Cam C. Hoang

NYSE, NYSE American and Nasdaq have postponed the effective date of the proposed clawback listing standards, so they would take effect on October 2, 2023, and issuers would be required to adopt compliant clawback policies by December 1, 2023.  Furthermore, the SEC has granted accelerated approval of each exchange’s proposal, as amended. The amendments have not changed the substantive requirements for a clawback policy.  However, besides the postponed effective date, NYSE has updated its listing standards so that the notice and cure period for noncompliance applies to circumstances beyond the delinquent adoption of a clawback policy, such as prompt recoupment of erroneously awarded compensation.  NYSE’s amendment is consistent with Nasdaq’s listing standards. Since clawback policies must cover all incentive-based compensation received on or after the October 2, 2023 effective date of the listing standards, earlier adopters may wish to specify this effective date in their policies. For FAQs on the SEC-prescribed clawback policy, please see the following Dorsey eUpdate.

On June 3, 2022, the Securities and Exchange Commission mandated the electronic filing or submission of certain documents that reporting companies currently may provide as paper filings, by adopting amendments to Regulation S-T. Electronic Submission of “Glossy” Annual Reports “Glossy” annual reports, which are prepared in accordance with Rule 14a-3 of the Securities Exchange Act of 1934 and delivered to shareholders with proxy materials, must be submitted electronically, likely starting with the 2023 proxy season.  The SEC’s EDGAR filing system will serve as a repository for electronic copies of the “glossy” annual reports to shareholders, whether or not companies decide to post the reports on their corporate websites. According to the adopting release, electronic submissions of the “glossy” annual reports should capture the graphics, styles of presentation, and prominence of disclosures (including text size, placement, color, and offset, as applicable) contained in the reports.  The reports should not be re-formatted, re-sized, or otherwise re-designed for purposes of the submission on EDGAR. Currently, the only format that EDGAR supports is PDF, but if EDGAR is upgraded to accommodate other formats appropriate for electronic filing of the “glossy” annual report, the SEC will communicate the upgrade by adopting an updated EDGAR Filer Manual that supports such formats. Reporting companies will no longer need to deliver paper copies of annual reports to the SEC, but those companies using notice & access to deliver proxy materials will still need to make their proxy materials, including their annual reports, publicly accessible free of charge on a website specified in the notice. We will present reminders of this and other developments during our December presentation Preparing for the 2023 SEC Reporting Season. Other Mandatory Electronic Filings or Submissions The adopting release also mandates: the electronic filing of Form 144, which provides notice of an affiliate’s proposed reliance on the Rule 144 exemption for public resales of restricted or control securities; the filing is triggered when the amount to be sold under Rule 144 by the affiliate during any three-month period exceeds 5,000 shares or units or has an aggregate sales price in excess of $50,000 the electronic filing or submission of certain other documents that are currently permitted as paper filings, including: notices of exempt solicitations exempt preliminary roll-up communications annual reports for employee benefit plans on Form 11-K all filings on Form 6-K, which are used by certain foreign private issuers to provide information between annual reports certain foreign language documents (in PDF) certifications that a security has been approved by an exchange for listing and registration the use of Inline eXtensible Business Reporting Language (“Inline XBRL”) for the filing of the financial statements and accompanying notes to the financial statements required by Form 11-K Compliance Deadlines For most of these amendments, we expect that compliance will be required in early 2023, six months from the amendments’ effective date.  Electronic submissions of Form 144 will be required later, six months from the date of publication in the Federal Register of the SEC release that adopts the version of the EDGAR Filer Manual addressing updates to Form 144.  Inline XBRL reporting for Form 11-Ks will be required three years from the effective date of the amendments.

As expected, the SEC has adopted final rules requiring the use of universal proxy cards in shareholder meetings involving non-exempt contested director elections held after August 31, 2022. In addition, certain amendments will impact proxy disclosure for all director elections, contested or uncontested. Amended Proxy Disclosure for All Director Elections The rules establish new proxy disclosure requirements for all director elections, including uncontested elections. The proxy card must include an “against” voting option when applicable state law gives effect to a vote “against” a nominee. Shareholders must have the ability to “abstain” in an election where a majority voting standard is in effect. Amended Item 21 of Schedule 14A requires disclosure regarding the effect of a “withhold” vote in an election. Amended Rule 14a-5 requires companies to disclose the deadline for dissident shareholders to provide notice of a solicitation of proxies in support of director nominees other than management nominees pursuant to Rule 14a-19 for the next annual meeting. Generally, the notice must be postmarked or transmitted electronically no later than 60 calendar days prior to the anniversary of the previous year’s annual meeting date. Effective Date The universal proxy rules will apply to all shareholder meetings involving non-exempt contested director elections held after August 31, 2022. The other rule amendments will be applicable to all shareholder meetings involving director elections held after August 31, 2022. Additional information is available here.

The SEC’s Division of Corporation Finance has issued a sample comment letter, and sent actual comment letters to a series of public companies, asking for additional Form 10-K disclosure on topics addressed in the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 2, 2010), or an explanation for why the comments do not apply.  The comment letters are a preamble to the SEC’s rulemaking, which is now expected early in 2022. In his recent remarks on mandatory climate change disclosure, SEC Chairman Gary Gensler noted that investor demand is driving SEC rulemaking: “Investors today are asking for that ability to compare companies with each other.  Generally, I believe it’s with mandatory disclosures that investors can benefit from that consistency and comparability.  When disclosures remain voluntary, it can lead to a wide range of inconsistent disclosures.” SEC Comment Letters In its comment letters, the SEC has suggested that it will continue to monitor climate change disclosure beyond SEC filings.  Companies are asked to explain what consideration was given to providing the same type of climate-related disclosure in SEC filings as was provided in more expansive disclosure in corporate social responsibility (CSR) reports.  This comment prompts companies to evaluate the consistency of their disclosure across multiple platforms.  Specifically, companies may re-consider whether and when to use the term “material,” and what it means in an SEC filing versus a CSR report or a website.  When used to qualify a requirement for the furnishing of information in a registered securities offering, the SEC definition of “materiality” limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered. Furthermore, the comments request Management’s Discussion & Analysis disclosure, to the extent material, of: the effect of pending or existing climate-change legislation and international accords on the business, financial condition and results of operations, capital expenditures for climate-related projects, indirect consequences of regulations or business trends, such as changes in demand for goods or services based on carbon emissions, weather-related and other physical effects of climate change on operations and results, and quantification of increased compliance costs related to climate change. Companies have also been asked to add or update material risk factors related to climate change, including potentially: transition risks related to climate change that may affect the business, financial condition and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks or technological changes, and litigation risks related to climate change and the potential impact on the company. More information on governance and disclosure considerations from the SEC's Climate Change Comment Letters can be found here.

