By Bill Flook
The House Appropriations Committee on July 15, 2020, advanced a budget bill for financial regulators and other agencies that would give the SEC $1.92 billion for the fiscal year beginning in October, a more than $100 million boost over its current year funding.
The Financial Services and General Government (FSGG) appropriations measure would also block two SEC rule proposals, one on streamlining the framework for exempt securities offerings, the other raising the bar for shareholders to submit and resubmit proposals. The fiscal 2021 bill, which also funds the Treasury, Judiciary, Internal Revenue Service, among others, passed on a 30 to 22 vote.
The House Appropriations Committee, in its bill report, said it wanted to increase “protections for investors against predatory and unfair practices by financial companies and advisors.”
The budget boost would pay for SEC salaries and expenses “to increase enforcement actions related to securities and financial fraud, monitoring of major market participants, compliance examinations, and investor education activities,” the committee wrote in the report.
The budget also reflects Democratic grievances with the direction of the commission under Chairman Jay Clayton, who has largely prioritized easing financial market regulation during his tenure.
In one case, the budget would outright block the SEC’s November 2019 proposal in Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, which would make a series of changes that would increase the difficulty for shareholders to bring proposals up for vote.
The proposed rules address long-standing grievances by the business lobby that public companies are swamped by “idiosyncratic” proposals that have little to do with a business’s financial performance. The proposal is deeply unpopular with institutional investors, Democratic lawmakers, and financial reform activists, who argue the changes would stifle a large swath of shareholders and tip the corporate governance scales in favor of management.
(See Divided SEC Proposes to Make it More Difficult for Shareholders to Bring Proposals for Vote at Company Annual Meetings in the November 6, 2019, edition of ACA.)
Today, under Rule 14a-8, investors can put forth proposals if they own at least $2,000, or 1 percent, of a public company’s voting shares for at least one year. Under Release No. 34-87458, that 1 percent threshold would be eliminated. Instead, a shareholder with $2,000 of a company’s securities must hold them for three years to be eligible. That ownership period shrinks to two years for a shareholder with $15,000 of a company’s securities, and one year for $25,000.
The proposal also deals with the resubmission thresholds under Rule 14a-8(i)(12), which today allow a company to exclude a proposal from its proxy statement for a vote at the annual meeting if it failed to receive the support of 3 percent of shareholders if voted on once in the last five years, 6 percent if voted on twice in the last five years, and 10 percent if voted on three or more times in the last five years. Under Release No. 34-87458, that vote requirement would grow to 5 percent, 15 percent, and 25 percent, respectively, among other changes.
The budget would also place new conditions on the SEC finalizing its March proposal in Release No. 33-10763, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets.
Release No. 33-10763 is designed to streamline the current patchwork of exempt offerings that allow companies to raise capital without registering with the commission. Today, companies can use a range of exemptions when raising capital, including those in Regulation A, Regulation D, and Regulation Crowdfunding (CF), all of which carry different requirements for accounting, investor accreditation, and disclosure. The proposal in Release No. 33-10763 would raise the dollar ceilings for some of those exemptions, among other changes. (See SEC Proposes Broad Reforms for Exempt Offerings, Commissioner Lee Dissents Citing Erosion of Investor Protection in the March 6, 2020, edition of Accounting & Compliance Alert.)
Under the proposed Democratic budget, the SEC would be barred from using any of the funds to “finalize, issue, or implement any rule, regulation, or order regarding the exempt offering framework” unless it completes a 2013 proposal strengthening filing requirements around exempt offerings, in order to enhance the agency’s “ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation.”
The SEC in 2013 proposed Release No. 33-0416, Amendments to Regulation D, Form D and Rule 156, which would have beefed up Form D filing requirements under Rule 506 of Regulation D under the Securities Act of 1933, among other changes. House Democrats want the SEC to finalize those rules before it finishes up its work on the exempt offering framework.
This article originally appeared in the July 17, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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