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/10/sec-proposes-universal-ballots

On October 19th, the SEC released five new Compliance and Disclosure Interpretations (“CDIs”) relating to the upcoming “Pay Ratio Disclosure” requirements in Item 402(u) of Regulation S-K. Item 402(u) Pay Ratio Disclosure requirements, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, require each covered public company to make annual disclosure of the ratio of its principal executive officer’s total annual compensation to the total annual compensation of an individual whose compensation is determined to be the median compensation of all of the company’s employees. Read our complete summary here:  https://www.dorsey.com/newsresources/publications/client-alerts/2016/10/new-cdis-help-issuers