CURRENT MONTH (September 2020)

Securities Regulation

SEC Adopts Long-Awaited Amendments to Modernize Shareholder Proposal Rule

By Alan J. Wilson, WilmerHale

On September 23, the Securities and Exchange Commission (SEC) adopted amendments to the shareholder proposal rule – Rule 14a-8 under the Securities Exchange Act of 1934.  As the Commission noted in announcing the rule changes, Rule 14a-8 has not been substantively changed since 1998 in the case of the initial submission eligibility thresholds and 1954 in the case of the resubmission shareholder support thresholds, so the rule changes represent a significant development and modernization of the shareholder proposal system. 

Among the more significant changes, the amendments to Rule 14a-8(b) replace the current ownership threshold to submit a proposal with three alternative ownership thresholds, prohibit the aggregation of holdings for satisfying the amended ownership thresholds, require that shareholder proponents using a representative to submit a proposal provide documentation to make clear the representative’s authority to act on the shareholder’s behalf, and require that shareholder proponents offer times to meet with company management regarding the proposal.  Amendments to Rule 14a-8(c) limit the ability of individual persons – whether a shareholder proponent or representative – to submit more than one proposal to an individual company.  For proposal resubmissions, the amendments to Rule 14a-8(i)(12) increase the level of shareholder support that a proposal must receive to be eligible for resubmission at the same company’s future meetings.

See our September 24, 2020 client alert for a more extensive discussion of these latest amendments.

SEC Significantly Amends Information Review Requirements for Quotations of OTC Securities

By Colin Lloyd, Carl Emigholz and John Lightbourne, Cleary Gottlieb

On September 16, 2020, the SEC published a final rule amending SEC Rule 15c2-11, which imposes information review requirements before a broker-dealer may publish or submit a quotation for an OTC security.  The final rule:

  • Emphasizes that an issuer’s information be current and publicly available
  • Extends the information review requirements to, and permits reliance upon, qualified interdealer quotation systems
  • Limits the availability of certain existing exceptions to the information review requirements, including the “piggyback” exception, and
  • Adds additional exceptions for certain securities that are less susceptible to fraud

The final rule’s adopting release also updates existing SEC guidance regarding how a broker-dealer evaluates the reliability of information provided by an issuer and whether the information is accurate.  However, the adopting release reinforces that a broker-dealer is not generally required to undertake an independent review of an issuer similar to an underwriter to fulfill its obligations under the final rule.

Please see our September 29, 2020 alert memorandum for details on the final rule.

SEC Adopts Rules to Modernize Disclosure for Banking Registrants

By Bella Zaslavsky, K&L Gates LLP

On September 11, 2020, after a comment process, the Securities and Exchange Commission (“SEC”) announced that it adopted rules to update and expand the disclosures bank and savings and loan registrants provide to investors. The new rules replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies, with updated disclosure requirements in a new subpart 1400 of Regulation S-K (the general regulation that sets out the reporting requirements for various SEC filings used by public companies in the United States). The intent of the new rules, in part, is to eliminate inconsistencies and overlap with applicable requirements under U.S. GAAP and IFRS, the two accounting standards available to SEC registrants. SEC Chairman Jay Clayton stated that the changes “are designed to elicit better disclosures for investors and add efficiencies to the compliance efforts of registrants.”

The new rules, which apply to bank holding companies, banks, savings and loan holding companies, and savings and loan associates (both foreign and domestic), require disclosure about the following:

  • Distribution of assets, liabilities and stockholders’ equity, the related interest income and expense, and interest rates and interest differential;
  • Weighted average yield of investments in debt securities by maturity, allowing the maturity categories to be based on the requirements of U.S. GAAP or IFRS;
  • Maturity analysis of the loan portfolio including the amounts that have predetermined interest rates and floating or adjustable interest rates;
  • Certain credit ratios and the factors that explain material changes in the ratios, or the related components during the periods presented;
  • Allowance for credit losses by loan category, now based on the loan categories required to be disclosed by U.S. GAAP or IFRS; and
  • Bank deposits including average amounts and rate paid and amounts that are uninsured.

