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

The SEC has issued proposed amendments to Rule 10b5-1 and to related forms and disclosures.  The amendments are intended to address perceived abuses of Rule 10b5-1 plans. The amendments also address several other matters such as:

  • Mandatory disclosure of trades pursuant to a 10b5-1 plan on Form 4.
  • Requiring gifts to be reported on Form 4.
  • Disclosures regarding the timing of option grants and similar equity instruments shortly before or after the release of material nonpublic information

Cooling-Off Period

The SEC proposes to amend Rule 10b5-1(c)(1) to add as a condition to the availability of the affirmative defense to require that:

  • a minimum 120-day cooling-off period after the date of adoption of any Rule 10b5-1(c)(1) trading arrangement (including adoption of a modified trading arrangement) by a director or officer (as defined in Rule 16a-1(f)) before any purchases or sales under the new or modified trading arrangement; and
  • a minimum 30-day cooling-off period after the date of adoption of any Rule 10b5-1(c)(1) trading arrangement by an issuer before any purchases or sales under the new or modified trading arrangement.

The proposed amendments also include a note that clarifies that a “modification” of an existing Rule 10b5-1(c)(1) trading arrangement, including cancelling one or more trades, would be deemed equivalent to terminating the plan in its entirety, and the cooling-off period would therefore apply after a “modification” before any new trades could commence.

Director and Officer Certifications

The SEC is proposing to amend Rule 10b5-1(c)(1)(ii) to impose a certification requirement as a condition to the affirmative defense. Under the proposed amendment, if a director or officer of the issuer of the securities adopts a Rule 10b5- 1 trading arrangement, as a condition to the availability of the affirmative defense, such director or officer would be required to promptly furnish to the issuer a written certification at the time of the adoption of a new/modified trading arrangement.

The certification would require a director or officer to certify at the time of the adoption of the trading arrangement:

  • That they are not aware of material nonpublic information about the issuer or its securities; and
  • That they are adopting the contract, instruction, or plan in good faith and not as part of a plan or scheme to evade the prohibitions of Exchange Act Section 10(b) and Exchange Act Rule 10b-5.

The proposed amendment also includes an instruction that a director or officer seeking to rely on the affirmative defense should retain a copy of the certification for a period of ten years. The proposed amendments would not require a director, officer, or the issuer to file the certification with the SEC. The proposed certification would not be an independent basis of liability for directors or officers under Exchange Act Section 10(b) and Rule 10b-5. Rather the proposed certification would underscore the certifiers’ awareness of their legal obligations under the federal securities law related to the trading in the issuer’s securities.

Restricting Multiple Overlapping Rule 10b5-1 Trading Arrangements and Single-Trade Arrangements

The SEC is proposing to amend Rule 10b5-1(c)(1) to eliminate the affirmative defense for any trades by a trader who has established multiple overlapping trading arrangements for open market purchases or sales of the same class of securities. Under the proposed amendment, the affirmative defense would not be available for trades under a trading arrangement when the trader maintains another trading arrangement, or subsequently enters into an additional overlapping trading arrangement, for open market purchases or sales of the same class of securities.

In addition to restricting the use of multiple overlapping trading arrangements, the SEC is also proposing to amend Rule 10b5-1(c)(1)(ii) to limit the availability of the affirmative defense for a trading arrangement designed to cover a single trade, so that the affirmative defense would only be available for one single-trade plan during any 12-month period. Under the proposed amendment, the affirmative defense would not be available for a single-trade plan if the trader had, within a 12-month period, purchased or sold securities pursuant to another single-trade plan.

Requiring that Trading Arrangements be Operated in Good Faith

The SEC is proposing to amend Rule 10b5-1(c)(1)(ii) to add the condition that a contract, instruction, or plan be “operated” in good faith. The amendment is meant to address concerns such as the ability to trade on the basis of material nonpublic information through a Rule 10b5-1(c)(1) trading arrangement may incentivize corporate insiders to improperly influence the timing of corporate disclosures to benefit their trades under the trading arrangement.

Additional Disclosures Regarding Rule 10b5-1 Trading Arrangements

The SEC is proposing new Item 408 under Regulation S-K and corresponding amendments to Forms 10-Q and 10-K to require:

  • Quarterly disclosure of the use of Rule 10b5-1 and other trading arrangements by a registrant, and its directors and officers for the trading of the issuer’s securities; and
  • Annual disclosure of a registrant’s insider trading policies and procedures.

The SEC is also proposing new Item 16J to Form 20-F to require annual disclosure of a foreign private issuer’s insider trading policies and procedures. In addition, the SEC is proposing amendments to Forms 4 and 5 to require insiders to identify whether a reported transaction was executed pursuant to a Rule 10b5-1(c) trading arrangement.

Quarterly Reporting of Rule 10b5- 1(c) and non-Rule 10b5-1(c) Trading Arrangements

Proposed Item 408(a) of Regulation S-K would require registrants to disclose:

  • Whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), the registrant has adopted or terminated any contract, instruction or written plan to purchase or sell securities of the registrant, whether or not intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and provide a description of the material terms of the contract, instruction or written plan, including:
    • The date of adoption or termination;
    • The duration of the contract, instruction or written plan; and
    • The aggregate amount of securities to be sold or purchased pursuant to the contract, instruction or written plan.
  • Whether, during the registrant’s last fiscal quarter, any director or officer has adopted or terminated any contract, instruction or written plan for the purchase or sale of equity securities of the registrant, whether or not intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), and provide a description of the material terms of the contract, instruction or written plan, including:
    • The name and title of the director or officer;
    • The date on which the director or officer adopted or terminated the contract instruction or written plan;
    • The duration of the contract instruction or written plan; and
    • The aggregate number of securities to be sold or purchased pursuant to the contract, instruction or written plan.

