Governance & Compliance Insider

In response to the COVID-19 pandemic, NASDAQ and NYSE are providing temporary relief from certain continued listing standards. As of now, NYSE American has not provided similar relief from its continued listing standards as a result of COVID-19. Specifically, NASDAQ is providing relief from the continued listing bid price ($1.00) and market value of publicly held shares listing requirements through June 30, 2020. While NASDAQ will continue to notify companies about new instances of non-compliance with bid price and market value of publicly held shares requirements during this period, compliance periods for any newly identified non-compliance will not begin until July 1, 2020. In addition, the compliance periods for any company previously notified about non-compliance will be suspended and resume on July 1. Starting on July 1, companies would receive the balance of any pending compliance period in effect at the start of the tolling period to regain compliance. NASDAQ will continue to monitor securities to determine if a company regains compliance during the relief period. A company can regain compliance by satisfying the minimum requirement for a minimum of 10 consecutive days. The NASDAQ’s Listing Center FAQ for COVID-19 can be found at the link below: https://listingcenter.nasdaq.com/assets/Listing%20Center%20Coronavirus%20FAQs%20for%20Nasdaq-listed%20Companies.pdf Similarly, the New York Stock Exchange (“NYSE”) has announced a number of measures to assist companies during this tumultuous time. NYSE has agreed to toll any applicable compliance periods through June 30, 2020, related to having (i) both stockholders’ equity of less than $50 million and an average global market capitalization over a consecutive 30 trading-day period of less than $50 million (the “$50 Million Standard”) or (ii) an average closing price of a company’s shares below $1.00 over a consecutive 30 day trading period (“Dollar Price Standard”). NYSE will continue to identify companies that fall below the $50 Million Standard and the Dollar Price Standard and such companies will be required to (i) comply with the standard disclosure requirements set out in the Listed Company Manual (the “Manual”), and (ii) submit compliance plans within the standard time frames set out in the Manual. However, the time period to cure such deficiency (i.e., 18 months for the $50 Million Standard and six months for the Dollar Price Standard) will only commence on July 1, 2020. Companies that are currently in a compliance period will have their compliance period tolled and it will recommence on July 1, 2020. A company can regain compliance during the tolling period by satisfying the standard cure requirements set out in the Manual. NYSE has also suspended until June 30, 2020, the requirement that companies maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15 million (the “Market Capitalization Standard”). Under the suspension of NYSE’s Market Capitalization Standard, companies will not be notified of new events of noncompliance during the suspension period. However, following the temporary rule suspension, any new events of noncompliance with NYSE’s Market Capitalization Standard would be determined based on a consecutive 30 trading-day period commencing on or after July 1, 2020. In addition, NYSE has instituted a partial waiver of the application of Section 312.03(b) of the Manual, which requires shareholder approval of any issuance to a director, officer or substantial security holder of the company (each a "Related Party") or to an affiliate of a Related Party if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. The waiver eliminates the shareholder approval requirement through June 30, 2020, but is specifically limited to transactions that involve the sale of the company’s securities for cash at a price that meets the Minimum Price requirement as set forth in Section 312.04 of the Manual. In addition, to qualify for this waiver, a transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. Furthermore, this temporary exemption may not be available if the proceeds are used to fund an acquisition. Furthermore, NYSE has instituted a waiver of the shareholder approval requirement of Section 312.03(c) of the Manual until June 30, 2020, such that no shareholder approval is required to (i) issue on a private placement basis, greater than 20% of an issuer’s issued and outstanding shares, (ii) issue greater than 5% of the company’s issued and outstanding shares to a single investor, and (iii) undertake a “bona fide private financing” during that period in which there is only a single purchaser, so long as the issuances are for cash at a price greater than the Minimum Price. If any purchaser in such a transaction is a Related Party, the transaction must be reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors. The SEC’s releases related to the rule changes can be found at the following links: sec.gov/rules/sro/nyse/2020/34-88572.pdf; sec.gov/rules/sro/nyse/2020/34-88441.pdf; sec.gov/rules/sro/nyse/2020/34-88717.pdf

On April 7, 2020, the SEC updated its prior guidance for conducting shareholder meetings in light of COVID-19 concerns to address delays in printing and mailing of proxy materials and clarify that its guidance applies for special meetings of shareholders, as well as annual meetings.  Previously, the SEC had advised issuers of its view that an issuer that has already mailed and filed its definitive proxy materials may notify shareholders of a change in the date, time, or location of its annual shareholder meeting without mailing additional soliciting materials or amending its proxy materials if it: Issues a press release announcing the change; Files the announcement as definitive additional soliciting material on EDGAR; and Takes all reasonable steps necessary to inform intermediaries in the proxy process, and other relevant market participants, of the change. Issuers must still be mindful of applicable notice provisions under state law.  For example, on April 6, 2020, the Governor of Delaware issued an order providing, in effect, that a Delaware corporation switching from a physical meeting to a virtual meeting would be deemed in compliance with Delaware notice requirements if they comply with the SEC’s guidance on making such a change. The SEC’s updated guidance would allow issuers experiencing COVID-19-related delays in printing and mailing the “full set” of proxy materials to use the “notice only” delivery option, even if the issuer does not meet all of the notice and timing requirements of Rule 14a-16.  To rely on the Staff’s position, the issuer must provide shareholders with proxy materials sufficiently in advance of the meeting to review those materials and exercise their voting rights under state law in an informed manner, and announce the change in delivery method using the three steps described above.  Affected issuers should also continue to use best efforts to send paper copies of proxy materials and annual reports to requesting shareholders, even if delayed.

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

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

On April 2, 2020, SEC Chairman John Clayton, issued a public statement amid the ongoing COVID-19 pandemic. In the statement, Chairman Clayton stated that the Commission and its staff remain focused on protecting the interests of Main Street investors who are “the lens through which” the Commission evaluates if it is effectively advancing its mission and noting that the Commission “continue[s] to allocate [its] resources in the best interests of investors and… capital markets, with investor protection and market integrity front of mind.” As part of the statement, Chairman Clayton emphasized that the Commission is “keenly focused on ensuring that issuers and other registrants continue to provide material information to investors, including information related to the current and expected effects of COVID-19, as promptly as practicable.” Chairman Clayton also referenced the recent Commission notification that while the comment period on a variety of proposed actions had closed in March 2020, the Commission would not take final action on those items in the coming weeks to allow potential commenters more time to submit comments for consideration if needed. He noted that the Commission does not expect to move forward on any of these proposed actions before May 1, 2020. These actions include: Amendments to Rule 2-01, Qualifications of Accountants; Amending the “Accredited Investor” Definition; Disclosure of Payments by Resource Extraction Issuers; Use of Derivatives by Registered Investment Companies and Business Development Companies; Required Due Diligence by Broker-Dealers and Registered Investment Advisers Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse Investment Vehicles; Notice of Proposed Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data; and Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds. Issuers and other interested parties that desire to submit comments on these proposed actions are encouraged to do so on the most reasonable possible timeframe prior to May 1, 2020.

