On Wednesday, October 26, 2016, beginning at 10:00 a.m., the Securities and Exchange Commission will hold an open meeting at which the Commission will consider the adoption of final rule amendments relating to Securities Act Rule 147 and Rule 505, which would facilitate intrastate and regional securities offerings.  The proposed amendments were well-received by market participants and generated only modest comments.  The open meeting notice also states that the Commission will consider whether to repeal Rule 505.  Rule 505 provides an exemption for sales of up to $5 million of securities in a 12-month period, without the use of general solicitation, to accredited investors and, subject to information requirements, to non-accredited investors.  Presumably, the amendments to Rule 504 would render Rule 505 superfluous.

On September 28, 2016, the SEC proposed an amendment to Exchange Act Rule 15c6-1(a) in order to shorten the standard settlement cycle from three business days (“T+3”) to two business days (“T+2”) following the applicable trade date.  This amendment would affect settlements for most broker-dealer securities transactions, requiring prior agreement for any transaction with a settlement cycle longer than T+2.  The SEC cited several reasons for the proposed amendment, including (1) reducing credit, market, and liquidity risk, (2) reducing systematic risk for participants in the U.S. financial markets, and (3) increasing the operational efficiency of post-trade processes.  The SEC has requested comments on the proposed amendment from industry professionals, specifically with respect to the economic effects of shortening the settlement cycle to T+2, including any costs, benefits, burdens, or effects on efficiency, competition, and capital formation.  The proposed amendment is available for public comment for 60 days after publication in the Federal Register.

The proposed amendment is available at: https://www.sec.gov/rules/proposed/2016/34-78962.pdf.

Today, the two-year tick size pilot program, which was proposed by the national securities exchanges and FINRA in June 2014 and approved by the SEC in May 2015, officially commenced.  The pilot program is a data-driven test to evaluate whether or not widening the minimum quoting and trading increments (“tick sizes”) for stocks of smaller capitalization companies would impact the trading, liquidity and market quality of those stocks.  The SEC modified several provisions of the pilot program initially proposed by the national securities exchanges and FINRA.  A variety of data generated during the tick size pilot will be released publicly on an aggregated basis to assist in analyzing the impact of wider tick sizes on smaller capitalization stocks.  In addition, the national securities exchanges and FINRA must submit their initial assessments of the pilot program’s impact by April 1, 2018 based on data generated during the first 12 months of the pilot program’s operation.

The pilot program includes stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less, and a volume weighted average price of at least $2.00 for every trading day.  The pilot program consists of a control group of approximately 1,400 securities and three test groups with 400 securities each, selected through stratified sampling.  For the duration of the pilot program: (i) the control group will be quoted at the current tick size increment of $0.01 per share and will trade at the currently permitted increments; (ii) the first test group will be quoted in $0.05 minimum increments but will continue to trade at any price increment that is currently permitted; (iii) the second test group will be quoted in $0.05 minimum increments and will trade at $0.05 minimum increments subject to a midpoint exception, a retail investor exception, and a negotiated trade exception; and (iv) the third test group will be subject to the same terms as the second test group and also will be subject to the “trade-at” requirement to prevent price matching by a person not displaying at a price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies.  In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions similar to those under Rule 611 of Regulation NMS will apply.

The Securities and Exchange Commission has published the agenda for the October 5 meeting of the Advisory Committee on Small and Emerging Companies.

The Advisory Committee plans to discuss and cover Regulation S-K disclosure requirements, research on corporate board diversity and outreach relating to capital raising for smaller companies.

In addition, the Division of Trading and Markets will provide updates on equity capital market structure initiatives, a tick-size pilot, and the treatment of “finders”.

The meeting begins at 9:30am and will be live streamed via the SEC’s website.

Today the SEC announced it will host a public forum to discuss financial technology (Fintech) innovation in the financial services industry.  The press release notes that the forum is designed to foster greater collaboration and understanding among regulators, entrepreneurs and industry experts into Fintech innovation and evaluate how the current regulatory environment can most effectively address these new technologies. The panels will discuss issues such as blockchain technology, automated investment advice or robo-advisors, online marketplace lending and crowdfunding, and how they may impact investors. The forum will be on November 14, 2016. See: https://www.sec.gov/news/pressrelease/2016-195.html

Next week, the House is scheduled to debate two bills designed to reduce regulatory burden on small businesses in order to facilitate access to capital.  H.R. 5424, the Investment Advisers Modernization Act, was approved by the Financial Services Committee on June 16, 2016.  H.R. 2357, the Accelerating Access to Capital Act, was approved by the Financial Services Committee on May 20, 2016.  H.R. 2357 will also consist of two other bills, H.R. 4850 and H.R. 4852.

  • H.R. 5424 proposes to amend the Investment Advisers Act of 1940 and directs the Securities and Exchange Commission to amend its rules to modernize certain requirements relating to investment advisers.
  • H.R. 2357 proposes to direct the Securities and Exchange Commission to revise Form S-3 so as to permit securities to be registered pursuant to General Instruction I.B.1. of the form if either: (1) the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant is $75 million or more, or (2) the registrant has at least one class of common equity securities listed and registered on a national securities exchange.
  • Incorporated into H.R. 2357, H.R. 4850, the Micro Offering Safe Harbor Act, proposes to amend the Securities Act of 1933 to exempt certain micro-offerings from the Act’s registration requirements.  To qualify for the exemption (1) each purchaser has a substantive pre-existing relationship with an owner; (2) there are 35 or fewer purchasers; and (3) the amount does not exceed $500,000.  H.R. 4852, Private Placement Improvement Act of 2016, proposes to direct the SEC to revise the filing requirements of Regulation D (which provides exemptions from securities registration requirements) to require an issuer that offers or sells securities in reliance upon a certain exemption from registration to file, no earlier than the date of first sale of such securities, a single notice of sales containing the information required by Form D for each new offering of securities.

