In mid-December, the SEC published its semiannual regulatory agenda and plans for rulemaking. The Unified Agenda of Regulatory and Deregulatory Actions contains the Regulatory Plans of 28 federal agencies and 68 federal agency regulatory agendas. The Fall 2021 Agenda (“Agenda”) met with criticism from Commissioner Hester M. Peirce and now former Commissioner Elad L. Roisman as failing to provide any items intended to facilitate capital formation – one of the main tenets of the SEC. The Agenda is published twice a year, and for several years I have blogged about each publication.
The Agenda is broken down by (i) “Pre-rule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to be completed in a 12-month time frame jumped up to 52 items since Spring, which had only 45 items (which was more than the prior 32 items). Many of the new items are a revisit of previously passed rule changes.
Items on the Agenda can move from one category to the next or be dropped off altogether. New items can also pop up in any of the categories, including the final rule stage showing how priorities can change and shift within months.
Two items appear in the pre-rule stage, including exempt offerings and third-party service providers, both of which were also listed in the pre-rule stage on Spring Agenda. Third-party service providers refer to the asset management industry and includes services, such as index and model providers.
The SEC adopted final amendments updating the exempt offering rules and processes on November 2, 2020. I published a five-part blog on the series, including related to integration (HERE); offering communications (HERE); amendments to Rule 504, Rule 506(b) and 506(c) of Regulation D (HERE); Regulation A (HERE); and Regulation CF (HERE).
The Agenda indicates that the SEC is now planning on seeking public comment on ways to further updated the SEC rules for exempt offerings “to more effectively promote investor protection, including updating the financial thresholds in the accredited investor definition, amendments to Rule 701, and amendments related to the integration framework for registered and exempt offerings.” In August 2020, the SEC updated the definition of an accredited investor and specifically decided not to increase the financial thresholds (see HERE). In 2018 the SEC amended Rule 701 and issued a concept release seeking comment on potential further proposals (see HERE) and HERE). Rule 701 appeared on the long term list in Spring and so appears to be gaining traction again as a priority.
It seems we could be going back to the beginning in this whole process. As a practitioner, I am frustrated by the idea that the SEC’s rulemaking could be so partisan driven. Historically, that was not the case. Certainly, we have seen a different focus with new administrations but not a seesaw of rulemaking.
Forty-seven are included in the proposed rule stage, up from 36 on the Spring 2021 list, and include plenty of brand-new interesting topics as well as several from the Spring list. Executive compensation clawback (see HERE), which had been on the proposed rule list in Spring 2020, then moved to long-term action, and then back to proposed in Spring, remains on the proposed list. Clawback rules would implement Section 954 of the Dodd-Frank Act and require that national securities exchanges require disclosure of policies regarding and mandating clawback of compensation under certain circumstances as a listing qualification. This topic has been batting around since 2015. Clawbacks of incentive-based compensation arrangements at certain financial institutions that have $1 billion or more in total assets also remains on the proposed list.
Implementation of Dodd-Frank’s pay for performance, which had jumped from the long-term list where it had sat for years to the final rule stage in Spring, has been pushed down to proposed rule stage (see HERE). On January 27, 2022, The SEC re-opened the comment period on this languishing rule.
Similarly dropping from final rule stage to proposed rule stage are the controversial amendments to the Rule 144 holding period and Form 144 filings. In December 2020, the SEC surprised the marketplace by proposing amendment to Rule 144, which would prohibit the tacking of a holding period upon the conversion of variably priced securities (see HERE). The responsive comments have been overwhelmingly opposed to the change, with only a small few in support and those few work together in plaintiff’s litigation against many variably priced investors. Many of the opposition comment letters are very well thought out and illustrate that the proposed change by the SEC may have been a knee-jerk reaction to a perceived problem in the penny stock marketplace. I wholly oppose the rule change and hope the SEC does not move forward. For more on my thoughts on the damage this change can cause, see HERE.
Amendments to Regulation ATS for the registration of and reporting by alternative trading systems (ATS) for government securities also dropped from final rule stage to proposed rule stage. Proposed rules were published in January 2022.
Still on the proposed rule list is corporate board diversity (although nothing has been proposed, it is a hot topic and Nasdaq adopted its own board diversity rules in August 2021 – see HERE); mandated electronic filings increasing the number of filings that are required to be made electronically; Rule 10b5-1 and in particular, a review of affirmative defenses available for insider trading cases (see HERE); cybersecurity risk governance which could enhance company disclosure requirements regarding cybersecurity risk; amendments to the whistleblower program; disclosure regarding beneficial ownership of swaps including interests in security-based swaps; and short sale disclosure reforms.
Also still on the proposed list are several items that were new to the list last Spring in the ESG category, including climate change and human capital disclosure. In addition to many public announcements on the topic of climate change, in March, the SEC issued a statement requesting public input on climate change disclosure with a focus on enhancing and updating the prior 2010 guidance (see HERE). Although the SEC enhanced human capital disclosure requirements as part of recent Item 101 of Regulation S-K (description of business) disclosures (see HERE), it is now considering rule amendments to further enhance the disclosure requirements. Other proposed items in the ESG category are rules related to investment companies and investments advisors addressing environmental, social and governance factors.
