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

As we previously noted, the House was set to vote on the disapproval of the SEC Resource Extraction Rule under the Congressional Review Act. The joint resolution passed the House by a vote of 235 in favor and 187 against.  Now the Minneapolis StarTribune is reporting that “the Senate used an unusual pre-dawn vote to approve legislation, 52-47, killing a regulation that has required oil and gas companies to disclose payments to the U.S. or foreign governments for commercial development.”  The White House has said it would sign the joint resolution.

So now it is back to the drawing board for the SEC on this Dodd-Frank regulation that does not have much to do with the protection of investors. Given the current climate, one might be tempted to think the SEC won’t act to fast.  But Oxfam America previously sued the SEC and won, claiming the SEC was violating the Administrative Practices Act by dragging its feet.

Grant Thornton LLP became the first registered public accounting firm to file a Form AP with the PCAOB. Form AP currently requires identification of the engagement audit partner associated with certain SEC filings and the related Partner ID. Later this year the Form will also be required to include information for other audit partners participating in the audit.

SEC Acting Chairman Michael S. Piwowar issued a “Statement on the Commission’s Conflict Minerals Rule” and another statement titled “Reconsideration of Conflict Minerals Rule Implementation.”

Chairman Piwowar reviewed the history of the litigation and resulting SEC guidance noting “In April 2014, the Court of Appeals for the D.C. Circuit held that a portion of the disclosure required by the Commission’s Conflict Minerals Rule violated the First Amendment. Shortly thereafter, the then-Director of the Division of Corporation Finance issued guidance regarding compliance with the Rule in light of the court’s decision and the Commission issued an order staying the effect of the compliance date for those portions of the rule found to be unconstitutional. The case was subsequently remanded to the district court for further consideration. The litigation remains ongoing and the staff’s guidance remains in effect.”

While a new judge has been assigned to the district court case, as of yesterday there has been no activity on the docket.

Chairman Piwowar also noted “While visiting Africa last year, I heard first-hand from the people affected by this misguided rule. The disclosure requirements have caused a de facto boycott of minerals from portions of Africa, with effects far beyond the Congo-adjacent region. Legitimate mining operators are facing such onerous costs to comply with the rule that they are being put out of business. It is also unclear that the rule has in fact resulted in any reduction in the power and control of armed gangs or eased the human suffering by many innocent men, women, and children in the Congo and surrounding areas. Moreover, the withdrawal from the region may undermine U.S. national security interests by creating a vacuum filled by those with less benign interests.”

As a result, Chairman Piwowar has directed the staff to reconsider whether the 2014 guidance on whether the conflict minerals rule is still appropriate and whether any additional relief is appropriate. Chairman Piwowar is soliciting comments from all interested parties in the next 45 days.

Public companies are advised to continue preparation for filing upcoming conflict minerals reports unless and until the SEC issues new guidance. Suppliers should also note that even if the SEC were to change its stance, some companies that have invested in responsible supply chain initiatives are likely to continue to require some sort of certification.

The SEC has previously provided guidance on the filing of annual and supplemental reports required under Rule 17a-5 or Rule 17a-12 by broker-dealers or over-the-counter derivatives dealers on the SEC EDGAR system. However, filers commented that the process was complicated and time-consuming because it required that broker-dealers upload each of the components of the annual reports (for example, the statement of financial condition, the statement of income, and the statement of cash flows) as a separate attachment.

In response, the SEC has issued a revised no-action letter to FINRA. Under a new process, a broker-dealer filing its reports under paragraph (d) of Rule 17a-5 electronically on EDGAR could file in one of two ways:

  • The broker-dealer could attach one document containing all of the annual reports as a public document; or
  • The broker-dealer could attach two documents to its submission: a public document containing the statement of financial condition, the notes to the statement of financial condition, and the accountant’s report which covers the statement of financial condition; and a non-public document containing all of the components of the annual reports.

On Wednesday, February 1, 2017, the House of Representatives is scheduled to consider a joint resolution of disapproval of the SEC’s resource extraction rule. This resolution is provided for under the Congressional Review Act and was introduced by Capital Markets, Securities and Investment Subcommittee Chairman Bill Huizenga (R-MI).

According to a press release, the SEC’s rule, mandated by Section 1504 of the Dodd-Frank Act, puts American public companies at a competitive disadvantage to their foreign competitors, especially state-owned foreign corporations in countries like China and Russia. The SEC rule is a politically motivated mandate that the SEC’s Acting Chairman said is “largely contrary to the [SEC’s] core mission.”

The Congressional Review Act is a law that was enacted by the United States Congress as section 251 of the Contract with America Advancement Act of 1996, also known as the Small Business Regulatory Enforcement Fairness Act of 1996. The law empowers Congress to review, by means of an expedited legislative process, new federal regulations issued by government agencies and, by passage of a joint resolution, to overrule a regulation. Congress is given 60 legislative days to disapprove, after which the rule will go into effect.

For the regulation to be invalidated, the Congressional resolution of disapproval either must be signed by the President, or must be passed over the President’s veto by two-thirds of both Houses of Congress.

Fulfilling a campaign promise set forth in President Trump’s Contract with the American Voter, President Trump has signed an executive order to implement a requirement that for every new federal regulation, two existing regulations must be eliminated. The regulation puts the Director of the Office of Management and Budget, or the Director, in charge of implementing the executive order.  Reuters reported that the White House confirmed the executive order does not apply to independent regulatory agencies such as the Securities and Exchange Commission.

The executive order provides that “Whenever an executive department or agency (agency) publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed.”

The following requirements of the executive order are immediately applicable to the 2017 current fiscal year.  According to the order:

  • The total incremental cost of all new regulations, including repealed regulations, to be finalized this year shall be no greater than zero.
  • Any new incremental costs, or New Incremental Costs, associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations.
  • The Director shall provide the heads of agencies with guidance on the implementation of these provisions.

The executive order also provides parameters for regulations proposed in fiscal year 2018, and each subsequent fiscal year thereafter. According to the order:

  • The head of each agency shall identify, for each regulation that increases incremental cost, the regulations which offset New Incremental Costs described above, and provide the agency’s best approximation of the total costs or savings associated with each new regulation or repealed regulation.
  • Each regulation approved by the Director during the Presidential budget process shall be included in the Unified Regulatory Agenda required under Executive Order 12866, as amended, or any successor order.
  • During the Presidential budget process, the Director shall identify to agencies a total amount of incremental costs that will be allowed for each agency in issuing new regulations and repealing regulations for the next fiscal year. No regulations exceeding the agency’s total incremental cost allowance will be permitted in that fiscal year, unless required by law or approved in writing by the Director. The total incremental cost allowance may allow an increase or require a reduction in total regulatory cost.
  • The Director shall provide the heads of agencies with guidance on the implementation of the requirements in these provisions on standardized measurement and estimation of regulatory costs.
  • The Director will also be tasked with determining whether emergencies and/or other circumstances might justify individual waivers of the order’s requirements.

As used in the executive order, the term “regulation” or “rule” means an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency. There are exceptions for military, national security, or foreign affairs functions, regulations related to agency organization, management, or personnel, and any other category of regulations exempted by the Director.

The executive order is in addition to a regulatory freeze ordered by Reince Priebus, President Trump’s Chief of Staff. How the two directives work together remains to be seen.

[Update:  See our blog on President Trump’s executive order to implement a requirement that for every new federal regulation, two existing regulations must be eliminated.]

Reince Priebus, President Trump’s Chief of Staff, issued a memo ordering an immediate regulatory freeze (link via Politico). The memo was addressed to heads of executive departments and agencies.  According to the memo:

  • Except for emergency situations or other urgent circumstances relating to health, safety, financial, or national security matters, or otherwise, no regulation shall be sent to the Office of the Federal Register, or the OFR, until a department or agency head appointed or designated by the President after noon on January 20, 2017, reviews and approves the regulation.
  • Regulations that have been sent to the OFR but not published in the Federal Register must immediately be withdraw from OFR review.
  • For regulations that have been published in the OFR but have not taken effect, steps shall be taken, as permitted by applicable law, to temporarily postpone their effective date for 60 days.

Various news agencies described the action as typical for an incoming administration.

The SEC announced that Allergan Inc. had agreed to admit securities law violations and pay a $15 million penalty for disclosure failures in the wake of a hostile takeover bid.

The SEC’s order finds that Allergan failed to disclose in a timely manner its negotiations with potentially friendlier merger partners in the months following a tender offer from Valeant Pharmaceuticals International and co-bidders in June 2014.  Allergan publicly stated in a disclosure filing that the Valeant bid was inadequate and it was not engaging in negotiations that could result in a merger.  It was required to amend the filing if a material change occurred.  According to the SEC’s order, Allergan never publicly disclosed material negotiations it entered with a different company that would have made it more difficult for Valeant to acquire a larger combined entity.  And after those negotiations failed, the investing public wasn’t informed that Allergan entered into merger talks with Actavis, the company that ultimately acquired Allergan, until the announcement that a merger agreement had been executed.

A public company that is the subject of a tender offer has an obligation to express a position on the tender offer in a Schedule 14D-9. See Exchange Act Rules 14d-9 and 14e-2. Item 7 of Schedule 14D-9 (incorporating Item 1006(d) of Regulation M-A) requires the subject of a tender offer to provide certain disclosure, as elaborated further herein, if it enters into “negotiations” “in response to the tender offer” that relate to an “extraordinary transaction,” including a merger or acquisition transaction. After a Schedule 14D-9 is filed, Rule 14d-9(c) obligates the filer to amend the Schedule 14D-9 if any material change occurs.

According to the SEC, Allergan failed to disclose its negotiations with Actavis in a timely manner despite repeated requests from staff of the Commission’s Division of Corporation Finance, referred to as Corp. Fin. Following news reports of rumors that Allergan was in talks with potential friendly merger partners, Corp. Fin. staff urged Respondent to make appropriate disclosures. Specifically, on September 23, 2014, Corp. Fin. staff informed Allergan’s counsel that, to the extent that Allergan was engaged in merger negotiations, Schedule 14D-9 required those negotiations to be disclosed. Corp. Fin. staff reiterated this message in subsequent communications with Allergan’s counsel.