On March 25, the SEC issued CF Disclosure Guidance Topic No. 9 that provides the Division of Corporation Finance’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. In the guidance, the SEC recognizes that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Never the less, the guidance is clear that the SEC considers COVID-19 developments to be material and that public companies have an obligation to address these risks even as the business risks are evolving and impacts on a specific company are uncertain. As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. The guidance provides a checklist of topics related to COVID-19 to be considered by public companies as they prepare their periodic reports and other public disclosures: The impact of on the company’s financial condition and results of operations in the near term and longer term. The impact of on the company’s capital and financial resources, including liquidity, cost and access to capital (such as access to revolving credit facilities), sources and uses of cash, the company’s ability to meet financial covenants, new material expenditures in response to COVID-19 and other matters. The impact on the company’s balance sheet and assets, including any impairment charges. The impact on operations, including remote work, productivity, human resources, supply chain, product distribution and travel restrictions. The impact on demand for the company’s goods and services. The impact on internal controls, disclosure controls, accounting judgments or financial statements. The guidance highlights public companies’ obligations to address management’s expectations for future periods and to discuss trends and uncertainties. The guidance notes that these statements are likely to be forward looking information, based on assumptions and expectations regarding future events, which may be covered by the safe harbor protections. The guidance further notes that the disclosure should be tailored for the specific company and allow investors to see the impact of COVID-19 through the eyes of management. The guidance reminds companies that as they consider the impacts of COVID-19 on their financial condition and operations, their directors and officers, and other corporate insiders, who are aware that COVID-19 has affected their companies in ways that would be material to investors, should refrain from trading in the companies’ securities until such information is disclosed to the public. The guidance also reminds companies to take the necessary steps to avoid selective disclosures by disseminating material information related to the impacts of COVID-19 broadly to the public. In addition, the guidance addressed earnings releases and non-GAAP financial measures. As to earning releases the guidance is primarily a caution to prepare early to address novel issues and accounting judgments that may arise from COVID-19. To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, the guidance is that the disclosure should highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. The guidance also states that if a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments, requiring additional information and analysis to complete, the staff would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on reasonable estimates, or a range of reasonably estimable GAAP results. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges. Under the guidance, a company presenting non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting. The guidance is clear that the other rules for disclosure of non-GAAP financial measures continue to apply, including that companies should avoid “cherry-picking”. In addition, companies should limit the measures they present to those non-GAAP financial measures they are using to report financial results to their Boards of Directors.

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

Prior to the open of markets in the U.S. on March 23, the Federal Reserve announced that it is committed to using its full range of tools to address the coronavirus pandemic. The steps announced by the Federal Reserve are described in this eUpdate.

As more annual meetings may be held virtually this year, and many board meetings are being held telephonically due to social distancing or travel restrictions caused by COVID-19, working remotely has created a number of logistical challenges for companies, including the gathering of manually executed signature pages for electronic filings with the SEC. The Staff of the SEC has now provided guidance to help address this concern. On March 24, 2020, the Staff* of the three divisions of the SEC issued a staff statement regarding Rule 302(b) of Regulation S-T, which generally requires filers to obtain manual signatures for all documents filed electronically with the SEC, on or before the time of the electronic filing. The Staff still expects that those subject to Regulation S-T will comply with Rule 302(b) to the fullest extent practicable based on their particular facts and circumstances. However, in light of the COVID-19 pandemic, the Staff indicated it will not recommend enforcement action with respect to Rule 302(b) under the following circumstances: The signatory retains a manually signed signature page or other document (such as a power of attorney) and provides the document to the filer “as promptly as reasonably practicable,” for retention pursuant to Rule 302(b); The document indicates the date and time when the signature was executed; and The filer establishes and maintains policies and procedures governing this process. The signatory may also provide to the filer an electronic record (such as a photograph or pdf) of the document when it is signed. Based on this statement, the Staff would permit a filing on the basis of a manual signature which is scanned and emailed, or otherwise electronically delivered, to the filer, but even electronic delivery would not be necessary as long as the filer’s policies and procedures provide for identification of the signatory and confirmation of the date and time of the signature, for example by an email or phone call. The Staff notes that if a signatory is telecommuting, the signatory could execute a hard copy of the signature page remotely, and deliver the page to the filer upon his or her return to the place of business. However, it is less clear whether a filing can be made on the basis of a purely electronic signature, for example, on a board portal document. And in fact, the Staff reiterates the language of Rule 302(b)’s adopting release, that the requirement to retain the paper original of authentication documents was “established to provide a satisfactory means by which signatories could authenticate and adopt their typed signatures appearing on filed documents for evidentiary purposes.” Filers that are subject to Regulation S-T should establish and maintain policies and procedures to ensure that they receive the original documents, whether by mail or at the next in-person meeting, if they are planning to rely on the relief provided by the Staff statement. *The statement was a joint statement of the staff of the Division of Corporation Finance, the Division of Investment Management and the Division of Trading and Markets. It reflects the views of the three divisions indicated and is not a rule, regulation or statement of the Securities and Exchange Commission.