Disclosure of Insider Trading Policies and Procedures

The SEC is proposing to add new Item 408(b) to Regulation S-K, which would require registrants to disclose whether the registrant has adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of the registrant’s securities by directors, officers, and employees or the registrant itself that are reasonably designed to promote compliance with insider trading laws, rules, and regulations, and any listing standards applicable to the registrant. If the registrant has not adopted such insider trading policies and procedures, the registrant woule be required explain why it has not done so.

If the registrant has adopted insider trading policies and procedures, the registrant would be required to disclose such policies and procedures. These disclosures would be required in a registrant’s annual reports on Form 10-K and proxy and information statements on Schedules 14A and 14C. Foreign private issuers would also be required to provide analogous disclosure in their annual reports pursuant to a new Item 16J in that form.

Structured Data Requirements

The SEC is proposing to require registrants to tag the information specified by Item 408 in Inline XBRL in accordance with Rule 405 of Regulation S-T (17 CFR 232.405) and the EDGAR Filer Manual.

Identification of Rule 10b5-1(c) and non-Rule 10b5-1(c)(1) Transactions on Forms 4 and 5

The SEC is proposing to add a Rule 10b5-1(c) checkbox as a mandatory disclosure requirement on Forms 4 and 5. The checkbox would require a Form 4 or 5 filer to indicate whether a sale or purchase reported on that form was made pursuant to a Rule 10b5-1(c) trading arrangement. Filers would also be required to provide the date of adoption of the Rule 10b5-1 trading arrangement, and would have the option to provide additional relevant information about the reported transaction.

In addition, the SEC is proposing to add a second, optional checkbox to both of Forms 4 and 5. This optional checkbox would allow a filer to indicate whether a transaction reported on the form was made pursuant to a pre-planned contract, instruction, or written plan that is not intended to satisfy the conditions of Rule 10b5-1(c).

Disclosure Regarding the Timing of Option Grants and Similar Equity Instruments Shortly before or after the Release of Material Nonpublic Information

The SEC proposes to revise Item 402 of Regulation S-K that would require tabular disclosure of:

  • Each option award (including the number of securities underlying the award, the date of grant, the grant date fair value, and the option’s exercise price) granted within 14 calendar days before or after the filing of a periodic report, an issuer share repurchase, or the filing or furnishing of a current report on Form 8-K that contains material nonpublic information;
  • The market price of the underlying securities the trading day before disclosure of the material nonpublic information; and
  • The market price of the underlying securities the trading day after disclosure of the material nonpublic information.

In addition, revised Item 402 would require narrative disclosure about an issuer’s option grant policies and practices regarding the timing of option grants and the release of material nonpublic information, including how the board determines when to grant options and whether, and if so, how, the board or compensation committee takes material nonpublic information into account when determining the timing and terms of an award.

Reporting of Gifts on Form 4

The SEC is proposing to amend Exchange Act Rule 16a-3 to require the reporting of dispositions of bona fide gifts of equity securities on Form 4 instead of delayed reporting on Form 5. Under the proposed amendment, an officer, director, or a beneficial owner of more than 10 percent of the issuer’s registered equity securities making a gift of equity securities would be required to report the gift on Form 4 before the end of the second business day following the date of execution of the transaction. This would be significantly earlier than what is required under current reporting rules.

In November, 2021 the SEC Division of Corporation Finance announced it had rescinded Staff Legal Bulletin (“SLBs”) Nos. 14I, 14J and 14K after a review of staff experience applying the guidance in them.  Apparently as a result of this, the SEC staff announced it would again respond to no action requests.

The SEC staff issued this statement:

“In 2019, the Division’s staff discontinued the longstanding practice of responding to each shareholder proposal no-action request with a written letter.[1]  During the last two proxy seasons, the staff instead responded with a written letter only in limited instances and communicated the vast majority of responses via notations to a chart maintained on the Division’s website.

We have reconsidered this approach, and after review of the practice we believe that written responses will provide greater transparency and certainty to shareholder proponents and companies alike.  Beginning with the publication of this announcement, we will return to our prior practice and the staff will once again respond to each shareholder proposal no-action request with a written letter, similar to those issued in prior years.  Our response letters will be posted publicly on the Division’s website in a timely manner.  We will no longer communicate our responses via a chart, but we expect to publish a chart upon completion of the proxy season.”

The Financial Crimes Enforcement Network (FinCEN) has proposed rules to require certain entities to file reports with FinCEN that identify two categories of individuals: The beneficial owners of the entity; and individuals who have filed an application with specified governmental authorities to form the entity or register it to do business. The proposed regulations would implement Section 6403 of the Corporate Transparency Act (CTA), enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), and describe who must file a report, what information must be provided, and when a report is due.

The proposed regulations describe who is a beneficial owner and who is a company applicant. A beneficial owner is any individual who meets at least one of two criteria:

  • exercising substantial control over the reporting company; or
  • owning or controlling at least 25 percent of the ownership interest of the reporting company.

The proposed regulations also describe who is a company applicant. In the case of a domestic reporting company, a company applicant is the individual who files the document that forms the entity. In the case of a foreign reporting company, a company applicant is the individual who files the document that first registers the entity to do business in the United States. The proposed regulations specify that a company applicant includes anyone who directs or controls the filing of the document by another.

Information to be Reported on Beneficial Owners and Company Applicants

The CTA requires each reporting company to submit to FinCEN a report identifying each beneficial owner of the reporting company and each company applicant by:

  • full legal name,
  • date of birth,
  • current residential or business street address, and
  • unique identifying number from an acceptable identification document; or, or, if this information has already been provided to FinCEN, by a FinCEN identifier.

Proposed 31 CFR 1010.380(b)(1)(ii) sets forth the specific items of information that a reporting company must report about each individual beneficial owner and each individual company applicant. The language is drawn nearly verbatim from 31 U.S.C. 5336(b)(2)(A).

