On August 14, 2017, the SEC approved the NYSE’s proposed rule change amending Sections 204.12, 204.21, and 202.06(B) of its NYSE Listed Company Manual to require listed companies to provide notice to the NYSE at least ten minutes before making any public announcement about a dividend or stock distribution, including outside of the hours during which the NYSE’s immediate release policy is in operation.  The proposed rule change was issued on April 13, 2017 and was approved as originally proposed.  The principal effect of the change is to require listed companies to provide ten minutes advance notice to the NYSE with respect to a dividend announcement made at any time, rather than just during the hours of operation of the immediate release policy which had been the case previously.

A copy of the SEC order approving the proposed rule change is available at: https://www.sec.gov/rules/sro/nyse/2017/34-81393.pdf.

A copy of the proposed rule change is available at: https://www.nyse.com/publicdocs/nyse/markets/nyse/rule-filings/filings/2017/NYSE-2017-17.pdf.

On July 31, 2017, S&P Dow Jones Indices (“S&P”) issued a press release announcing a methodology change for multi-class shares following its consultation published on April 3, 2017.  The S&P Composite 1500 and its component indices will no longer add companies with multiple share class structures, such as Snap Inc. and Blue Apron Holdings, Inc.  The methodology change is effective immediately.  However, existing constituents of the S&P Composite 1500 will be grandfathered in and will not be affected by the methodology change, such as Alphabet Inc. and Facebook, Inc.  The S&P Global BMI Indices and S&P Total Market Index will continue to include companies with multiple share classes or with limited or no shareholder voting.  S&P noted that unlike the S&P Global BMI Indices and S&P Total Market Index, the S&P Composite 1500 (comprised of the S&P 500, S&P MidCap 400 and S&P SmallCap 600) follows more restrictive eligibility rules including a minimum float of 50% and positive earnings as measured by GAAP.  S&P also clarified that the methodologies of other S&P and Dow Jones branded indices remain unchanged.

A copy of the S&P press release is available here.

On Tuesday, July 25, 2017, SEC Chairman Jay Clayton spoke at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC). During the panel, Chairman Clayton discussed the Commission’s priorities on a variety of issues.

Bad Actors/Retail Fraud. Chair Clayton noted the substantial costs of the effects of a bad actor and the costs of restoring faith in our capital markets. He also made it clear that there would be no tolerance for retail fraud under his tenure.

Enforcement. Chair Clayton noted that the Commission has increased the use of data to determine more effective ways to target exams, taking into consideration to whom to issue an exam, how to conduct the exam and whether the Commission is being effective in these examinations.

Proxy Reports/Disclosure Effectiveness. Chairman Clayton noted that adding disclosure does not signal better disclosure. The Chairman stressed that disclosure should be written to protect the investor rather than be written in case of a court appearance.

Reduction in Number of Public Companies. The Chairman stressed that the Commission would not do anything to inhibit private capital formation. He cited a recent meeting with a number of small- and mid-cap companies where they discussed the timing of their respective IPOs. Chairman Clayton noted that having both a healthy public capital market and a private equity market provides companies with financing options, facilitates capital formation and provides healthy and necessary market competition.

Lifecycle of a Company. Chairman Clayton referenced that, in the past, the general public used to be able to participate in the growth of a company, but in our current environment, Main Street has a limited ability to participate. He noted that it is difficult to offer private investment opportunities to individual investors in a cost effective way.

Effectiveness of the U.S. Capital Markets. The Chairman noted that the U.S. capital markets are efficient for large-cap companies, but Chairman Clayton noted that there is room for improvement for mid- and small-cap companies. The Chairman outlined a number of factors affecting the effectiveness of the U.S. capital markets for smaller companies, including liquidity in the secondary trading markets and the costs of being a public company.

Costs of Compliance. Chairman Clayton acknowledged the Commission’s need to keep in mind the costs of compliance when writing rules, given that compliance can be very costly depending on how the rule is written.

Pay Ratio Rule. The Chairman noted that the Commission will be reviewing the rule but recognizes that the compliance date is coming.

Best Interest Standard. The Chairman directly stated that he would be disappointed if there were any reductions in choices for the individual investor relating to the best interest standard. The Chairman noted that, with the DOL’s Fiduciary Rule on the books, having differing standards for individual investors would not make sense. He then noted that the market would benefit from greater clarity on this issue. Chairman Clayton stressed that the Commission wants the best for the main street investor and is hopeful that common ground exists between the DOL and the Commission’s mandates.

Coordination Among Domestic Regulators. Chairman Clayton acknowledged the cooperative nature between the Commission and other domestic regulators such as FSOC and the CFTC. The Chairman stressed, however, that there should be no gaps between the various regulatory rules, no duplication and that regulators should not be asking for the same information in different ways. He noted that his colleagues at the other regulators share this view. Specifically, the Chairman confirmed that the Commission is engaged with the CFTC on this issue, given that these two entities oversight sometimes overlaps.