Special purpose acquisition companies (SPACs) remain on the proposed list after being added in the Spring. The topic includes a plethora of potential rule changes such as specific exclusion from the protections of Private Securities Litigation Reform Act (PSLRA), enhanced disclosure requirements, amendments to Exchange listing requirements and changes to accounting treatment, among others (see HERE). Similarly, potential changes to Section 10 liability provisions surrounding loans or the borrowing of securities remains on the proposed rule list.
Another hot topic amongst the SEC and marketplace has been share repurchase programs by public companies, including the potential they unfairly benefit insiders selling into the upmarket created by the repurchase programs. Share repurchase disclosure modernization was added to the proposed list in Spring, where it remains. The SEC proposed rules on the topic in December, 2021 – see HERE.
Keeping with the redo trend the disclosure of payments by resource extraction issuers (proposed rules published in December 2019 – see HERE) and finalized in December 2020 (see HERE) is on the proposed rule list to determine if additional amendments might be appropriate.
Maintaining a willingness to subject the marketplace to continued regulatory uncertainty, back on the proposed list is amendments to the rules regarding the thresholds for shareholder proxy proposals under Rule 14a-8. After years of discussion and debate, the SEC adopted much-needed rule changes in September 2020 (see HERE) which are now back on the table. Not waiting for rule changes, the SEC issued new guidance on the topic which wiped out the three prior published guidance bulletins – see HERE. The complete proxy advisory rule changes (see HERE) are also back in play with new proposed rules having been published in November (blog coming soon).
Amendments to the transfer agent rules still remain on the proposed rule list, although it has been four years since the SEC published an advance notice of proposed rulemaking and concept release on new transfer agent rules (see HERE). Former SEC top brass suggested that it would finally be pushed over the finish line last year, but so far it remains stalled (see, for example, HERE).
Also still on the hefty proposed rule list is reporting on proxy votes on executive compensation (i.e., say-on-pay – see HERE); amendment to Form PF, the form on which advisers to private funds report certain information about private funds to the SEC (amendments proposed on January 26, 2022); money market fund reforms; electronic submission of applicators for orders under the Advisors Act, confidential treatment requests for filings on Form 13F, and ADV-NR; open-end fund liquidity and dilution management; prohibitions of conflicts of interest relating to certain securitizations; broker-dealer liquidity stress testing, early warning, and account transfer requirements; electronic filing of broker-dealer annual reports, financial information sent to customers, and risk-assessment reports; electronic filing by clearing agencies and security-based swap entities; electronic filing of Form 1 by a prospective national securities exchange and amendments to Form 1 by national securities exchanges; and registration and regulation of security-based swap execution facilities.
Continuing on the proposed list is equity market structure reform including related to payment for order flow, order routing, conflicts of interest, best execution, market concentration, and the disclosure of best execution statistics. Gary Gensler gave a heads-up that this was a priority in his May 6, 2021 speech to the House Financial Services Committee (see HERE). Keeping in the market structure category, the SEC is still considering amending the rules to shorten the standard settlement cycle. The historical t+3 was shortened to t+2 back in March 2017 (see HERE) and many believe that technology can currently handle t+1 with a goal of reaching simultaneous settlement (t+0).
Moving from long-term to proposed is amendments to the fund names rule, and additional changes to exchange-traded products.
New to the proposed list, in addition to the exempt offering changes discussed above, are amendments to Regulation D and Form D improvements. I’m unsure what these changes may entail as nothing has been published. Revisions to the definition of securities held of record is also new to the list. Any proposal would relate to the definition for purposes of Section 12(g) of the Exchange Act. For a review of the current rule, see HERE.
Also new to the proposed rule list are rules related to the trading prohibitions under the Holding Foreign Companies Accountable Act and associated enhanced listing standards. For more on the Act, see HERE. The Holding Foreign Companies Accountable Act rules supplant the former proposed rules enhancing listing standards for access to audit work papers and improvements to the rules related to access to audit work papers and co-audit standards. In June 2020, the Nasdaq Stock Market filed a proposed rule change to amend IM-5101-1, the rule which allows Nasdaq to use its discretionary authority to deny listing or continued listing to a company. The proposed rule change will add discretionary authority to deny listing or continued listing or to apply additional or more stringent criteria to an applicant based on considerations surrounding a company’s auditor or when a company’s business is principally administered in a jurisdiction that is a “restrictive market” (see HERE).
Bolstering Nasdaq’s position, the Division of Trading and Markets and the Office of the Chief Accountant are considering jointly recommending (i) amendments to Rule 2-01(a) of Regulation S-X to provide that only U.S. registered public accounting firms will be recognized by the SEC as a qualified auditor of an issuer incorporated or domiciled in non-cooperating jurisdictions for purposes of the federal securities laws, and (ii) rule amendments to enhance listing standards of U.S. national securities exchanges to prohibit the initial and continued listing of issuers that fail to timely file with the SEC all required reports and other documents, or file a report or document with a material deficiency, which includes financial statements not prepared by a U.S. registered public accounting firm recognized by the SEC as a qualified auditor.