On March 12, 2020, the Securities and Exchange Commission (the “Commission”) adopted amendments to the “accelerated filer” and “large accelerated filer” definitions in the Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The amendments would exclude from the definition of “accelerated filer” and “large accelerated filer” issuers that are eligible to be smaller reporting companies and that have less than $100 million in revenues in their most recent fiscal year for which audited financial statements are available.  This exclusion permits these issuers to forego an auditor attestation report on the issuers’ internal control over financial reporting (“ICFR”) in their annual reports on Form 10-K.  The following table from the adopting release sets forth the relationship between smaller reporting companies, non-accelerated filers, accelerated filers and large accelerated filers following the new amendments. Relationships between SRCs and Non-Accelerated, Accelerated, and Large Accelerated Filers under the Final Amendments Status Public Float Annual Revenues SRC and Non-Accelerated Filer Less than $75 million $75 million to less than $700 million N/A Less than $100 million SRC and Accelerated Filer $75 million to less than $250 million $100 million or more Accelerated Filer (not SRC) $250 million to less than $700 million $100 million or more Large Accelerated Filer (not SRC) $700 million or more N/A Note: This table addresses initial determinations of filer status and does not consider requirements for transitions between filer status. Transition thresholds have also been amended, as discussed below. More specifically, the amendments: Exclude from the “accelerated filer” and “large accelerated filer” definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. The amendments also allow business development companies to qualify for this exclusion if they meet the requirements of the smaller reporting company revenue tests using their annual investment income as the measure of annual revenue, although business development companies would continue to be ineligible to be smaller reporting companies; Increase the public float transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million; Provide that an issuer may exit reporting as an accelerated filer or large accelerated filer by either falling below the adjusted public float thresholds or by falling below the smaller reporting company revenue test thresholds, as applicable; and Add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing. The amendments do not impact the most significant exemption from the ICFR auditor attestation requirement, which is the exemption provided to an emerging growth company (“EGC”) pursuant to Title I of the JOBS Act. Generally, an EGC is company that has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year end and that has not sold common equity securities under a registration statement. The JOBS Act provides EGCs with a five-year exemption from the ICFR auditor attestation requirement. The following are two examples of the implementation of the new definitions and transition thresholds taken from the adopting release: An issuer with a December 31 fiscal year end that did not exceed the public float threshold for a smaller reporting company in the prior year and that has a public float, as of June 30, 2020, of $230 million and annual revenues for the fiscal year ended December 31, 2019 of $101 million will be eligible to be a smaller reporting company under the public float test; however, because the issuer would not be eligible to be a smaller reporting company under the smaller reporting company revenue test, it will be an accelerated filer (assuming the other conditions for accelerated filer are also met). At the next determination date (June 30, 2021), if its public float, as of June 30, 2020, remains at $230 million and its annual revenues for the fiscal year ended December 31, 2019 are less than $100 million, the issuer will be eligible to be a smaller reporting company under the smaller reporting company revenue test (in addition to the public float test) and thus it will become a non-accelerated filer. On the other hand, an issuer with a December 31 fiscal year end that has a public float, as of June 30, 2020, of $400 million and annual revenues for the fiscal year ended December 31, 2019 of $101 million will not be eligible to be a smaller reporting company under either the public float test or the smaller reporting company revenue test and will be an accelerated filer (assuming the other conditions for accelerated filer also are met). At the next determination date (June 30, 2021), if its public float, as of June 30, 2021, remains at $400 million, that issuer will not be eligible to be a smaller reporting company under the smaller reporting company revenue test unless its annual revenues for the fiscal year ended December 31, 2020 are less than $80 million, at which point it will be eligible to be a smaller reporting company under the smaller reporting company revenue test and to become a non-accelerated filer. The amendments will become effective 30 days after publication in the Federal Register. The final amendments will apply to annual report filings due on or after the effective date.

