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

The Fixing America’s Surface Transportation Act, or FAST Act, required the SEC to consider ways to streamline SEC regulations. Accordingly, the SEC has adopted final amendments to its rules that are 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. The amendments are also intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information.  The new rules will generally be effective 30 days after publication in the Federal Register with special transition provisions for certain items. In addition, amendments to the rules governing redaction of confidential information in material contracts are effective upon publication in the Federal Register.

MD&A

Required MD&A disclosure is currently set forth in Item 303(a) of Regulation S-K.  Instruction 1 to Item 303(a) currently provides that the discussion and analysis shall be of the financial statements and other statistical data that the registrant believes will enhance a reader’s understanding of its financial condition, changes in financial condition, and results of operations. This instruction also provides that, generally, the discussion shall cover the three-year period covered by the financial statements and either use year-to-year comparisons or any other format that in the registrant’s judgment would enhance a reader’s understanding. The instruction also states that reference to the five-year selected financial data may be necessary where trend information is relevant.

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 will now state 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.

Redaction of Confidential Information in Material Contract Exhibits

Current SEC rules allow registrants to redact information from material contracts filed as exhibits if the information is not material and is covered by an exemption from the Freedom of Information Act.  However, the registrant must file a confidential treatment request, or CTR, which the SEC must approve.

Under the revised rules, CTRs will no longer be required for material contracts filed pursuant to Item 601(b)(10) of Regulation S-K. Instead, the registrant may redact provisions or terms of exhibits required to be filed if those provisions or terms are both not material and would likely cause competitive harm to the registrant if publicly disclosed. If it does so, the registrant must mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. The registrant also must indicate by brackets where the information is omitted from the filed version of the exhibit. The SEC intends to police this provision through its filing review process.

The SEC also adopted changes to Form 8-K to clarify that the accommodations to the exhibit filing requirements extend to Item 1.01 of Form 8-K as well, to the extent such exhibits are filed with the intention of being incorporated into future filings in satisfaction of Item 601(b)(10).

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. The final rules also provide a uniform standard of disclosure based on materiality for non-industry specific properties. In some cases, application of this analysis may result in a description of property on an individual basis or on a collective basis, or may result in no disclosure.

Directors, Executive Officers, Promoters, and Control Persons

Item 401 of Regulation S-K sets forth disclosure requirements about the identity and background information of a registrant’s directors, executive officers, and significant employees.  Instruction 3 to Item 401(b) allows registrants to include required information about their executive officers in Part I of Form 10-K. If a registrant chooses this alternative, Instruction 3 states that the registrant is not required to repeat that information in its definitive proxy or information statement.

To make clear that Instruction 3 applies to any executive officer disclosure required by Item 401, and therefore registrants need not duplicate such disclosure in their definitive proxy or information statement if they have already provided it in their Form 10-K, the revised rules clarify the scope of the instruction by moving it from Item 401(b) and making it a general instruction to Item 401. The revised rules also require the caption for the disclosure if it is 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.”

Compliance with Section 16(a) of the Exchange Act

Item 405 of Regulation S-K requires registrants to disclose each reporting person who failed to file Section 16 reports on a timely basis during the most recent fiscal year or prior fiscal years. The revised rules eliminate the requirement in Rule 16a-3(e) that reporting persons furnish Section 16 reports to the registrant. The revised rules also amend Item 405 to:

  • 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.
  • 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.
  • Eliminate the checkbox on the cover page of Form 10-K (and the related instruction in Item 10 of Form 10-K) whereby the registrant indicates that there is no disclosure of delinquent filers in the Form 10-K and, to the best of the registrant’s knowledge, will not be included in a definitive proxy or information statement incorporated by reference.