The rules will apply to fiscal years ending on or after December 15, 2021, although the SEC will accept voluntary compliance in advance. Industry Guide 3 will be rescinded effective January 1, 2023.

SEC Amends Whistleblower Incentive Program Rules

By Thomas W. White, Retired Partner, WilmerHale

Pursuant to the Dodd-Frank Act, in 2011 the Securities and Exchange Commission instituted its whistleblower incentive program (Rule 21F under the Securities Exchange Act).  The program provides for monetary awards to eligible whistleblowers who voluntarily provide “original information” that leads to successful SEC enforcement actions and related actions resulting in monetary sanctions over $1 million.  The awards can be between 10 and 30 percent of the monetary sanctions.  According to the SEC, such whistleblower reports have led to recovery of over $2.5 billion in financial remedies, and the SEC has awarded approximately $523 million to 97 individuals under the incentive program.

On September 23, the SEC adopted, by a 3-2 vote, amendments to the whistleblower program rules “designed to provide greater clarity to whistleblowers and increase the program’s efficiency and transparency.”  These changes include:

  • Establishing a presumption that where the statutory maximum award amount is $5 million or less, the SEC will pay the claimant the full maximum amount
  • Expanding the forms of enforcement actions that will qualify for whistleblower words to include deferred prosecution agreements, non-prosecution agreements and SEC settlements outside the context of judicial or administrative proceedings
  • Clarifying the definition of “related action”
  • Modifying the definition of “whistleblower” to make it uniform in all parts of the rules and to conform to the Supreme Court’s decision in the Digital Realty case, and making other changes to the anti-retaliation rules
  • Amending the claims review process to increase efficiency in processing claims
  • Publishing interpretive guidance to help clarify the meaning of “independent analysis” that can form a basis for a whistleblower submission

Additionally, the SEC Office of the Whistleblower issued staff guidance regarding its process for determining recommended award amounts.

California Court Enforces Exclusive Federal Forum Provision in Delaware Charter

By Melissa Sanders, Fox Rothschild LLP

A California Superior Court recently upheld a provision in a Delaware corporation’s charter requiring that claims under the Securities Act of 1933 be brought in federal court.  Wong v. Restoration Robotics involved plaintiffs who filed a case in California state court alleging securities law violations against a Delaware company and its officers and directors.  The defendants brought a motion for forum non conveniens based on a provision in the company’s charter requiring that such claims be made in federal court.  After an extensive analysis of Delaware precedent, the court determined that the mandatory federal forum provision in the company’s charter was most analogous to a forum selection clause. The court held in favor of defendants and disagreed with certain analogies that Delaware courts made in prior decisions involving similar provisions, such as analogizing such provisions to mandatory arbitration clauses. Although the court seemed to take a critical view of the provisions at issue, it noted that a California state court could not adjudicate the constitutionality of the Delaware statue that it interpreted as allowing such provisions in a motion for forum non conveniens. 

ISS Releases 2020 Global Benchmark Policy Survey Results

By Madeline A. Moore, K&L Gates LLP

On September 24, 2020, Institutional Shareholder Services, Inc. (ISS) released the results of its 2020 Global Benchmark Policy Survey. This survey aims to solicit broad feedback from institutional investors, corporate executives, board members, and other interested constituencies on potential areas of policy change for 2021 and beyond. This year’s survey focuses on such topics as: COVID-19 pandemic response, including ISS’s policy guidance issued earlier in the year and the pandemic’s impact on annual meeting formats, executive compensation, and short-term/annual incentive programs; sustainability and climate change; auditor and audit committee evaluations; and board composition and diversity. 

Please see my full article for more details on the results of this ISS survey. 

