Government Enforcement & Corporate Investigations

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.  

Last week, the SEC issued a reminder that Regulation FD remains a vital element of the federal securities regulations. In the first enforcement action regarding Regulation FD since 2013, the SEC charged TherapeuticsMD Inc., a pharmaceutical company, with violations of Regulation FD based on its sharing of material, nonpublic information with sell-side research analysts without also disclosing the same information to the public. The SEC’s order found that on two separate occasions in 2017, TherapeuticsMD selectively shared material information with analysts about the company’s interactions with the U.S. Food and Drug Administration (FDA). One day after a publicly-announced meeting with the FDA about a new drug approval, TherapeuticsMD sent private messages to sell-side analysts describing the meeting as “very positive and productive.” TherapeuticsMD’s stock price closed up 19.4 percent on heavy trading volume the next day. At that time, the company had not issued a press release or made any other market-wide disclosure about the meeting. On the morning of July 17, 2017, TherapeuticsMD issued a press release announcing that it had submitted additional information to the FDA, but did not yet have a timeline for its new drug approval. TherapeuticsMD’s stock price declined approximately 16 percent in pre-market trading following the issuance of the press release. TherapeuticsMD held a call with and emailed sell-side analysts after the press release was issued and selectively shared previously undisclosed details about the June FDA meeting. All of the analysts published research notes containing these details, and the stock rebounded to close down only 6.6 percent for the day. The SEC order found that TherapeuticsMD, at the time of the violations, did not have policies or procedures relating to compliance with Regulation FD. Regulation FD prohibits public companies, or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain persons outside the company, including institutional investors, securities analysts, and other securities professionals. Whenever a public company discloses material, nonpublic information to any such person, Regulation FD requires that the company also disclose the information to the public simultaneously. TherapeuticsMD consented to the SEC’s order without admitting or denying the findings and was ordered to cease and desist from future violations of Regulation FD and Section 13(a) of the Securities Exchange Act of 1934. The company agreed to pay a $200,000 penalty. In addition, TherapeuticsMD implemented policies and procedures which, among other things, (a) require public disclosure of material, nonpublic information in connection with Regulation FD, (b) provide examples of types of material, nonpublic information that may arise in light of TherapeuticsMD’s business model, and (c) establish specific review protocols for all external communications, including earnings calls, analyst meetings, and press releases. TherapeuticsMD also now requires Regulation FD training for employees. The TherapeuticsMD order is a good reminder that public companies should establish and follow guidelines for complying with Regulation FD when interacting with market participants, including stockholders, institutional investors, securities analysts, and other securities professionals.

As we previously noted, in February, the SEC proposed expanding its “test-the-waters” accommodation from emerging growth companies (EGCs) only to all issuers via a new Rule 163B and related amendments. This accommodation would enable all issuers to engage in “test-the-waters” communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following the filing of a registration statement related to such offering. These communications would be exempt from restrictions under Section 5 of the Securities Act on written and oral offers before or after filing a registration statement. The accommodation would be limited to communications with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs). The proposal is part of SEC Chairman Jay Clayton’s well-publicized initiative to encourage more issuers to consider entering the public equity markets. The proposal builds on a popular similar provision of the Jumpstart Our Business Startups Act (JOBS Act) that had also previously been limited to EGCs but now allows all issuers to make non-public filings with the SEC during their initial stages of becoming a public company. The “test-the-waters” reform is intended to provide a broader range of issuers with the “[enhanced] ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies,” according to Chairman Clayton. The overwhelming majority of the comment letters received during the 60-day comment period agreed that the new proposal would accomplish this intention, with a common theme being that it provided a good balance of encouraging greater participation in the public markets while still adequately protecting investors. One comment letter, however, sounded some ominous warning bells. Better Markets argued that this reform would create “a dangerous loophole” through which unsophisticated investors could slip, since the proposed rule would allow self-certification of QIB or IAI status by a simple check of a box. In addition, the rule would allow issuers to communicate with QIBs and IAIs of their own choosing. Better Markets worries that this would create further information asymmetry between a “selected subset of investors that are in the know” and other investors who may be similarly qualified but only learn about the offering once it is made public because they can’t afford the underwriters and other intermediaries of the former group.

The SEC proposed amendments that would revise the definitions of “accelerated filer” and “large accelerated filer.” These proposed revisions follow amendments adopted by the SEC on June 28, 2018, that expanded the smaller reporting company (SRC) definition and so brought some issuers under both the definitions of an accelerated filer and an SRC. As a result of last year’s amendments, some SRCs must have an independent outside auditor attest to their internal control over financial reporting. See our previous discussion of the prior amendments here. The new proposed amendments seek to realign the definitions of accelerated filers and SRCs and would eliminate the requirement of smaller issuers to obtain such independent attestation. In this way, the SEC aims to reduce the cost of compliance of lower-revenue reporting companies and impose upon them more efficient, tailored regulatory requirements without significantly affecting the ability of investors to make informed investment decisions. Under the proposed amendments: an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available would be excluded from the accelerated and large accelerated filer definitions; the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer would be increased from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million; and a revenue test would be added to the transition thresholds for exiting both accelerated and large accelerated filer status. The proposal is subject to a 60-day public comment period. Additional information is available in the SEC’s press release regarding the proposed new amendments here: sec.gov/news/press-release/2019-68.

In the United States, the process by which shareholders submit proposals to be voted on at a company’s annual meeting has long been a mechanism used to promote often obscure special interests and social issues. In recent years, however, as environmental, social and governance (ESG) topics have become more mainstream, the market has seen a surge in this type of proposal. In 2018, Russell 3000 companies received a record 144 proposals requesting action on social and environmental issues, making this category larger than any other. In a recent article, The Wall Street Journal reported that the increase in support for ESG-related proposals has risen from “middle single digits from 2000 until 2008 to 24% in 2018.” Another record. As we draw closer to the end of the 2019 proxy season, it is clear that the momentum in this area continues. New Fronts in Environmental Proposals In the same article, the WSJ reported on a new front involving proposals focusing on plastic waste, a trend we previously noted in our March chemical industry update. The WSJ further noted that most of the companies that had received the proposal about plastic waste agreed to implement the request in order to avoid including it in their proxy statements. Proposals are often withdrawn when companies and proponents reach a compromise approach. This is a tactic that has risen in popularity in recent years as ESG topics have garnered more support from the broader shareholder base. In another article, the WSJ highlighted this trend, explaining that about 49% of environment-related shareholder proposals were withdrawn last year, compared with 33% two years prior and that “roughly 45% of shareholder proposals related to social issues, including income inequality, political-spending disclosure and animal testing, were withdrawn last year, up from 34% two years earlier.” Another development involves proposals related to climate change. This category itself is not new, and in fact these proposals have dominated in recent years, even gaining majority approval in some cases. This year, however, some companies found a degree of success via the no-action letter process. At least two companies obtained permission from the SEC to exclude a proposal that (if passed) would have required them to disclose how their operations align with the greenhouse gas reduction targets under the Paris Climate Accord. The SEC explained in one of the no-action letters: “the Proposal would micromanage the Company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.” This success, however, is limited. The SEC declined to issue no-action letters on other types of climate change proposals, and more carefully crafted proposals are likely to survive review next year. The Future of ESG-related Shareholder Proposals The SEC announced last fall it was conducting a review of the proxy system. The shareholder proposal process was included as one of the areas due for an overhaul. While it remains unclear what form changes may take, it is possible the SEC will issue guidance after this proxy season. Proposed rulemaking could also follow. One anticipated rule change would be to raise the stock ownership threshold required for submitting a shareholder proposal (currently, a de minimis $2,000 in shares). Another would be to increase resubmission thresholds. Such steps will certainly make a dent in the number of overall proposals, particularly from shareholders who don’t have a financially meaningful stake in a company. However, many ESG proposals—such as the new ones about plastic waste—are backed by non-governmental organizations who either have meaningful resources themselves or who partner with larger shareholders. As such, absent some broader change to the shareholder proposal process (such as expanding the bases on which companies can seek to exclude proposals), we don’t expect the popularity of ESG-related shareholder proposals to diminish anytime soon.