Audit Committee Discussions with Independent Auditor

Under existing Item 407(d)(3)(i)(B) of Regulation S-K, when a registrant files a proxy or information statement relating to an annual or special meeting of security holders at which directors are elected or written consents are provided in lieu of a meeting, a registrant’s audit committee must state whether it has discussed with the independent auditor the matters required by AU section 380, Communication with Audit Committees (“AU sec. 380”).  The reference to AU sec. 380 has become outdated and the revised rules replace the outdated reference with “the applicable requirements of” the Public Company Accounting Oversight Board (“PCAOB”) and the Commission.”

Exhibits

Description of Registrant’s Securities

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. Registrants provide Item 202 disclosure about registered securities in their registration statements, but are not required to provide this disclosure in their Form 10-K or Form 10-Q.   The revised rules require registrants to provide the information required by Item 202(a)-(d) and (f) as an exhibit to Form 10-K, rather than limiting this disclosure to registration statements.

Additional Information Omitted From Exhibits

Schedules and Attachments to Exhibits

Under existing rules in Item 601 of Regulation S-K, registrants generally must file complete copies of any required exhibits. Very often, these exhibits include a number of schedules, appendices, and other similar attachments which can be quite lengthy but not necessarily material to investors. Except for paragraph (b)(2) of Item 601, which applies only to material plans of acquisition, reorganization, arrangement, liquidation, or succession, registrants must file every required exhibit under Item 601 in its entirety, irrespective of the materiality of particular information in the exhibits. Because the information in certain schedules or similar attachments to the exhibits may not be material to investors, the SEC believes a uniform filing requirement for this information is not commensurate with the corresponding costs and burden imposed on registrants, particularly when the schedules, appendices, and other attachments contain proprietary or otherwise sensitive information.

In the revised rules Item 601(a)(5) expands the existing accommodation in Item 601(b)(2) to include all exhibits filed under Item 601. Similar to current Item 601(b)(2), proposed Item 601(a)(5) would permit registrants to omit entire schedules and similar attachments to required exhibits, provided:

  • they do not contain material information;
  • they were not otherwise disclosed in the exhibit or the disclosure document; and
  • the filed exhibit contains a list briefly identifying the contents of any omitted schedules and attachments.

Personally Identifiable Information

Exhibits filed pursuant to Item 601 of Regulation S-K may include sensitive personally identifiable information, such as bank account numbers, social security numbers, home addresses, and similar information, or PII.  As a matter of practice, the staff generally does not object where a registrant omits PII from exhibits without also submitting a CTR. To codify this current staff practice, the revised rules include new Item 601(a)(6) to allow registrants to omit PII from their required Item 601 exhibits without submitting a CTR.

Material Contracts

Item 601(b)(10)(i) requires registrants to file every material contract not made in the ordinary course of business, provided that one of two tests is met:

  • the contract must be performed in whole or in part at or after the filing of the registration statement or report; or
  • the contract was entered into not more than two years before that filing.

The proposed rules revise Item 601(b)(10)(i) to limit the two-year look back test set forth in the second bullet to “newly reporting registrants,” which is a term that is defined in the new revision to Instruction 1 of Item 601(b)(10).

Incorporation by Reference

Item 10(d).  Item 10(d) of Regulation S-K states that where rules, regulations, or instructions to the forms permit incorporation by reference, a document may be incorporated by reference to the specific document and to the prior filing or submission in which that document was physically filed or submitted. Item 10(d) generally prevents registrants from incorporating by reference a portion of a document that itself also incorporates pertinent information by reference. It also prohibits incorporating documents by reference if they have been on file with the Commission for more than five years and do not fall within one of the exceptions provided in the rule. The revised rules eliminate the five-year limit in Item 10(d).

Exhibit and Other Filing Requirements. Rule 12b-23(a)(3) under the Exchange Act requires that copies of any information incorporated by reference must be filed as an exhibit, with limited exceptions. Rule 411(b)(4) under the Securities Act, which is more limited and pertains to non-prospectus information that is incorporated by reference, requires that the incorporated information be filed as an exhibit if it does not comply with the five-year limit in Item 10(d).  The revised rules eliminate these provisions, because most Exchange Act filings are made publicly available on EDGAR, and the SEC does not have similar exhibit filing requirements for Securities Act registration statements.