The statute requires reporting companies to identify beneficial owners and applicants by their “residential or business street address.” The statutory requirement does not specify when or whether one type of address should be used in preference to another or resolve more specific questions regarding secondary addresses or whether addresses should be domestic, if possible, or can be foreign.  FinCEN believes that the residential street address will be more useful for establishing the unambiguous identity of an identified beneficial owner. The reporting of a residential street address will also likely allow for easier follow-up by law enforcement in the event of investigative need. Accordingly, FinCEN believes that requiring the disclosure of beneficial owners’ residential street address for tax residency purposes is appropriate. FinCEN therefore proposes that the reporting company report the residential address for tax residency purposes of each beneficial owner.

With respect to a company applicant’s address, FinCEN proposes a bifurcated approach. For company applicants that provide a business service as a corporate or formation agent, the reporting company would need to report the business address of any company applicant that files a document in the course of such individual’s business.  For all other company applicants, the reporting company would need to report the residential street address that the individual uses for tax residency purposes.

In addition, the CTA authorizes FinCEN to prescribe procedures and standards governing the reports identifying beneficial owners and applicants “by,” among other things, a “unique identifying number from an acceptable identification document.” Therefore, the proposed rule specifies that the reporting company provide a scanned copy of the identification document from which the unique identifying number of the beneficial owner or company applicant is obtained, in connection with reporting that unique number.

Information to be Reported on Reporting Companies

Proposed 31 CFR 1010.380(b)(1)(i) would require reporting companies to report certain information to identify the reporting company. While the CTA specifies the information required to be reported to “identify each beneficial owner of the applicable reporting company and each applicant with respect to that reporting company,” the CTA does not specify what, if any, information a reporting company must report about itself.

Therefore, to ensure that each reporting company can be identified, the proposed regulations would require each reporting company to report its name, any alternative names through which the company is engaging in business (“d/b/a names”), its business street address, its jurisdiction of formation or registration, as well as a unique identification number.

Specifically, the reporting company would be required to submit a TIN (including an Employer Identification Number (EIN)), or where a reporting company has not yet been issued a TIN, a Dun & Bradstreet Data Universal Numbering System (DUNS) number or a Legal Entity Identifier (LEI).

Beneficial Owners

As noted, the CTA defines a beneficial owner, with respect to a reporting company, as “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.”

Consistent with the CTA, the proposed rule would require a reporting company to identify any individual who satisfies either of these two components. Based on the breadth of the substantial control component, FinCEN expects that a reporting company would identify at least one beneficial owner under that component regardless of whether (1) any individual satisfies the ownership component, or (2) exclusions to the definition of beneficial owner apply.

Substantial Control

Proposed 31 CFR 1010.380(d)(1) sets forth three specific indicators of substantial control:

  • service as a senior officer of a reporting company;
  • authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and
  • direction, determination, or decision of, or substantial influence over, important matters of a reporting company.

The regulation also includes a catch-all provision to make clear that substantial control can take additional forms not specifically listed. Each of these indicators supports the basic goal of requiring a reporting company to identify the individuals who stand behind the reporting company and direct its actions.

Ownership rr Control of Ownership Interests

The other component of the definition of beneficial owner concerns individuals who own or control 25 percent of a reporting company’s ownership interests. The CTA defines a beneficial owner to include “an individual who . . . owns or control not less than 25 percent of the ownership interests of the entity.” Proposed 31 CFR 1010.380(d)(3)(i) provides that “ownership interests,” for the purposes of this rule, would include both equity in the reporting company and other types of interests, such as capital or profit interests (including partnership interests) or convertible instruments, warrants or rights, or other options or privileges to acquire equity, capital, or other interests in a reporting company. Debt instruments are included if they enable the holder to exercise the same rights as one of the specified equity or other interests, including the ability to convert the instrument into one of the specified equity or other interests.

Proposed 31 CFR 1010.380(d)(3)(ii) identifies ways in which an individual may “own or control” interests. It restates statutory language that an individual may own or control an ownership interest directly or indirectly. It also gives a non-exhaustive list of examples to further emphasize that an individual can own or control ownership interests through a variety of means. FinCEN’s proposed approach requires reporting companies to consider all facts and circumstances when making determinations about who owns or controls ownership interests.

Proposed 31 CFR 1010.380(d)(3)(ii)(C) specifies that an individual may directly or indirectly own or control an ownership interest in a reporting company through a trust or similar arrangement. The proposed language aims to make clear that an individual may own or control ownership interests by way of the individual’s position as a grantor or settlor, a beneficiary, a trustee, or another individual with authority to dispose of trust assets. In relation to trust beneficiaries in particular, FinCEN believes that it is appropriate to consider an individual as owning or controlling ownership interests held in trust if the individual is the sole permissible recipient of both income and principal from the trust, or has the right to demand a distribution of, or withdraw substantially all of the assets from, the trust. Other individuals with authority to dispose of trust assets, such as trustees, will also be considered as controlling the ownership interests held in trust, as will grantors or settlors that have retained the right to revoke the trust, or to otherwise withdraw the assets of the trust.

Company Applicant

A reporting company would be required to report identifying information about a company applicant under proposed 31 CFR 1010.380(a)(1). Proposed 31 CFR 1010.380(e) defines a company applicant as any individual who files a document that creates a domestic reporting company or who first registers a foreign reporting company with a secretary of state or similar office in the United States.

The proposed definition of a company applicant would also include any individual who directs or controls the filing of such a document by another person. This additional requirement is designed to ensure that the reporting company provides information on individuals that are responsible for the decision to form a reporting company given that, in many cases, the company applicant may be an employee of a business formation service or law firm, or an associate, agent, or family member who is filing the document on behalf of another individual. In such a case, the individual directing or controlling the formation of a legal entity should not be able to remain anonymous simply by directing another individual to file the requisite paperwork, and must therefore disclose his or her identity to FinCEN along with the individual that made the filing.