Business Roundtable Releases New Principles to Address Climate Change

By Rani Doyle, EY*

Business Roundtable CEO members lead companies with more than 15 million employees and $7.5 trillion in revenues. The combined market capitalization of Business Roundtable member companies is the equivalent of over 27 percent of total U.S. stock market capitalization, and Business Roundtable members invest nearly $147 billion in research and development — equal to over 40 percent of total U.S. private R&D spending.

In September 2020, the Business Roundtable issued a warning on the threats climate change pose to the United States and issued principles and policies to address climate change, stating that:

Business Roundtable believes that to avoid the worst impacts of climate change, the world must work together to limit global temperature rise this century to well below 2 degrees Celsius above preindustrial levels, consistent with the Paris Agreement.* The United States and the international community must aggressively reduce GHG emissions and create incentives for developing new technologies to achieve this goal. Business Roundtable supports a goal of reducing net U.S. GHG emissions by at least 80 percent from 2005 levels by 2050 which should be achieved in a manner consistent with [specified] key principles.

Some of the specified principles include:

  • Increase global engagement, cooperation and accountability
  • Minimize social and economic costs for those least able to bear them
  • Support both public and private investment in low-carbon and GHG emissions reduction technologies along the full innovation pipeline
  • Ensure that U.S. policies account for international emissions reduction programs

The Business Roundtable also suggests the principles be supported through policies, including a market-based emissions reduction strategy that would put a price on carbon and use any resulting revenues to double federal funding for research, development and demonstration of GHG reduction technologies.

World Economic Forum Issues a White Paper on Common Metrics and Consistent Reporting of Sustainable Value Creation

By Rani Doyle, EY*

On September 22, 2020, the World Economic Forum released a set of universal environmental, social and governance (ESG) metrics and disclosures to measure stakeholder capitalism that companies can report on regardless of their industry or region. The metrics and standards are organized around principles of governance, planet, people and prosperity and are designed to provide a common set of existing disclosures that lead towards a coherent and comprehensive global corporate reporting system. The metrics and disclosures were developed in collaboration with Deloitte, EY, KPMG and PwC and reflect an open consultation process with corporations, investors, standard-setters, NGOs and international organizations.

In parallel to this work, the World Economic Forum also collaborated with the Impact Management Project to bring together the efforts of the five leading independent global framework and standard-setters – CDP, Climate Disclosure Standards Board, Global Reporting Initiative, International Integrated Reporting Council and Sustainability Accounting Standards Board – to work towards a comprehensive corporate reporting system and a statement of intent to complement the WEF report. 

SEC Staff Issues New Guidance for Extending Confidential Treatment

By Andrew J. Stanger, Mayer Brown

On September 9, 2020, the U.S. Securities and Exchange Commission (SEC) staff amended CF Disclosure Guidance Topic No. 7, Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b-2 (Guidance Topic No. 7) to specify options available when a confidential treatment order is about to expire. Notably, the amendments permit companies to maintain confidential treatment in some cases by transitioning from reliance on Rules 406 or 24b-2 to the “streamlined” redaction rules of Regulation S-K Item 601(b)(10)(iv).

The amendments to Guidance Topic No. 7 expand the options companies have to extend confidential treatment when a confidential treatment order (CTO) is about to expire:

  • If the CTO initially was issued more than 3 years ago, it may be extended by either:
  • Transitioning to Item 601(b) confidential treatment (and other parallel rules), which requires re-filing the exhibit in compliance with the Item 601(b)(10)(iv) requirements. The transition may occur any time after the 3-year period following the initial issuance of the CTO, even if the CTO has not yet expired. The staff will not recommend enforcement action if the company re-files the exhibit in its first Exchange Act report following the expiration of the CTO; or
  • Submitting a complete CTR application (the short-form application is not available).
  • If the CTO initially was issued less than 3 years ago, companies may extend by filing a short-form CTR application.
  • If the information in a material contract exhibit no longer needs protection after the expiration of the CTO, it must be re-filed in unredacted form.

For further background, see my September 16, 2020 post on the new guidance.

*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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