SEC Spring 2020 Regulatory Agenda

In July 2020, the SEC published its latest version of its semiannual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. The Office of Information and Regulatory Affairs, which is an executive office of the President, publishes a Unified Agenda of Regulatory and Deregulatory Actions (“Agenda”) with actions that 60 departments, administrative agencies and commissions plan to issue in the near and long term.  The Agenda is published twice a year, and for several years I have blogged about each publication.

Like the prior Agendas, the spring 2020 Agenda is broken down by (i) “Pre-rule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions.  The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that.  The number of items to be completed in a 12-month time frame has decreased to 42 items as compared to 47 on the fall 2019 list.

Items on the Agenda can move from one category to the next or be dropped off altogether.  New items can also pop up in any of the categories, including the final rule stage showing how priorities can change and shift within months.  Portfolio margining harmonization was the only item listed in the pre-rule stage in the fall 2019 and remains so on the current list.

Nineteen items are included in the proposed rule stage, down from 31 on the fall list.  Still on the proposed rule list is executive compensation clawback (HERE).  Clawback rules would implement Section 954 of the Dodd-Frank Act and require that national securities exchanges require disclosure of policies regarding and mandating clawback of compensation under certain circumstances as a listing qualification.

Amendments to Rule 701 (the exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements), and Form S-8 (the registration statement for compensatory offerings by reporting companies) remain on the proposed rule list.  The SEC has recently amended the rules and issued a concept release (see HERE  and HERE) and appears committed to enacting much-needed updates and improvements to the rules.

Earnings releases and quarterly reports were on the fall 2018 pre-rule list, moved to long-term on the spring 2019 list and up to proposed in fall 2019 where it remains.  The SEC solicited comments on the subject in December 2018 (see HERE), but has yet to publish proposed rule changes.

Amendments to the transfer agent rules remain on the proposed rule list although it has been four years since the SEC published an advance notice of proposed rulemaking and concept release on new transfer agent rules (see HERE).  SEC top brass speeches suggested that it would finally be pushed over the finish line last year but so far it remains stalled (see, for example, HERE).

Other items that are still on the proposed rule list include amendments to Guide 5 on real estate offerings and Form S-11; amendments to the custody rules for investment advisors; investment company summary shareholder report; amendments to Form 13F filer thresholds; amendments to the family office rule; prohibition against fraud, manipulation, and deception in connection with security-based swaps; and broker-dealer reporting, audit and notifications requirements.

Items moved up from long-term to proposed-rule stage include mandated electronic filings increasing the number of filings that are required to be made electronically; additional proxy process amendments; amendments to the Family Office Rule; amendments to Rule 17a-7 under the Investment Company Act concerning the exemption of certain purchase or sale transactions between an investment company and certain affiliated persons; electronic filing of broker-dealer annual reports, financial information sent to customers, and risk-assessment reports; and amendments to the rules regarding the consolidated audit trail.

New to the list and appearing in the proposed rule stage is a rule regarding the valuation practices and the role of the board of directors with respect to the fair value of the investments of a registered investment company or business development company.  Also new to the list and in the proposed rule stage is a potential amendment to Form PF, the form on which advisers to private funds report certain information about private funds to the SEC.  Another new item that made it to the proposed stage is a proposal to amend Regulation ATS to increase operational transparency and foster oversight of ATSs that transact in government securities.

Twenty-one items are included in the final rule stage, increased from 16 on the fall list, including a few of which are new to the agenda.  Amendments to certain provisions of the auditor independence rules (some amendments were adopted in June 2019 and additional amendments proposed on December 30, 2019 – see HERE) moved up from the proposed list to final rule stage.

Still in the final rule stage is the modernization and simplification of disclosures regarding the description of business, legal proceedings and risk factors which were proposed in August 2019 (see HERE).  The SEC previously made some changes to risk factor disclosures in an amendment adopted in March 2019 (see HERE) but the newest proposals would go further to: (i) require summary risk factor disclosure if the risk factor section exceeds 15 pages; (ii) refine the principles-based approach of that rule by changing the disclosure standard from the “most significant” factors to the “material” factors required to be disclosed; and (iii) require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

Financial disclosures about acquired businesses are still listed in the final rule stage although final rules were adopted in May 2020, which are still on my list as a catch-up blog.  The proposed amendments were published in May 2019 (see HERE).  Similarly, amendments to address certain advisors’ reliance on the proxy solicitation exemptions in Rule 14a-2(b) (see HERE) still appear on the final rule list although final rules were adopted in July 2020 (also on my future blog list).

Jumping from a long-term action item to final rule stage is universal proxy process.  Originally proposed in October 2016 (see HERE), the universal proxy is a proxy voting method meant to simplify the proxy process in a contested election and increase, as much as possible, the voting flexibility that is currently only afforded to shareholders who attend the meeting. Shareholders attending a meeting can select a director regardless of the slate the director’s name comes from, either the company’s or activist’s. The universal proxy card gives shareholders, who vote by proxy, the same flexibility.