The London Interbank Overnight Rate (“LIBOR”) is an interest rate calculation that is used globally for purposes of debt capital market transactions including bond issuances, loans, and derivatives. In particular, LIBOR underpins many Floating Rate Notes (“FRNs”), which use the rate as a reference for purposes of calculating coupon. The intention is that LIBOR reflects the overall health of the financial system, which in turn is reflected in the coupon rate to be paid/received with regards to FRNs. LIBOR is calculated by taking a cross-section of the average interest rate at which one bank can borrow from another bank. In the last several years, however, LIBOR has been subject to a scandal of rigging, fraud, and collusion amongst these banks. As a result, the UK Financial Conduct Authority (“FCA”) has urged banks and institutions to move to other benchmarks by 2021, and will no longer require or encourage banks to publish these rates following 2021. LIBOR underpins over $300 trillion of global loans and its phase-out presents issues for all debt instruments that use LIBOR as a reference rate. Any issuers of FRNs or other debt instruments should be aware of this development and should take a closer look at their debt. Subsequent action may be required in light of the imminent discontinuation of LIBOR. Issuers thinking about issuing debt in the future should also be aware that the FCA has urged firms to start thinking about using alternative benchmarks and treat the LIBOR discontinuation event “as something that will happen and which they must be prepared for.” For more information about the phase-out and what it means for participants who are U.S. public companies, see our recent eUpdate here: dorsey.com/newsresources/publications/client-alerts/2019/04/the-libor-phase-out.

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.

Public companies that have previously obtained a confidential treatment order from the Staff of the Securities and Exchange Commission for a material contract filed as an exhibit under the periodic reporting requirements of the Securities Exchange Act of 1934 must continue to file extension applications if they want to protect the confidential information from public release pursuant to a Freedom of Information Act request after the original order expires. Following the SEC’s recently adopted rules that provide a simplified approach for requesting confidential treatment as described in our recent eUpdate, the SEC’s Division of Corporation Finance has announced a streamlined procedure to extend confidential treatment for exhibits that are subject to a previously granted confidential treatment request. More information can be found in our eUpdate here: dorsey.com/newsresources/publications/client-alerts/2019/04/sec-announces-new-streamlined-procedure.  

The SEC proposed a new rule and related amendments that would expand the "test-the-waters" accommodation—currently available to emerging growth companies—to all issuers, including investment company issuers. Proposed Securities Act Rule 163B, if adopted, would significantly enhance an issuer’s ability to cost-effectively assess the demand for and valuation of its securities, and also provide insights into the structural components for the offering that are important to investors. The proposed Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or 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. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining what to communicate regarding a contemplated securities offering. Under the proposed rule: there would be no filing or legending requirements for test-the-waters communications; test-the-waters communications may not conflict with material information in the related registration statement; issuers subject to Regulation FD would 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; and although the new rule would exempt test-the-waters communications from the gun-jumping provisions of Section 5, such communications would still be considered “offers” under the Securities Act subject to Section 12(a)(2) liability and the anti-fraud provisions of the federal securities laws. The proposal is subject to a 60-day public comment period. Additional information is available in the SEC’s press release regarding the proposed new rule here: sec.gov/news/press-release/2019-14.

You are invited to join us on February 26, 2019, at 11 am PT/2 pm ET, for a webinar discussing the SEC’s new mining disclosure rules. On October 31, 2018, the SEC adopted final rules effecting a complete overhaul of the technical disclosure requirements applicable to companies engaged in material mining operations, including royalties. Upon effectiveness in 2021, the new rules will replace the SEC’s decades-old guidelines, set forth in Industry Guide 7. The new rules will bring the U.S. reporting regime closer to global reporting standards, and will apply to all SEC reporting companies except those that report exclusively under the Canada-U.S. MJDS system. We will be providing an overview of the new rules, and how U.S. domestic, Canadian, other foreign, and even MJDS filers will be affected. The registration page and details about CLE/CPD credit are available here: dorsey.com/newsresources/events/event/2019/02/understanding-the-secs-new-mining-disclosure-rules. A written discussion of the SEC’s new mining disclosure rules (in Q&A format) is available here: dorsey.com/newsresources/publications/client-alerts/2019/02/new-mining-disclosure-rules-2019.

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.

On January 10, 2019, the Division of Corporation Finance of the Securities and Exchange Commission updated its Frequently Asked Questions (FAQs) about how to handle certain filing matters during the U.S. government shutdown, which is now entering its fourth week. (See, sec.gov/page/corpfin-section-landing.) The staff revised questions 4 and 5 and added new questions 6 and 9. Question 4 was revised to emphasize that Rule 430A is only available to add pricing information to registration statements declared effective prior to the government shutdown (i.e., by December 26, 2018). Issuers whose registration statements were not declared effective before the shutdown are not eligible to use Rule 430A. Question 5 was revised to specify the “magic words” that must be included in an amendment to a registration statement to remove the delaying amendment language and start the 20-day clock to take the registration statement effective. The amendment must include the statement: “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” Registrants who amended their registration statements to remove the delaying amendment without including the “magic words” will need to file amendments to add them. New question 6 adds clarity for registrants who have unresolved staff comments on their filings and wish to amend their registration statements to remove the delaying amendment. The staff stated that registrants could nevertheless remove the delaying amendment, but reiterated that responsibility for complete and accurate disclosure lies with the registrant and others involved in the preparation of the registration statement. Finally, new question 9 indicates that issuers may request relief under Rule 3-13 of Regulation S-X, which provides that the SEC may permit the omission of one or more of the financial statements required by Regulation S-X or the filing of appropriate substitute financial statements “where consistent with the protection of investors.” During the shutdown, however, such requests must relate to a demonstrable emergency and the protection of a significant property interest. Whether Rule 3-13 proves useful as a practical matter during the shutdown remains to be seen. Below are (1) the revised text of questions 4 and 5 with new language shown in blue text, and (2) the text of the new questions 6 and 9. Question Answer 4.  If my registration statement was declared effective prior to the shutdown (my effective date was December 26, 2018 or earlier) what happens if I don’t price my offering within the 15-day time period provided in Rule 430A?       Because your registration statement was declared effective prior to the shutdown, you are eligible to use Rule 430A and you may file post-effective amendments, as necessary, under Rule 462(c) to restart the 15-business-day period so that, at the time of pricing you will be able to include the pricing information in a 424(b) prospectus supplement. Post-effective amendments filed pursuant to Rule 462(c) are effective upon filing. Alternately, at the time of pricing, you could file a post-effective amendment under Rule 462(c), prior to the time confirmations are sent or given, to include the information omitted under Rule 430A. NOTE: You cannot rely on Rule 462(c), however, to include the pricing information if the post-effective amendment includes substantive changes from, or additions to, the prospectus in the effective registration statement. 5.  Now that the shutdown is in effect, can I file an amendment to my current registration statement to remove the delaying amendment so my registration statement will be effective in 20 days?                   Yes. If you choose to remove the delaying amendment, your registration statement will not become effective until 20 days have passed. If the SEC’s operational status does not change and you wish to further delay the effective date of your registration statement, you may file another pre-effective amendment during the 20-day period. The registration statement would not become effective until 20 days after the latest pre-effective amendment that does not include a delaying amendment. If the SEC’s operating status changes to operational and your registration statement is not yet effective, we would consider a request to accelerate to an earlier date. We may ask you to amend the registration statement to include the delaying amendment. NOTE: Simply omitting the delaying amendment from an amendment will not begin the 20-day period. [Emphasis added.] A company that intends to remove the delaying amendment must amend its registration statement to include the following language provided by Rule 473(b) - “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” It must also amend to include all information required by the form, including the price of the securities it will sell. Rule 430A is not available in the absence of a delaying amendment because Rule 430A is only available with respect to registration statements that are declared effective by the Commission or the staff. 6.  Can I amend to remove the delaying amendment while I have outstanding, unresolved staff comments on my filings?   Yes. As in all situations, responsibility for complete and accurate disclosure lies with the company and others involved in the preparation of a company’s filings. If you amend your filing to remove the delaying amendment and our operating status changes prior to your effective date, we may ask you to amend your filing to include the delaying amendment so that we may work with you to resolve outstanding comments. 9.  Will the Division consider a request for emergency relief under Rule 3-13 of Regulation S-X?           During a lapse in appropriations, the Division’s activities are limited. The Anti-deficiency Act generally prohibits agencies from continued operation in the absence of appropriations, but contains exceptions, one of which is for emergencies involving the protection of property. Thus, an agency may act where there is some reasonable likelihood that the protection of property would be compromised, in some significant degree, by delay in the performance of the function in question. In an emergency where Rule 3-13 may provide relief for registrants, the Division may grant an application where consistent with the limitations discussed below [sic]. Submit requests to CFEmergency@sec.gov and describe the emergency and the significant property interest to be protected.   More information about the SEC's plan of operations and the effect on securities offerings, public company reporting, investment companies, and securities markets during the government shutdown can be found in our prior blog post here: governancecomplianceinsider.com/u-s-government-shutdown-impacts-sec-operations-edgar-and-other-filings-enforcement-and-regulatory-activities/, and also on Dorsey's website here: dorsey.com/newsresources/publications/client-alerts/2019/01/government-shutdown-limits-sec-operations.  