On March 13, 2020, the Securities and Exchange Commission (SEC), indicating that it is closely monitoring the impact of coronavirus on investors, funds and advisers, announced regulatory relief for funds and investment advisers whose operations may be affected by the coronavirus. The relief covers in-person board meetings and certain filing and delivery requirements for investment funds and investment advisers.  Recognizing that the impacts of the coronavirus may delay or prevent funds and advisers operating in affected areas from meeting certain regulatory obligations, relief is designed to enable funds and advisers to meet those obligations and to continue their operations, while recognizing that there may be temporary disruptions outside of their control. For more information on the proposed rules, see our recent eUpdate available here: dorsey.com/newsresources/publications/client-alerts/2020/03/sec-takes-targeted-action-to-assist-funds.

On March 4, 2020, the Securities and Exchange Commission (the “Commission”) proposed amendments to the private offering exemptive framework under the Securities Act of 1933, as amended (the “Securities Act”) to “simplify, harmonize, and improve certain aspects of the framework” with the goal of promoting capital formation while maintaining investor protections. The current private offering framework is a set of exemptions and safe harbors which permit issuers to raise capital through various, differing rules which don’t require the filing of a registration statement with the Commission under the Securities Act. These rules are meant to provide issuers with a less expensive and more efficient alternative to a registered public offering in exchange for certain limitations and requirements being placed on the offering, typically regarding the number and type of investors, the type and context of solicitations, the size of the offering and individual investments and certain limited information requirements. The conflicting requirements of the current, differing rules and the potential integration (determination of whether multiple transactions are part of the same offering) of offerings conducted under this “patchwork system” has resulted in a complex and sometimes confusing regulatory framework where the interaction of offerings conducted under the various exemptions and safe harbors is often uncertain, leading to potential violations of the Securities Act. As Chairman Clayton stated in relation to the proposed amendments, “[t]he complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth.” As noted in the Commission’s press release, “[t]he Commission’s proposed amendments are intended to reduce potential friction points to make the capital raising process more effective and efficient to meet evolving market needs.” The proposed amendments would: address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering; increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits; provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions. For more information on the proposed rules, see our recent eUpdate here.

I live and work in the Seattle area. As a result of COVID-19, school districts are now closed for 6 weeks, Seattle public libraries are closed for a month, a number of restaurants have closed for the time being and my beloved Mariners’ baseball season has been postponed (along with most other sporting events). As we adjust to the current realities of dealing with COVID-19, the staff of the SEC has been providing timely, practical advice and assistance to issuers. On March 4th, they provided filing relief for companies affected by COVID-19, while simultaneously reminding them of their disclosure obligations relating to the rapidly evolving impact of COVID-19. Today, the staff provided guidance to companies who wish to hold virtual annual meetings, or change the date, time or location of an annual meeting. Changing the date, time or location of an annual meeting If an issuer has already mailed and filed its definitive proxy materials but wants to change the date, time or location of the meeting, it need not mail additional soliciting materials or amend its proxy materials if the issuer promptly: issues a press release announcing such change; files the announcement as definitive additional soliciting material on EDGAR; and takes all reasonable steps necessary to inform other intermediaries (such as any proxy service provider) and stock exchanges of such change. For issuers who have not yet mailed and filed their definitive proxy statement, it may be prudent to include disclosure regarding potential changes to the timing or location of the annual meeting. Holding Virtual or Hybrid Meetings For issuers who desire to hold a virtual meeting (no in-person meeting and participation solely through electronic means) or a hybrid meeting (consisting of both an in-person meeting and participation through electronic means), the staff expects issuers to provide clear and timely instructions regarding access, participation and voting at the meeting. Shareholder Proponents For shareholder proponents who are required to “appear and present” their proposal, the staff encourages issuers to provide shareholder proponents with the ability to present their proposal through alternative means, such as by phone. The inability of a proponent to present their proposal due to factors relating to COVID-19 will be considered by the staff to be “good reason” under Rule 14a-8 and so cannot form a basis to exclude future proposals by that proponent during the next two years. State Law Considerations Prior to changing the date, time or location of an annual meeting or changing to a virtual meeting, issuers should review state law and their articles and bylaws to ensure the issuer remains compliant with all notice and meeting requirements.

In connection with the order issued by the Securities and Exchange Commission yesterday providing filing relief for companies that are affected by the coronavirus, the Commission reminded all companies to be vigilant regarding their disclosure obligations related to the evolving coronavirus scenario. A company’s assessment of, and plans for addressing, material risks to its business and operations resulting from the coronavirus can be material to investors, and companies are encouraged, to the fullest extent practicable, to keep investors and markets informed of material developments. As a reminder, under the federal securities laws: When a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and take steps to prevent its directors, officers and other corporate insiders who are aware of these matters from initiating such transactions until investors have been appropriately informed about the risk. When a company does disclose material information related to the impacts of the coronavirus, it should take the necessary steps to avoid selective disclosures and to disseminate such information broadly in compliance with Regulation FD. Companies should consider whether they may need to revisit, refresh or update previous disclosure to the extent that such information becomes materially inaccurate. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the coronavirus, should take steps to avail themselves of the safe harbor in Section 21E of the Securities Exchange Act of 1934 for this information. While the need to seek filing relief due to the coronavirus will hopefully be limited to very few companies, these disclosure obligations are likely to impact most companies.

On March 2, the Securities and Exchange Commission adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The final amendments amend Rule 3-10 of Regulation S-X and partially relocate its provisions to new Rule 13-01 and completely relocate Rule 3-16 into new Rule 13-02 (Rule 3-16 will continue to exist during the transition period). The Commission stated that the amendments are intended to: Improve existing Rules 3-10 and 3-16 by requiring disclosures that focus investors on the information that is material given the specific facts and circumstances and by making the disclosures easier to understand; Reduce the cost of compliance for registrants and encourage potential issuers to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protections they may not be provided in offerings conducted on an unregistered basis; and Facilitate, through lower costs and burdens of compliance, issuers' flexibility to include guarantees or pledges of affiliate securities as collateral when they structure debt offerings, which may increase the number of registered offerings that include these credit enhancements and could result in a lower cost of capital and an increased level of investor protection. The amendments as adopted are substantially similar to the amendments proposed by the Commission on July 24, 2018. The amendments will be effective on January 4, 2021, but voluntary compliance will be permitted in advance of the effective date. Amendments to Rule 3-10 and New Rule 13-01 Prior to the amendments, Rule 3-10 required financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, subject to several exceptions. Under the amendments, Rule 3-10 will continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees. Similar to the existing rule, the amended rule will provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements. New Rule 13-01 sets forth the accompanying amended disclosure requirements, as follows: The condition that a subsidiary issuer or guarantor be 100%-owned by the parent company is replaced with a condition that it be consolidated in the parent company's consolidated financial statements; The condensed consolidating financial information, as specified in existing Rule 3-10, is replaced with certain new financial and non-financial disclosures. The amended financial disclosures will consist of summarized financial information of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented. The amended non-financial disclosures, among other matters, will expand the qualitative disclosures about the guarantees and the issuers and guarantors. Consistent with the existing rule, disclosure of additional information about each guarantor will be required if it would be material for investors to evaluate the sufficiency of the guarantee; The amended disclosures may be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings; and The amended financial and non-financial disclosures are required for as long as an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding. Amendments to Rule 3-16 and New Rule 13-02 Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant. Under the amendments, the requirements in Rule 3-16 will be replaced with the disclosure requirements in new Rule 13-02 (although existing Rule 3-16 will remain in place for transitional purposes). Among other things, the amendments will: Replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security. The registrant will be permitted to provide the amended financial and non-financial disclosures outside the footnotes to its audited annual and unaudited interim consolidated financial statements in all filings; and Replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the registered securities with a requirement to provide the proposed financial and non-financial disclosures in all cases, unless they are immaterial.

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

On January 30, 2020, the SEC issued new guidance to companies that use key performance indicators and metrics in their MD&A. Concurrently, the SEC also proposed amendments that would significantly simplify and modernize the requirements for a company’s MD&A and related financial disclosures. New MD&A Guidance The SEC’s new guidance is effective immediately, and applies to all key performance indicators and metrics used in a company’s MD&A. In the guidance, the SEC notes that the metrics used in MD&A vary significantly from company to company. Some relate to external or macro-economic factors, while others are industry or company specific, such as same store sales or revenue per customer. The Guidance reminds companies that, in addition to complying with any more specific requirements, such as the requirements applicable to non-GAAP measures, they must ensure that when presenting a given metric they include such further material information, if any, as may be necessary in order to make the presentation of the metric, in light of the circumstances under which it is presented, not misleading. The guidance states the SEC’s expectation that a metric will be accompanied by: A clear definition of the metric and how it is calculated; A statement indicating the reasons why the metric provides useful information to investors; and A statement indicating how management uses the metric in managing or monitoring the performance of the business. Companies are cautioned to also consider whether there are estimates or assumptions underlying the metric or its calculation, and whether disclosure of such items is necessary for the metric not to be materially misleading. The guidance advises a company changing the method by which it calculates or presents a metric from one period to another or otherwise, to consider the need to disclose, to the extent material: The differences in the way the metric is calculated or presented compared to prior periods; The reasons for such changes; The effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported (potentially including a recalculation of metrics disclosed in prior periods, if necessary to place the current disclosure in an appropriate context); and Such other differences in methodology and results as would reasonably be expected to be relevant to an understanding of the company’s performance or prospects. Finally, the guidance reminds companies of the requirement to maintain effective disclosure controls and procedures. Where key performance indicators and metrics are material to an investment or voting decision, the company should consider whether it has effective controls and procedures in place to process information related to the disclosure of such items to ensure consistency as well as accuracy. The full text of the guidance is available here. Proposed Amendments to MD&A and Related Disclosures The SEC’s proposed amendments to MD&A and related disclosures are subject to a comment period ending 60 days after the publication of the proposed rules in the Federal Register, and final rulemaking action. If adopted, the amendments would eliminate certain of the requirements of MD&A and related financial disclosures for SEC reporting companies, including: Elimination of the 5-year table of selected financial data; Elimination of the 2-year table of quarterly financial data, and related information; Elimination of the table of contractual obligations; and Elimination of the discussion of inflation and changing prices, except where material. The amendments would also modernize a number of other aspects of MD&A. If adopted, the amendments would require a company to disclose: The objective of the MD&A; The reasons for material changes in line items; Critical accounting estimates; Material cash requirements, their general purpose and anticipated source of funds; and Known events that are reasonably likely to cause a material change in the relationship between costs and revenues (e.g., higher labor costs). Finally, the amendments would reword and reorder certain other portions of the MD&A instructions, and would expressly permit MD&A for interim (i.e., quarterly) periods to include a comparison of the current period against either the comparable period of the preceding year, or alternatively, the most recent preceding interim period. To the extent that foreign issuers are currently subject to these requirements, the proposed amendments would also apply to the forms filed by such issuers with the SEC. The full text of the proposed amendments is available at here.  

On January 14, 2020, the U.S. House of Representatives passed HR 4335, the “8-K Trading Gap Act of 2019” (the “Act”) by a bipartisan vote of 384 to 7. The Act is designed to stop company insiders from trading during the 8-K trading gap, as described below. While many companies have insider trading policies in place which would already prevent such trades, a 2015 Columbia Law School paper found that insiders are more likely to engage in open market purchases of their own company’s stock when the firm is about to reveal new agreements with customers and suppliers, and that, when engaging in such purchases, insiders are correct about the directional impact of the 8-K filing more often than not. The Act would require the SEC to adopt rules, within one year of the Act’s enactment, to require all SEC reporting companies to establish and maintain policies, controls and procedures reasonably designed to prevent their executive officers and directors from trading in or otherwise transferring the company’s securities during the 8-K trading gap, that is, between the occurrence of the event triggering the Form 8-K filing and the filing itself. For Section 7 (Regulation FD) furnished disclosures and Section 8 (Other Events) filings, the prohibition on trading would apply from the date the company determines it would disclose the event on Form 8-K. The Act gives the SEC authority to exempt certain transactions, including transactions under a 10b5-1 plan which was adopted outside of an 8-K trading gap. The Act will now pass to the Senate, where it appears likely to pass, although the timing of passage is uncertain.

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

At the Securities and Exchange Commission’s (the “Commission”) open meeting on December 18, 2019, the Commissioners approved proposed amendments to the definition of “accredited investor” under Regulation D under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) and the definition of a “qualified institutional buyer” in Rule 144A under the U.S. Securities Act. Commissioners Robert Jackson and Allison Lee both dissented on the proposal. The statements of the commissioners on the proposed rules showcased significant disagreement between them on the role of the Commission and the fundamental purposes of the federal securities laws. Commissioner Jackson’s public statement was titled Statement on Reducing Investor Protections around Private Markets and highlighted his belief that the new release does not take the Commission’s role in protecting investors seriously. Commissioner Lee also noted her concern regarding the one-sided nature of the proposed rules which seek to expand the pool of available investors without adequately considering an adjustment in the income and wealth thresholds. The amendments to the definition of “accredited investor” are meant to provide more opportunity for main street investors to participate in private capital markets by including a greater number of institutional and individual investors that have the knowledge and expertise to participate in private capital markets. The proposed amendments add new categories of natural persons and entities that qualify as accredited investors. Specifically, the proposed amendments would: add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s “knowledgeable employee;” expand the list of entities that may qualify as accredited investors and allow entities meeting an investments test to qualify; add family offices with at least $5 million in assets under management and their family clients; and add the term “spousal equivalent” to the definition. Changes are also proposed to the “qualified institutional buyer” definition to include limited liability companies, RBICs, and any institutional accredited investor not already listed in Rule 144A when they meet the existing threshold of $100 million in securities owned and invested. For more information on the proposed amendments, see our recent eUpdate here.

At the Securities and Exchange Commission’s (the “Commission”) open meeting on December 18, 2019, the Commissioners proposed rules to require resource extraction issuers to file an annual Form SD that includes information about payments related to the commercial development of oil, natural gas, or minerals that are made to a foreign government or to the U.S. federal government. The proposed rules implement Section 13(q) of the United States Exchange Act of 1934, as amended, and they are mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). It has been a difficult road for the Commission to implement these rules. The Commission first adopted rules on resource extraction payments disclosure in 2012, but those rules were vacated by the U.S. District Court for the District of Columbia. The Commission then adopted new rules in 2016, which were disapproved by a joint resolution of Congress pursuant to the Congressional Review Act. The new proposed rules are a substantial easing of the requirements in the prior rules. For more information on the proposed rules, see our recent eUpdate here.

At the SEC's open meeting yesterday (November 5, 2019), the Commissioners approved two new proposed rules in their ongoing efforts to modernize proxy solicitation and shareholder proxy access, as follows: (1) amendments to certain procedural requirements, including ownership requirements, documentation requirements, meetings to discuss proposals and limitations on the number of proposals submitted, and resubmission thresholds for shareholder proposals, and (2) amendments to proxy rules conditioning the availability of certain existing exemptions from the information and filing requirements of the proxy rules for proxy voting advice businesses upon compliance with additional disclosure and procedural requirements. Comments on the proposals are due on or before 60 days after publication in the Federal Register. For more information on the proposed rules, see our recent eUpdate available here: dorsey.com/newsresources/publications/client-alerts/2019/11/sec-adopts-proposed-rules-requirements.

Yesterday the SEC announced the agenda for its upcoming open meeting to be held on Tuesday, November 5 at 10:00 a.m. EST. All SEC open meetings are webcast and a hyperlink to the webcast will be posted to www.sec.gov shortly before the start of a meeting. The SEC has indicated that the agenda, in part, will focus on “continued efforts to facilitate constructive shareholder engagement and enhance transparency, improve disclosures, and increase confidence in the proxy process.” We expect to provide further analysis following the open meeting and on any proposals once they are published. More information about the specific agenda items for the open meeting can be found in our eUpdate here:  dorsey.com/newsresources/publications/client-alerts/2019/10/sec-to-discuss-proxy-adviser-regulation.

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

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

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

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

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

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.