Category SEC

On August 21, 2019, the SEC issued two sets of guidance: (1) for proxy advisors, stating that the proxy rules apply to the provision of proxy voting advice, and (2) for investment advisers, regarding their proxy voting responsibilities.

This guidance could significantly change the proxy voting landscape and impact voting process at public companies. I provide my observations about these potential impacts and summaries of the SEC guidance in this Exequity Client Alert.

Earlier this month, the SEC issued a press release announcing that it was soliciting comments on earnings releases and quarterly reports. Specifically, the SEC is seeking comments on how the existing periodic reporting system, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants.

The request for comments addresses the following:

• The nature and timing of disclosures that reporting companies must provide in their quarterly Form 10-Q reports, including when the Form 10-Q disclosure requirements overlap with the disclosures companies voluntarily provide to the public in earnings releases furnished on Form 8-K.
• How the SEC can promote efficiency in periodic reporting by reducing unnecessary duplication in the information that reporting companies disclose and how any such changes could affect capital formation, while enhancing, or at a minimum maintaining, appropriate investor protection.
• Whether SEC rules should allow reporting companies, or certain classes of reporting companies, flexibility as to the frequency of their periodic reporting.
• How the existing periodic reporting system, earnings releases, and earnings guidance (either standing alone or in combination with other factors) may affect corporate decision making and strategic thinking, including whether these factors foster an inefficient outlook among reporting companies and market participants by focusing on short-term results.

The SEC will accept comments through March 21, 2019.

The SEC Press Release can be found at, https://www.sec.gov/news/press-release/2018-287, and the version of the request published in the Federal Register can be found at, https://www.sec.gov/rules/other/2018/33-10588.pdf.

On December 18, 2018, the SEC announced that it had finalized the hedging rules required by the Dodd-Frank Act (see https://www.sec.gov/news/press-release/2018-291). The SEC then made the Final Rule release (Release No. 33-10593; File No. S7-01-15) available on its website at: https://www.sec.gov/rules/final/2018/33-10593.pdf).

Final Rule Requirements

• New Item 407(i) of Regulation S-K requires a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director.
• Companies can satisfy this requirement by providing a summary of the practices or policies that apply, including the categories of persons they affect and any categories of hedging transactions that are specifically permitted or specifically disallowed, or by disclosing the practices or policies in full.
• If the company does not have any such practices or policies, the company must disclose that fact or state that hedging transactions are generally permitted.
• Equity securities for which this disclosure requirement applies are equity securities of the company, any parent, or any subsidiary of the company or any parent.

Timing of Application of Final Rules

Companies must generally comply with these new disclosure rules in proxy and information statements for the election of directors during fiscal years beginning on or after:

• July 1, 2020 for smaller reporting companies and emerging growth companies; and
• July 1, 2019 for public companies
• But note that the rules will not apply to closed-end funds and foreign private issuers.

On October 23, 2018, the SEC issued Staff Legal Bulletin No. 14J (CF) [SLB 14J] regarding Rule 14a-8. Specifically, SLB 14J takes a look at the economic relevance and ordinary business exclusions for shareholder proposals. The SEC Staff last addressed these concepts in SLB 14I.

SLB 14J offers additional guidance on proposals that address senior executive and/or director compensation and ordinary business matters. The SLB states that in evaluating proposals that raise both ordinary business and senior executive and/or director compensation matters, the SEC staff examines whether the focus of the proposal is an ordinary business matter or aspects of senior executive and/or director compensation. Where the focus appears to the SEC staff to be on an ordinary business matter, the proposal might be excludable under Rule 14a-8(i)(7).

Furthermore, the SEC Staff indicated that it believes a proposal that addresses senior executive and/or director compensation may be excludable under Rule 14a-8(i)(7) if a primary aspect of the targeted compensation is broadly available or applicable to a company’s general workforce and the company demonstrates that the executives’ or directors’ eligibility to receive the compensation does not implicate significant compensation matters.

The SEC also announced a bit of a change in how it will approach the exclusion of proposals addressing senior executive and/or director compensation on the basis of micromanagement. Historically, the SEC has not agreed with such exclusions. However, the SEC rethought its position and may support such exclusions in cases where the proposal seeks intricate details or seeks to impose specific timeframes or methods for implementing complex policies.

SLB 14J also details the form of analysis that would be most helpful to the SEC Staff as it considers the no-action request to exclude a shareholder proposal. The SLB lays out the factors that the SEC Staff believes the board may need to address depending on the facts and circumstances in determining whether the shareholder proposal involves a policy issue that is otherwise significantly related to the company’s business or is sufficiently significant in relation to the company’s business. The SLB indicates that a well-developed discussion will describe in sufficient detail the specific substantive factors the board considered in arriving at its conclusion that an issue is not otherwise significantly related to its business or is not sufficiently significant in relation to the company.

SEC Staff Legal Bulletin

Available at: https://www.sec.gov/corpfin/staff-legal-bulletin-14j-shareholder-proposals#