The 10-K and proxy season begins in a little over a month for companies with calendar fiscal year-ends.  The following governance and disclosure developments should be considered in the course of preparing these filings. For additional background, see our presentation and supplemental materials for Preparing for the 2019 SEC Reporting Season. Proxy Statement Impact of the government shutdown: During the government shut down, the SEC is operating with a skeleton staff, with no capacity for reviewing preliminary proxy statements or no-action requests. Companies that need to file preliminary proxy materials should continue to file them in accordance with Rule 14a-6(a) of the Exchange Act, at least ten calendar days prior to the date the definitive materials are first sent or given to shareholders.  If companies are not advised by SEC staff within that period that there will be a review, they should proceed with the definitive filing and distribution of proxy materials. While the Division of Corporation Finance has not discussed how no-action requests for shareholder proposals will be handled during the government shutdown, companies should continue to make the submission required by Rule 14a-8(j) via email if they intend to exclude a shareholder proposal.  Given that companies must submit no-action requests no later than 80 calendar days before filing definitive proxy statements, it is likely that the SEC staff will have a chance to review and respond to submissions under Rule 14a-8 once the shutdown ends.  If the current shutdown is still in effect at the time that the proxy statement is filed, a company would have to decide whether it has a basis to exclude the proposal without the benefit of a no-action letter. See this update and this update on the shutdown’s impact on capital markets regulation and this 19-firm memo prepared during the last shutdown. Gender diversity voting policies:  For meetings held after January 1, 2019, Glass Lewis will generally recommend votes against nominating committee chairs (and potentially other nominating committee members) on boards with no female directors.  ISS will do so for meetings held on or after February 1, 2020.  Mitigating circumstances disclosed in the proxy statement may influence their recommendations. Rapidly evolving disclosure of environmental and social programs:  More companies are dedicating sections of their proxy statements to describing these initiatives, or referring to applicable disclosure on their websites or in their responsibility reports, while being careful not to incorporate by reference these materials into their filings. Expanding duties for compensation committees: These committees are overseeing broader issues of human capital management beyond director and executive officer compensation, sometimes in response to allegations of sexual harassment and other misconduct, followed by investor questions.  Semler Brossy reports that one-third of DJIA (Dow Jones Industrial Average) 30 companies have a board compensation committee with broader responsibilities, e.g., leadership development and/or other HR areas - many of which signal their breadth in their name, such as Talent & Development Committee or Human Resources Committee. Updated tax policy discussions in the CD&A: Companies historically may have disclosed that they use best efforts to obtain tax deductions for executive compensation above the $1 million cap under Section 162(m) of the Internal Revenue Code.  Since the exemption for performance-based compensation has been eliminated under the Tax Cuts and Jobs Act, with limited grandfathering for compensation payable pursuant to a written binding contract in effect on November 2, 2017, this disclosure now should be updated. CEO pay ratio in year two: Companies may keep the median employee from last year, unless there were significant changes to (i) the employee population, (ii) employee compensation arrangements or (iii) the original median employee’s circumstances, so that the company reasonably believes its pay ratio disclosure would significantly change.  In cases (i) and (ii), the median employee should be re-identified.  In case (iii), the company may use another employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select the original employee.  If the same median employee is used, briefly disclose the basis for the reasonable belief. Say-on-frequency for smaller reporting companies: A non-binding say-on-frequency vote is due for those companies that had their last vote in 2013, including most smaller reporting companies.  Shareholders may cast an advisory vote on whether to hold the advisory vote on executive compensation ("say-on-pay") every year, every two years or every three years.  Per Rule 14a-21 of the Exchange Act, include (i) a statement that the vote concerning the frequency of the say-on-pay vote is being provided as required pursuant to Section 14A of the Securities Exchange Act of 1934, as amended; (ii) a description of the general effect of the say-on-frequency vote, such as whether it is non-binding; and (iii) the current frequency of the say-on-pay vote and when the next say-on-pay vote will occur.  Emerging growth companies ("EGCs") are exempted from say-on-pay and say-on-frequency votes.  The SEC also expanded the definition of "smaller reporting company" this year.  See discussion below. Guidance for equity compensation plan proposals: The SEC updated its guidance related to equity compensation plan proposals, see Section 161 of the Proxy Rules and Schedules 14A/14C C&DIs.  Among the clarifications provided: Companies should be prepared to disclose all material terms of a plan, even when the proposal is for an amendment of an existing plan.  Furthermore, a New Plan Benefits Table (listing benefits or amounts that will be received by each of the named executive officers and certain groups under the proposed plan) will only be called for if the plan is: (i) a plan with set benefits or amounts (e.g., director option plans); or (ii) one under which some grants or awards have already been made subject to shareholder approval. Annual Report on Form 10-K Disclosure simplification:  As a result of the SEC’s Disclosure Update and Simplification rulemaking, certain 10-K disclosure can be eliminated, because the information is  outdated or duplicative of information already included in the financial statements in accordance with GAAP or in the MD&A when material to the business. Part I, Item 1, Business: Companies are no longer required to disclose: three years of segment level financial information, amounts spent on R&D financial information by geographic area risks associated with foreign operations and a segment’s dependence on foreign operations facts indicating why performance in certain geographic areas may not be indicative of current or future operations (but consider for the MD&A) reference to the SEC’s Public Reference Room, physical address and phone number (but disclose the SEC website, a statement that SEC filings are available there, and the company’s website) Part II, Item 5, Market for Registrant’s Common Equity: Companies are no longer required to disclose: high and low sales prices for common equity traded over the last two fiscal years (but disclose trading symbols for each class of common equity traded) frequency and amount of cash dividends declared restrictions that currently or are likely to materially limit a company’s ability to pay dividends on its common equity (including restrictions on subsidiaries to transfer funds) Part II, Item 7, MD&A: Companies should discuss changes in financial condition and results of operations based on geographic area, if they are material to an understanding of the business. Part IV, Item 15, Exhibits: Companies are no longer required to provide a ratio of earnings to fixed charges as an exhibit. Update those risk factors:  Not only should companies consider new and emerging risks, they should review the status of existing risks.  An abstract discussion may not be sufficient if an existing risk has materialized.  Earlier this year, as reported here, Altaba (formerly Yahoo! Inc.) agreed to pay a $35 million penalty to settle charges that it misled investors by failing to disclose one of the world’s largest data breaches thus far.  Among its violations, Yahoo's post-breach disclosure in quarterly and annual reports was too general, stating that the company faced only the risk of, and negative effects that might flow from, data breaches.  The company failed to disclose the actual breach or its potential business impact and legal implications. Continue to mind the GAAP: In a recent SEC cease-and-decease order discussed here, ADT was fined $100,000 for failing to give “equal or greater prominence” to the most directly comparable GAAP measures in accordance with Item 10 of Regulation S-K.  The company highlighted non-GAAP measures in the headlines and bullets summaries of two earnings releases, without disclosing the GAAP measures until later in the earnings releases. Leasing and revenue recognition accounting standards: Public entities besides EGCs must adopt the leasing accounting standard (FASB ASC Topic 842) for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period.  For calendar year-end companies, they will adopt the standard on a modified retrospective basis on January 1, 2019, with an initial application date of January 1, 2017.   Section 11200 of the SEC Financial Reporting Manual clarifies that filing a registration statement with an earlier comparative period (eg, January 1, 2016) does not change the date of initial application. Last year, public entities adopted the revenue recognition accounting standard (FASB ASC Topic 606) for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period.  SEC Chief Accountant Wes Bricker has indicated that revenue recognition disclosure will be a top issue for comment this season, and the SEC staff has encouraged companies to refine and supplement their annual disclosures included in subsequent quarterly filings. Areas of judgment, such as identification of performance obligations and the application of principal vs. agent guidance have been the most frequently discussed topics in consultations with the Office of the Chief Accountant.   Section 11100 of the SEC Financial Reporting Manual addresses certain disclosure issues related to the adoption of ASC 606.  For instance, for companies that adopted ASC 606 using the full retrospective approach, they do not need to apply the standard when reporting selected financial data in the 10-K for periods prior to those periods that are retroactively adjusted, but they must provide information regarding comparability of data presented pursuant to Instruction 2 to the Item 301. Updates to the 10-K cover page were made in connection with rulemaking for smaller reporting companies and inline XBRL reporting (see our Preparing for the Proxy Season presentation for a markup). No delivery of hard copies of proxy materials to the NYSE, if the hard copies have been filed in EDGAR.  Nasdaq had abolished this requirement earlier. More companies qualify as “Smaller Reporting Companies:” During 2018, as discussed here, the SEC expanded the definition of “smaller reporting company” to include (i) those companies with public float of less than $250 million as of the last business day of their second fiscal quarter, and (ii) those companies with less than $100 million of annual revenues and either no public float or public float of less than $700 million.  As a result, additional companies now qualify to provide scaled disclosure in this year’s Form 10-K and proxy statement.  If and until the SEC makes corresponding amendments to the definitions of “accelerated and “non-accelerated” filers, smaller reporting companies with public float of $75 million or more will continue to be accelerated filers that must comply with shorter filing deadlines and provide an auditor’s attestation of management’s assessment of internal control over financial reporting required under Sarbanes-Oxley Act Section 404(b). And coming up for future 10-Qs and 10-Ks: Effective for quarters beginning after November 5, 2018 (which means Q1 2019 for calendar companies), amended Rules 8-03(a)(5) and 10-01(a)(7) under Regulation S-X require quarterly (vs annual) analysis of changes in stockholders’ equity and the amount of dividends per share for each class of shares for “the current and comparative year-to-date [interim] periods, with subtotals for each interim period.”   These changes were adopted as part of the Disclosure Update and Simplification rulemaking discussed above. A discussion of critical audit matters, which are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment, will be included in audit reports for fiscal years ending on or after June 30, 2019 for large accelerated filers and in audit reports for fiscal years ending on or after December 15, 2020 for all other companies to which these requirements apply.  The new requirement does not apply to emerging growth companies. Inline XBRL, which allows filers to embed financial data into the body of an SEC filing, rather than attaching the data as an exhibit, must be implemented as early as fiscal periods ending on or after June 15, 2019 for large accelerated filers; fiscal periods ending on or after June 15, 2020 for accelerated filers and fiscal periods ending on or after June 15, 2021 for all other filers. And coming up for future proxy statements: Effective for proxy statements filed during fiscal years beginning on or after July 1, 2019 (July 1, 2020 for smaller reporting companies and emerging growth companies), companies must describe any practices or policies that they have adopted regarding the ability of employees, officers or directors to engage in hedging transactions.  Companies may either disclose the full policy, or a "fair and accurate" summary of the policy.  Summaries must include the categories of persons and the categories of transactions specifically permitted or disallowed.  Companies that have not adopted hedging policies must disclose that fact or state that hedging transactions are permitted.