The revised rules also eliminate the requirement in Item 601(b)(13) to file a Form 10-Q as an exhibit when it is specifically incorporated by reference into a prospectus. This provision is no longer necessary because under the revised rules a registrant is required to include a hyperlink to any information that is incorporated by reference to a document available on EDGAR.

Hyperlinks.  Rule 411 and Rule 12b-23 have been revised to require hyperlinks to information that is incorporated by reference if that information is available on EDGAR.  Registrants are not required to refile information that is incorporated by reference from a document that was previously filed with the SEC in paper given that electronic filing has been required for over two decades and paper filings are currently made in very limited circumstances.

The new rules do not require registrants to file an amendment to a document solely to correct an inaccurate hyperlink, unless that hyperlink was included in a pre-effective registration statement, similar to the existing requirements for exhibit hyperlinking.  An inaccurate hyperlink alone would neither render the filing materially deficient nor affect a registrant’s eligibility to use Form S-3. Unlike the requirements for exhibit hyperlinking, a registrant is not required to correct inaccurate hyperlinks to information incorporated by reference in an effective registration statement by including a corrected hyperlink in a subsequent periodic report or a post-effective amendment.

Tagging Cover Page Data 

Current rules require certain specific data points on the cover of certain Exchange Act forms to be tagged in XBRL including form type, company name, filer size, and public float.  The revised rules require all of the information on the cover pages of Form 10-K, Form 10-Q and Form 8-K to be tagged in Inline XBRL.  The revised rules also require the cover pages of these forms to include the trading symbol for each class of securities registered pursuant to Section 12(b) of the Exchange Act.  The revised rules also require Form 10-Q and Form 8-K to disclose the title of each class of similarly registered securities and each exchange on which they are registered.

The cover page tagging requirements are subject to phased compliance dates.  The dates are the same as the phased compliance dates for Inline XBRL.  Accordingly, large accelerated filers must begin compliance with these requirements for fiscal periods ending on or after June 15, 2019.

Registration Statement and Prospectus Provisions

Outside Front Cover Page of the Prospectus

Item 501(b) of Regulation S-K sets forth disclosure requirements related to the outside front cover page of prospectuses. The revised rules eliminate a statement in an instruction to Item 501(b) that indicates that the registrant may be required to change its name if disclosure is insufficient to eliminate confusion because a registrant’s name is the same as that of a “well known” company, or if the name leads to a misleading inference about the registrant’s line of business.

Offering Price of the Securities

Item 501(b)(3) of Regulation S-K requires disclosure on the prospectus front cover page of the price of the securities being offered. In situations where it is not practicable to provide a price for the securities, Instruction 2 to Item 501(b)(1)(3) permits registrants to explain the method by which the price is to be determined. The revised rules amend Instruction 2 to explicitly allow registrants to include a clear statement on the cover page, when applicable, that the offering price will be determined by a particular method or formula that is more fully explained in the prospectus.

Market for the Securities

Item 501(b)(4) of Regulation S-K requires a registrant to disclose on the prospectus cover page the name of any SEC registered national securities exchange that lists the securities being offered and the trading symbols for those securities.  The revised rules expand the scope of the disclosure to any principal United States markets where the registrant, through the engagement of a registered broker-dealer, has actively sought and achieved quotation.

Prospectus “Subject to Completion” Legend

Item 501(b)(10) of Regulation S-K requires a registrant that is using a preliminary prospectus to include a legend that states, among other things, that the prospectus is not an offer to sell or a solicitation of an offer to buy securities in any state where the offer or sale is not permitted.  The revised rules permit registrants to exclude from the prospectus the portion of the legend relating to state law for offerings that are not prohibited by state blue sky laws.