Cyber Security. The Chairman stressed that coordination among regulators is very important when it comes to cyber security and that regulators should be developing standards in order to effectively respond to these incidents. He acknowledged that fellow regulators are very open to cooperation and indeed see the need for this cooperation. The Chairman also addressed the issue of punishing victims of a cyber attack. He noted that if a company was acting responsibly in terms of protections and disclosures, regulators should not be punishing them for being victims.

International Harmonization. Chairman Clayton noted that it is part of the Commission’s mission to handle international coordination of regulation as more U.S.-based companies become global companies and participants. The Chairman specifically acknowledged the Commission’s preparation for the implementation of MiFIID II and for any issues that might arise from the rule.

Materiality. Chairman Clayton also touched on the issue of materiality during the Q&A portion. The Chairman noted that having a flexible materiality standard is useful given that, when a court is determining materiality, the determination is reflective of the substantial difference between certain projects.  In this instance, the Chairman was referencing the municipal bond space when discussing materiality.

In closing, the Chairman thanked former Chairman of the Commission Mary Joe White and Commissioner Michael Piwowar for their service.

On July 18, 2017, the House Subcommittee on Capital Markets, Securities and Investments held a hearing and heard testimony regarding the regulatory burdens facing public companies in the United States that may result in diminishing the appeal for privately held companies of undertaking an IPO.  The testimony focused principally on the requirements arising from the Sarbanes-Oxley Act, including auditor attestation, and the requirements arising from the Dodd-Frank Act.  Given that many private companies are less focused on disclosure burdens, it is a shame that almost all of the dialogue regarding the decline in the number of IPOs and the decline in the number of public companies in the United States has been limited to the same few themes.  Many private companies are more focused on other considerations, such as the availability of research coverage, liquidity in their stocks should they choose to become listed companies, short-termism and the pressures arising from the need to focus on each successive earnings announcement, litigation exposure, and a variety of issues that are broader than those considered by the witnesses.

Here is a link to the key takeaways:  https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=402173.

Securities and Exchange Commissioner Stein, speaking on the same day as Chair Clayton, in a speech that addressed principally market structure issues also made a number of observations on the current state of the markets. Commissioner Stein framed the market changes, such as the decline in the number of IPOs, somewhat differently than the Chair. She points out that framing matters as a “tug-of-war” between investors (demanding information) and issuers (seeking access to capital) may lead to viewing regulatory choices as a tradeoff between disclosure and capital formation. Such a view might not fully take into consideration the degree to which the market as a whole rely on access to information about private and public companies for price discovery and other purposes. Commissioner Stein observed that from “2009 through 2014, investors supplied nearly $17 trillion in primary capital – providing capital directly to companies in exchange for debt or equity securities.” During the same period, the amount of capital raised in the private markets outpaced the amount raised in the public market. Commissioner Stein noted that “during 2014, for every investor dollar raised in the public market, nearly $1.50 was raised in the private markets.” In her remarks, the Commissioner noted that there is an abundance of private capital that companies are able to access and, in addition, many companies are choosing to be acquired instead of going public. She observed that “One impact is a reduction in the aggregate amount of information available to the entire capital marketplace. On the whole, our markets are less transparent.” The complete remarks may be accessed here: https://www.sec.gov/news/speech/stein-lighting-our-capital-markets-071117.

In a speech earlier today, Securities and Exchange Commission Chair Clayton discussed the Commission’s guiding principles.  In his comments relating to disclosure requirements, Chair Clayton noted that “the roughly 50% decline in the total number of U.S.-listed public companies over the last two decades forces us to question whether our analysis should be cumulative as well as incremental.”  I believe it should be.  As a data point, over this period, studies show the median word-count for SEC filings has more than doubled, yet readability of those documents is at an all-time low.”  Clayton notes that the Commission needs to do more to make the public markets more attractive, without affecting adversely the private markets.  Consistent with the Commission’s statements a few days ago regarding the Commission’s willingness to consider requests from issuers regarding omitting certain information, Clayton noted that, “Under Rule 3-13 of Regulation S-X, issuers can request modifications to their financial reporting requirements in these situations.  I want to encourage companies to consider whether such modifications may be helpful in connection with their capital raising activities and assure you that SEC staff is placing a high priority on responding with timely guidance.”

Clayton also noted that the Staff of the Commission continues to work on recommendations following the report on modernizing and simplifying Regulation S-K requirements.  The full speech, which also addressed enforcement, the regulation of derivatives, and investment management, is available here:  https://www.sec.gov/news/speech/remarks-economic-club-new-york.