On January 17, 2017, the SEC announced nine settled enforcement actions for violations of the pay-to-pay rule against private equity, venture capital and hedge fund sponsors. The firms involved agreed to pay monetary penalties from $35,000 to $75,000.  In addition, the firms involved did not admit or deny the allegations.

The pay-to-play rule is designed to address pay-to-play abuses involving campaign contributions made by certain investment advisers or their covered associates to government officials who are in a position to influence the selection of investment advisers to manage government client assets, including public pension fund assets. Among other things, Rule 206(4)-5 prohibits certain investment advisers from providing investment advisory services for compensation to a government client (or to an investment vehicle in which a government entity invests) for two years after the adviser or certain of its executives or employees (known as covered associates) makes a campaign contribution to certain elected officials or candidates who can influence the selection of certain investment advisers.

While the amounts involved may seem small, the de minimis exception to Rule 206(4)-5 only permits covered associates to make aggregate contributions of up to $350, per election, to an elected official or candidate for whom the covered associate is entitled to vote, and up to $150, per election, to an elected official or candidate for whom the covered associate is not entitled to vote.

Some details of the enforcement actions are set forth below.

Adams Capital — a covered associate of this private equity sponsor made two $500 campaign contributions to two elected officials in Pennsylvania.

Aisling Capital — a covered associate of this venture capital sponsor made campaign contributions totaling $1,500 to a candidate for elected office and an elected official in New York.

Commonwealth Venture Management — two covered associates of this venture capital sponsor made campaign contributions totaling $1,000 to a candidate for elected office in Massachusetts.

Alta Communications — a covered associate of this private equity sponsor made a $500 campaign contribution to an elected official in Massachusetts.  After the contribution was made, the covered associate sought and received the return of the contribution.

NGN Capital — a covered associate of this venture capital sponsor made campaign contributions totaling $1,925 to two candidates for elected office in New York.

Lime Rock Management — a covered associate of this private equity sponsor made a $1,000 campaign contribution to an elected official in Ohio.

FFL Partners — a covered associate of this private equity sponsor made a $1,000 campaign contribution to a candidate for elected office in the state of Wisconsin.

The Banc Funds — a covered associate of this private equity fund made a $1,000 campaign contribution to a candidate for Governor of Illinois.

Pershing Square Capital Management — a covered associate of this hedge fund sponsor made a $500 campaign contribution to a candidate for elected office in Massachusetts.

With its passage of the SEC Regulatory Accountability Act last week, the U.S. House of Representatives has taken action to place additional constraints on future rulemaking by the Securities and Exchange Commission; however, many of the requirements of the legislation appear duplicative of pre-existing requirements to assess costs and benefits of proposed regulation.

The House’s Regulatory Accountability Act is expressly aimed at “ensuring that the benefits of proposed SEC regulations justify the potential impact on jobs, economic growth, and capital formation.”

In particular, under the House’s new legislation, the SEC will be required to:

  • identify the nature and source of the problem its proposed regulation is meant to address;
  • utilize the SEC’s Chief Economist to assess the costs and benefits of a proposed regulation to ensure the benefits justify the costs;
  • identify and assess available alternatives;
  • ensure that any regulations are consistent and written in plain language, and
  • conduct a comprehensive review of its regulation every five year assessing the impact of major rules.

Drafters of the proposed rulemaking are already tasked with complying with numerous pre-existing requirements (typically found in the “back end” of proposed rulemaking) which appear to substantially overlap with the Regulatory Accountability Act, such as the following:

  • the Regulatory Flexibility Act, which requires discussion of:
    • Reasons for, and Objectives of, the Proposed Action
    • Legal Basis
    • Small Entities Subject to the Proposed Rules
    • Projected Reporting, Recordkeeping and Other Compliance Requirements
    • Duplicative, Overlapping or Conflicting Federal Rules and
    • Significant Alternatives
  • the Small Business Regulatory Enforcement Fairness Act of 1996, which requires information as to how a “major” rule could impact:
    • the broader economy;
    • individual consumers and industries and
    • competition, investment or innovation, and
  • the Paperwork Reduction Act of 1995, which focuses on burdens associated with information collection.

In addition, the SEC’s Division of Economic and Risk Analysis (DERA), created in 2009 with the goal, in part, to integrate financial economics and rigorous data analytics into rulemaking, collaborates on a cost/benefit analysis of each proposed rulemaking. See here for the SEC’s current guidance on the inclusion of economic analysis in rulemaking efforts. This cost/benefit analysis is then evaluated and signed-off on by the SEC’s Chief Economist.  Since it is already part of the SEC’s pre-existing rulemaking protocol, the Regulatory Accountability Act’s required reliance on the SEC’s Chief Economist to assess such costs and benefits of proposed regulation would seem to be unnecessary.

In light of the redundancies highlighted above, the House’s new legislation appears intended to serve as another obstacle to the SEC’s rulemaking agenda; further limiting the Commission’s ability to independently develop and implement rules and regulation absent a specific mandate from Congress.