For those public companies soon to be receiving shareholder proposals for their upcoming annual shareholder meetings, please keep in mind that in September 2020, the SEC adopted amendments to Rule 14a-8. These amendments apply to any shareholder proposal submitted for an annual or special meeting to be held on or after January 1, 2022. However, the SEC may revisit this rulemaking and postpone their effectiveness pending further review. These amendments: Update the eligibility criteria that a shareholder must satisfy to have a shareholder proposal included in a company’s proxy statement, though the current criteria are grandfathered for certain shareholders for meetings held prior to January 1, 2023; Require shareholder proponents to make themselves available for discussions with the company; Require shareholders appointing representatives to provide additional documentation; Provide that a single person may not submit multiple proposals at the same shareholders’ meeting, whether as a shareholder or as a representative of a shareholder; and Increase the levels of required shareholder support a proposal must receive to be eligible for resubmission at the same company’s future meetings. The final rules also provide for a transition period that will allow certain shareholders to rely on the existing $2,000/one-year ownership threshold for proposals submitted for an annual or special meeting to be held prior to January 1, 2023. These shareholders must have continuously held at least $2,000 of the company’s stock for one year as of the effective date of the amendments, and continuously maintain ownership of at least $2,000 of such stock from the effective date of the amendments through the date the shareholder submits a proposal to such company. We have provided a more detailed summary of the amendments at the end of this document.

On August 6, 2021, the Securities Exchange Commission (the “SEC”) approved Nasdaq Rules 5605(f) and 5606 on board diversity, which are the first of their kind to be implemented on a national scale in the United States. They are controversial, opposed by SEC Commissioners Hester Peirce and Elad Roisman, and may face legal challenges. While there has been no indication that the NYSE will follow, the SEC’s rulemaking agenda indicates that the Commission may propose new rules regarding board and director nominee diversity disclosures as soon as October 2021. Board Diversity Matrix Rule 5606 will require each Nasdaq-listed company subject to certain exceptions, to publicly disclose in an aggregated form, to the extent permitted by applicable law, information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the company’s board of directors. The requirements are intended to make consistent and comparable statistics widely available to investors regarding the number of diverse directors serving on a Nasdaq-listed company’s board. Companies must present this information in Nasdaq’s board diversity matrix or a substantially similar searchable format by the later of: (i) August 8, 2022 or (ii) the date the company files its proxy statement or its information statement for its annual meeting of shareholders (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) during 2022. The matrix must indicate the total number of directors and (1) the number of directors based on gender identity (female, male, or non-binary) and the number of directors who did not disclose gender; (2) the number of directors based on race and ethnicity (African American or Black, Alaskan Native or Native American, Asian, Hispanic or Latinx, Native Hawaiian or Pacific Islander, White, or Two or More Races or Ethnicities), disaggregated by gender identity (or did not disclose gender); (3) the number of directors who self-identify as LGBTQ+; and (4) the number of directors who did not disclose a demographic background under item (2) or (3) above. After the first year of disclosure, companies must disclose the matrix for the current year and immediately prior year. The required disclosure can be presented on a company’s website or in its proxy statement, information statement, Form 10-K, or 20-F. If a company decides to include the disclosure on its website, it must publish it concurrently with the applicable SEC filing. It must also submit a URL link to the disclosure through the Nasdaq Listing Center within one business day after posting. A company that does not comply with proposed Rule 5606 would have 45 calendar days to submit a plan of compliance to Nasdaq and upon review of such plan, Nasdaq staff may provide the company with up to 180 days to regain compliance or face a delisting determination, which may be appealed to a hearings panel. “Comply or Explain” Approach to Board Diversity In addition to the board diversity matrix, pursuant to Rule 5605(f), Nasdaq adopted a “comply or explain” approach to board composition that requires each Nasdaq-listed company, subject to certain exceptions, to have at least two “diverse” board members, including: (i) at least one director who self-identifies as female; and (ii) at least one director who self-identifies as an “underrepresented minority” or part of the LGBTQ+ community. If a company does not have such diverse directors by the deadlines described under “Transition Periods” below, it must: (i) specify the applicable requirements of Rule 5605(f)(2); and (ii) explain the reasons why it does not have them, which could include a description of a different approach to diversity. For example, in the commentary, Nasdaq explains that companies do not need to agree with the definition of “underrepresented minority,” and they may consider diversity more broadly, for example, to include persons of Middle Eastern, Central Asian or North African descent. Veterans are another example of a category not currently covered under Nasdaq’s definition of “diversity.” The company’s explanation for not reaching the diversity requirement must be disclosed at the same time and in the same location as its board diversity matrix. While Nasdaq will verify that the company has provided an explanation, it will not assess the explanation on its merits. For purposes of this Rule, “underrepresented minority” is defined to mean an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities, which are categories consistent with categories reported to the Equal Employment Opportunity Commission through the Employer Information Report EEO-1 Form. If a director self-identifies in the “Two or More Races or Ethnicities” category, the director must also self-identify in each individual category, as appropriate. “LGBTQ+” is defined to mean an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community. Modified Requirements and Exemptions for Certain Companies There are modified requirements for companies with smaller boards, smaller reporting companies, foreign issuers and newly listed companies. Companies with smaller boards of five or fewer directors can meet the requirements by having at least one diverse director, who can be either a female, an underrepresented minority or a member of the LGBTQ+ community. The diverse director can also be appointed as the sixth director on the board without triggering additional diversity requirements. Smaller reporting companies (as defined in Rule 12b-2) can meet the requirements by having at least two female directors, or one female director and a second director who is an underrepresented minority or a member of the LGBTQ+ community. Foreign issuers can meet the requirements by having at least two female directors, or one female director and one director who is either (i) an underrepresented individual (based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the company’s principal executive offices), or (ii) a member of the LGBTQ+ community. Foreign issuers include a “foreign private issuer” or a “foreign issuer” (Rule 3b-4(b)) that has its principal executive offices located outside of the United States. There are various phase-in periods for newly listed companies under Rule 5605(f), depending on the Nasdaq market. For example, special purpose acquisition companies (“SPACs”) listed under IM-5101-2 of the Nasdaq Regulatory Authority are not required to provide disclosure information or to have the minimum number of diverse directors until their business combination. However, following the business combination, such companies must meet, or explain why they do not meet, the applicable diversity requirements by the later of (i) two years from the date of listing or (ii) the date the company files its proxy statement or its information statement (or 10-K or 20-F) for the company’s second annual meeting of shareholders subsequent to the company’s listing. Certain types of companies are exempt under Rule 5605(f)(4), because they do not have boards, do not list equity securities, list only securities with no voting rights towards the election of directors, or are not operating companies, and holders of the securities they issue do not expect to have a say in the composition of their boards. Transition Periods Nasdaq-listed companies will have a transition period to comply with these rules, based on their listing tier: All Nasdaq-listed companies, including companies with smaller boards, should have at least one diverse director by the later of August 7, 2023 or the date the company files its proxy or information statement (or Form 10-K or 20-F) for the company’s annual shareholder meeting in 2023. Nasdaq Global Select Market and Nasdaq Global Market companies should have at least two diverse directors by the later of August 6, 2025 or the date the company files its proxy or information statement (or Form 10-K or 20-F) for the company’s annual shareholder meeting in 2025. Nasdaq Capital Market companies should have at least two diverse directors by the later of August 6, 2026 or the date the company files its proxy or information statement (or Form 10-K or 20-F) for the company’s annual shareholder meeting in 2026. If a company fails to comply with Rule 5605(f), Nasdaq will notify the company of a deadline to cure the deficiency and regain its compliance, which if not met, will result in a delisting determination subject to appeal before a hearings panel. Nasdaq has established that the deadline to cure is the later of (i) the company’s next annual meeting or (ii) 180 days from the event that caused the deficiency. Listed companies that no longer meet diversity requirements due to a board vacancy will have a one-year grace period to resume compliance, but they must disclose this reliance on the grace period in their proxy statement or on their website. Board Recruiting Service The SEC also approved a proposal to offer eligible listed companies access to a one-year complimentary board recruiting service, which would provide access to a network of diverse candidates. In order to be eligible, a listed company must represent to Nasdaq that it does not have (i) at least one director who self-identifies as female; and it does not have (ii) at least one director who self-identifies as an underrepresented minority or LGBTQ+. Foreign issuers and smaller reporting companies have separate eligibility criteria consistent with their diversity requirements. A company that is not eligible may still receive complimentary 90-day access. What To Do Now Nasdaq will host several live webinars to help companies understand key elements of these listing rules and how to gain access to a variety of free board recruiting services. Webinars will also be available for replay. The first webinar is scheduled for August 17, 2021 at noon eastern. In preparation for the 2022 proxy season, companies are encouraged to provide their directors with an opportunity to self-identify diversity characteristics for the matrix, either as part of a D&O questionnaire or a separate survey. To the extent that the board does not currently meet Nasdaq’s diversity criteria, they may decide to review director succession plans, or otherwise be prepared to explain the decision not to undertake such a review. Where the board uses a definition of “diversity” that is different from the Nasdaq definition, it should be prepared to explain why the definition is appropriate for the company and how board composition measures up to that definition. While the Nasdaq rules do not mandate board diversity, and Nasdaq will not assess the validity of any explanations provided, companies should be sensitive to how their investors will interpret the disclosure. It is also important to monitor existing or developing legislation on board diversity, as states including California, Colorado, Illinois, Maryland, New York, Pennsylvania, and Washington have enacted such legislation.