Monday, July 24, 2017
1:00 p.m. – 2:00 p.m. EDT

During this webinar, the panelists will address the rules applicable to U.S. public companies seeking to offer securities into Canada concurrent with undertaking a U.S. SEC-registered offering. The speakers also will address the framework applicable to Canadian companies that are MJDS filers, as well as the framework applicable to dual-listed (U.S. and Canadian) issuers that seek to undertake a range of financing transactions. In particular, the speakers will focus on navigating the rules of the road in the context of structuring and executing the following types of transactions:

  • PIPE transactions and private placements;
  • Confidentially marketed public offerings;
  • Public offerings completed on an agented or best efforts basis;
  • U.S.-style bought deals; and
  • At-the-Market offerings.

Speakers:

  • Timothy McCormick
    Partner, Stikeman Elliott LLP
  • Anna Pinedo
    Partner, Morrison & Foerster LLP

PLI will provide CLE credit.

For more information, or to register, please click here.

On June 1, 2017, the Public Accounting Oversight Board (PCAOB) adopted Auditing Standard No. 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, which the PCAOB believes will increase the relevance and utility of auditors’ reports by including additional information regarding the audit process, and other disclosures. Most significantly, the new standard requires inclusion in the audit report of a discussion of critical audit matters (CAMs) identified in the course of the audit. The new standard also contains an auditor tenure disclosure requirement and standardizes the format of the report, among other changes. The new standard retains the pass/fail opinion of the existing auditor’s report.

The new standard and other changes are subject to Securities and Exchange Commission (SEC) approval. Assuming that approval is obtained, the PCAOB expects the provisions, other than those related to CAMs, to take effect for audits for fiscal years ending on or after December 15, 2017. Provisions related to CAMs will take effect for (1) large accelerated filers, in connection with audits for fiscal years ending on or after June 30, 2019, and (2) all other filers, in connection with audits for fiscal years ending on or after December 15, 2020.

Read our client alert.

Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:

The effects of removing barriers to equity issuance, Journal of Financial Economics, July 14, 2016.  This article examines whether the relaxation of the eligibility requirements for use of a shelf registration statement, permitting smaller issuers to use a shelf registration statement, contributed to a decline in reliance by such companies on PIPE transactions for their follow-on capital-raising efforts.

Principles for Publicness, Florida Law Review, Omnig H. Dombalagian.  This article considers the duties that “public” companies owe investors and considers a tiered regulatory framework for companies as companies mature.

The Law and Economics of Scaled Equity Market Regulation, The Journal of Corporation Law, Jeff Schwartz.  This article reviews the concept of tiered regulation based on the size and age of companies using a marginal analysis model and concludes that size-based regulatory scaling is beneficial.

The Monitoring Role of the Media: Evidence from Earnings Management, Yangyang Chen, C.S. Agnes Cheng, Shuo Li, and Jingran Zhao, May 2017.  This article looks at the effect of media coverage on earnings management.  Media scrutiny serves to limit management of earnings in ways that favor insiders.

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) adopted a new standard for auditor’s reports that requires a description of “critical audit matters,” for purposes of providing investors with information regarding the most challenging, subjective or complex aspects of the audit. Under the new standard, critical audit matters are defined as any matter arising from the current period’s audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex auditor judgment. If no critical audit matters arose from the audit, the auditor’s report must state that there were no critical audit matters. The communication of each critical audit matter in the auditor’s report must include: (a) the identification of the critical audit matter; (b) a description of the principal considerations that led the auditor to determine that the matter was a critical audit matter; (c) a description of how the critical audit matter was addressed in the audit; and (d) a reference to the relevant financial statement accounts or disclosures. Additional changes to the auditor’s report under the new standard include items that are intended to clarify the auditor’s role and responsibilities, provide additional information about the auditor and make the auditor’s report easier to read for investors. Under the new standard, the auditor’s report will still retain the pass/fail opinion of the existing auditor’s report.

The new standard will apply to audits conducted under PCAOB standards, but communication of critical audit matters will not be required for audits of: (1) broker-dealers reporting under Exchange Act Rule 17a-5; (2) investment companies other than business development companies (BDCs); (3) employee stock purchase, savings and similar plans; and (4) emerging growth companies (EGCs) as defined under Exchange Act Section 3(a)(80). The new standard is still subject to approval by the SEC. If approved, all provisions other than those related to critical audit matters will take effect for audits for fiscal years ending on or after December 15, 2017. The provisions related to critical audit matters will take effect for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers and for fiscal years ending on or after December 15, 2020 for all other companies subject to such provisions.

A copy of the PCAOB’s fact sheet on the new standard is available at: https://pcaobus.org/News/Releases/Pages/fact-sheet-auditors-report-standard-adoption-6-1-17.aspx.

A copy of the PCAOB’s release on the new standard is available at: https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf.