Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Our preliminary list of important planning considerations for the 2020 proxy season is set forth below.

Directors’ and Officers’ Questionnaires; Committee Charters

We have identified only a few possible changes to date for D&O questionnaires and committee charters for the 2020 proxy season.

New rules adopted to implement the FAST Act clarify that registrants may, but are not required to, rely only on Section 16 reports that have been filed on EDGAR (as well as any written representations from the reporting persons) to assess whether there are any Section 16 delinquencies to disclose. Accordingly, on the directors’ and officers’ questionnaires, registrants may replace  questions regarding whether all Section 16 reports have been provided to the registrant with a question about whether all required Section 16 reports have been filed on EDGAR.

As noted last year, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition rule. We continue to urge caution in eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members unless it is clear the compensation committee is not required to administer any compensation arrangements under the transition rule. The same can be said for eliminating references to §162(m) in compensation committee charters.

In June, Nasdaq filed a proposal to amend the definition of “Family Member” used in its corporate governance rules, which is incorporated into the definition of “Independent Director.” If approved by the SEC, the definition will no longer include step-children and will include a carve out for domestic employees who share a director’s home. Additionally, Nasdaq emphasized the issuer’s board must still affirmatively determine that no relationship exists that would interfere with a director’s ability to exercise independent judgment.

D&O questionnaires for Nasdaq issuers would perhaps have to be updated if the Nasdaq proposal is approved by the SEC. The SEC is considering the legal and policy implications of the Nasdaq proposal, and the proposal has not yet been approved.

Determine Your Status as an Issuer

While not new this year, the SEC adopted final rules, effective September 10, 2018, to expand the availability of scaled disclosure requirements for a company qualifying as a smaller reporting company, or SRC, by allowing companies with a public float of less than $250 million to qualify as an SRC, as compared to the $75 million threshold under the prior definition. In addition, companies that either do not have a public float or have a public float of less than $700 million are now permitted to provide scaled disclosures if annual revenues are less than $100 million, as compared to the prior threshold of less than $50 million in annual revenues. A reporting company must determine whether it qualifies as a SRC annually as of the last business day of its second fiscal quarter. If it qualifies as a SRC on that date based on public float, it may elect to reflect that determination and use the SRC scaled disclosure accommodations in its subsequent filings, beginning with its second quarter Form 10-Q. Otherwise the new status is reflected on Form 10-Q for the first fiscal quarter of the next year.

Issuers that rely on emerging growth company status, or EGCs, should also determine if they remain eligible as an EGC. Among other tests, an issuer is only allowed to retain EGC status for five years after its IPO, and the five-year window continues to close for some.

As in prior years, issuers should verify whether or not they are transitioning from status as a non-accelerated filer, accelerated filer, or large accelerated filer.

Changes to Accelerated Filer and Large Accelerated Filers Definitions (Proposed)

In May, the SEC issued proposed rule amendments that would, if enacted:

  • exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a SRC and had no revenue or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available and thereby eliminate the requirement to provide an ICFR auditor attestation for such companies; and
  • adjust the transition thresholds for issuers exiting accelerated and large accelerated filer status.

As a result of the amendments, certain low-revenue issuers would not be required to have their assessment of the effectiveness of internal control over financial reporting attested to, and reported on, by an independent auditor, although they would continue to be required to make such assessments and to establish and maintain the effectiveness of their internal control over financial reporting.

The SEC has not yet acted on the May proposal.

Fast Act Changes

The Fixing America’s Surface Transportation Act, or FAST Act, required the SEC to consider ways to streamline SEC regulations. Accordingly, the SEC adopted final amendments intended to modernize and simplify certain disclosure requirements in Regulation S-K, and related rules and forms, in a manner that reduces the costs and burdens on registrants while continuing to provide all material information to investors.

For Form 10-Ks:

  • Cover Page: Eliminate the following reference on the cover page to delinquent Section 16 filings:

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. □

  • Cover page; Delete the previously required disclosure for securities registered pursuant to 12(b) of the Act and add the “Trading Information Table: Delete the current required tabular disclosure referring to the title of each class of securities and the name of each exchange where registered for securities registered pursuant to Section 12(b) of the Act and replace it with the following Trading Information Table, which is placed immediately following the required disclosure regarding the registrant’s telephone number:

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange where registered


  • “Cover Page Tagging Requirements”: All cover page data must be tagged in Inline XBRL. For large accelerated filers, cover page tagging of Form 10-K will be required for calendar year issuers. Other issuers are subject to the following compliance schedule:
    • Accelerated filers that prepare their financial statements in accordance with U.S. GAAP — Reports for fiscal periods ending on or after June 15, 2020
    • All other filers — Reports for fiscal periods ending on or after June 15, 2021
  • MD&A
    • Instruction 1 of Item 303 has been revised under the new rules to eliminate the reference to year-to-year comparisons. As revised, Instruction 1 now states that registrants may use any presentation that in the registrant’s judgment enhances a reader’s understanding of the registrant’s financial condition, changes in financial condition, and results of operations, without suggesting that any one mode of presentation is preferable to another. Instruction 1 has also been revised to delete the reference to five-year selected financial data.
    • The SEC also revised Instruction 1 to Item 303(a) to allow registrants who are providing financial statements covering three years in a filing to omit discussion of the earliest of the three years if such discussion was already included in any other of the registrant’s prior filings on EDGAR that required disclosure in compliance with Item 303. Registrants electing not to include a discussion of the earliest year in reliance on this instruction must identify the location in the prior filing where the omitted discussion may be found.
  • Description of Property: The SEC revised Item 102 of Regulation S-K to make clear that, unless otherwise specified, disclosure need only be provided about a physical property to the extent it is material to the registrant.
  • Description of Registrant’s Securities. The revised rules require registrants to provide the information required by Item 202(a)-(d) and (f) as an exhibit to Form 10-K. Item 202 of Regulation S-K requires registrants to provide a brief description of their registered capital stock, debt securities, warrants, rights, American Depositary Receipts, and other securities. You can review sample disclosures here.
  • Directors, Executive Officers, Promoters, and Control Persons. New general instruction 1 to Item 401 (moved from Instruction 3 to Item 401(b)) allows registrants to include required information about their executive officers in Part I of Form 10-K as per previous practice. The revised rules also require the caption for the disclosure included in Part I of Form 10-K to reflect a “plain English” approach. The required caption is “Information about our Executive Officers” instead of “Executive officers of the registrant.”

For proxy statements:

  • Change the disclosure heading required by Item 405(a)(1) from “Section 16(a) Beneficial Ownership Reporting Compliance” to the more specific “Delinquent Section 16(a) Reports”. The SEC also encourages registrants to exclude this heading altogether when they have no Section 16(a) delinquencies to report. The revised rules eliminate the requirement in Rule 16a-3(e) that reporting persons furnish Section 16 reports to the registrant.
  • In the audit committee report, change the reference to whether the audit committee has discussed with the independent auditor the matters required by AU section 380, Communication with Audit Committees to “the applicable requirements of” the Public Company Accounting Oversight Board (“PCAOB”) and the Commission.

Say-on-Pay Frequency Vote

Rule 14a-21(b) requires a say-on-pay frequency vote every six years. Issuers should review their own particular facts and circumstances to determine if they are required to hold a say-on-pay frequency vote. We note that issuers that formerly qualified as EGCs should also remain mindful of say-on-pay requirements as issuers that no longer qualify as EGCs lose their exemption from the requirements under Exchange Act Sections 14A(a) and (b). Such former EGCs are required to begin providing say-on-pay votes within one year of losing EGC status (or no later than three years after selling securities under an effective registration statement if an issuer was an EGC for less than two years). Typically, such companies will also hold say-on-pay frequency votes when they hold their first say-on-pay vote as a non-EGC.

Inline XBRL

Last year the SEC also adopted final rules to require the use of Inline XBRL. Previously, data in XBRL format was attached as an exhibit to SEC filings. Inline XBRL allows filers to embed XBRL data directly into the body of the SEC filing, eliminating most of the need to tag a copy of the information in a separate XBRL exhibit. Inline XBRL will still require exhibits to be used to provide contextual information about the XBRL tags embedded in the filing.

Large accelerated filers were required to use Inline XBRL beginning with their first Form 10-Q filing for a fiscal period ending on or after June 15, 2019, and the upcoming 10-K will be the first to require use of Inline XBRL. Accelerated filers that prepare their financial statements in accordance with U.S. GAAP are required to use Inline XBRL with their first Form 10-Q filing for the fiscal period ending on or after June 15, 2020. Other filers are required to use Inline XBRL with their first Form 10-Q filing for the fiscal period ending on or after June 15, 2021.

Special care should be paid to the XBRL exhibits in the exhibit index. The SEC issued Compliance and Disclosure Interpretations, or C&DIs, which provide:

  • Registrants subject to Inline XBRL requirements should identify any Interactive Data File required under Rule 405 of Regulation S-T as Exhibit 101 in the exhibit index.
  • The Interactive Data File required because the cover page is tagged under Rule 406 of Regulation S-T should be identified as Exhibit 104 in the exhibit index.
  • When an interactive data file is submitted using Inline XBRL, Instruction 1 to paragraphs (b)(101)(i) and (ii) of Regulation S-K Item 601 requires that the exhibit index include the word “Inline” within the title description for any such exhibit.

Hedging Disclosures

The SEC approved final rules on hedging that require companies to disclose practices or policies related to the ability of employees or directors to engage in hedging transactions with respect to a company’s equity securities. Companies that do not maintain a hedging policy are required to disclose this fact and note, if accurate,  that hedging transactions are generally permitted.

Large accelerated and accelerated filers will need to include the hedging disclosures in proxy and information statements for the election of directors for fiscal years beginning on or after July 1, 2019. SRCs and EGCs were given an additional year to phase-in the disclosures which will be required for SRCs and EGCs in proxy and information statements on or after July 1, 2020.

Modernization of Property Disclosures for Mining Registrants

The SEC adopted amendments to modernize the property disclosure requirements for mining registrants, and related guidance, previously set forth in Item 102 of Regulation S-K and in Industry Guide 7. The amendments are intended to provide investors with a more comprehensive understanding of a registrant’s mining properties, which should help them make more informed investment decisions. The SEC’s revised mining property disclosure requirements now appear in Subpart 1300 of Regulation S-K.

Registrants engaged in mining operations must comply with the final rule amendments for the first fiscal year beginning on or after January 1, 2021. Industry Guide 7 will remain effective until all registrants are required to comply with the final rules, at which time Industry Guide 7 will be rescinded.

Diversity Disclosures

In new C&DIs the SEC staff provided guidance on disclosure of self-identified specific diversity characteristics of board members and board nominees. The SEC staff noted Item 401(e) of Regulation S-K requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) of Regulation S-K requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees. To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company’s disclosure of those characteristics, the staff would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered. Similarly, in these circumstances, the staff would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics.

Critical Audit Matters

The Public Company Accounting Oversight Board previously adopted a new auditor reporting standard that requires information about critical audit matters, or CAMs. The new standard was approved by the SEC and is applied for large accelerated filers for audits for fiscal years ending on or after June 30, 2019.  Audit reports identifying CAMs have begun to appear in public filings (as discussed here). Audit reports for all other issuers are required to address critical audit matters, if any, for fiscal years ending on or after December 15, 2020.

ISS Proxy Voting Policies

ISS is in the process of formulating changes to its voting recommendation policies.  ISS recently released the results of its global policy survey. The survey generally foreshadows changes to policies for the upcoming proxy season.  This year’s survey solicited feedback on board gender diversity, overboarding, climate change, and a combined CEO chair position. We recommend that issuers monitor ISS’s new and updated policies, including ISS’s official proxy voting guidelines, which are typically issued in December for the upcoming proxy season.

Shareholder Proposals

The SEC staff will no longer respond in writing (and, in some cases, at all) to all issuer requests for no action letters to exclude shareholder proposals. The staff of the Division of Corporation Finance has indicated that a written response can be expected if Corp Fin “believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.” See these additional thoughts from the for related implications.

Strike Suits reports a variety of strike suit patterns from last proxy season. The report indicates the plaintiffs’ bar has been sending demand letters to companies alleging inadequate or inaccurate disclosure about the vote required to approve proposals included on the company’s proxy materials, and threatening legal action in the event that corrective disclosure is not provided. Other strike suit demands include matters related to compensation plans on issuer’s ballots, alleging inadequate disclosure under Item 10(a) of Schedule 14A, which relates to general disclosures for compensation plans being submitted for shareholder approval. We recommend issuers carefully scrub these areas before filing a proxy statement.

Modernization of Business, Human Capital, Legal Proceedings, and Risk Factors Disclosures (Proposed)

In August 2019 the SEC issued proposed rule amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. Among other things, the proposal would require as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business, such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel. The SEC has not yet taken further action on the proposal.

SEC Guidance on Investment Advisers’ Proxy Voting Responsibilities and Application of Proxy Rules to Voting Advice

The SEC provided guidance to assist investment advisers in fulfilling their proxy voting responsibilities. The guidance discusses, among other matters, the ability of investment advisers to establish a variety of different voting arrangements with their clients and matters they should consider when they use the services of a proxy advisory firm.  In addition, the Commission issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules and provided related guidance about the application of the proxy antifraud rule to proxy voting advice.  Both of these actions explain the Commission’s view of various non-exclusive methods entities can use to comply with existing laws or regulations or how such laws and regulations apply.

At this point it is unclear as to how the SEC guidance might impact the upcoming proxy season.  Ed Hauder has some interesting thoughts on different paths this could go down.

Other Regulatory Initiatives

Proposed rules have also been issued on the following topics in prior years, but final rules have not been adopted:

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