Reporting Company

The CTA defines a reporting company as “a corporation, limited liability company, or other similar entity” that is either:

  • created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or
  • formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.

To facilitate application of the statutory definition of reporting company, proposed 31 CFR 1010.380(c)(1) defines two new terms: “Domestic reporting company” and “foreign reporting company.”

Domestic Reporting Company

Consistent with the CTA’s statutory language, FinCEN proposes to define a domestic reporting company to include:

  • a corporation;
  • a limited liability company; or
  • other entity that is created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian Tribe.

Because corporate formation is governed by state or Tribal law, and because the CTA does not provide independent definitions of the terms “corporation” and “limited liability company,” FinCEN intends to interpret these terms by reference to the governing law of the domestic jurisdiction in which a reporting company that is a corporation or limited liability company is formed.

In general, FinCEN believes the proposed definition of domestic reporting company would likely include limited liability partnerships, limited liability limited partnerships, business trusts (a/k/a statutory trusts or Massachusetts trusts), and most limited partnerships, in addition to corporations and limited liability companies (LLCs), because such entities appear typically to be created by a filing with a secretary of state or similar office. FinCEN understands that state and Tribal laws may differ on whether certain other types of legal or business forms—such as general partnerships, other types of trusts, and sole proprietorships—are created by a filing, and therefore does not propose to categorically include any particular legal forms other than corporations and limited liability companies within the scope of the definition.

Foreign Reporting Company

Proposed 31 CFR 1010.380(c)(1)(ii) defines a foreign reporting company as any entity that is a corporation, limited liability company, or other entity that is formed under the law of a foreign country and that is registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian Tribe. Similar to the treatment of the phrase “corporation, limited liability company, or other similar entity” for domestic reporting companies, FinCEN intends to interpret these terms by reference to the requirement to register to do business in the United States by the filing of a document in a state or Tribal jurisdiction.

Exemptions

The CTA specifically excludes from the definition of “reporting company” twenty-three types of entities. The statute also authorizes the Secretary of Treasury to exempt, by regulation, additional entities for which collecting beneficial ownership information (BOI) would neither serve the public interest nor be highly useful in national security, intelligence, law enforcement, or other similar efforts.  In general, FinCEN proposes to adopt verbatim the statutory language granting the twenty-three specified exemptions.

Proposed 31 CFR 1010.380(c)(2)(xxi) clarifies an exemption relating to what the proposed regulations refer to as “large operating companies.” An entity falls into this category, and therefore is not a reporting company, if it:

  • employs more than 20 employees on a full-time basis in the United States”;
  • filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of other entities owned by the entity and through which the entity operates; and
  • has an operating presence at a physical office within the United States.”

Under the proposed regulations, an entity with an “operating presence at a physical office within the United States” would be one for which the physical office is owned or leased by the entity, is not a residence, and is not shared space (beyond being shared with affiliated entities)—in short, a genuine working office of the entity.

In the exemption, FinCEN also proposes to clarify what it means to employ someone on a full-time basis through reference to the Internal Revenue Service definition of “full-time employee” and related determination methods at 26 CFR 54.4980H-1(a)(21) and 54.4980H-3. These regulations generally count as a full-time employee anyone employed an average of at least 30 service hours per week or 130 service hours per month, with adaptations for non-hourly employees.

Regarding the $5,000,000 filing threshold, FinCEN proposes to make clear that the relevant filing may be a federal income tax or information return, and that the $5,000,000 must be reported as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under federal income tax principles. For entities that are part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return, FinCEN proposes that the applicable amount should be the amount reported on the group’s consolidated return.

Proposed 31 CFR 1010.380(c)(2)(xxii) would clarify the exemption for entities in which “the ownership interests are owned or controlled, directly or indirectly, by 1 or more [specified entity types that do not qualify as reporting companies].” FinCEN is calling this the “subsidiary exemption,” and interprets the definite article “the” in the quoted statutory text as requiring an entity to be owned entirely by one or more specified exempt entities in order to qualify for it.

The last category of exempt entities for which FinCEN proposes to clarify ambiguous statutory language is the exemption for “dormant entities” that meet the criteria provided at 31 U.S.C. 5336(a)(11)(B)(xxiii). Under the CTA, the exemption applies to any entity:

  • In existence for over 1 year;
  • that is not engaged in active business;
  • that is not owned, directly or indirectly, by a foreign person;
  • that has not, in the preceding 12-month period, experienced a change in ownership or sent or received more than $1,000; and
  • that does not otherwise hold assets of any type.

The phrase “in existence for over 1 year” is ambiguous because the CTA did not specify whether it refers to entities in existence for over one year at the time of the CTA’s enactment or to entities in existence for over one year at any time the statute is applied. While other prongs of the exemption use the present tense (“is” not engaged in active business; “does” not hold assets) and such present-tense language generally does not include the past, the first prong notably lacks any verb, much less one in the present tense. Moreover, both the CTA’s text and its legislative history suggest that the exemption was understood to be a “grandfathering” provision for entities in existence before the CTA’s enactment. Another CTA provision expressly refers to entities subject to this exemption as “exempt grandfathered entities.” And in a floor statement made just before the passage of the CTA, Senator Brown explained that “[t]he exemption for dormant companies is intended to function solely as a grandfathering provision that exempts from disclosure only those dormant companies in existence prior to the bill’s enactment.” He added, “No entity created after the date of enactment of the bill is intended to qualify for exemption as a dormant company.” It therefore appears reasonable to FinCEN to interpret the dormant entity exemption as a grandfathering provision applicable only to entities in existence for over one year at the time the CTA was enacted. This interpretation also limits opportunities for bad actors to exploit the exemption by forming exempt shelf companies for later use.