Risk Factors

Item 503(c) of Regulation S-K requires disclosure of the most significant factors that make an offering speculative or risky. This risk factor disclosure was initially called for only in the offering context, but in 2005 the risk factor disclosure requirements were extended to periodic reports and registration statements on Form 10. Consistent with this change, the revised rules relocate Item 503(c) to new Item 105, as Subpart 100 of Regulation S-K covers a broad category of business information and is not limited to offering-related disclosure. Because the risk factor rule is principles-based, the revised rules eliminate the specific risk factor examples that are currently enumerated in Item 503(c).

Plan of Distribution

Item 508 of Regulation S-K requires disclosure about the plan of distribution for securities in an offering, and permits disclosure if a dealer is paid any additional discounts or commissions for acting as a “sub-underwriter.”  The revised rules define “sub-underwriter” as a dealer that is participating as an underwriter in an offering by committing to purchase securities from a principal underwriter for the securities but is not itself in privity of contract with the issuer of the securities.

Undertakings

Item 512 of Regulation S-K provides undertakings that a registrant must include in Part II of its registration statement, depending on the type of offering.  The revised rules eliminate undertakings that are duplicative of other rules or that have become unnecessary due to developments since their adoption.

The PCAOB recently noted that during 2019 it will provide an opportunity for audit committee chairs of certain companies whose audits are subject to inspection to “engage in a dialogue with the inspections staff.” While we assume the PCAOB’s motive is in good faith to obtain a better mutual understanding of the PCAOB process on one hand and the audit committee process on the other, the dialogue may be a gateway to enforcement activity.

Accordingly, we believe issuers should approach any such engagement cautiously, if at all. Perhaps the only circumstance for which this may be appropriate is upon assurance by the PCAOB that the inspection of the issuer is complete and final and no potential deficiencies were identified. Even then, issuers should consider whether there is any benefit to the dialogue. It is especially worth consideration because the PCAOB also announced it intends to publish additional updates to audit committees regarding its inspections including observations from these interviews and its inspection findings.

Why? Inspection findings can lead to restatements and potential liability for companies. Even if there are no findings, issuers will not have any control over how the PCAOB reports the results of its interviews to the public. There is a risk that audit committee chairs or issuers could be cast in a negative light.

Additionally, inspections are the root of many PCAOB enforcement actions.  While the PCAOB’s Division of Enforcement and Investigations, or DEI, only has the authority to act against auditors (at present), it is DEI’s practice to share investigative results with government enforcement agencies, including those who have the authority to bring actions against issuers.  Such “engagement” could become the route by which the PCAOB obtains statements from audit committee chairs that are shared with and used by DEI without causing DEI first to obtain an SEC subpoena.

So, what should issuers do if the PCAOB wants to talk to their audit committee chair or if issuers otherwise become aware that their audit has become subject to inspection and deficiencies have been noted?

Issuers should include a requirement in their audit engagement letters that the auditor must (within 14 days) reveal to the company if: (i) the PCAOB selects one of their audits for inspection, (ii) the issuer is the subject of an investigation, or (iii) the issuer otherwise becomes connected to an inquiry from the PCAOB or the SEC. While perhaps more controversial, issuers should also consider including a requirement that the work papers of the auditor will be shared with or available to the issuer if there is a triggering event such as selection of an audit for inspection by the PCAOB. If the conduct of the issuer is questioned as part of the inspection, or if the inspection could result in a restatement, the issuer or perhaps its audit committee should retain counsel to conduct a privileged internal investigation. Counsel should then retain a forensic auditor to assist in the investigation in a privileged manner.

We believe that counsel for the company or the audit committee is the proper person to engage with the PCAOB. If an audit committee member is invited in by the PCAOB’s Director of Registration and Inspections for some “engagement,” she or he may want to bring counsel along, or first send counsel in her or his place to get a preview. Alternatively, to keep the engagement on a narrowly defined track, counsel should request that the PCAOB submit its questions in writing and work with the issuer to provide its response in writing through counsel followed by a subsequent phone call with the PCAOB to resolve any open questions.