Last November, the SEC finalized certain amendments that would eliminate selected financial data, two years of supplementary financial information, and MD&A provisions for the contractual obligations table and off-balance sheet disclosure, under certain circumstances, for SEC reports and registration statements. Companies may now early adopt these amendments for filings made after the rulemaking's effective date of February 9, 2021, as long as they provide disclosure responsive to the amended item in Regulation S-K in its entirety.  Compliance is mandatory for the first fiscal year ending on or after August 9, 2021 (210 days after publication in the Federal Register). Those companies considering early adoption should be aware that certain SEC commissioners opposed the amendments, and particularly elimination of the contractual obligations table, which they consider to be useful disclosure not presented elsewhere.  The amendments may be repealed or adjusted under the Biden administration. We have summarized the amendments, and the applicable sections of Regulation S-K, below.  The amendments: Clarify the MD&A objective, with emphasis on cash flow and forward-looking information (Item 303(a)) Eliminate certain disclosure: Five years of selected financial data (Item 301) Two years of supplementary financial information; replaced with principles-based disclosure of material retrospective changes (Item 302(a)) Inflation and price changes; replaced with new instruction to discuss inflation and price changes if they are part of a known trend or uncertainty (Item 303(a)(3)(ii) replaced by amended Item 303(b)(2)(ii) Off-balance sheet arrangements; replaced with requirement to discuss such arrangements if they are material (Item 303(a)(4) replaced by new Instruction 8 to Item 303(b)) Contractual obligations table; replaced with principles-based discussion of material cash requirements from known contractual and other obligations in liquidity and capital resources section (Item 303(a)(5) replaced by new Item 303(b)(1)) Provide new flexibility to compare current quarter to either prior year period (ie, as is done currently) or to immediately preceding quarter (amended Item 303(c)(2)(ii)) Add or clarify certain disclosure: Known events that are “reasonably likely to cause a material change in relationship between costs and revenue,” such as increases/decreases in labor costs, pricing changes, inventory adjustments (amended Item 303(b)(2)(ii)) Material changes (not just increases) in net sales or revenue (amended Item 303(b)(2)(iii)) Underlying reasons for material changes in line items (amended Item 303(b)) More detail around cash needs over short- (ie, 12 months) and long- (ie, beyond 12 months) term and sources of liquidity (amended Item 303(b)(1)) Capital resources disclosure to focus on material cash requirements, anticipated sources of funds needed and general purposes of cash requirements (amended Item 303(b)(1)) Explicit requirement to disclose critical accounting estimates (amended Item 303(b)(3))  

Companies that count State Street Global Advisors as an investor should review its CEO Cyrus Taraporevala’s just-released annual letter on its proxy voting agenda, which has significant updates on voting policies with regard to board and workforce diversity. Indicating that State Street's primary challenge as an investor is the lack of publicly available racial and ethnic diversity data, the CEO states: In 2021, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards; In 2022, we will vote against the Chair of the Compensation Committee at companies in the S&P 500 that do not disclose their EEO-1 Survey responses; and In 2022, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not have at least 1 director from an underrepresented community on their boards. Diversity voting policies at State Street and other investors are prompting companies to expand disclosure of board demographics in their proxy statements, with many considering the matrix disclosure from the Nasdaq proposed listing standard. And the attention to workforce diversity continues to grow.  State Street’s request for EEO-1 Survey responses is likely to result in expanded human capital management disclosure in annual reports on Form 10-K. On sustainability, starting in 2020, State Street began voting against companies in the bottom 10% of R-Factor scores that could not articulate a plan to improve their score — its R-Factor scoring system is based on the Sustainability Accounting Standards Board (SASB) framework, which focuses on financially-material, industry-specific ESG risks. The CEO also reiterated State Street's support for climate risk disclosure using the Taskforce on Climate-related Financial Disclosures (TCFD) framework.

On December 1, 2020, Nasdaq submitted a proposal to the SEC seeking approval of new listing requirements for board diversity. The stated goal of the proposal is to provide stakeholders with a better understanding of a company’s current board composition and enhance investor confidence that listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that standard. Nasdaq has provided a summary of the top five things companies should know and will update this document throughout the SEC review and approval process.  There is also a related set of FAQs. Under proposed Rule 5606, Nasdaq proposes to provide each company with one calendar year from the date that the SEC approves this proposal (the “Approval Date”) to comply with the requirement for statistical information regarding diversity, using a standardized disclosure matrix template. For the first year a company is required to disclose board diversity statistics, the company would be required to publish board diversity statistics for the current year only.  Each subsequent year, the company will be required to publish its data for the last two years. Under proposed Rule 5605(f)(2), no later than two calendar years after the Approval Date, each company must have, or explain why it does not have, one Diverse director. Further, each company must have, or explain why it does not have, two Diverse (at least one Female director and at least one director who is either an Underrepresented Minority or LGBTQ+) directors no later than: (i) four calendar years after the Approval Date for companies listed on the Nasdaq Global Select or Global Market tiers; or (ii) five calendar years after the Approval Date for companies listed on the Nasdaq Capital Market tier. Foreign issuers and smaller reporting companies, by contrast, have more flexibility and may satisfy the requirement by having two Female directors, or in the case of foreign issuers, one Female director and a director who is an underrepresented individual in their home country jurisdiction. The proposed rules currently exempt non-operating companies from proposed rule. Consistent with Nasdaq’s corporate governance rules the following types of companies are exempt: acquisition companies listed under IM-5101-2; asset-backed issuers and other passive issuers (as set forth in Rule 5615(a)(1)); cooperatives (as set forth in Rule 5615(a)(2)); limited partnerships (as set forth in Rule 5615(a)(4)); management investment companies (as set forth in Rule 5615(a)(5)); issuers of non- voting preferred securities, debt securities and Derivative Securities (as set forth in Rule 5615(a)(6)); and issuers of securities listed under the Rule 5700 Series. The FAQs are worth a read, as they provide additional color on the proposed rules.  For companies who do not eventually meet the diversity requirements, they may provide an explanation as to why they do not meet the requirements. The following are several examples of such disclosure included in the rule filing for the proposed board diversity and disclosure rules: If under Israeli law regarding board diversity, an Israeli company is required only to have a minimum of one woman on the board and such Israeli company chooses to comply with Israeli home country law in lieu of meeting the diversity objectives of Rule 5605(f)(2)(B), it may choose to disclose that “the Company is incorporated in Israel and required by Israeli law to have a minimum of one woman on the board, and satisfies home country requirements in lieu of Nasdaq Rule 5605(f)(2)(B), which requires each Foreign Issuer to have at least two Diverse directors.” If a U.S. company had two Diverse directors but one resigned due to unforeseen circumstances, it could disclose, for example: “Due to the unexpected resignation of Ms. Smith this year, the Company does not have at least one director who self-identifies as Female and one director who self-identifies as an Underrepresented Minority or LGBTQ+. We intend to undertake reasonable efforts to meet the diversity objectives of Rule 5605(f)(2)(A) prior to our next annual meeting and have engaged a search firm to identify qualified Diverse candidates. However, due to unforeseen circumstances, we may not achieve this goal.” Or a U.S. company may disclose that it chooses to define diversity more broadly than Nasdaq’s definition by considering national origin, veteran status or individuals with disabilities when identifying nominees for director because it believes such diversity brings a wide range of perspectives and experiences to the board. Timing for SEC approval is currently unclear, but could happen as early as the first half of 2021.  The SEC will provide a minimum of 21 days from the time they publish the proposed rule changes in the Federal Register for the public (including investors, companies, and their representatives) to have an opportunity to comment on the proposals.  After publication in the Federal Register, the SEC has 30 to 240 calendar days to approve the proposal. Clients who do not currently meet these board diversity requirements are encouraged to start board-level conversations on board size, director succession planning and director recruitment.  As discussed here, we also encourage companies to start gathering information on the demographics of their boards, for example, through the annual D&O questionnaire.  We have updated our model question in light of the proposed Nasdaq rulemaking. Corporate secretaries who choose to include a director diversity question should review it against any existing board diversity policies.  They may also wish to provide directors with a supplemental explanation as to why they are being asked to self-identify and how the information will be used, particularly if it may be disclosed in the proxy statement and other media including the company website, responses to ESG surveys and the corporate responsibility report.  Corporate secretaries may also choose to emphasize that responses are optional. Sample Director Diversity Question: We are planning to disclose director diversity information in our Proxy Statement.  Please answer the following questions if you agree to inclusion of the information: 1. Gender (check one):  Male  Female  Non-Binary  Other: _____________  Prefer not to answer 2. LGBTQ+ (check one):  Yes  No  Prefer not to answer 3. Ethnicity or Race (check one or more):  White  Hispanic, Latinx or Spanish Origin  Black or African American  American Indian or Alaska Native  Asian  Native Hawaiian or Other Pacific Islander  Other: ______________  Prefer not to answer   Other Diversity Characteristics that You Wish to Identify (e.g., [underrepresented individual in home country jurisdiction][for foreign private issuers], religion, nationality, disability, military service or socio-economic or demographic characteristics):                                                                                                                                                                                                             

In response to commonly asked questions, the SEC staff has released three FAQs related to amendments to the business description, legal proceedings and risk factor disclosure requirements in Regulation S-K Items 101, 103, and 105, discussed here.  The rulemaking became effective on November 9, 2020. Compliance for Form S-3 Registration Statements and Prospectus Supplements The first FAQ clarifies that for registration statements on Form S-3 that became effective before November 9, 2020, Form 10-Ks incorporated by reference into the registration statements do not need to be amended to comply with the new requirements for business descriptions and legal proceedings in Items 101 and 103.  Furthermore, even though Form S-3 expressly requires risk factor disclosure pursuant to Item 105, related prospectus supplements filed on or after November 9, 2020 do not need to comply with the amendments until the next update to the related registration statement on Form S-3 for Section 10(a)(3) purposes.  In other words, issuers are not required to amend the risk factor disclosure set forth in their last 10-K until they file their next 10-K, at which time the risk factor disclosure included in the new 10-K will automatically supersede the previous risk factor disclosure. Presumably, a registration statement on Form S-3 that becomes effective after November 9, 2020 will need to comply with the updated risk factor requirements, either by incorporating by reference an earlier Exchange Act filing that complies with such updated requirements or by restating the risk factors in the body of the registration statement.  However, the staff has not specifically addressed this scenario. Business Development - Period to be Covered in Form 10-K Under amended Item 101(a), issuers are to provide a description of the general development of their businesses for the period over which information would be material. However, Item 1 of Form 10-K indicates that this description only needs to cover developments since the beginning of the fiscal year for which the report is filed. The second FAQ confirms that that Form 10-Ks only need to cover developments since the beginning of the fiscal year. However, in light of the principles-based approach underlying the Regulation S-K amendments, we would advise companies to take a broader view of the time period covered by amended Item 101(a) if appropriate to provide for a full discussion of the general development of the business in all material respects. Business Development – Incorporation by Reference of Full Discussion The SEC staff clarifies that for filings other than an initial registration statement, an issuer may omit the full discussion of the general development of its business if the issuer (1) provides an update to the general development of its business, disclosing all material developments that have occurred since the most recent registration statement or report that includes the full discussion; (2) includes one active hyperlink to the registration statement or report that includes the full discussion; and (3) incorporates the full discussion by reference to the registration statement or report. The SEC clarifies that an issuer is not required to use this updating method, though the staff anticipates that the updating method will apply mainly to registration statements. The rulemaking notes that a filing that includes an update and incorporates by reference the more complete business development discussion could not be incorporated by reference into a subsequent filing, such as a Form S-3 or Form S-4.  This prohibition may limit the amendment’s usefulness for registration statements.  Rule 12b-23 of the Securities Exchange Act and Rule 411 of the Securities Act provide that information must not be incorporated by reference in any case where such incorporation would render the disclosure incomplete, unclear, or confusing, such as incorporating by reference from a second document if that second document incorporates information pertinent to such disclosure by reference to a third document.

Corporate secretaries of public companies will soon be updating their D&O questionnaires for the 2021 proxy season, and they should consider whether to include a question that allows directors to self-identify as diverse.  While companies may be hesitant to raise the issue, increasingly, they are being asked for diversity data on their boards and employees.   In recent news: The California governor has signed into law AB 979, mandating that the boards of public companies incorporated or headquartered in the state initially include at least one “director from an underrepresented community” by the end of 2021, meaning a director who self-identifies as “Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.”  There are already legal challenges pending based on state constitutional grounds. The New York City Comptroller announced that in response to its campaign, nearly half of S&P 100 companies will now publicly disclose their Consolidated EEO-1 Reports. These Reports give a comprehensive breakdown of a company’s U.S. workforce by race, ethnicity and gender according to 10 employment categories, including senior management, defined to incorporate individuals within two reporting levels of the CEO. Ethnic and gender diversity have dominated current discussions on board and employee diversity, but the SEC’s Compliance and Disclosure Interpretations 116.11 and 133.33 recognize a greater range of diversity characteristics.  To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered self-identified diversity characteristics (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company's disclosure of those characteristics, the SEC staff would expect that the company's proxy discussion would include identifying those characteristics and how they were considered. Similarly, in these circumstances, the staff would expect any description of diversity policies to include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics. Our sample question for D&O questionnaires (copied below) invites directors to self-identify by gender, and according to categories of race and ethnicity consistent with the 2020 US Census and the EEO classifications, but the question also invites identification of a broader range of diversity characteristics, consistent with the SEC guidance discussed above.    Corporate secretaries who choose to include a director diversity question should review it against any existing board diversity policies.  They may also wish to provide directors with a supplemental explanation as to why they are being asked to self-identify and how the information will be used, particularly if it may be disclosed in the proxy statement and other media including the company website, responses to ESG surveys and the corporate responsibility report.  Corporate secretaries may also choose to emphasize that responses are optional. Sample Director Diversity Question: We are planning to disclose director diversity information in our [  ] Proxy Statement.  Please answer the following questions if you agree to inclusion of the information: Gender: Male Female Other: _____________ Prefer not to answer 2. Ethnicity or Race (check one or more): White Hispanic, Latinx or Spanish Origin Black or African American American Indian or Alaska Native Asian Native Hawaiian or Other Pacific Islander Other: ______________ Prefer not to answer 3. Other Diversity Characteristics that You Wish to Identify (e.g., religion, nationality, disability,   sexual orientation, military service or socio-economic or demographic characteristics):  ___________________________________________________________________ Please note that if you choose to provide this information, you consent to our possible public disclosure of the information in other public media, including on our website and our corporate responsibility report and in response to inquiries from surveys, analysts, shareholders or journalists.  

Companies have offered benefits to employees, including executive officers, to enable them to continue their work and otherwise to make their lives easier during the COVID-19 pandemic.  Now the SEC has released additional guidance as to when these benefits constitute perquisites or personal benefits that should be included in executive compensation for proxy disclosure purposes.  See Question 219.05 of the SEC's Compliance and Disclosure Interpretations.  In brief, reporting companies are to apply the SEC's existing  two-step analysis to identify whether an item constitutes a perquisite or personal benefit: An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item that confers a direct or indirect benefit and that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, is a perquisite or personal benefit unless it is generally available on a non-discriminatory basis to all employees. While the analysis is fact-specific, the SEC staff indicates that enhanced technology needed to work from home during a stay-at-home order would generally not be a perquisite, because of the integral and direct relationship to the performance of the executive's duties.  It is worth noting that as long as there is that "integral and direct" relationship, the item is not a perquisite, even if confers an ancillary personal benefit. In contrast, health-related or personal transportation benefits provided to address new risks because of the pandemic may not be integrally and directly related to the performance of the executive's duties, and should be considered perquisites unless they are generally available to all employees. Director benefits are subject to the same two-step analysis, and while director perquisites have been on a downward trend, we would expect that the guidance also applies to director benefits where relevant.

The Securities and Exchange Commission (the “SEC”) has adopted amendments to Regulation S-K to update the description of business (Item 101), legal proceedings (Item 103), and risk factors (Item 105) that public companies are required to provide in certain registration statements and reports. These disclosure requirements have not undergone significant revisions in over 30 years. In related remarks, SEC Chair Jay Clayton emphasized the modernizing impact of the amendments, and their basis in materiality judgments and the principles-based disclosure framework. A tabular summary of the changes can be found on page 8 in the adopting release.   Among other things, the amendments that impact the business description: adopt a principles-based approach to the business description (which appears in certain registration statements and the annual report), eliminating the prescribed five-year time frame, and permitting a company to disclose only material developments that have occurred since its most recent full business description, with the full business description incorporated by reference from a prior filing; and provide an updated, non-exclusive list of examples for the business description, adding a description of human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the business; material changes to a registrant’s previously disclosed business strategy; and a description of all material government regulations, not just environmental laws. The amendments that impact the description of legal proceedings: specify that the required information on legal proceedings may be provided by hyperlink or cross-reference to another part of the document; and increase the threshold for disclosure of governmental environmental proceedings resulting in monetary sanctions, from $100,000 to $300,000, but also allow a company, at its election, to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or one percent of the company's current assets. If a company chooses to use a threshold other than the $300,000 threshold, it must disclose that threshold (including any change thereto) in each annual and quarterly report. As an aside, "environmental proceedings" historically have been construed broadly by the SEC, including issuance of informal or formal notices of violation, administrative orders, civil suits in which a party seeks injunctive relief and civil fines, or criminal prosecutions. The amendments that impact risk factors: require summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages, namely, a series of concise, bulleted or numbered statements summarizing the principal factors that make an investment in the company or offering speculative or risky; and require risk factors to be organized under relevant headings in addition to the subcaptions currently required, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption for “General Risk Factors.” The SEC notes that except for the heading for general risk factors, the amendments do not specify other headings that companies should use, and many companies already organize their risk factor disclosure through groupings of related risk factors and the use of headings. These amendments will become effective 30 days after publication in the Federal Register, potentially in time to impact third quarter reports by calendar year-end companies.  However, the impact may be limited, since quarterly reports on Form 10-Q do not include a business description, and they only require the disclosure of material developments in legal proceedings and material changes in risk factors, as previously disclosed in the last Form 10-K. The final amendments to Items 101 and 103 will affect only domestic registrants and “foreign private issuers” that have elected to file on domestic forms subject to Regulation S-K disclosure requirements.  Regulation S-K does not apply to foreign private issuers unless a form reserved for foreign private issuers (such as Securities Act Form F-1, F-3, or F-4) specifically refers to Regulation S-K.  

The Securities and Exchange Commission continues to encourage public companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management and to proactively revise and update disclosures as facts and circumstances change. Ahead of public company reports of their second quarter results, the SEC's Division of Corporation Finance has released a supplement to CF Disclosure Guidance Topic No. 9 (summarized here).  The supplement presents a series of additional questions that companies should consider for how the COVID-19 pandemic has affected their businesses, financial condition and results of operations. Public companies are asked to consider whether there are material operational and financial adjustments which should be disclosed in quarterly report on Form 10-Q, under the Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A").  Questions presented by the SEC staff include:   What are the material operational challenges that management and the Board of Directors are monitoring and evaluating? How is your overall liquidity position and outlook evolving? Have you reduced your capital expenditures and if so, how? Have you reduced or suspended share repurchase programs or dividend payments? Have you modified contractual arrangements (eg, with customers, landlords or suppliers) in response to COVID-19 in such a way that the revised terms may materially impact your financial condition, liquidity, and capital resources? Have you assessed the impact material events that occurred after the end of the reporting period, but before the financial statements were issued, have had or are reasonably likely to have on your liquidity and capital resources and considered whether disclosure of subsequent events in the financial statements and known trends or uncertainties in MD&A is required? In the supplement, the SEC staff encourages public companies receiving federal assistance through the CARES Act, including loans and tax relief, to consider the short- and long-term impact of that assistance on their financial condition, results of operations, liquidity, and capital resources, as well as the related disclosures and critical accounting estimates and assumptions. The SEC staff reminds public companies that at each annual and interim reporting period, US generally accepted accounting principles ("GAAP") requires management to evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued.  Where there is substantial doubt, or the substantial doubt is alleviated by management’s plans, management should provide the appropriate respective disclosures in the financial statements and consider MD&A disclosure.  In drafting these disclosures, we would encourage public companies to review Accounting Standards Codification 205-40-50-13.      

In light of the COVID-19 pandemic, SEC Chair Clayton and Director William Hinman have issued a joint statement urging public companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning, in upcoming earnings releases and analyst and investor calls. Specifically: Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in:  (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress.  Historical information may be relatively less significant. The Division of Corporation Finance recently provided a useful list of questions for companies to consider with respect to their present and future operations. Chair Clayton and Director Hinman noted that detailed discussions of current liquidity positions and expected financial resource needs; efforts to protect worker health and well-being and customer safety; and the nature, amounts and effects of financial assistance under the CARES Act or other similar federal and state programs, will be particularly helpful disclosure for investors and markets. They emphasized that it will be important, though challenging, to provide detailed and future-facing information regarding operating conditions and resource needs.   Companies are to avoid boilerplate and to make reasonable efforts to convey meaningful information.  Chair Clayton and Director Hinman acknowledged that forward-looking statements will be based on a mix of assumptions, most notably, the time frames for current COVID-19 social distancing guidelines and other mitigation-related requirements. Companies are encouraged to avail themselves of the safe-harbors for forward-looking statements.  Chair Clayton and Director Hinman would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC. Click here for some thoughts on preparing forward-looking disclosure during the COVID-19 pandemic.

In light of the COVID-19 pandemic, SEC Chair Clayton and Director William Hinman have issued a joint statement urging public companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning, in upcoming earnings releases and analyst and investor calls. The joint statement is summarized here.  In the joint statement, companies are encouraged to avail themselves of the safe-harbors for forward-looking statements.  Chair Clayton and Director Hinman would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC. Subject to certain statutory exemptions, the Private Securities Litigation Reform Act of 1995 (PSLRA) enacted safe harbor provisions for forward-looking statements, whether written or oral: That are identified as forward-looking statements, and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements; or That are immaterial; or Where the plaintiff fails to prove that the forward-looking statements (1) if made by a natural person, were made with actual knowledge by that person that the statements were false or misleading; or (2) if made by a business entity, were (a) made by or with the approval of an executive officer of that entity; and (b) made or approved by such officer with actual knowledge by that officer that the statements were false or misleading. There is extensive case law interpreting the scope and conditions of the safe harbor for forward-looking statements.  Companies should continue to take precautions against private securities claims based on forward-looking disclosure: In written communications, clearly identify forward-looking statements using expressions of expectation or belief, combined with an explanatory description of the company’s intention to thereby designate the statements as forward-looking. In oral communications, such as conference calls, announce at the beginning of the call that (1) the company can or will provide forward-looking information; (2) actual results could differ materially from the information provided; and (3) the factors that can cause the difference are explained in the risk factors contained in the company’s SEC filings. Tailor and update the cautionary language that accompanies forward-looking statements, based on the specific risks and uncertainties. Courts have declined to apply the safe harbor where risk disclosures are boilerplate and are not updated or do not identify the appropriate risks (ie, the risks that ultimately caused the prediction to not come to pass). In the cautionary language, emphasize that the accuracy of the forward-looking statements depend on future events, and articulate assumptions supporting the forward-looking statements. Provide the cautionary language in close proximity to the forward-looking statements, or clearly indicate which sections contain forward-looking statements. Some, but not all, courts find that when a statement is “mixed” with forward- and non-forward looking statements, the part of the statement that refers to non-forward looking information is not entitled to the safe harbor protection.  Furthermore, a materially false statement of non-forward looking information may preclude application of the safe harbor to the forward-looking portion of the statement. The PSLRA and federal securities laws do not impose a duty to update a forward-looking statement.  However, companies have a duty to correct prior disclosure that the company determines was untrue at the time it was made, and certain courts have suggested that there is a duty to update a specific and material representation regarding a future event that, without updating, would mislead investors.  However, this duty has been very narrowly defined.

The Securities and Exchange Commission has extended an earlier order, so that subject to certain conditions that we reported on here, public companies may have an additional 45 days from the original due date to file their Exchange Act reports that are otherwise due between March 1 and July 1, 2020. Companies relying on this relief, in compliance with the conditions imposed by the order, will preserve their eligibility to use registration statements on Forms S-3, F-3 and S-8, as long as they were current and timely in their Exchange Act filing requirements as of the first day of the 45-day of the relief period, and they file their reports due during the relief period.  In addition, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the extended due date.  Rule 12b-25 provide an additional 15-calendar day grace period for annual reports, and a five-calendar day grace period for quarterly reports, under certain circumstances.

The Securities and Exchange Commission issued an order today providing filing relief for companies that are affected by the coronavirus.  In the order, the Commission notes that disruptions to transportation, and limited access to facilities, support staff, and professional advisors as a result of COVID-19, could hamper the efforts of public companies and other persons with filing obligations to meet their filing deadlines. Companies may have an additional 45 days from the original due date to file their Exchange Act reports that are otherwise due between March 1 and April 30.  In the reports, companies must disclose that they are relying on the order and state the reasons why they could not file their reports on a timely basis. As conditions to the filing relief, companies must be unable to meet their filing deadlines due to circumstances related to COVID-19. They must furnish in a report on Form 8-K or Form 6-K, by the later of March 1 or the original filing deadline, (1) a statement that they are relying on the order; (2) a brief description of the reasons why they could not file the report on a timely basis; (3) the estimated date of filing; (4) if appropriate, a risk factor explaining, if material, the impact of COVID-19 on their business; and (5) if the report cannot be filed on a timely basis because of the inability of a third party to furnish a required opinion, report or certification, a signed statement by the third party. Companies may also be exempt from Exchange Act requirements to furnish proxy and other soliciting materials under certain conditions, where the shareholder has a mailing address located in an area where the common carrier has suspended delivery service as a result of COVID-19, and the companies have made a good faith effort to furnish their proxy materials.

Preparations for annual reporting on Form 10-K and the 2020 proxy season have begun in earnest for many companies. We have summarized certain governance and disclosure developments that should be considered in the course of preparing these filings and you can find them here. For additional background, please contact us for materials from our presentation, “Preparing for the 2020 SEC Reporting Season.”

  The SEC posted a notice yesterday addressing EDGAR technical difficulties which may impact filers’ ability to make timely submissions.  For those issuers who, due to technical difficulties, are unable to furnish or file earnings information on Form 8-K within 48 hours before the earnings conference call, the staff will adjust the receipt date of such Form 8-K so that it will be deemed furnished or filed at the time the issuer first attempted to submit such report.  Earnings information is furnished or filed in accordance with Item 2.02 of Form 8-K.  This adjustment enables issuers to qualify for an exemption under Item 2.02, as long as they meet the other enumerated conditions.  If they qualify for the exemption, issuers do not need to disclose any further information based on oral communication from the subsequent earnings conference call (such as a transcript of the call), even if additional material nonpublic information about the completed earnings period is disclosed on the call. This is welcome relief for issuers who would otherwise need to furnish or file transcripts or other materials from the earnings conference call, as well as post these materials on their websites, in order to comply with the requirements of Item 2.02 and Regulation FD.    

