CURRENT MONTH (June 2021)
Securities Regulation
Statement on the Application of the Proxy Rules to Proxy Voting Advice
By Dan S. Cohen, K&L Gates LLP
On June 1, 2021, SEC Chairman Gary Gensler announced that he has directed the SEC Staff to evaluate whether to recommend that the SEC “revisit” the 2020 changes to Rules 14a-1(l), 14a-2(b), and 14a-9 (85 Fed. Reg. 55,082 (Sept. 3, 2020)) — including the definition of “solicitation” as it now includes proxy voting advice, and the exemptions and filing requirements for solicitations — and the July 2019 SEC interpretation (84 Fed. Reg. 47,416 (Sept. 10, 2019)) of the application of the proxy rules to proxy voting advice. He has not announced a timeline for when recommendations will be received and when the SEC may act on any such advice.
Also on June 1, 2021, the Division of Corporation Finance (Corp. Fin.) announced that in light of the Chairman’s directive, it will not recommend enforcement action to the Commission based on the 2019 interpretation or the 2020 rule changes “during the period in which the Commission is considering further regulatory action in this area.” In the event that the SEC does not modify the amendments to Rule 14‑2(b)(9), the Division will not recommend an enforcement action based on those amendments “for a reasonable period of time” after the pending litigation of ISS v. SEC, 1:19-cv-3275 (D.D.C.) continues (if applicable). The changes to Rule 14a-2(b)(9) will go into effect on December 1, 2021, unless the Commission initiates a rulemaking process to amend them.
Commissioners Elad Roisman and Hester Peirce issued a joint statement expressing a willingness to consider potential recommendations, but noting that it is “challenging, if not impossible” to know whether the amendments “work in practice” since the changes to Rule 14a-2(b)(9) are not in effect. They are concerned by the directive to reconsider the interpretation and guidance of the Rules.
These announcements do not rescind or modify the 2019 interpretation or the 2020 amendments to the rules. In fact, the amendments to Rule 14a-2(b)(9) are not in effect until December 1, 2021. Rather, the announcements demonstrate that:
(1) The SEC is likely to revise the 2019 interpretation with respect to the application of the definition of “solicitation” to proxy voting advice and to eventually initiate a rulemaking process to modify, or rescind, the 2020 amendments to the rules; and
(2) From June 1 until at least the date on which Corp. Fin. provides its recommendations to the Commission, enforcement based on non-compliance with the 2019 interpretation or any provisions of the amended rules that are currently in effect is negligible.
The timetable is open-ended and undisclosed so there is uncertainty as to how long the non-enforcement posture will last. Practically, any amendments to the rules that are currently in effect still have the force of law but compliance is unlikely to be required by the SEC.
SEC Chair Asks Staff to Propose Amendments to Rule 10b5-1
By Bella Zaslavsky, Madeline A. Moore, K&L Gates LLP
On June 7, 2021, SEC Chair Gary Gensler announced that he had directed SEC Staff to propose recommended reforms to Rule 10b5‑1. Under Section 10(b) of Rule 10b-5 of the Securities Exchange Act of 1934, it is illegal to purchase or sell a security on the basis of material non-public information (MNPI). Rule 10b5‑1 plans, if properly established when not in possession of MNPI, are intended to provide an affirmative defense against insider trading to companies and insiders transacting in company securities.
In his statement, Gensler stated that “these plans have led to real cracks in our insider trading regime.” Gesner went on to identify four primary areas of concern:
(1) Cooling-off period. Without a mandatory cooling off period before making the first trade, trading immediately following the establishment of a plan could be perceived as a loophole to participating in insider trading.
(2) Limitations on termination. Because there is no limit on when a 10b5-1 plan can be cancelled, insiders are free to cancel an existing 10b5-1 plan at any time should they come into possession of MNPI, limiting their potential downside exposure.
(3) Mandatory disclosure. Gensler believes that increased disclosure around adoption and the terms of 10b5‑1 plans could enhance confidence in the markets.