Note: Joel Schwartz, a partner with Stinson Leonard Street LLP, is a former assistant director of enforcement at the PCAOB.  Steve Quinlivan, Bryan Pitko and Jaclyn Schroeder practice with Stinson’s Corporate Finance Division and regularly represent public companies.

William Hinman, Director, SEC Division of Corporation Finance, recently gave his views on sustainability disclosures by public companies, among other topics.

According to Mr. Hinman, sustainability disclosures are a complicated topic.  Investors want information, but do not agree on the types of sustainability disclosures that should be made.  It is likely some of the information requested is not material under standards used by the SEC.

Mr. Hinman interprets the currently differing views on sustainability disclosures as the market evaluating what types of disclosure would provide consistently material and useful information.  Allowing this evolution to continue should provide market participants with a continued opportunity to sort out the types of information they find useful. The SEC would have stymied this evolution if it had issued prescriptive regulation the first time an investor asked for it.  Prescriptive regulatory solutions are not preferable to market driven solutions, according to Mr. Hinman.  The SEC is watching carefully as market-led approaches develop in this area, and is actively comparing the information companies voluntarily provide – typically outside of their SEC filings – with the disclosure filed with the SEC.

Mr. Hinman also warned that imposing specific bright-line requirements can increase the costs associated with being a public company but not deliver the relevant and material information that market participants are seeking. Adding costly disclosure requirements that do not deliver commensurate benefits decreases the attractiveness of public markets, which in turn can reduce the number of public investment options available to all investors.

In a published document, the PCAOB noted its new strategic plan anticipated enhanced external engagement and more proactive communication with its stakeholders, including audit committees, to inform them about its core activities—including its inspections—and to maintain an ongoing dialogue with them.

The PCAOB noted that during 2019 it will provide an opportunity for audit committee chairs of certain companies whose audits are subject to inspection to engage in a dialogue with the inspections staff. The purpose of the audit committee dialogue is to provide further insight into the PCAOB process and obtain audit committee views. The PCAOB expects to publish additional updates to audit committees regarding its inspections to provide observations from these interviews and its inspection findings.

I guess that means if your audit is selected for inspection the PCAOB may contact you.  It may be advisable to set up a protocol for responding to any such contact such as who should be informed and who will participate in the “dialogue” with the inspections staff and any necessary preparation for the dialogue.

Following that introduction, the PCAOB summarized its previously announced 2019 inspection priorities.  The PCAOB then noted that in addition to required communications from their auditors, audit committees may—at their discretion—choose to further engage with their auditors on current issues of inspection focus as they work to positively affect audit quality in those areas. The PCAOB provided the following sample questions that are designed to provide audit committees ideas of the types of questions they may consider asking their auditors, if relevant, throughout the year.

  • Auditor Response to Identified Risks
    • How have the current economic factors influenced the auditor’s risk assessment for the current year’s audit?
    • How has the auditor considered the relevant economic factors that could affect the company’s ability to continue as a going concern?
    • How has the auditor assessed potential risks of material misstatement related to the company’s technology systems, including cyber security, and how has it addressed those potential risks?
  • Changes in Auditor’s Report
    • What are the most substantive issues or learnings identified pursuant to the firm’s pilot testing and dry runs related to communicating CAMs in the auditor’s report?
    • What items, if any, were considered “close calls” but ultimately not identified as a CAM by the auditor? Why were these items not determined to be CAMs?
  • Implementation of New Accounting Standards
    • What are the auditor’s observations regarding the company’s implementation of the new revenue recognition standard?
    • What is the auditor’s view of the company’s readiness to adopt new accounting standards pertaining to lease accounting and valuation of financial instruments, including credit losses (if relevant)?
  • Quality Controls
    • How does the firm’s quality control system promote audit quality?
    • What are recent actions taken by the firm to strengthen its quality control system?
    • Did the audit include the use of software audit tools? If so, how were these tools used and how did the use of these tools affect the risk assessment and the quality of audit evidence?
  • Auditor Independence
    • How does the firm monitor compliance with the independence requirements of the PCAOB and SEC, including compliancewith obtaining pre-approvals for non-audit services?
    • How can the audit committee and management assist the auditor in complying with independence requirements?
  • PCAOB Inspection Results and Corrective Actions
    • If the firm has been inspected by the PCAOB, were there inspection findings? If so, what were those findings and what corrective actions has the firm taken?
    • How has the firm’s inspection findings changed over time?
  • Possible Indicators to Audit Quality
    • Has the firm developed a definition of audit quality? If so, how is audit quality defined?
    • Based on the firm’s definition, what are the key drivers of audit quality for the firm overall and for this audit engagement specifically?
    • How does the firm identify, set targets for, and monitor those key drivers generally, and specifically with respect to this audit engagement?