On December 26, 2018, the SEC filed a cease-and-desist order and fined ADT Inc. (“ADT”) $100,000 for its use of non-GAAP financial measures without giving equal or greater prominence to the comparable GAAP financial measures. The order serves as a reminder of the importance of the SEC’s “equal or greater prominence” rule when disclosing non-GAAP financial measures, even when comparable GAAP financial measures are also disclosed. Item 10(e)(1)(i)(A) of Regulation S-K states that when a registrant uses a non-GAAP financial measure in an SEC filing, the registrant must also present “with equal or greater prominence, … the most directly comparable financial measure or measures calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP).” The requirements of Item 10(e)(1)(i)(A) are applicable to, among other filings, registration statements, quarterly and annual reports, proxy statements, as well as earnings releases. In the headline of ADT’s earnings release for the fourth quarter and full year 2017 ADT stated that adjusted EBITDA, a non-GAAP financial measure, was up 8% year-over-year. However, in violation of Item 10(e)(1)(i)(A), ADT did not also provide the comparable GAAP financial measure (net income or loss) in the headline. In ADT’s first quarter 2018 earnings release, it again presented non-GAAP measures in the headline and summary bullets without disclosure of the most directly comparable GAAP measures. In the headline of the release, ADT stated that adjusted EBITDA was up 7% year-over-year. Furthermore, in bullet points included at the top of the release under the heading “FIRST QUARTER 2018 HIGHLIGHTS,” ADT stated that its adjusted EBITDA of $620 million was up 7%, adjusted net income of $249 million was up 26%, and adjusted net income per share of $0.34 was up 10%. However, it wasn’t until the second and sixth full paragraphs of the release that ADT disclosed that its GAAP net loss had increased from $141 million for the first quarter of 2017 to $157 million for the first quarter of 2018, which is a significant difference from the non-GAAP results in the headline and summary bullets. As a result of these violations, ADT and the SEC agreed to a cease-and-desist order and an accompanying penalty of $100,000. The full text of the SEC’s cease-and-desist order is available here: sec.gov/litigation/admin/2018/34-84956.pdf.