Timing of Reports

Timing of Initial Reports

For newly formed or registered companies, proposed 31 CFR 1010.380(a)(1)(i) specifies that a domestic reporting company formed on or after the effective date of the regulations shall file a report within 14 calendar days of the date it was formed as specified by a secretary of state or similar office. Proposed 31 CFR 1010.380(a)(1)(ii) specifies that any entity that becomes a foreign reporting company on or after the effective date of the regulation shall file a report within 14 calendar days of the date it first became a foreign reporting company.

For entities formed or registered before the effective date of the regulations, the CTA requires filing of beneficial owner and company applicant information “in a timely manner,” but no later than two years after the effective date of the final regulations. Proposed 31 CFR 1010.380(a)(1)(iii) would require any domestic reporting company created before the effective date of the regulation and any entity that became a foreign reporting company before the effective date of the regulation to file a report not later than one year after the effective date of the regulation.

Proposed 31 CFR 1010.380(a)(1)(iv) would require entities that are not reporting companies by virtue of one or more exemptions to file a report within 30 calendar days after the date on which the entity no longer meets any exemption criteria.

Update or Correction of Reports

FinCEN proposes to provide reporting companies with 14 calendar days to correct any inaccurate information filed with FinCEN from the date on which the inaccuracy is discovered and 30 calendar days to update with FinCEN information that has changed after filing. Specifically, proposed 31 CFR 1010.380(a)(3) would require reporting companies to file a report to correct inaccurately filed information within 14 calendar days after the date on which the reporting company becomes aware or has reason to know that any required information contained in any report that the reporting company filed with FinCEN was inaccurate when filed and remains inaccurate.

Proposed 31 CFR 1010.380(a)(2)(i) provides that if a reporting company becomes exempt after filing an initial report, this change will be deemed a change requiring an updated report.

Proposed 31 CFR 1010.380(a)(2)(ii) provides that if an individual is a beneficial owner of a reporting company because the individual owns at least 25 percent of the ownership interests of the reporting company, and such beneficial owner dies, a change with respect to the required information will be deemed to occur when the estate of a deceased beneficial owner is settled.

Reporting Violations

The provision at 31 U.S.C. 5336(h)(1) makes it unlawful for any person to “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information . . . to FinCEN” or to “willfully fail to report complete or updated beneficial ownership information to FinCEN.” The CTA further provides for civil and criminal penalties for any person violating that obligation. Such person shall be liable for a civil penalty of up to $500 for each day a violation continues or has not been remedied, and may be fined up to $10,000 and imprisoned for up to two years, or both, for a criminal violation.

The proposed regulations clarify that a person “fails to report” complete or updated beneficial ownership information to FinCEN, within the meaning of section 5336(h)(1), if such person directs or controls another person with respect to any such failure to report, or is in substantial control of a reporting company when it fails to report.

The SEC issued a statement reminding public companies that on March 5, 2021, LIBOR’s regulator, the Financial Conduct Authority, and administrator, ICE Benchmark Administration, Limited, announced that the publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities will cease immediately after December 31, 2021, with the remaining USD LIBOR maturities ceasing immediately after June 30, 2023.

The statement said the SEC staff encourages companies to provide qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past December 31, 2021 or June 30, 2023, as applicable, to provide context for the status of the company’s transition efforts and the related risks.  For example, companies with material risk related to outstanding debt with inadequate LIBOR fallback provisions should consider disclosing how much debt will be outstanding after the relevant cessation date and the steps the company is taking address the situation, such as renegotiating contracts or refinancing the obligations.  To the extent that a company has or is taking steps to identify and assess LIBOR exposure and mitigate material risks or potential impacts of the transition, the company should consider providing investors insight into what the company has done, what steps remain, and the timeline for further efforts.

According to the SEC, companies generally include disclosures about the LIBOR transition as part of risk factors, recent developments, MD&A and/or quantitative and qualitative disclosures about market risk.  To the extent a company provides this disclosure in response to more than one disclosure requirement within a filing, the SEC encourages companies to consider providing a cross-reference or otherwise summarizing or tying the information together so an investor has a complete and clear view of the company’s plan for the discontinuation of LIBOR, the status of the company’s efforts, and the related risks and impacts.  The SEC staff expects disclosures to evolve over time as companies provide updates to reflect transition efforts and the broader market and regulatory landscape.

ISS has released updates to its 2022 ISS benchmark proxy voting policies. The updated policies will generally be applied for shareholder meetings taking place on or after Feb. 1, 2022, except for those updates that are being announced now with a one-year transition period and which will become effective in 2023.

Say on Climate (SoC) Management Proposals

ISS is codifying the framework developed over the last year for analyzing management-offered climate transition plans put up for shareholder approval, incorporating feedback received during this year’s policy development process including from the Climate Survey. For transparency, the policy lists the main criteria that will be considered when analyzing these plans (a non-exhaustive list).

Say on Climate (SoC) Shareholder Proposals

“Say-on Climate” shareholder proposals emerged late in 2020 and increased in 2021, generally asking companies to publish a climate action plan and to put it to a regular shareholder vote. This policy establishes a case-by-case approach toward such proposals and provides a transparent framework of analysis that will allow for consistency of assessment across markets.

Gender Diversity

ISS adopted a U.S. board gender diversity policy in 2019, which went into effect in February 2020, for companies in the Russell 3000 or S&P 1500 indices. Based on institutional investor feedback in 2021, after a one-year transition period, the current U.S. board gender diversity policy will be extended to all companies covered under U.S. policy with effect from 2023.