The SEC’s Division of Investment Management is seeking comment on the application of the Custody Rule to digital assets. The Custody Rule provides that it is a fraudulent, deceptive or manipulative act, practice or course of business for an investment adviser that is registered or required to be registered under the Investment Advisers Act to have “custody” of client funds or securities unless they are maintained in accordance with the requirements of the Custody Rule.

Areas in which the SEC is seeking comments include:

  • What challenges do investment advisers face in complying with the Custody Rule with respect to digital assets? What considerations specific to the custody of digital assets should the staff evaluate when considering any amendments to the Custody Rule? For example, are there disclosures or records other than account statements that would similarly address the investor protection concerns underlying the Custody Rule’s requirement to deliver account statements?
  • To what extent are investment advisers construing digital assets as “funds”, “securities”, or neither, for purposes of the Custody Rule? What considerations are advisers applying to reach this conclusion?
  • To what extent are investment advisers including digital assets in calculating regulatory assets under management for purposes of meeting the thresholds for registering with the Commission? What considerations are included within this analysis?
  • To what extent do investment advisers use state chartered trust companies or foreign financial institutions to custody digital assets? Have these investment advisers experienced similarities/differences in custodial practices of such trust companies as compared to those of banks/broker-dealers?

Elon Musk, in a court filing, offered the following three reasons why he should not be held in contempt of court for violating a court Order in a recent tweet:

  • There is no clear and convincing evidence that an unambiguous court order was violated. According to Musk, Tesla has confirmed Musk has complied with its policies, which permits Musk to exercise his reasonable discretion in the first instance to determine whether his communications contain information requiring pre-approval.
  • There is no evidence that Musk did not diligently attempt to comply with the order.
  • The Order as the SEC interprets it would raise serious First Amendment issues and implicate other constitutional rights. The SEC seeks to rewrite the Order to eliminate Musk’s discretion, effectively requiring Musk to seek pre-approval of any tweet that relates to Tesla, regardless of its significance, prior dissemination, or nature.

 

The CFTC announced an Enforcement Advisory on self-reporting and cooperation for violations of the Commodity Exchange Act, or CEA, involving foreign corrupt practices.  Because the Enforcement Advisory is limited to the CEA, it does not suggest that the CFTC will bring actions regarding violations of the Foreign Corrupt Practices Act.

The new Enforcement Advisory provides further clarity surrounding the benefits of self-reporting misconduct, full cooperation, and remediation in this context, according to the CFTC.  According to a CFTC official, “Together with the Department’s Corporate Enforcement Policy, CFTC’s Advisory on self-reporting and cooperation will make clear to companies the significant benefits of voluntarily self-disclosing misconduct, fully cooperating with the government’s investigation, and remediating the misconduct.”