Moving up from proposed rule to final rule stage are filing fee processing updates including changes to disclosures and payment methods (proposed rules published in October 2019); disclosure of payments by resource extraction issuers (proposed rules published in December 2019 – see HERE); proposals to amend the rules regarding the thresholds for shareholder proxy proposals under Rule 14a-8 (see HERE); procedures for investment company act applications; NMS Plan amendments; use of derivatives by registered investment companies and business development companies; market data infrastructure including market data distribution and market access (proposed rules published in February 2020); amendments to the SEC’s Rules of Practice;  disclosure requirements for banking and savings and loan registrants, including statistical and other data; prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds; amendments to marketing rules under the Advisors Act; and amendments to modernize and simplify disclosures regarding Management’s Discussion & Analysis (MD&A), Selected Financial Data and Supplementary Financial Information.  Some amendments to MD&A were adopted in March 2019 (see HERE)

The much-needed amendments to the accredited investor definition moved from the proposed list to the final rule stage.  The SEC published its report on the definition of accredited investors back in December 2015 (see HERE) and finally issued a proposed rule in December 2019 (see HERE).  As mentioned in my blog on the subject, as a whole industry insiders, including myself, are pleased with the proposal and believe it will open up private investment opportunities to a wider class of sophisticated investors, while still maintaining investor protections.

Amendments to Rule 15c2-11, which first appeared on the agenda in spring 2019, moved from the proposed rule list to the final agenda.  The SEC proposed amendments to Rule 15c2-11 in late September (see HERE) after several speeches setting the stage for a change.  I’ve written about 15c2-11 many times, including HERE and HERE .  In the former blog I discussed OTC Markets’ comment letter to FINRA related to Rule 6432 and the operation of 15c2-11, and in the latter I talked about SEC Chairman Jay Clayton’s and Director of the Division of Trading and Markets Brett Redfearn’s speeches on the subject.  Comments and responses to the proposed rules have been voluminous and largely negative.  The early sentiment is that the proposed rules would shut down an important trading market for day traders and sophisticated investors that trade in the non-reporting or minimal information space on a regular basis, or even for a living.  However, parts of the proposed rule changes are very good and would be hugely beneficial to this broken system.

Other items remaining in the final rule stage include Fund of fund arrangements (proposed rules were issued in December 2018); customer margin requirements for securities futures (proposed rules published in July 2019); and amendments to the whistleblower program.

At least partially, new to the agenda and in the final rule stage is the harmonization of exempt offerings.  In March 2020 the SEC proposed sweeping rule changes.  For my five-part blog on the proposed rules, see HERE, HERE, HERE, HERE, and HERE.  Regulation A and Regulation CF amendments were on the fall 2019 proposed rule list and although dropped off as separate items, are encompassed in the harmonization of exempt offerings proposed amendments.

Several items have dropped off the agenda as they have now been implemented and completed, including financial disclosures for registered debt security offerings. The proposed amendment was published during the summer in 2018 (see HERE) and the final rules adopted in March 2020 (see HERE). Amendments to the definition of an accelerated and large accelerated filer were finalized in March 2020 (see HERE) and thus removed from the list.

Items also completed and removed from the agenda include offering reform for business development companies (adopted in April 2020); amendments to Title VII cross-border rules (final rules adopted in September 2019); recordkeeping and reporting for security-based swap dealers (adopted in September 2019); disclosure for unit investment trusts and offering variable insurance products (adopted in May 2020); a new definition for covered clearing agency (adopted in April 2020); and risk mitigation techniques (adopted on December 2019).

Thirty items are listed as long-term actions (down from 37 in fall 2019 and 52 in spring 2019), including many that have been sitting on the list for a long time now.  Implementation of Dodd-Frank’s pay for performance (see HERE) has sat on the long-term list for several years now.  Other items still on the long-term list include asset-backed securities disclosures (last amended in 2014); corporate board diversity (although nothing has been proposed, it is a hot topic); conflict minerals amendments (prior proposed rules were challenged in lengthy court proceedings on a constitutional First Amendment basis and yet another proposal was published in December 2019 – HERE); Regulation AB amendments; reporting on proxy votes on executive compensation (i.e., say-on-pay – see HERE); and stress testing for large asset managers.

Also still on the long-term action list is the modernization of investment company disclosures, including fee disclosures; custody rules for investment companies; prohibitions of conflicts of interest relating to certain securitizations; incentive-based compensation arrangements; removal of certain references to credit ratings under the Securities Exchange Act of 1934; definitions of mortgage-related security and small-business-related security; broker-dealer liquidity stress testing, early warning, and account transfer requirements; covered broker-dealer provisions under Title II of Dodd-Frank; additional changes to exchange-traded products; short sale disclosure reforms; execution quality disclosure; credit rating agencies’ conflicts of interest; amendments to requirements for filer validation and access to the EDGAR filing system and simplification of EDGAR filings.

A few electronic filing matters remain on the long-term list including electronic filing of Form 1 by a prospective national securities exchange and amendments to Form 1 by national securities exchanges; and Form 19b-4(e) by SROs that list and trade new derivative securities products.

Several swap-based rules remain on the long-term list including ownership limitations and governance requirements for security-based swap clearing agencies, security-based swap execution facilities, and national exchanges; end user exception to mandatory clearing of security-based swaps; registration and regulation of security-based swap execution facilities; and establishing the form and manner with which security-based swap data repositories must make security-based swap data available to the SEC.

New to the list are requests for comments on fund names; amendments to improve fund proxy systems; amendments to Rules 17a-25 and 13h-1 following creation of the consolidated audit trail (part of Regulation NMS reform); records to be preserved by certain exchange members, brokers and dealers; and proposed Rule 15 to Regulation S-T, administration of the EDGAR system.

Items that dropped from the agenda without action include amendments to the registration of alternative trading systems and clawbacks of incentive compensation at financial institutions.  Sadly, completely dropped from the agenda is Regulation Finders.  The topic of finders has been ongoing for many years, but unfortunately has not gained any traction.  See here for more information HERE.

The Author

Laura Anthony, Esq.

Founding Partner

Anthony L.G., PLLC

A Corporate Law Firm

LAnthony@AnthonyPLLC.com

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service.  The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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