Also new to the list are potential rule changes to the Advisors Act to address lack of transparency, conflicts of interest, and certain other matters involving private fund advisers; rules addressing conflicts of interest for clearing agencies of security-based swaps; prohibition against fraud, manipulation, and deception in connections with security-based swaps and disclosure of security-based swap positions; removal of references to credit ratings from Regulation M; electronic recordkeeping requirements for broker-dealers and security-based swap dealers and major security-based swap participants; expanding clearing of government securities; and further amendments to the definition of dealers (which could be a statutory response to the current plethora of dealer litigation actions against convertible note lenders).
Five items are included in the final rule stage, down from nine on the Spring Agenda, two of which are new to the Agenda. Holding Foreign Companies Accountable Act matters are listed in the final rule stage as well as proposed rule stage. See discussion above on this Act. Tailored shareholder reports, treatment of annual prospectus updates for existing investors, and improved fee and risk disclosure for mutual funds and ETFs as well as fee information in Investment Company ads is new and on the final rule list.
Still listed in the final rule stage is the universal proxy process. Originally proposed in October 2016 (see HERE), the universal proxy is a proxy voting method meant to simplify the proxy process in a contested election and increase, as much as possible, the voting flexibility that is currently only afforded to shareholders who attend the meeting. Shareholders attending a meeting can select a director regardless of the slate the director’s name comes from, either the company’s or activists. The universal proxy card gives shareholders, who vote by proxy, the same flexibility. The SEC re-opened comments on the rule proposal in April 2021 (see HERE) and finalized rules in November 2021 (see HERE).
Also, still in the final rule stage are filing fee processing updates including changes to disclosures and payment methods (proposed rules published in October 2019 and finalized in December 2021 – see HERE). Amendments to the NMS Plan for the consolidated audit trail data security remain in the final rule stage.
Eighteen items are listed as long-term actions, up one from the 17 that were on the Spring list, including many that have been sitting on the list for years and a few that are new. Continuing there tenure on the long term action list is conflict minerals amendments; additional proxy process amendments; custody rules for investment companies; amendments to improve fund proxy systems; investment company securities lending arrangements; end user exception to mandatory clearing of security-based swaps; definitions of mortgage-related security and small-business-related security; amendments to Rules 17a-25 and 13h-1 following creation of the consolidated audit trail (part of Regulation NMS reform); credit rating agencies’ conflicts of interest and transparency; amendments to requirements for filer validation and access to the EDGAR filing system and simplification of EDGAR filings; amendments to municipal securities exemption reports; and amendment to reports of the Municipal Securities Rulemaking Board.
Several items moved from the proposed list to the long-term action list including portfolio margining of uncleared swaps and non-cleared security-based swaps; stress testing for large asset managers; amendments to the custody rules for investment advisors (which was moved from proposed to long-term back to proposed, and now back to long-term); and establishing the form and manner with which security-based swap data repositories must make security-based swap data available to the SEC.
Moving from the pre-rule stage to a long-term action item is digital engagement practices for broker-dealers and investment advisors – i.e., gamification. Under the gamification category, the SEC is considering seeking public comment on potential rules gamification, behavioral prompts, predictive analytics, and differential marketing. Gary Gensler talked about gamification issues in a recent speech – see HERE.
New to the Agenda and appearing on the long-term action list is modernization of fixed income market structure.
Several items have dropped off the Agenda as they have now been implemented and completed, including amendments to the Investment Advisors Act of 1940 regarding investment adviser advertisements and compensation for solicitation; use of derivatives by registered investment companies and business development companies; market data infrastructure, including market data distribution and market access; and amendments to the SEC’s Rules of Practice.
Dropped from the Agenda in Spring and still missing are amendments to Form 13F filer thresholds, though Gary Gensler has hinted that this remains an upcoming priority. Amendments to the 13F filer thresholds were proposed in July 2020, increasing the threshold for the first time in 45 years. Surprisingly, the proposal was met with overwhelming pushback from market participants. There were 2,238 comment letters opposing the change and only 24 in support. Although the SEC continues to recognize that the threshold is outdated, it seems to be focusing on other, more pressing matters.
Other items dropped from the Agenda without action in Spring and still not listed include amendments to asset-backed securities disclosures (last amended in 2014); earnings releases and quarterly reports were on the fall 2018 pre-rule list, moved to long-term on the Spring 2019 list and up to proposed in Fall 2019 and Spring 2020 back down to long-term in Fall 2020 and now has been dropped altogether. The SEC solicited comments on the subject in December 2018 (see HERE), but has yet to publish proposed rule changes and is clearly not making this topic a top priority.
Also still dropped without action is amendments to Guide 5 on real estate offerings and Form S-11 (though some changes were made in relation to the acquisition of businesses by blind pools); and amendments to the family office rule (though I expect this will be partly covered by the item on the proposed list related to disclosure regarding beneficial ownership of swaps including interests in security-based swaps).
Disappointingly still not on the Agenda is Regulation Finders. Although the SEC proposed a conditional exemption for finders (see HERE), it does not go far enough, and again is not a priority.