A CFTC official also noted companies and individuals engaging in foreign corrupt practices should recognize that foreign corrupt practices might constitute fraud, manipulation, false reporting, or a number of other types of violations under the CEA, and thus be subject to enforcement actions brought by the CFTC.  “Bribes might be employed, for example, to secure business in connection with regulated activities like trading, advising, or dealing in swaps or derivatives.  Corrupt practices might be used to manipulate benchmarks that serve as the basis for related derivatives contracts.  Prices that are the product of corruption might be falsely reported to benchmarks.  Or corrupt practices in any number of forms might alter the prices in commodity markets that drive U.S. derivatives prices.  We currently have open investigations involving similar conduct.  But regardless of the specific factual scenario, we are committed at the CFTC to enforcing the CEA provisions that encompass foreign corrupt practices.”

The new Enforcement Advisory only apples to non-CFTC registrants.  CFTC registrants have existing obligations to disclose to the Commission CEA violations, including those involving foreign corrupt practices; registrants are thus not eligible for the presumptive recommendation of no penalty set out in this Advisory.  Nevertheless, the CFTC stated CFTC registrants who self-report, cooperate, and remediate still would be eligible to receive the recommended substantial reduction in penalty generally applicable under existing Enforcement Advisories.

We have been unable to find extensive SEC comments on last year’s first round of pay ratio disclosures.  Searches for comment letter responses referring to for “402(u)” or “pay ratio” do not seem to turn up anything of general applicability.

Maybe the SEC staff determined that commenting on pay ratio disclosures would not materially benefit investor protection. Or maybe filings selected for review by the staff had materially complete disclosures. Who knows.

In any event, issuers can proceed towards proxy season knowing there are not any staff positions out there that are not clearly reflected in the rules.

Set forth below are examples of pay ratio disclosures from recently filed proxies where registrants chose to rely on the median employee identified in the prior year.

Sabre Corporation

In accordance with Item 402(u), we are using the same “median employee” identified in 2017 in our 2018 pay ratio calculation, as we believe that there has been no change in our employee population or employee compensation arrangements that we believe would result in a significant change to our pay ratio disclosure for 2018. See our 2017 proxy statement for information regarding the process we utilized to identify our “median employee.” We then identified and calculated the elements of this employee’s total compensation for 2018 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $88,297. This annual total compensation includes the estimated value of the employee’s health care benefits (estimated for the employee and the employee’s eligible dependents to be $1,890) and other statutory benefits. With respect to the annual total compensation of our CEO, we used the amount reported in the “Total” column of our 2018 Summary Compensation Table, adjusted as follows. To maintain consistency between the annual total compensation of our CEO and the “median employee,” we added the estimated value of our CEO’s health care benefits (estimated for our CEO and our CEO’s eligible dependents at $24,905) to the amount reported in the 2018 Summary Compensation Table. This resulted in annual total compensation for purposes of determining the ratio in the amount of $10,797,250, which exceeds the amount reported for him in the Summary Compensation Table by this amount.

Seaboard Corporation

Seaboard has elected to identify its median employee every three years unless a significant change in employee population or employee compensation arrangements has occurred. In 2018, the prior year’s median employee terminated employment. Therefore, as allowed by the SEC, Seaboard identified an alternate median employee with comparable pay as the median employee for 2018.

Superior Industries International, Inc.

In accordance with Instruction 2 to Item 402(u) of Regulation S-K, because there has been no change in our employee population or employee compensation arrangements in the past fiscal year that we reasonably believe would result in a significant change to our pay ratio disclosure, we elected to utilize the same median employee that we had identified in 2017 to calculate our 2018 CEO pay ratio. The process that we used to determine our median employee in 2017 is summarized below:

The Goodyear Tire & Rubber Company

For 2018, we used the same median employee that was identified in 2017 since there has been no change in our employee population or employee compensation arrangements that we believe would significantly impact our pay ratio disclosure.

The SEC has proposed new rules that would permit all issuers to solicit investor views about potential offerings to be taken into account at an earlier stage in the process than is the case today. The new rule and related amendments would expand the “test-the-waters” accommodation—currently available to emerging growth companies or “EGCs”—to all issuers, including investment company issuers. The ability for EGCs to engage in test-the-waters-communications was provided for under the JOBS Act.