The SEC has proposed rule amendments to automate filing fee calculations and payment processing.  If the rules are adopted, filing fees would be paid via Automated Clearing House (ACH) and would no longer be payable via checks and money order.  Each fee table and the accompanying notes would include all information required for the fee calculation tagged in inline XBRL.  Currently, information required for the fee calculation is optional but often footnoted by companies, and filers manually calculate the fee, which may then be subject to review by the SEC staff.  The new system is intended to reduce errors and provide certainty to filers on the correctness of the fee paid, since EDGAR would compute the filing fee from inputs and validate information provided by the filer.   In the event of incorrectly submitted information, filers would receive a warning and the staff would follow up, but the filing would not be suspended. The SEC is soliciting comments on the proposed rule amendments, due within 60 days after the amendments' publication in the Federal Register.    

For SEC reporting companies providing financial statements covering three years in a filing, discussion about the earliest of the three years may be omitted from the MD&A if such discussion was already included in the company's prior filings on EDGAR, provided that the company provides a statement that identifies the location in the prior filing where the omitted discussion may be found.  See our summary of the SEC's FAST Act amendments, including to Item 303 of Regulation S-K, here. According to notes on a joint meeting this summer between the SEC staff and the Center for Audit Quality (CAQ), the SEC staff confirmed that the amendment does not change the standard that applies to all MD&As, which is to provide such other information that the company believes to be necessary to understanding its financial condition, changes in financial condition and results of operations. As a result, the notes continue, where there has been a retrospective change in financial statements in either of the earliest two years covered in the filing (eg, due to accounting errors, retrospective adoption of new accounting principles, segment changes, discontinued operations or changes in the reporting entity), the company should assess whether the previously filed disclosure (that it is considering omitting and referencing) still provides the information necessary to understand the company's financial condition, changes in financial condition and results of operations.

In connection with its efforts to modernize the regulatory framework, the SEC announced a new rule that provides all issuers with the flexibility provided by the JOBS Act to use "test-the-waters" communications with institutional investors about potential IPOs and other registered offering to better gauge market interest.  Previously, test-the-waters communications were only available to emerging growth companies. Securities Act Rule 163B will permit any issuer to engage in oral or written communications with potential investors that are, or that they reasonably believed to be, qualified institutional buyers ("QIBs") and institutional accredited investors ("IAIs") either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. A QIB generally is a specified institution that, acting for its own account or the accounts of other QIBs, in the aggregate, owns and invests on a discretionary basis at least $100 million in securities of unaffiliated issuers.  An IAI is any institutional investor that is also an accredited investor, as defined in paragraph (a) of Rule 501 of Regulation D. The staff intentionally does not specify the steps that an issuer could or must take to establish a reasonable belief that the intended recipients of test-the-water communications are QIBs or IAIs, with the stated goal of providing issuers with the flexibility to use methods that are cost-effective but appropriate in light of the facts and circumstances of each contemplated offering and each potential investor.  In the adopting release, the staff states that issuers should continue to rely on the methods that they currently use to establish a reasonable belief with respect to an investor’s status as a QIB or IAI pursuant to Rule 144A and Rule 501(a) of the Securities Act.   Under the rule: There are no filing or legending requirements.  A written communication would not constitute a free writing prospectus, which is subject to filing requirements. The communications are deemed “offers” subject to Section 12(a)(2) liability in addition to the anti-fraud provisions of the federal securities laws.  The information provided must not conflict with material information in the related registration statement, and furthermore, the staff may request that the issuer furnish any test-the-waters communication. Issuers subject to Regulation FD will need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.  Regulation FD requires public disclosure of any material nonpublic information that has been selectively disclosed to certain securities market professionals or shareholders. Where an issuer wishes to pursue a private placement in lieu of a registered offering immediately after engaging in test-the-waters communications, the issuer should consider whether the test-the-waters communication was conducted in such a way as to constitute a general solicitation that could disqualify the issuer from completing a private placement   The staff noted that limiting communications to financially sophisticated investors, the applicability of anti-fraud provisions and Regulation FD, and the investors' ultimate receipt of a prospectus will mitigate investor protection concerns. The rule will become effective 60 days after publication in the Federal Register.