Board Accountability on Climate

Climate change and climate-related risks are now among the most critical topics for many investors, and this area has developed significantly in the last year. Many investors around the world are seeking to better integrate climate risk considerations in their investment, engagement, and voting processes. Scientific experts have stated that there is an imperative to limit cumulative CO2 emissions, aiming to reach net zero CO2 emissions by midcentury, along with strong reductions in other greenhouse gas emissions in order to limit human-induced global warming. The ISS policy updates for 2022 introduce a board accountability policy for the assessment of and focus on the world’s highest greenhouse gas (GHG) emitting companies.

In response to ISS’ 2021 Climate Policy survey, high percentages of investor respondents supported establishing minimum criteria for companies considered to be strongly contributing to climate change. Therefore, ISS is for 2022 focusing on the 167 companies currently identified as the Climate Action 100+ Focus Group, and will recommend against incumbent directors – usually the appropriate committee chair in the first year – in cases where the company does not have both minimum criteria of disclosure such as according to the Task Force on Climate-related Financial Disclosures (TCFD) and quantitative GHG emission reduction targets covering at least a significant portion of the company’s direct emissions.

Unequal Voting Rights

Due to the strong support expressed through the survey results and roundtable discussions, ISS will remove the grandfathering of older companies with unequal voting rights. After a one-year grace period, starting in 2023, ISS will generally recommend against relevant directors at all companies with unequal voting rights, irrespective of when they first became public companies.

The SEC staff has released guidance for companies about how to properly recognize and disclose compensation cost for “spring-loaded awards” made to executives.

Spring-loaded awards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction.

According to Staff Accounting Bulletin (SAB) No. 120 prepared by the SEC’s Office of the Chief Accountant and the Division of Corporation Finance, non-routine spring-loaded grants merit particular scrutiny by those responsible for compensation and financial reporting governance at public companies.

SEC staff believes that as companies measure compensation actually paid to executives, they must consider the impact that the material nonpublic information will have upon release.

According to the SEC companies should not grant spring-loaded awards under any mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.

According to SAB No. 120, the staff has observed numerous instances where companies have granted share-based compensation while in possession of positive material non-public information.  SAB No. 120 includes examples where adjustments may be necessary and reminds companies of their corporate governance obligations and disclosure obligations under U.S. GAAP with respect to share-based payment transactions, as well as the need to maintain effective internal control over financial reporting.

The “excepted foreign state” definition in the CFIUS rules operates together with other relevant terms to exclude from CFIUS’s jurisdiction covered investments by certain foreign persons who meet certain criteria establishing sufficiently close ties to certain foreign states. Section 800.218 defines excepted foreign state by a two-criteria conjunctive test, with delayed effectiveness for the second criterion. The first criterion is that the Committee identify a foreign state as an eligible foreign state. The second criterion is that, by the end of the two-year delayed effectiveness period ( i.e., by February 13, 2022), the Committee make a determination under § 800.1001(a) for each eligible foreign state as to whether such foreign state “has established and is effectively utilizing a robust process” to analyze foreign investments for national security risks and to facilitate coordination with the United States on matters relating to investment security.

The “excepted real estate foreign state” definition in the Part 802 Rule operates together with other relevant terms to exclude from CFIUS’s jurisdiction certain real estate transactions by certain foreign persons who meet certain criteria establishing sufficiently close ties to certain foreign states. The Part 802 Rule applies a two-criteria conjunctive test in the definition of excepted real estate foreign state that is analogous to the test in the Part 800 Rule, except that the second criterion is a determination under § 802.1001(a) that the foreign state must have “made significant progress” in establishing and effectively utilizing the robust process and coordination that is described in § 800.1001.

On January 17, 2020, the Committee identified Australia, Canada, and the United Kingdom of Great Britain and Northern Ireland as eligible excepted foreign states under the Part 800 Rule and as eligible excepted real estate foreign states under the Part 802 Rule. Thus, as of February 13, 2020, when the Part 800 Rule and the Part 802 Rule became effective, each of the three identified eligible foreign states was deemed to be an excepted foreign state and excepted real estate foreign state, without regard in each case to the second criterion, which is a determination under §§ 800.1001 and 802.1001. In order to remain an excepted foreign state and excepted real estate foreign state after February 12, 2022, each foreign state must remain eligible under §§ 800.218(a) and 802.214(a), respectively, and the Committee must make the determinations required under §§ 800.1001(a) and 802.1001(a), respectively, regarding the foreign state.

CFIUS has published a proposed rule that would change the date in each of §§ 800.218 and 802.214 from February 13, 2022, to February 13, 2023. The proposed rule therefore would have the effect of extending the delayed effectiveness period for the second criterion in each of the Part 800 and Part 802 Rules without making any change to the two-criteria conjunctive test in either the definition of excepted foreign state or the definition of excepted real estate foreign state. The proposed rule would make no change to any country’s status as an excepted foreign state or excepted real estate foreign state. Under the proposed rule, the Committee may make a determination under § 800.1001 or § 802.1001 for an eligible foreign state, including Australia, Canada, the United Kingdom of Great Britain and Northern Ireland and any other state that the Committee identifies as eligible, at any time before the revised February 13, 2023, date.

In 2019, the SEC proposed changes to its proxy advisor rules (the “2019 Proposed Rules”).  Later the SEC adopted final rules regarding proxy voting advice (the “2020 Final Rules”) provided by proxy advisory firms, or proxy voting advice businesses (“PVABs”).  PVABs include ISS, Glass Lewis and other proxy advisors.  The SEC now proposes to amend the 2020 Final Rules.

