CURRENT MONTH (December 2020)

Securities Regulation

IRS Issues Final Section 162(m) Regulations

By Michael Albano, Mary Alcock, Caroline Hayday and Julia Rozenblit, Cleary Gottlieb

On December 18, 2020, the Internal Revenue Service issued final regulations under Section 162(m) of the Internal Revenue Code, as amended by the 2017 Tax Cuts and Jobs Act (TCJA). Section 162(m) limits the deductibility of compensation paid in any year to certain public company executives to $1 million. The final regulations provide further guidance on the TCJA’s amendments to Section 162(m) and are generally consistent with the IRS’ 2019 proposed regulations. The final regulations will apply to tax years beginning on or after December 30, 2020, with special applicability dates for specified provisions.

Key changes from the proposed regulations and other clarifications are discussed in our December 30, 2020 alert memorandum

Nasdaq Proposes New Board Diversity Listing Rules

By Mark L. Johnson, Bella Zaslavsky, Andrew H. Galtieri, K&L Gates LLP 

On December 1, 2020, The Nasdaq Stock Market (Nasdaq) filed a proposal with the SEC to adopt listing rules related to director diversity and disclosure. The proposed rules would not mandate the election of any “diverse” directors, but instead would reflect a “comply or explain” approach: listed companies generally would be required to either have two diverse directors or explain why they do not. In addition, listed companies would be required to annually disclose statistical information on the diversity of their boards of directors.

To meet the requirements of proposed Rule 5605(f), each Nasdaq-listed company (subject to limited exemptions) must have (or explain why it does not):

  • One director who self-identifies as female, without regard to her designated sex at birth, and
  • One director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or LGBTQ+, except that a “smaller reporting company” or foreign private issuer may comply with this requirement by electing a second director who self identifies as female.

Companies already listed on Nasdaq would be required to comply with the new requirements by:

  • Disclosing board diversity statistics by the first anniversary of SEC approval of the rules.
  • Having at least one diverse director (or explaining why not) by the second anniversary of SEC approval.
  • Having at least two diverse directors (or explaining why not):
    • For a company listed on The Nasdaq Global Select Market or The Nasdaq Global Market, by the fourth anniversary of SEC approval; or
    • For a company listed on The Nasdaq Capital Market, by the fifth anniversary of SEC approval.

Each company newly listing on Nasdaq would be required to comply with all of the new requirements by the later of (a) the phase-in periods described above and (b) one year after the date of listing.

Comments on the proposal were required to be submitted by January 1, 2021.

SEC Updates Volume 1 of the EDGAR Filer Manual

By:  Rani Doyle, EY*

On December 14, 2020, the SEC issued new rules to significantly revise Volume I of the EDGAR Filer Manual. The revisions remove unnecessary and outdated content and relocate basic instructions and technical explanations to the EDGAR—Information for Filers webpage at The revisions include other changes, including acceptance of electronic and remote online notarizations in connection with the Form ID application for EDGAR access.  

SEC Again Adopts Resource Extraction Disclosure Rules

By Thomas W. White, Retired Partner, WilmerHale

Section 13(q) of the Exchange Act requires the SEC to adopt rules requiring “resource extraction issuers” (oil, gas and mining companies that are publicly traded in the U.S.) to disclose information about payments to foreign governments or the U.S. Federal government for the purpose of development of oil, natural gas or minerals.  Resource extraction issuers would be required to disclosure information about the type and total amount of payments made for each of their projects and the total amount of payments made to each government.  Section 13(q) was enacted in 2010 by the Dodd-Frank Act.

On December 16, 2020, the SEC took its third crack in 10 years at implementing this law, the previous two rules having been struck down by the courts or Congress.  The SEC’s latest version of the rules

  • require resource extraction issuers only to provide information by “project” at the national and major subnational political jurisdiction level, and not at the more granular contract level;
  • contain exemptions from compliance based on conflicts with foreign laws or contract terms, as well as for smaller reporting companies or emerging growth companies;
  • refine the definition of “control” for purposes of determining what subsidiaries of resource extraction issuers are subject to the disclosure rules;
  • limit potential liability by providing that the reports are furnished, not filed with the SEC; and
  • provides transition relief for initial public offerings.