Overview Earlier this month, the SEC's Division of Corporation Finance announced that its staff may respond orally instead of in writing to some shareholder proposal no-action requests, beginning with the 2019-2020 proxy season.   Furthermore, the staff may now more frequently decline to state a view on the no-action request, whereas in the past, it had typically concurred or disagreed with a company's asserted basis for exclusion. As background, companies submit no-action requests in order to exclude shareholder proposals from their annual meeting proxy statements.  When these requests are granted under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the staff will not recommend that the SEC take enforcement action in response to the exclusion of a shareholder proposal.  Over the last proxy season (since October 1, 2018), more than 230 no-action requests were submitted to the SEC for review..  Transitioning to oral responses is intended to make the process more efficient for the staff in light of the large volume of requests.  The staff still intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8. The SEC’s announcement lacked a number of important details and leaves much to speculation. It remains to be seen how frequently the staff will issue oral versus written determinations.  In remarks before the U.S. Chamber of Commerce in July, Director of the Division of Corporation Finance Bill Hinman had commented that under an updated process, requests based on difficult topics, such as the ordinary business exclusion, would likely continue to receive responses from the staff.  In the announcement, the staff reiterates that board analysis is often useful for requests on the basis of the ordinary business or economic relevance exceptions. Whether the staff responds orally or in writing, it will inform the proponent and the company of its position, which may be that the staff concurs, disagrees or declines to state a view, with respect to the company’s asserted basis for exclusion. As discussed below, in light of the revised no-action process, it becomes more important for companies to designate an appropriate and prepared representative to receive the staff's call and to keep a careful record of the discussion. For more discussion on the SEC's announcement, see the Observations and Recommendations below, and register for our upcoming webinar, Shareholder Proposals: Strategies and Tactics. Observations and Recommendations There will be more flexibility for staff, but likely less information publicly available. Until now, companies and proponents have been able to review a complete database of the staff's responses, which have all been issued in written form, to discern trends, and to observe consistencies as well as inconsistencies in the determinations.  Under the updated process, it is not clear whether the staff will provides public access to its oral responses.  SEC Rule 81 only provides for public access to the staff's written communications in connection with no-action requests, as soon as practicable after the response has been sent or given.  If their oral responses are not made public, and if they have more flexibility to decline to state a view, the staff will also have more latitude to make case-by-case determinations under less scrutiny. Faster responses to no-action requests?  In keeping with the staff's commitment to a more efficient process, oral versus written responses may facilitate more prompt turnaround on no-action requests, though the staff has made no such commitment. The staff likely will not provide information in calls beyond what is stipulated in the announcement. In each case, the staff will communicate their determination with respect to the asserted basis for exclusion, to both the company and the proponent.  However, we do not expect additional substantive information to be communicated verbally.  The staff will avoid conflicting messages, or unnecessarily prejudicing either party, for example, by providing one party with more detail or nuance than has been received by the other party.  Furthermore, the staff is unlikely to entertain additional requests, such as requests for reconsideration, on a call.  This approach would be aligned with the spirit of previous guidance.  In SLB 14B, the staff stated that "In order to ensure that the staff's process is fair to all parties, we base our determinations on the written materials provided to us. While we will respond to telephone questions from the company or the shareholder proponent regarding the status of a request, we do not discuss the substantive nature of any specific no-action request with either the company or the shareholder proponent. Therefore, we request that any additional information that the company or the shareholder proponent would like to provide be submitted to us and the other party in writing." Written no-action letters may contain more guidance, and they will receive more scrutiny.  Currently, the staff will often issue a determination with little or no explanation for why they concur or disagree with the bases cited in the no-action request.  Since the staff has now specified that written letters will now be issued where they may provide "broadly applicable guidance," we expect that the letters will contain more substantive guidance than they have in the past. Companies will need to carefully assess alternatives if the staff declines to state a view on any particular request.  Negotiated withdrawals may become even more attractive. The announcement confirms that if the staff declines to state a view on any particular request, the interested parties should not interpret that position as indicating that the proposal must be included. In such circumstances, the staff is not taking a position on the merits of the arguments made, and the company may have a valid legal basis to exclude the proposal under Rule 14a-8. As an alternative,  the parties may seek formal, binding adjudication on the merits of the issue in court—an option that has always been available but rarely pursued. It is unclear how frequently the staff will decline to take a view on a no-action request.  There are certain bases for exclusion that may more readily invite this position.  For example, where companies cite a violation of law as a basis for exclusion under Rule 14a-8(i)(2), the staff may be more likely to defer to rulings by courts, the SEC or other state or federal authorities, as the staff largely did in their response to Johnson & Johnson regarding a proposal for the adoption of mandatory arbitration bylaws, discussed here. Without a definitive staff determination, and faced with the unappealing prospect of litigation, parties may accelerate the already existing trend towards negotiated withdrawals on a broad range of shareholder proposals.  In the absence of a withdrawal, the company still has the option either to exclude the proposal without a staff concurrence, which carries some risk of potential litigation, or present it for a shareholder vote. Will companies exclude shareholder proposals without staff concurrence? Some commentators posit that the staff’s refusal to state a view will provide companies with more latitude to exclude proposals, but it appears that investor and proxy advisory firm pressure will discourage companies from unilaterally excluding proposals.  While it is the exception rather than the rule that proponents have resorted to litigation in the past to challenge the exclusion of a shareholder proposal, coalitions of investors are finding that the influence and the resources to do so in order to pressure companies into settlement.  Furthermore, institutional investors and proxy advisory firms may take a dim view of a company's unilateral determination to exclude a proposal.  Under their existing voting policies, ISS and Glass Lewis may recommend votes against directors of companies that exclude proposals without a no-action determination or court order, though these policies may be modified in light of the staff's expanded ability to decline to state a view. Will there be more shareholder proposals submitted and voted on? The staff's potential refusal to take a view creates greater uncertainty around the no-action process. The absence of a complete written record of the staff’s position on no-action letter request during a proxy season will make it more difficult to assess the probability of success going forward. This lack of transparency may deter companies from making requests, particularly where they are not confident that there is a firm basis for exclusion.  As a result, the announcement may encourage a greater number and a greater variety of shareholder proposals to be submitted, and once submitted, to be voted on instead of excluded. Designate an appropriate and prepared representative and keep a record on conversations with the staff. In light of the revised no-action process, companies should designate an appropriate and prepared representative to receive the staff's calls.  This representative should be an individual who is generally familiar with the no-action process and with the specific request at issue, such as the general counsel, the corporate secretary or outside counsel.   If the staff does not concur with the company's position, the company likely will not be able to make requests on the call, but will continue to be able to make subsequent, written requests for reconsideration. The representative should be provided with guidelines for conducting the call and asking appropriate questions in order to obtain as much clarity as possible. The company should also create a record of its written and oral communications with the staff.  The record will provide a basis for a report to the board and the company's decision-makers with regard to current and future shareholder proposals.  

The SEC recently finalized amendments to its regulations to modernize and simplify disclosure requirements for public companies, investment advisors and investment companies, consistent with the Commission’s mandate under the Fixing America’s Surface Transportation (FAST) Act. The SEC subsequently released an additional announcement on the amendments to the confidential treatment request requirements. More information on the amendments relevant to public companies, including markups of the Form 10-K, 10-Q, and 8-K cover pages, can be found in our recent eUpdate here: dorsey.com/newsresources/publications/client-alerts/2019/04/sec-fast-act-amendments.

On February 11, 2019, the Staff of the Division of Corporation Finance granted no-action relief permitting Johnson & Johnson to omit a shareholder proposal from its proxy statement.  The shareholder proposal requested mandatory arbitration of shareholder claims arising under the federal securities laws. The Staff relied on Rule 14a-8(i)(2), which permits exclusion of a proposal that, if implemented, would cause the company to violate any state, federal or foreign law to which it is subject.  Johnson & Johnson argued that the proposal, if implemented, would result in a violation of both federal and state law, but the SEC granted no-action relief specifically on the basis of state law.  Among the company's submissions, the Staff recognized of the legal authority of the New Jersey Attorney General, who issued an opinion that implementation of the proposal would result in a New Jersey state law violation. The decision was sufficiently significant that SEC Chair Jay Clayton issued an accompanying statement, noting that mandatory arbitration provisions have garnered a great deal of attention, and that it is a complex matter requiring careful consideration. Chairman Clayton supported the Staff's recommendation, citing the New Jersey Attorney General's submission.  Chairman Clayton also agreed with the Staff's decision not to address the legality of mandatory shareholder arbitration under federal securities laws, and he expressed the view that any SEC policy decision on this subject should be made by the Commission instead of the Staff. Rule 14a-8(i)(2) permits the exclusion of shareholder proposals that would result in a violation of any state, federal or foreign law, including but not limited to corporate and securities laws.  Other examples where the Rule 14a-8(i)(2) exception has been successfully invoked include a written consent proposal that violated state laws requiring unanimous shareholder written consent (Lowe's Companies (March 10, 2011)) and a proposal to amend governing documents to require that at least 50% of board nominees shall be minorities (Safeway Inc. (March 28, 2005)). As with Rule 14a-8(i)(1), which permits exclusion of proposals that are not proper subjects for shareholder action, the company must provide a supporting opinion of counsel when the basis for exclusion is a matter of state or foreign law, and in cases involving Delaware law, the Staff may request a legal interpretation from the Delaware Supreme Court.  The Staff will permit proponents to convert mandatory proposals into precatory proposals if the mandatory nature of the proposal creates the potential violation.

On February 6, 2019, the SEC's Division of Corporation Finance released Compliance and Disclosure Interpretations (identical Questions 116.11 and 133.13) advising companies on how they should disclose directors' self-identified specific diversity characteristics (such as race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background) in proxy statements. In brief, Corp Fin would expect the company's discussion of directors' experience, qualifications, attributes or skills pursuant to Item 401(e) of Regulation S-K to identify these self-identified diversity characteristics to the extent that they were considered by the nominating committee, and the individual director consented to the disclosure of those characteristics. Similarly, in these circumstances, the description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees under Item 407(c)(2)(vi) should include a discussion of how the company considers self-identified diversity attributes. With board diversity at an increasing premium, and an expanding definition of diversity, self-identified diversity is likely to become a more frequent practice during the director recruitment and nomination process.  Particularly in ambiguous circumstances, those companies that rely on self-identification without a more thoughtful examination of a director candidate's historic affiliations and their engagement in the claimed communities, and without consideration of the diversity of thought or perspective that the candidate is ultimately expected to contribute, will do so at their own hazard and at the candidate's hazard, as suggested by Elizabeth Warren's unfortunate claim to Native American ancestry based on 1/64 to 1/1024 ancestry and the ensuing backlash.