By Bill Flook
Senate Banking Committee Chairman Mike Crapo, in an August 27, 2020, letter to SEC Chairman Jay Clayton, urged the market regulator to keep pushing on finalizing its agenda, following a prolific rulemaking push. Crapo, an Idaho Republican, pressed Clayton to finish the commission’s work on streamlining the exempt offering framework, raising thresholds for shareholders to submit and resubmit proposals, and modernizing Regulation S-K disclosures.
“The SEC staff and Commissioners have done their due diligence on these outstanding regulatory items,” Crapo wrote. “It is now time to take action and remove unnecessary restrictions, modernize and right-size these rules and regulations to enhance the competitiveness of the U.S. markets.”
The letter reflects a recent uptick in urgency among Republicans as the November election approaches, with the prospect that the next chairman of the SEC could be less inclined to follow the commission’s current deregulatory march.
Crapo’s plea comes a day after the SEC finalized two outstanding rules, one changing how public companies must disclose how they manage their workforce, the other expanding the definition of an accredited investor who can invest in less-regulated private offerings.
The SEC issued the accredited investor changes in Release No. 33-10824, Amending the “Accredited Investor” Definition, which allows investors holding certain professional licenses – such as a Series 7 – to qualify as accredited, even if they do not meet the wealth threshold. For decades, under Rule 501 in Regulation D under the Securities Act of 1933, an investor was only deemed accredited if they had at least an income of $200,000, joint income of $300,000, or at least $1 million in net worth, excluding a primary residence. The changes opens up private securities offerings to potentially hundreds of thousands of new investors. (See SEC Expands Pool of ‘Accredited Investors’ in the August 28, 2020, edition of Accounting & Compliance Alert.)
The SEC issued the human capital management rule in Release No. 33-10825, Modernization of Regulation S-K Items 101, 103, and 105, which sets out a materiality-based framework for public companies to disclose how their manage their workforce. (See SEC Adopts Disclosure Rule on Human Capital Management in the August 27, 2020, edition of ACA.)
The human capital management changes are part of a broader SEC effort to revamp its disclosure framework in Reg S-K.
“I encourage the SEC to finalize modernization of these Regulation S-K disclosures to improve their readability, as well as streamline the information collected,” Crapo wrote. “This update is beyond ripe for action as the last time the SEC reviewed Regulation S-K disclosures was more than 30 years ago.”
Crapo’s letter also focuses on two other unfinished proposals:
- Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, issued in November 2019.The proposal would make it more difficult for shareholders to both submit and resubmit proposals for a vote at a public company’s annual meeting. The SEC has scheduled a September 16 vote on the changes.
Today, Rule 14a-8 allows an investor to put forth a proposal if they have owned at least $2,000, or 1 percent, of a public company’s voting shares for at least one year.
Release No. 34-87458 would scrap that 1 percent threshold. In its place would be a new regime in which a shareholder with $2,000 of a company’s securities must hold them for three years to be eligible, falling to two years for a shareholder with $15,000 of a company’s securities, and one year for $25,000.
The proposal also squeezes the resubmission thresholds under Rule 14a-8(i)(12). Today, 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. Release No. 34-87458 steps up that vote requirement to 5 percent, 15 percent, and 25 percent, respectively, among other changes.
Raising both the submission and resubmission thresholds has been a longstanding priority of the business lobby, which has complained that investors with only marginal stakes in public companies have swamped them with “idiosyncratic” proposals that waste management’s time and resources. Central to those criticisms are the rise of environmental, social, and governance (ESG) proposals that seek greater disclosures from companies on topics such as climate risk and political spending.
Crapo, in his letter, said “the current rules have empowered a small number of individuals with limited stakes to consume corporate boardrooms.”
“This update is even more important as companies should be focusing their efforts on recovering from COVID-19 disruptions,” Crapo wrote.
Brown’s Democratic counterpart on the Banking Committee, ranking member Sen. Sherrod Brown of Ohio, earlier this month urged the SEC to drop the proposal, arguing it would “substantially restrict shareholders’ ability to hold corporate executives accountable for how corporations are considering and addressing those issues.”
House Democrats, in a “minibus” package containing SEC funding that passed the chamber in late July, included a provision that would block the changes in Release No. 34-87458.
- Release No. 33-10763, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, issued in March. The proposal would raise the dollar ceilings for offerings under Regulation D, Regulation A, and Regulation Crowdfunding (CF), 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.)
“Finalizing the harmonization of exempt offerings will remove roadblocks for small businesses looking for capital, which is especially critical in light of the COVID-19 pandemic,” Crapo wrote in his letter.
House Democrats, in the same funding package, included language that would bar the SEC from finalizing Release No. 33-10763 until it strengthened filing requirements under Reg D’sRule 506
Specifically, to move forward with its exempt offering rules, the SEC under the House budget would be required to wrap up its languishing 2013 proposal is Release No. 33-0416, Amendments to Regulation D, Form D and Rule 156, which would have beefed up requirements around Form D filings, as well as other changes.
This article originally appeared in the August 31, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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