Resource extraction issuers will be required to comply with the rules for fiscal years ending no earlier than two years after the effective date of the final rules.  This means that calendar fiscal year companies will most likely not have to file a report until 2024 with respect to the 2023 fiscal year.

SEC Proposes Amendments to Rule and Form 144

By Rani Doyle, EY*

On December 22, 2020, the SEC proposed new rules that would mandate electronic filing of Form 144 and eliminate “tacking” under Rule 144 for securities acquired upon the conversion or exchange of certain market-adjustable securities. The proposed amendment would not affect the use of Rule 144 for most convertible or variable-rate securities transactions. It would apply only to market-adjustable securities transactions in which:

  • The newly acquired securities were acquired from an issuer that, at the time of the conversion or exchange, does not have a class of securities listed, or approved for listing, on a national securities exchange; and
  • The convertible or exchangeable security contains terms, such as conversion rate or price adjustments, that wholly or partially offset declines in the market value of the underlying securities occurring prior to conversion or exchange, other than terms that adjust for stock splits, dividends, or other issuer-initiated changes in its capitalization.

The proposed amendments to the filing requirements for Forms 4, 5, and 144 would:

  • Mandate the electronic filing of Form 144;
  • Eliminate the Form 144 filing requirement related to the sale of securities of issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
  • Amend the Form 144 filing deadline so that Form 144 may be filed concurrently with Form 4 by persons subject to both filing requirements; and
  • Amend Forms 4 and 5 to add an optional check box to indicate that a reported transaction was intended to satisfy Rule 10b5-1(c).

The SEC included a fact sheet in its press release announcing the proposed rules.

New SEC Rule Will Modernize Fund Valuation Practices

By Melissa Sanders, Fox Rothschild LLP

 A recent rule adopted by the SEC will modernize the regulatory framework surrounding valuation practices for registered investment companies and business development companies (Funds).  In a press release, the SEC noted that investment practices had “evolved considerably” in the 50 years since the SEC had last comprehensively addressed the issue.  New Rule 2a-5 (the Rule) is intended to clarify how the board of directors of a Fund can meet its obligations to value the Fund’s investments.  Recognizing that boards do not typically have a “day-to-day role” related to the pricing of a Fund’s investments, the Rule allows a Fund to designate the determination of fair value to the Fund’s investment advisor or, if the firm is internally managed, to one or more officers of the Fund. The designation will be subject to certain conditions and requirements set out in the Rule, including the requirement for the designee to make “periodic and prompt” reports to the board.  The SEC also adopted a related new Rule 31a-4 to address recordkeeping requirements.  

President Trump Signs the HFCAA into Law Prompting SEC to Change Course

By Thomas Kollar, Jason T. Elder, Andrew Olmem & Christina M. Thomas, Mayer Brown

On December 18, 2020, President Trump signed the Holding Foreign Companies Accountable Act (HFCAA) into law. Later that day, SEC Chairman Jay Clayton published a statement providing an update on a planned SEC rulemaking in light of the enactment of the HFCAA. Noting the significant overlap between the HFCAA and the planned SEC rulemaking, Chairman Clayton has directed the staff to revise the near-final rule proposal to incorporate the congressional mandate.

The passage of the HFCAA, which mandates that the SEC adopt rules applicable to reporting companies that use an auditor located in a jurisdiction where authorities restrict the Public Company Accounting Oversight Board’s (PCAOB) ability to inspect or investigate the audit firm. Specifically, the SEC would have to promulgate rules requiring disclosure about ties to foreign governmental entities, including the Chinese Communist Party. In addition, the SEC would have to prohibit trading of a company’s securities if the SEC determines that the company has had three “non-inspection years” related to its audit.

Continue reading the full legal update here.

*Material included in this Month-In-Brief publication is for general informational purposes only and does not represent the advice of Ernst & Young LLP or any of its professionals as to any client or particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome.


Rani Doyle

Rani Doyle

Managing Editor, Securities Law

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