Background

The 2020 Final Rules, among other things, did the following:

  • Amended 17 CFR 240.14a-1(l) (“Rule 14a-1(l)”) to codify the Commission’s interpretation that proxy voting advice generally constitutes a “solicitation” subject to the proxy rules.
  • Adopted 17 CFR 240.14a-2(b)(9) (“Rule 14a-2(b)(9)”) to add new conditions to two exemptions (set forth in 17 CFR 240.14a-2(b)(1) and (3) (“Rules 14a-2(b)(1) and (3)”)) that PVABs generally rely on to avoid the proxy rules’ information and filing requirements. Those conditions include:
    • New conflicts of interest disclosure requirements in 17 CFR 240.14a-2(b)(9)(i) (“Rule 14a-2(b)(9)(i)”); and
    • A requirement in 17 CFR 240.14a-2(b)(9)(ii) (“Rule 14a-2(b)(9)(ii)”) that a PVAB adopt and publicly disclose written policies and procedures reasonably designed to ensure that (A) registrants that are the subject of proxy voting advice have such advice made available to them at or prior to the time such advice is disseminated to the PVAB’s clients and (B) the PVAB provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants that are the subject of such advice, in a timely manner before the security holder meeting (the “Rule 14a-2(b)(9)(ii) conditions”).
  • Amended the Note to Rule 14a-9, which prohibits false or misleading statements, to include specific examples of material misstatements or omissions related to proxy voting advice.

In addition to those two conditions noted, Rule 14a-2(b)(9) also sets forth two non-exclusive safe harbor provisions in paragraphs (iii) and (iv) that, if met, are intended to give assurance to PVABs that they have satisfied the conditions of Rules 14a-2(b)(9)(ii)(A) and (B).  Further, Rules 14a-2(b)(9)(v) and (vi) contain exclusions from the Rule 14a-2(b)(9)(ii) conditions. Those rules provide that PVABs need not comply with Rule 14a2(b)(9)(ii) to the extent that their proxy voting advice is based on a client’s custom voting policy or if they provide proxy voting advice as to non-exempt solicitations regarding certain mergers and acquisitions or contested matters.

The SEC stated the proposed amendments do not represent a wholesale reversal of the 2020 Final Rules. Rather, they are intended to be tailored adjustments in response to concerns and developments related to particular aspects of the 2020 Final Rules. The goal of the proposed amendments is to avoid burdens on PVABs that may impede and impair the timeliness and independence of their proxy voting advice and subject them to undue litigation risks and compliance costs, while simultaneously preserving investors’ confidence in the integrity of such advice.

Proposed Amendments to Rule 14a-2(b)(9)

According to the SEC investors continue to express strong concerns about the Rule 14a-2(b)(9)(ii) conditions.  The SEC states investors have asserted that the Rule 14a-2(b)(9)(ii) conditions impose increased compliance costs on PVABs and impair the independence and timeliness of their proxy voting advice and that such effects are not justified or balanced by corresponding investor protection benefits.

The SEC is proposing to amend Rule 14a-2(b)(9) by deleting paragraph (ii) and rescinding the Rule 14a-2(b)(9)(ii) conditions. The proposed amendments would also delete paragraphs (iii), (iv), (v) and (vi) of Rule 14a-2(b)(9), which contain safe harbors and exclusions from the Rule 14a-2(b)(9)(ii) conditions. The Rule 14a-2(b)(9)(ii) conditions were intended to benefit shareholders by improving the overall mix of available information so as to allow them to make more informed voting decisions. While the goal of facilitating more informed voting decisions remains unchanged, the SEC believes that the continued concerns expressed by the investors who rely on proxy voting advice to make their voting decisions warrants a reassessment of the appropriate means to achieve that goal.

When adopting the proposed amendments, the SEC considered PVABs’ efforts to develop industry-wide practices, as well as improve their own business practices, that could address the concerns underlying the Rule 14a-2(b)(9)(ii) conditions.  The SEC noted ISS has mechanisms in place that approximate at least a portion of the Rule 14a2(b)(9)(ii) conditions. Specifically, ISS makes its proxy voting advice available to registrants at the time such advice is disseminated to its clients. Although ISS does not update its proxy voting advice to incorporate any response a registrant may have to such advice, it does offer its advice to registrants for free. This presumably makes it easier for registrants to access ISS’ proxy voting advice and respond to such advice by publishing and filing additional soliciting materials in a more timely manner.

Proposed Amendment to Rule 14a-9

In the adopting release for the 2020 Final Rules, the SEC codified the guidance set forth in a previous interpretive release that proxy voting advice is generally subject to Rule 14a-9. The 2020 Final Rules amended Rule 14a-9 by adding paragraph (e) to the Note to that rule. Paragraph (e) sets forth examples of what may, depending on the particular facts and circumstances, be misleading within the meaning of Rule 14a-9 with respect to proxy voting advice. Specifically, Note (e) to Rule 14a-9 provides that the failure to disclose material information regarding proxy voting advice, such as the PVAB’s methodology, sources of information, or conflicts of interest could, depending upon particular facts and circumstances, be misleading within the meaning of the rule.

According to the SEC, PVABs, their clients and other investors continue to express concerns and uncertainty regarding the extent of PVABs’ liability under Rule 14a-9. PVABs continue to assert that the amendments may increase their litigation risks, thereby increasing their costs, which, ultimately, may be passed along to their clients. These parties indicate that those litigation risks could also impair the independence and quality of PVABs’ proxy voting advice if, for example, registrants use the threat of litigation to pressure PVABs to make their proxy voting advice more favorable to such registrants. Further, PVABs and their clients remain concerned that Rule 14a-9 claims may be available for registrants who disagree with their proxy voting advice. Such disagreements could pertain not only to PVABs’ voting recommendations, but also to the specific methodology, analysis and information that PVABs use to formulate their recommendations.