In response to the U.S. government shutdown that began on December 22, 2018, the U.S. Securities and Exchange Commission and its Divisions of Corporation Finance and Investment Management published public guidance regarding the impacts on their operations. Although electronic filings will continue to be accepted in many cases, as described below, nearly all SEC operations, including the review and processing of filings and enforcement and regulatory functions, will be curtailed. Issuers and practitioners should make contingency plans to address the effects upon ongoing or planned securities offerings, filings, and requests for interpretive guidance, among other things. SEC operational status: Government shutdown impact The SEC published its operations plan under a lapse in appropriations and government shutdown (Securities and Exchange Commission, Operations Plan Under a Lapse in Appropriations and Government Shutdown, https://www.sec.gov/files/sec-plan-of-operations-during-lapse-in-appropriations-2018.pdf), which went into effect on December 27, 2018. During the shutdown, the SEC will have limited operations and limited staff. The SEC will retain only an extremely limited number of excepted staff members available to respond to emergencies involving the safety of human life or the protection of property, including law enforcement. Of the approximately 4,400 staff employees, fewer than 300 excepted staff remain in service during the shutdown. In summary, during the shutdown, while SEC systems will continue to accept various electronic filings and submissions, the SEC staff will discontinue: processing and approvals of ‘33 Act filings and registrations, including review and acceleration of effectiveness of registration statements; ongoing enforcement litigation, except for emergency enforcement matters; all non-emergency rulemaking, interpretive advice, and no-action letters; processing new and pending exemptive relief applications; approving applications for registration by investment advisers; processing proposed self-regulatory organization (SRO) rule changes, including NYSE and Nasdaq rule changes; responding to requests for information under the Freedom of Information Act, absent compelling need; responding to tips, complaints, or referrals, although limited staff will attempt to respond to certain critical matters, including allegations of ongoing fraud and misconduct; and responding to complaints, questions, or requests for information. In addition, while the SEC will continue to accept comment letters, the SEC anticipates that there will be delays in posting them to the SEC website. The public reference room will be closed. EDGAR Filings and Rulemaking.  The shutdown will not affect the ability to submit EDGAR filings. Additionally, SEC personnel will be able to process requests for EDGAR access codes and password resets and answer questions about fee-bearing EDGAR filings and other emergency questions regarding EDGAR submissions. The Divisions of Corporation Finance, Investment Management, and Trading and Markets, and the Office of Compliance Inspections and Examinations, however, will not process filings, provide non-emergency interpretive advice, issue no-action letters, or conduct any other normal Division and Office activities. The SEC will discontinue all non-emergency rulemaking and processing new or pending applications for exemptive relief. New or pending registration statements and applications for exemptive relief will not be processed regardless of the status of any review of those filings. The Division of Corporation Finance also published a set of Frequently Asked Questions (FAQs), discussed below, regarding Issuers’ options with respect to new and ongoing securities offerings during the shutdown. Division of Corporation Finance FAQs.  The SEC’s Division of Corporation Finance (CorpFin) has posted on its website additional guidance regarding the impact of the shutdown (See, https://www.sec.gov/page/corpfin-section-landing). A limited number of CorpFin staff members are available during the shutdown to answer questions relating to fee calculations for EDGAR filings, but will not generally be available to respond to other questions. Issuers and their representatives seeking assistance in calculating a filing fee for a filing during the shutdown should submit their requests to CFEmergency@sec.gov. CorpFin also provided a series of FAQs containing guidance with respect to ongoing and new offerings of securities during the shutdown: If a company with an effective registration statement determines it must update the information in its prospectus before commencing its offering, it should not go forward with the offering without updating the prospectus. The company must decide whether it can update the prospectus without filing a post-effective amendment because the staff will not be in a position to declare that amendment effective. Similarly, a company with a previously qualified Form 1-A that must be updated should not go forward with its offering before updating its offering statement. The staff will not be in a position to qualify a post-qualification amendment filed on EDGAR. If a company does not price its offering within the 15-day time period provided in Rule 430A, the CorpFin FAQs indicate the company may file post-effective amendments under Rule 462(c), which are automatically effective upon filing, to restart the 15-business-day period so that, at the time of pricing, the registrant will be able to include pricing information in a 424(b) prospectus supplement. As an alternative, at the time of pricing, the registrant could file a post-effective amendment under Rule 462(c), prior to the time confirmations are sent or given, to include the information omitted under Rule 430A. Registrants should note, however, that a Rule 462(c) post-effective amendment may not include substantive changes or additions to the prospectus in the registration statement at the time it became effective. The CorpFin FAQs indicate that a registrant may file an amendment to a current registration statement to remove the delaying amendment, in which case the registration statement will be effective in 20 days. The CorpFin staff notes, however, that if the SEC’s operating status changes to operational and the registration statement is not yet effective, the staff will consider a request to accelerate to an earlier date or ask the registrant to amend the registration statement to include the delaying amendment. Companies considering this approach should be aware that Rule 430A is not available in the absence of a delaying amendment. As a result, when a company amends a registration statement to remove the delaying amendment, the registration statement and prospectus must also be amended to include all information required by the applicable form, including the price of the securities being offered. A registrant may also file a new registration statement without a delaying amendment during the shutdown. Again, however, the CorpFin staff notes that, if the SEC’s operating status changes during the 20-day period prior to effectiveness, the staff may ask the registrant to amend the document to include a delaying amendment. Investment Adviser Registration Depository (IARD) system.  The SEC’s IARD system will continue to accept filings, including amendments to Form ADV, Form ADV-W, and Form ADV-E filings, but the Office of Compliance Inspections and Examinations will not approve applications for registration by investment advisers and the Division of Investment Management will not provide interpretive advice regarding the Advisers Act, rules or forms or consider applications for exemptive relief under the Advisers Act. As a result, new or pending investment adviser applications will not be processed. Division of Investment Management FAQs.  The SEC’s Investment Management (IM) also posted additional guidance regarding the impact of the shutdown (See, https://www.sec.gov/investment-management). Investment companies can continue to make filings on EDGAR during the shutdown, but the IM staff will not be available to respond to any questions about pending matters, other than answering questions relating to fee calculations for EDGAR filings. The IM guidance notes that a significant percentage of investment companies’ filings, including post-effective amendments to registration statements, become effective automatically either immediately upon filing or following the passage of a certain number of days. These filings will continue to become effective automatically in accordance with the applicable rules. The IM staff will follow the procedures established by Corp Fin, described above, with regard to the acceleration of initial registration statements and other types of filings made by registered investment companies during the federal government shutdown. Questions relating to calculating filing fees should be directed to IMEmergency@sec.gov. Central Registration Depository (CRD) and Transfer Agent Registration Systems.  The CRD system, used for broker-dealer licensing and registration, will continue to accept filings, but the Division of Trading and Markets and the Office of Compliance Inspections and Examinations will not review pending filings, consider new or pending applications or registrations, provide interpretive advice, or issue no-action letters. In addition, the staff will not be available to conduct any other normal Division and Office activities. Electronic Form Filing System (EFFS).  The EFFS will continue to accept submissions by self-regulatory organizations (SROs), but any SRO proposed rule change submitted through EFFS during the shutdown will have as its filing date the next business day after the shutdown has ended and SEC opens for regular business. Days that the SEC is operating under its shutdown plan (i.e. while the lapse in appropriations continues) will not constitute “business days” under Section 19 of the Exchange Act and Rule 19b-4 thereunder. Enforcement/Litigation.  The Division of Enforcement will have only a limited staff, and ongoing litigation, examinations, and investigative work will be suspended, except for limited emergency enforcement matters, including temporary restraining orders and/or investigative steps necessary to protect public and private property, monitoring the SEC’s “tips, complaints, and referrals” system and web-based investor complaint system, and process referrals from SROs and others to identify matters that are emergencies and take follow-up steps relating to such emergencies. The SEC also will continue Market Watch activities and continue to monitor market technology operations and any broker-dealers reported as being in financial distress. Money market fund surveillance and monitoring will also continue. The staff will also continue monitoring any international market developments that might affect the United States. Emergency Contacts.  Page 16 of the SEC’s shutdown plan contains a list of emergency contact telephone numbers and email addresses to reach an extremely limited number of Commission staff members in each office and division who are available to respond to emergency situations.

ISS released its annual update of frequently asked questions on its US Compensation Policies on December 20, 2018 (preliminary updates had been released in November). The updates are effective for shareholder meetings occurring on or after February 1, 2019. There are nine new or materially updated questions, which are summarized below: #19 Will any of the quantitative pay-for-performance screens change in 2019?  No.  The screens will continue to use GAAP/accounting performance measures, but ISS will display Economic Value Added (EVA) measures on a phased-in basis over the 2019 proxy season and will continue to explore their future use to add insight to financial performance.  (EVA can measure a company's residual wealth by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.) #21 Given the use of TSR in ISS' quantitative screen, does ISS prefer companies use TSR as an incentive program metric?  While it recognizes investors' preference for objective and transparent metrics, ISS does not endorse or prefer the use of total shareholder return (TSR) or any specific metric in executive incentive programs. #42 How does ISS analyze "front-loaded" awards intended to cover future years?  ISS is unlikely to support grants that cover more than four years (ie, the grant date plus three future years), and for these types of grants, commitments not to grant additional awards over the covered period should be firm.  Usual pay-for-performance considerations will be more closely scrutinized. #47 Which problematic practices are mostly likely to result in an adverse recommendation?  Additional problematic pay practices that are likely to result in adverse vote recommendations on compensation committee members and/or say on pay proposals now include: (1) excessive termination payments (not just change in control payments) exceeding three times base pay and annual bonus, and (2) a "good reason" termination definition that presents windfall risks. #48 How does ISS evaluate "Good Reason" termination definitions?  ISS will scrutinize "Good Reason" definitions to ensure that the circumstances are reasonably viewed as an adverse constructive termination, and to determine whether there is a potential windfall risk.  Circumstances reflecting potential performance failures, such as bankruptcy or delisting, will be considered problematic. #50 If a company becomes a "smaller reporting company" under the SEC's revised definition, how will ISS assess reduction in compensation disclosure?  ISS notes that smaller reporting companies (SRCs) are still required to hold say on pay votes, and so while they may use scaled compensation disclosure requirements, SRCs should continue to provide sufficient disclosure to enable investors to make an informed say on pay vote.  This means that SRCs should think carefully before eliminating CD&As, and at minimum, ensure that there is sufficient narrative for shareholders to meaningfully assess compensation philosophy and practices. #59 How would ISS view any compensation program changes made in light of the removal of 162(m) deductions?  While shifts away from performance-based compensation to discretionary or fixed pay elements did not make the list of problematic pay practices most likely to result in an adverse recommendation, ISS will still consider these shifts to be problematic pay practices and will view them negatively. #67 How does ISS apply its policy around "excessive" levels of non-employee director pay?   If ISS determines that a NED’s pay is a quantitative pay outlier (see FAQ below), it will perform a qualitative evaluation of the company’s disclosed rationale to determine if concerns are adequately mitigated.  The updated FAQs list a number of circumstances that will typically mitigate concern around high non-employee director (NED) pay, including onboarding grants, special payments related to corporate transactions or special circumstances, and payments for specialized scientific expertise as may be necessary in certain industries.  As a reminder, last year, ISS had announced a policy to recommend against board members responsible for approving NED pay when there is a recurring pattern of excessive pay magnitude without a compelling rationale in two or more consecutive years.  ISS subsequently updated its methodology to identify pay outliers, and in consideration of the updates, ISS had postponed issuing adverse recommendations until meetings occurring on or after February 1, 2020. #68 What is ISS' methodology to identify non-employee director pay outliers?  The updated FAQs clarify that the methodology identifies pay outliers above the top 2-3% (vs the top 5%) of all comparable directors within the same two-digit GICS group and index grouping (eg, S&P 500).  The revised methodology acknowledges that there are pay premiums for non-executive chairs and lead independent directors, and in limited instances, the methodology also makes allowances for narrow distributions of NED pay, where there is not a pronounced difference in pay between the top 2-3% of directors and the median director.