(4) Limits on number of plans. Insiders are able to enter into multiple plans at any one time and, as noted above, cancel those plans as they choose, potentially allowing insiders to choose among the plans that are most favorable to them.
The above list is not exhaustive, and Gensler asked the Staff to consider other potential reforms as well. The announcement signals not only an intent to consider changes to the rule itself, but also the possibility for heightened SEC focus on abuses in 10b5-1 plans. Companies and insiders should be mindful of potential increased scrutiny around 10b5-1 plans.
SEC Announces RegFlex Agenda
By Lillian Brown and Alan J. Wilson, WilmerHale
On June 11, 2021, the SEC announced its Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions (RegFlex Agenda), which sets forth the short-term and long-term regulatory actions that the SEC plans to take and is the first RegFlex Agenda released under Chair Gary Gensler.
Among the items on its latest RegFlex Agenda, the SEC highlighted the following list of proposed and final SEC rulemaking areas:
- Disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk;
- Market structure modernization within equity markets, treasury markets, and other fixed income markets;
- Transparency around stock buybacks, short sale disclosure, securities-based swaps ownership, and the stock loan market;
- Investment fund rules, including money market funds, private funds, and ESG funds;
- 10b5-1 affirmative defense provisions;
- Unfinished work directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including, among other things, securities-based swaps and related rules, incentive-based compensation arrangements, and conflicts of interest in securitizations;
- Enhancing shareholder democracy, which presumably refers to rulemaking regarding Rule 14a-8;
- Special purpose acquisition companies; and
- Mandated electronic filings and transfer agents.
Some other notable areas on the RegFlex Agenda include:
- Amendments to the conditions to use Rule 144 and to update the electronic filing requirements applicable to Form 144;
- Universal proxy;
- Trading prohibitions under the Holding Foreign Companies Accountable Act and enhanced listing standards; and
- Updates to the exempt offering rules, including updates to financial thresholds for accredited investors, disclosures in Reg D offerings and revisions to the integration framework for registered and exempt offerings.
The RegFlex Agenda items highlighted by the SEC are consistent with the areas of focus in recent remarks made by Chair Gensler and former Acting Chair Allison Herren Lee. Public companies should monitor for developments in these areas, in particular the following rulemakings that are expected by October 2021:
- Final rules amending the conditions to use Rule 144 and to update the electronic filing requirements applicable to Form 144;
- Proposed rules regarding disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk; and
- Proposed rules concerning 10b5-1 affirmative defense provisions.
SEC Removes PCAOB Chair, Plans to Appoint New Board Members
By Thomas W. White, Retired Partner, WilmerHale
In 2018, the SEC appointed five new members of the Public Company Accounting Oversight Board, which regulates auditors of US public companies and broker-dealers. The new members included Chairman William H. Duhnke III. On June 4, 2021, the SEC, now chaired by Gary Gensler, announced that it had removed Mr. Duhnke from the Board and appointed Board Member Duane M. DesParte as Acting Chairperson. The SEC also announced that it would seek candidates to fill all five board positions on the PCAOB, thereby signaling its intention to remove and replace the remaining three members of the Board (another seat is vacant).
Explaining the action, Mr. Gensler stated that “[t]he PCAOB has an opportunity to live up to Congress’ vision in the Sarbanes-Oxley Act” and that he sought to “set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.”
SEC Commissioners Hester M. Peirce and Elad L. Roisman issued a separate statement criticizing the SEC’s actions. They noted that replacing PCAOB members with every change in administration would “inject instability at the PCAOB, and undermine the PCAOB’s important mission by suggesting that it is subject to the vicissitudes of politics.”
Following the SEC’s action, on June 22, Acting Chairperson DesParte announced that he had directed staff to “reassess the organization’s stakeholder engagement efforts,” in particular the structure and membership of its advisory groups. As a result, the nomination process for the Board’s newly-created Standards Advisory Group “is being paused.”