In light of these concerns, the SEC is proposing to delete Note (e) to Rule 14a-9. As discussed above, Note (e) sets forth examples of what may, depending on the particular facts and circumstances, be misleading within the meaning of Rule 14a-9 with respect to proxy voting advice. Although Note (e) was intended by the SEC to clarify the potential implications of Rule 14a-9 for proxy voting advice under existing law, the SEC believes it appears instead to have unintentionally created a misperception that the addition of Note (e) to Rule 14a-9 purported to determine or alter the law governing Rule 14a-9’s application and scope, including its application to statements of opinion.  The proposed deletion of Note (e) is intended by the SEC to address that misperception and thereby reduce any resulting uncertainty that could lead to increased litigation risks or the threat of litigation and impaired independence of proxy voting advice.

In 2016 the SEC adopted proposed rules related to use of universal proxies in contested director elections. The SEC has now adopted final rules.  The SEC also adopted changes to the form of proxy and proxy statement disclosure requirements applicable to all director elections.

The new rules will require use of a “universal proxy card” in all non-exempt director election contests. This universal proxy card must include the names of all duly nominated director candidates presented for election by any party and for whom proxies are solicited. The SEC believes requiring a universal proxy card in non-exempt director election contests is the most effective means to ensure that shareholders voting by proxy are able to elect directors in a manner consistent with their right to vote in person at a shareholder meeting.

The final rules:

  • Require the use of a universal proxy card by all participants in a non-exempt director election contest. The universal proxy card must include the names of both registrant and dissident nominees, along with certain other shareholder nominees included as a result of proxy access;
  • Expand the determination of a “bona fide nominee” to include a person who consents to being named in any proxy statement for a registrant’s next shareholder meeting for the election of directors;
  • Require dissidents to provide registrants with notice of their intent to solicit proxies and to provide the names of their nominees no later than 60 calendar days before the anniversary of the previous year’s annual meeting;
  • Require registrants to notify dissidents of the names of the registrants’ nominees no later than 50 calendar days before the anniversary of the previous year’s annual meeting;
  • Require dissidents to file their definitive proxy statement by the later of 25 calendar days before the shareholder meeting or five calendar days after the registrant files its definitive proxy statement;
  • Require each side in a proxy contest to refer shareholders to the other party’s proxy statement for information about the other party’s nominees and refer shareholders to the Commission’s website to access the other side’s proxy statement free of charge;
  • Require that dissidents solicit the holders of shares representing at least 67% of the voting power of the shares entitled to vote at the meeting; and
  • Establish presentation and formatting requirements for universal proxy cards that ensure that each party’s nominees are presented in a clear, neutral manner.

The SEC also adopted, as proposed, changes to the form of proxy and proxy statement disclosure requirements applicable to all director elections. These amendments:

  • Require proxy cards to include an “against” voting option in director elections, when there is a legal effect to a vote against a director nominee;
  • Require that the proxy card provide shareholders with the ability to “abstain” in a director election where a majority voting standard applies; and
  • Require proxy statement disclosure about the effect of a “withhold” vote in an election of directors.

Compliance with the new rules will be required for shareholder meetings held after August 31, 2022.

The SEC Division of Corporation Finance announced it has rescinded Staff Legal Bulletin (“SLBs”) Nos. 14I, 14J and 14K after a review of staff experience applying the guidance in them.  Public companies relied on the guidance in the SLBs to determine whether to seek a no-action letter to exclude shareholder proposals under Rule 14a-8, to engage with the shareholder proponent or to include the shareholder proposal in the company’s proxy statement.

Ordinary Business Operations

Rule 14a-8(i)(7), the ordinary business exception, is one of the substantive bases for exclusion of a shareholder proposal in Rule 14a-8. It permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” The purpose of the exception is “to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.”

Going forward, the staff will realign its approach for determining whether a proposal relates to “ordinary business” with the standard the SEC initially articulated in 1976, which provided an exception for certain proposals that raise significant social policy issues, and which the SEC subsequently reaffirmed. According to the SEC, this exception is essential for preserving shareholders’ right to bring important issues before other shareholders by means of the company’s proxy statement, while also recognizing the board’s authority over most day-to-day business matters. For these reasons, staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.

Under this realigned approach, proposals that the staff previously viewed as excludable because they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable under Rule 14a-8(i)(7). For example, proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.

Because the staff is no longer taking a company-specific approach to evaluating the significance of a policy issue under Rule 14a-8(i)(7), it will no longer expect a board analysis as described in the rescinded SLBs as part of demonstrating that the proposal is excludable under the ordinary business exclusion.

Micromanagement

Upon further consideration, the staff has determined that its recent application of the micromanagement concept expanded the concept of micromanagement beyond the Commission’s policy directives. Specifically, the staff believes that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement.

The staff stated it will take a measured approach to evaluating companies’ micromanagement arguments – recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement. Instead, the staff will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management. The staff stated it would expect the level of detail included in a shareholder proposal to be consistent with that needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.

Additionally, in order to assess whether a proposal probes matters “too complex” for shareholders, as a group, to make an informed judgment, the staff may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic. The staff may also consider references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.

Going forward the staff will not concur in the exclusion of proposals that suggest targets or timelines so long as the proposals afford discretion to management as to how to achieve such goals.

Economic Relevance

Rule 14a-8(i)(5), the “economic relevance” exception, permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.”

Based on a review of the rescinded SLBs and staff experience applying the guidance in them, the staff is returning to its approach, prior to SLB No. 14I, of analyzing Rule 14a-8(i)(5) in a manner it believes is consistent with case law.  As a result proposals that raise issues of broad social or ethical concern related to the company’s business may not be excluded, even if the relevant business falls below the economic thresholds of Rule 14a-8(i)(5). In light of this approach, the staff will no longer expect a board analysis for its consideration of a no-action request under Rule 14a-8(i)(5).

Other

The staff also republished, with what it describes as primarily technical, conforming changes, the guidance contained in SLB Nos. 14I and 14K relating to the use of graphics and images, and proof of ownership letters. In addition, the staff provided new guidance on the use of e-mail for submission of proposals, delivery of notice of defects, and responses to those notices.