The SEC issued a request for comment on the nature and timing of disclosures that reporting companies must provide in quarterly reports on Form 10-Q, including when the requirements overlap with earnings releases furnished on Form 8-K.  Comments will be due within 90 days of publication of this request in the Federal register.  Comments may be submitted through the SEC's Internet comment form on its website or to rule-comments@sec.gov, referencing File Number S7-26-18. The Commission's request frames four broad issues for consideration (paraphrased below), with more specific questions listed under each issue: whether there are benefits to investors of having a separate quarterly report and earnings release, and reasons for variations and overlapping content between the two documents, the impact on investors when the earnings release is published before, after or concurrently with the quarterly report, whether earnings releases can be used to satisfy the core financial disclosure requirements of Form 10-Q, with the Form 10-Q supplementing or incorporating by reference the earnings release, and the merits of semi-annual vs quarterly interim reporting. The SEC's request follows an August tweet by President Trump, announcing that he had asked the Commission to study the termination of quarterly reporting in favor of semi-annual reporting, and SEC Chair Jay Clayton's remarks in November that the matter was under consideration. Observers are generally skeptical that the SEC will transition to less frequent reporting, given expectations of underwriters and investors and the current incorporation of periodic reports into registration statements.  However, the Commission has expressed its interest in exploring ways to promote efficiency in periodic reporting by reducing unnecessary duplication in the information that public companies disclose.  Furthermore, the SEC is seeking comment on how the existing system, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants. In particular, the SEC is considering streamlining the Form 10-Q and providing issuers with the option to provide quarterly reporting information in earnings releases to satisfy the core disclosure requirements of Form 10-Q.  In streamlining the Form 10-Q, the SEC has indicated that it may consider rescinding the Regulation S-X requirement that interim financial statements be reviewed by an auditor, US GAAP prescriptions on the form and content of interim financial statements, and Form 10-Q certifications by the CEO and CFO.  This approach would be similar to streamlined reporting requirements for foreign private issuers, which file annual reports, but not quarterly reports, and then furnish current reports on Form 6-K to the extent that the issuer must disclose material information about changes in the business. Would the Commission concurrently implement more stringent disclosure standards for earnings releases?  These releases  are currently "furnished" rather than "filed," meaning that they are not automatically incorporated by reference into registration statements or subject to liability under Sections 18 of the Securities Act of 1933, though they are still subject to anti-fraud provisions under Section 10(b) of the Securities Exchange Act of 1934. A decision to streamline quarterly reports and emphasize earnings releases, if is part of a broader emphasis on more current reporting, would be on-trend with investors' general appetite for information on a closer to real-time basis, similar to their experience with news and other types of information communicated through social media and Internet channels.  However, the importance and necessity of proper internal controls and disclosure controls, and the time required to perform those controls, will prevent real-time reporting without further technological advances.    

The SEC adopted new rules today that will require disclosure of a company’s hedging policies in proxy statements or information statements relating to the election of directors. The new rules are set forth in new Item 407(i) of Regulation S-K and require a company to describe any practices or policies it has adopted regarding the ability of its employees, officers or directors to engage in hedging transactions. The disclosure requirements can be satisfied by providing a “fair and accurate summary” of the hedging practices or policies, or by disclosing the practices or policies in full. If a summary is provided, it must include (i) the categories of persons covered by the policy or practice and (ii) the categories of hedging transactions that are specifically permitted or specifically disallowed. However, if a company has not established a hedging policy or practice it must disclosure that fact or state that hedging transactions are permitted. The rules do not require that companies prohibit or limit hedging transactions, or that companies adopt a policy relating to hedging. However, we expect that most companies will amend their current policies to address hedging if it is not already covered in existing policies. Implementation Dates: Except for “smaller reporting companies” and “emerging growth companies”, the new disclosure rules apply for proxy statements or information statements filed during fiscal years beginning on or after July 1, 2019. For “smaller reporting companies” and “emerging growth companies”, the rules apply for proxy statements or information statements filed during fiscal years beginning on or after July 1, 2020. Foreign private issuers will not be subject to the new disclosure requirements.

ISS recently announced the 2019 updates to its proxy voting policies, which can be found here and which will be applied to annual meetings held on or after February 1, 2019. Among the various updates provided by ISS, the following policies are particularly relevant for our clients, because they expand the circumstances in which ISS may recommend votes against director candidates: Absence of Board Gender Diversity. Effective for meetings held on or after February 1, 2020, companies included in the Russell 3000 and S&P 1500 will be subject to greater scrutiny regarding board gender diversity. ISS will recommend a vote "against" or a "withhold" vote for the chair of a company's nominating committee (or other directors on a case-by-case basis) if there are no women on the company's board. ISS will consider certain mitigating factors in the event a company does not have any female directors, including a firm commitment statement in the proxy statement to appoint at least one female director to the board in the near term, the presence of a female on the board at the preceding annual meeting, and other relevant factors that ISS may deem applicable. One rationale for the change is that investors are showing a greater preference for increased boardroom gender diversity, with ISS reporting that only 3% of surveyed investors did not believe that a lack of gender diversity in the boardroom is problematic, while over 80% of surveyed investors believed that a lack of gender diversity is problematic. In addition, ISS reported the results of a recent study that found that female directors are more likely to possess the skills most sought after by boards, including, among other skills, audit, strategic planning, risk management, and corporate social responsibility. Poor Board Meeting Attendance. ISS also codified its approach to poor attendance by directors at board meetings without the director providing a reasonable justification for the director's poor attendance. In this case-by-case approach, ISS will continue recommending votes "against" or a "withhold" vote for directors with poor attendance and will also recommend voting "against" or a "withhold" vote for other directors in the following situations: After three years of poor attendance by any director, ISS will recommend a vote "against" or "withheld" from the chair of the nominating or governance committee. After four years of poor attendance by any director, ISS will recommend a vote "against" or "withheld" from the full nominating or governance committee. After five years of poor performance by any director, ISS will recommend a vote "against" or "withheld" from all director nominees. The policy may apply in certain situations involving non-consecutive years of poor attendance. Management Ratification Proposals. Similar to the new Glass Lewis policy on conflicting & excluded proposals, ISS is codifying its policy to recommend a vote "against" or "withheld" from individual directors, members of the governance committee, or even the full board, when a board asks shareholders to ratify existing charter or bylaw provisions, unless they align with best practice. ISS will take into account the following factors when making its recommendations: the presence of a shareholder proposal addressing the same issue on the same ballot; whether the provision at question was adopted in response to the above-mentioned shareholder proposal; the board's rationale for seeking the ratification of the provision; the disclosure of the actions to be taken by the board if the ratification proposal fails; the level of impairment to shareholder rights caused by the existing provision that the board is seeking to have ratified; the history of proposals on the same provision at prior company shareholder meetings; the company's ownership structure; and whether the board of used ratification proposals to exclude shareholder proposals in the past. The rationale for this policy is that the use of board sponsored proposals to ratify existing charter or bylaw provisions increased significantly during the most recent proxy season in response to the SEC's grant of no-action relief to certain companies that sought to exclude shareholder proposals from the ballot by including a conflicting proposal to ratify a charter or bylaw provision. Lack of Board Responsiveness to Failed Ratification Proposals. ISS will undertake a board responsiveness analysis if a majority of votes were cast against a proposal seeking to ratify an existing charter or bylaw provision at the prior year's meeting and the board fails to act. This change is being made to align this policy with the ratification proposal policy discussed above. Including Five-Year TSR in Initial Screen of Director Performance Evaluations. ISS updated its policy to consider not only one- and three-year, but also five-year, total shareholder returns in the initial screen of whether a company has exhibited sustained poor performance . Previously, five-year TSR was a secondary factor in the analysis. This change is intended to reduce the number of companies that undergo scrutiny for poor performance. In addition to policy changes that may affect ISS's support for director candidates, ISS also updated its financial performance methodology and its voting policies with regard to reverse stock splits and social and environmental proposals: Use of EVA Data in Financial Performance Assessment. During the 2019 annual meeting season, ISS research reports on companies in the U.S. and Canada will feature Economic Value Added (EVA) data as a supplement to GAAP-based measures. Moving into 2020, ISS will consider the inclusion of EVA-based measurements as part of its Financial Performance Assessment methodology. Circumstances in which ISS will Support Reverse Stock Splits. ISS made two changes with respect to the approval of reverse stock splits: First, ISS will recommend a vote "for" a reverse stock split if (1) the number of authorized shares available to the company is also proportionately reduced or (2) the effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS policy. Second, rather than recommending a vote "against" a reverse stock split proposal that does not include the two factors listed above, ISS will take a case-by-case approach based on several factors, including but not limited to the following factors: (1) whether the company has received a notification of potential delisting from a stock exchange, (2) there is substantial doubt about the company's ability to continue as a going concern without additional financing, (3) the rationale provided by the company, or (4) other factors as applicable. Impact of Significant Controversies on Social and Environmental Proposals. ISS expanded the factors it will examine on a case-by-case approach to social and environmental proposals make clear that it will also consider whether there are significant controversies, fines, penalties or litigation associated with the company's social or environmental proposals.