The proposed rule eases regulatory burdens because Section 5(c) of the Securities Act prohibits any written or oral offers prior to the filing of a formal registration statement with the SEC. Once an issuer has filed a registration statement, Section 5(b)(1) limits written offers to a formal prospectus that conforms to the requirements of the Securities Act. As such, without the proposed rule change, most communications by issuers seeking to gauge investor interest would violate the Securities Act and constitute what is popularly referred to as “gun jumping.” According to the SEC, the ability of EGCs to engage in test-the-waters communications under the JOBS Act has not impaired investor protection.

The proposed rule will allow all issuers to engage in test-the-waters communications with potential investors that are, or that the issuer reasonably believes to be, qualified institutional buyers (“QIBs) or institutional accredited investors (“IAIs”), either prior to or following the date of filing of a registration statement related to such offering. Generally a QIB 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. IAIs are institutional investors that are also accredited investors, that meet the criteria of SEC Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8), and includes organizations with assets in excess of $5,000,000 not formed for the purpose of acquiring the securities offered. The SEC believes these types of entities do not need the protections of the Securities Act’s registration process.

The SEC noted its belief that allowing more issuers to engage with certain sophisticated institutional investors while in the process of preparing for a contemplated registered securities offering could help issuers to better assess the demand for and valuation of their securities and to discern which terms and structural components of the offering may be most important to investors before incurring costs associated with launching an offering. This, in turn, could enhance the ability of issuers to conduct successful offerings and lower their cost of capital.

Test-the-waters communications that comply with the proposed rule would not need to be filed with the SEC, nor would they be required to include any specified legends. The SEC does not believe it is necessary to impose such requirements because communications under the proposed rule would be limited to investors that are, or are reasonably believed to be, QIBs and IAIs. These types of investors are generally considered to have the ability to assess investment opportunities, thereby reducing the need for the additional safeguards provided by a filing or legending requirement.

Information provided in a test-the-waters communication under the proposed rule must not conflict with material information in a related registration statement. As is currently the practice of the SEC staff when reviewing offerings conducted by EGCs, the SEC or its staff could request that an issuer furnish the staff any test-the-waters communication used in connection with an offering.

The SEC cautioned public companies to consider whether any information in a test-the-waters communication would trigger any obligations under Regulation FD. Regulation FD requires public companies to make public disclosure of any material nonpublic information that has been selectively disclosed to certain securities market professionals or shareholders. To avoid the application of Regulation FD, a public company could consider obtaining a confidentiality agreements from any potential investor engaged under the proposed rule prior to providing the test-the-waters material.

In addition, the Commission noted that although the new rule would exempt test-the-waters communications from the gun-jumping provisions of Section 5, they would still be considered “offers” as defined under the Securities Act such that Section 12(a)(2) liability and the anti-fraud provisions of the federal securities laws would continue to be applicable.

Under the proposed rule, any potential investor solicited must meet, or issuers must reasonably believe that the potential investor meets, the requirements of the rule. The SEC stated that this standard would avoid imposing an undue burden on issuers compared to requiring issuers to verify investor status. For example, under the proposed rule, an issuer could reasonably believe that a potential investor is a QIB or IAI even though the investor may have provided false information or documentation to the issuer. The SEC does not believe that an issuer should be subject to a violation of Section 5 in such circumstances, so long as the issuer established a reasonable belief with respect to the potential investor’s status based on the particular facts and circumstances.

The SEC did not propose specific steps that an issuer could or must take to establish a reasonable belief that the intended recipients of test-the-waters communications are QIBs or IAIs. Identifying specific steps or providing additional guidance that could be used by an issuer to establish a reasonable belief regarding an investor’s status could create a risk that such steps or guidance would become a de facto minimum standard. The SEC believes issuers should continue to rely on the methods they currently use to establish a reasonable belief regarding an investor’s status in analogous circumstances. By not specifying the steps an issuer could or must take to establish a reasonable belief as to investor status, this approach is intended to provide 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.