On August 17th, the SEC adopted amendments updating and simplifying disclosure rules.  See our prior summaries here and here.  The rules have finally been posted today in the Federal Register, which makes them effective November 5, 2018.    Among the amendments is the extension of a previously annual requirement to interim periods, to present a statement of changes in shareholders’ equity and to disclose the amount of dividends per share for each class of shares (vs common shares only) (either in a separate statement or a footnote)(see revised Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X).  In guidance previously issued by the staff in CD&I 105.09, the staff indicated that it would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments, which is November 5, 2018. As a result, a December 31 fiscal year-end filer could omit this disclosure from its Form 10-Q for the period ended September 30, 2018, and a filer with a June 30 fiscal year-end could omit this disclosure from its Form 10-Q for the periods ended September 30, 2018 and December 31, 2018.  However, the new disclosure must be included in the first Form 10-Q covering the period that begins after November 5, 2018.  For example, for filers with a June 30 or December 31 fiscal year-end, the Form 10-Q filed for the quarter ended March 31, 2019 must include the new disclosure.    

In August, the SEC adopted amendments updating and simplifying disclosure rules. See our prior summary here. Notable amendments included: the extension of a previously annual requirement to interim periods, to present a statement of changes in shareholders' equity and to disclose the amount of dividends per share for each class of shares (vs common shares only) (either in a separate statement or a footnote)(revised Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X); the elimination of requirements to disclose pro forma information on business combinations in quarterly reports on Form 10-Q, because similar disclosure may be found in Form 8-K filings; the elimination of requirements in business descriptions to disclose financial information broken out by segment (Item 101(b) of Regulation S-K) and geography (Item 101(d)(2)), risks associated with, and dependence of a segment on, foreign operations (Item 101(d)(3)), and amounts spent on R&D (Item 101(c)(1)), because similar discussions may be found in the financial statement footnotes and/or the MD&A, when material; and the elimination of exhibits setting forth the computation of any ratio of earnings to fixed charges disclosed in an SEC report (Items 503(d) and 601(b)(12) of Regulation S-K), because US GAAP already requires the disclosure of components of the ratio. On www.thecorporatecounsel.net, Broc Romanek had blogged that it was unclear when the new rules become effective. The SEC staff has released C&DI 105.09 confirming that the amendments are effective for all filings made 30 days after publication of the final rule in the Federal Register, which for calendar year-end reporting companies, may include their Form 10-Qs for the third quarter of 2018, if the final rule is published soon. However, in light of the proximity of the anticipated effective date to the filing deadline, the staff will not object if companies first present the statement of changes in shareholders' equity (first bullet above) in the Form 10-Q for the quarter that begins after the effective date, ie, for the first quarter of 2019 for calendar year-end reporting companies.

The marijuana industry is attracting considerable interest from investors, and unfortunately, scam artists trying to take advantage of those investors. In response to these concerns, on September 5, 2018, the Securities and Exchange Commission’s Office of Investor Education and Advocacy (OIEA) and Retail Strategy Task Force issued an alert to investors warning them about investment schemes involving marijuana-related companies. According to the release, the OIEA has received multiple complaints about marijuana-related businesses and the SEC is pursuing enforcement actions against some of these businesses. The release includes warnings to investors regarding investment fraud and market manipulation. The release warns investors to be wary of (1) unlicensed and unregistered sellers, (2) offers guarantying returns with little to no risk, and (3) unsolicited offers. The release also warns investors that fraud may occur through scam artists manipulating stock prices, particularly for microcap stocks. The release recommends reviewing the registration or license status of any one recommending or selling securities. Investors can utilize the free search tool on investor.gov (https://www.investor.gov/) to verify the registration status of such person. Warning signs relating to microcap marijuana-related companies include whether the SEC has recently suspended trading of the company’s stock; whether the company has changed its name, industry, or business plan multiple times; and press releases reporting information that is difficult to believe. The release also reminded investors that in January 2018, the U.S. Department of Justice issued a marijuana enforcement memorandum, and that if an investor is considering investing in a marijuana-related company, they need to understand that such company may be criminally prosecuted under federal law, and that the prosecution may impact the value of such investment. In conclusion, the SEC is advising investors to take extra precautions in performing due diligence and understanding risks before investing in marijuana-related businesses.

In order to facilitate discussion on the role of proxy advisory firms at the upcoming Roundtable on the Proxy Process, which is scheduled for November 2018, the SEC staff has determined to withdraw two no action letters that provided comfort to investment advisers in relying on proxy advisory firm recommendations: In Egan-Jones Proxy Services (May 27, 2004), the staff had confirmed that by voting based on the recommendations of an independent proxy advisory firm, an investment adviser could demonstrate the absence of a conflict of interest, and the fulfillment of fiduciary duties, provided that the investment adviser should first ascertain, among other things, whether the proxy advisory firm "(a) has the capacity and competency to adequately analyze proxy issues and (b) can make such recommendations in an impartial manner and in the best interests of the adviser's clients." In Institutional Shareholder Services, Inc. (September 15, 2004), the staff had confirmed that investment advisers should evaluate the independence of proxy advisory firms based on the facts and circumstances, and that a number of ways include a thorough review of the firm's conflict procedures and the effectiveness of their implementation; case-by-case evaluation of the proxy advisory firm's relationship with issuers; or other means to ensure the integrity of the firm. The withdrawal of these no action letters opens up for discussion, and creates uncertainty around, the circumstances in which investors may rely on proxy advisory firm recommendations and when a firm may be considered independent.  The withdrawal is the latest development in the call for additional rulemaking around proxy advisory firms.  Last December, the House passed the Corporate Governance Reform and Transparency Act of 2017, which would require proxy advisory firms to register with the SEC, disclose potential conflicts of interest and codes of ethics and publicize methodologies for formulating proxy recommendations.  Then earlier this year, six members of the Senate Banking, Housing and Urban Affairs Committee sent letters to ISS and Glass Lewis requesting information regarding their eligibility for exemption from proxy rules, accuracy of reporting and potential conflicts of interest. The SEC staff has not to date signaled any changes to its guidance in Staff Legal Bulletin No.20, which among other topics, addresses considerations that an investment adviser may wish to take when it retains a proxy advisory firm, an investment adviser's ongoing duty to oversee a proxy advisory firm that it retains, and an investment adviser's duties to ascertain the material accuracy of the facts upon which a firm's recommendations are based. The impact of proxy advisory firms' recommendations on institutional investor voting is debated.  A study by Choi, Fisch and Kahan (2010) found that proxy advisory firms have modest influence on voting outcomes, with an estimate that ISS recommendations shift 6%-10% of investor voting.  Similarly, a survey by Rivel (2016) found that only 7% of institutional investors say that proxy advisory firms are the "most influential" contributors to their policies, and that generally established best practices are the primary source of their voting policies and decisions.  A study by McCahery, Sautner, and Starks (2016) of 143 institutional investors concluded that they rely on the advice of proxy advisory firms to complement their decision making, rather than relying on them exclusively. However, investor voting decisions often are highly correlated with proxy advisory firm recommendations.  According to a report published by the Manhattan Institute in May 2018, a sample of voting records for 713 institutional investors in 2017 showed that they are significantly likely to vote in accordance with proxy advisory firm recommendations across a broad spectrum of governance issues.  For example, 95% of institutional investors vote in favor of a say on pay proposal when ISS recommends for it, while only 68% vote in favor when ISS is opposed. This correlation may suggest that proxy advisory firms have more influence than institutional investors appreciate or acknowledge.  It may also indicate that governance practitioners form a community, whether they work for investors or proxy advisory firms, and that they develop and are influenced by a common set of trends and "best practices," resulting in investor voting policies that synch with ISS or Glass Lewis voting policies.

The Securities and Exchange Commission (SEC) announced last Friday that it has adopted amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other Commission disclosure requirements, US Generally Accepted Accounting Principles (GAAP), or changes in the information environment.   These amendments were originally proposed in 2016, in order to implement provisions of the Fixing America's Surface Transportation (FAST) Act.   While a more complete summary of the changes is provided below, notable amendments include: the elimination of requirements for pro forma information on business combinations in interim filings, because similar disclosure may be found in Form 8-K filings; and the elimination of requirements for financial information broken out by segment and geography in a business description contained in SEC reports and registration statements, because similar discussions may be found in the financial statement footnotes and/or the MD&A, when these topics are material to an understanding of the business. Overall, the amendments are not intended to alter the mix of information available to investors in SEC reports and registration statements.  As a result, companies should take care to cross-reference applicable overlapping disclosure and to continue to disclose segment and geographically-specific information in other parts of their filings, including in the risk factors and the MD&A, to the extent that the discussion is material to an understanding of the business. Where there are redundant and overlapping disclosure requirements from SEC rules and GAAP standards established by the Financial Accounting Standards Board (FASB), the amendments attempt to reduce issuers' compliance burden.  The SEC has referred certain proposed amendments to FASB for their consideration in making consistent changes to future GAAP standards, and commentators have encouraged both agencies  to continue to coordinate on their reporting standards. Multiple categories of issuers will be impacted by the amendments.  Specifically: Regulation S-K amendments relate to domestic issuers and foreign private issuers that choose to file on domestic forms. Regulation S-X amendments relate to domestic issuers and foreign private issuers that report under US GAAP or reconcile to US GAAP. Certain amendments affect asset-backed issuers, Regulation A issuers and companies regulated under the Investment Company Act. The amendments will be effective 30 days from publication in the Federal Register.  Furthermore, the SEC staff has been directed to review the amendments' impact on disclosure and capital formation within five years and to report back to the Commission.       Here are highlights of the SEC rules that have been eliminated or streamlined: Overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements.  Disclosure requirements that convey similar information, or that are incremental but no longer useful, have been deleted, while incremental, overlapping requirements have been integrated with other SEC rules.  Notable disclosure requirements that have been deleted include: (1) derivative accounting policies under Rule 4-08(n) of Regulation S-X, which are already addressed in financial statement footnotes under US GAAP, except for the requirement to disclose where in the statement of cash flows the effect of derivative financial instruments is reported; (2) amounts spent on research and development activities in the business description, in accordance with Item 101(c) of Regulation S-K, since this information will remain in the financial statement footnotes and the MD&A, when material; (3) dilution from the amount of common equity subject to outstanding options, warrants, or convertible securities, when the class of common equity has no established US public trading market, which must be disclosed in Form S-1 or Form 10 under Item 201(a)(2)(i) of Regulation S-K; (4) historical and pro forma ratios of earnings to fixed charges for issuers that register debt securities or preference securities, and an exhibit setting forth the computation of any ratio of earnings to fixed charges disclosed in an SEC report, required by Regulation S-K; (5) pro forma financial information in interim filings for business combinations, in accordance with Rule 8-03 and Rule 10-01 of Regulation S-X, because US GAAP and Item 9.01 of Form 8-K result in similar disclosure; (6) financial information about segments in the business description, pursuant to Item 101(b) of Regulation S-K, which will continue to be available in the footnotes to the financial statements and the MD&A, when material; (7) financial information by geographic area, pursuant to Item 101(d) of Regulation S-K, which will continue to be available in the footnotes to the financial statements and the MD&A, when material; and (8) information on the seasonality of the business in interim reports, pursuant to Instruction 5 to Item 303(b) of Regulation S-K, which will continue to be available in the MD&A, when available. Outdated requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment.  In addition to eliminating outdated transition disclosure requirements, the Commission amended rules that have become outdated due to changes in the regulatory, business and technological environment.  These amendments are described in detail starting on page 101 of the adopting release.  (1) With regard to market price disclosure required under Item 201(a)(1) of Regulation S-K and Item 9.A.4 of Form 20-F, issuers whose common equity is traded in an established public trading market will only be required to disclose the trading symbol, instead of sale or bid prices, of their stock.  (2) Domestic and foreign private issuers may delete requirements to identify the Public Reference Room and its physical address and phone number in their reports and registration statements, since investors now use the Internet to access filings.  (3) Furthermore, all issuers will be required disclose their Internet address if they have one.  (4) Foreign private issuers will no longer be required to disclose exchange rate data when financial statements are prepared in a foreign currency in Form 20-F, since exchange rate information is readily available free on a number of websites. Redundant and duplicative requirements, which require substantially similar disclosures as GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements.  These amendments are summarized in a series of tables starting on page 29 of the adopting release.  While they will not substantially change disclosure, they are intended to alleviate confusion and inconsistency by  eliminating redundant and duplicative disclosure requirements, including Regulation S-X requirements on: the consolidation of financial statements, disclosure of significant changes in debt obligations, income tax rate reconciliation, title and amount of securities subject to warrants, rights and convertible instruments, identification of related party transactions, material contingencies in interim financial statements, presentation and computation of earnings per share, disclosure specific to insurance companies and bank holding companies, reasons for changes in accounting principles in an interim period, examples of interim period adjustments, common control transactions disclosed in interim financial statements, the disclosure of discontinued operations in interim financial statements, and incorporation by reference into Form 10-Q of reports furnished to security holders. Superseded requirements, which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.  The SEC adopted a series of amendments to reflect more recently updated US GAAP requirements or more recently updated Commission disclosure requirements.  These amendments are described starting on page 108 of the adopting release and include: (1) elimination of a requirement under Rule 3-15(a)(1) of Regulation S-X that REITs separately present all gains and losses on the sale of properties outside of continuing operations in the income statement, which was inconsistent with a US GAAP requirement that only applies to discontinued operations; (2) elimination of certain Regulation S-X requirements related to consolidation of financial statements that were inconsistent with US GAAP provisions related to difference in fiscal periods, the Bank Holding Company Act of 1956 and intercompany transactions; (3) elimination of certain Regulation S-X requirements for development stage companies; (4) removal of certain Regulation S-X requirements for insurance companies that conflicted with US GAAP; (5) elimination of references to "extraordinary items" in SEC rules and forms, consistent with US GAAP; and (6) replacement of references to "generally accepted auditing standards" (GAAS) with PCAOB standards.