Financial Services Committee Chairman Jeb Hensarling noted that “[t]hese bills are solutions that will more appropriately balance rules with the urgent need to provide small businesses with greater access to capital so they can start up, hire workers and grow.”

Earlier this week, as part of the continuing Disclosure Effectiveness initiative, the SEC released a proposed rule for comment that would require registrants that file registration statements and periodic and current reports that are subject to the exhibit requirements under Item 601 of Regulation S-K, or that file on Forms F-10 or 20-F, to include a hyperlink to each exhibit listed in the exhibit index of the filings. The amendments would also require that registrants submit all of these filings in HTML format.  Currently, registrants list out exhibits and it often is time-consuming to trace back to identify when the registrant filed an exhibit that’s been incorporated by reference to a prior filing.  Here is the link to the proposed rule, which is subject to a 45-day comment period:  https://www.sec.gov/rules/proposed/2016/33-10201.pdf.

On August 25, 2016, the SEC issued a release requesting comments on certain disclosure requirements under Regulation S-K relating to disclosures on management, certain security holders and corporate governance matters contained in Subpart 400.  This request is part of an initiative by the SEC’s Division of Corporation Finance to review the disclosure requirements under Regulation S-K in order to consider ways to improve them for the benefit of investors and registrants.  The SEC also indicated that comments received in response to its request for comment will also inform the SEC’s study on Regulation S-K, which is required under Section 72003 of the Fixing America’s Surface Transportation Act (FAST Act).  Subpart 400 of Regulation S-K contains the following items:

  • Item 401: generally requires certain disclosures about a registrant’s directors, executive officers, promoters and control persons, or persons performing similar functions, and, if it has not adopted such a code of ethics, an explanation why it has not done so.
  • Item 402: generally requires disclosure of all plan and non-plan compensation awarded to, earned by, or paid to a registrant’s named executive officers and directors.
  • Item 403: generally requires a description of the security ownership of certain beneficial owners and management.
  • Item 404: generally requires a description of certain transactions with related persons, promoters and certain control persons.
  • Item 405: generally requires a registrant to identify certain persons who failed to file on a timely basis, as disclosed in certain forms or reports required by Exchange Act Section 16(a) during the most recent fiscal year or prior fiscal years.
  • Item 406: generally requires disclosures about whether the registrant has adopted a code of ethics that applies to certain of the registrant’s executive officers, or persons performing similar functions, and, if it has not adopted such a code of ethics, an explanation why it has not done so.
  • Item 407: generally requires certain corporate governance disclosure about director independence, board meetings, various board committees (e.g., nominating, audit and compensation committees) and any process for shareholder communications.

The deadline for submitting comments to the SEC is the date 60 days after publication of the release in the Federal Register.

The SEC release is available at: https://www.sec.gov/rules/other/2016/33-10198.pdf

The use of non-GAAP financial measures by public companies continues to be an area of growing concern and focus of the Securities and Exchange Commission (“SEC”). On June 27, 2016, SEC Chair Mary Jo White, speaking at the International Corporate Governance Network’s Annual Conference in San Francisco, lamented that “[i]n too many cases, the non-GAAP information, which is meant to supplement the GAAP information, has become the key message to investors, crowding out and effectively supplanting the GAAP presentation.” That sentiment has been shared by senior SEC staff and articulated in recent speeches and pronouncements by James Schnurr, the SEC’s Chief Accountant, Wesley R. Bricker, the SEC’s Deputy Chief Accountant and Mark Kronforst, the Chief Accountant in the SEC’s Division of Corporation Finance.

More importantly, on May 17, 2016, the staff of the SEC’s Division of Corporation Finance (the “Staff’) issued updated Compliance and Disclosure Interpretations (the “Updated C&DIs”) on the use of non-GAAP financial measures. The Updated C&DIs build on previous C&DIs issued by the Staff in 2011, 2010 and 2003 and provide further SEC guidance on Regulation G (“Regulation G”) under the Securities Act of 1933, as amended (the “Securities Act”), and Item 10(e) of Regulation S-K under the Securities Act (“Regulation S-K”), the two principal rules enacted by the SEC in 2003 to address the use of non-GAAP financial measures.

Over the past few months, we have noticed an increase in the number of SEC comments to public companies relating to their non-GAAP financial measures disclosures. With the recent SEC focus on this topic and the release of the Updated C&DIs, registrants must be extra careful in their public disclosures and filings to ensure they are complying with Regulation G, Item 10(e) of Regulation S-K and the Updated C&DIs.

In our latest “Practice Pointers on Non-GAAP Financial Measures,” we discuss the nature of non-GAAP financial measures, the disclosure rules governing them, and the Updated C&DIs. We also look at some recent SEC comment letters addressing non-GAAP financial measures and offer some practical guidance for public companies to comply with the updated SEC guidance.

For more information, see our “Practice Pointers on Non-GAAP Financial Measures” available at: https://media2.mofo.com/documents/160816-practice-pointers-on-non-gaap-financial-measures.pdf

On July 26, 2016, the SEC revised Question 140.02 of its Compliance and Disclosure Interpretations (“C&DIs”) on Regulation S-K, pertaining to selling securityholder disclosure.  Revised Question 140.02 states that a registrant must disclose for any selling securityholder that is not a natural person, in addition to any material relationships between the registrant and such selling securityholder, the information required under Item 507 of Regulation S-K regarding any persons (entities or natural persons) who:

  • have control over such selling securityholder; and
  • have had a material relationship with the registrant or any of its predecessors or affiliates within the past three years.

In such case, the registrant must identify each such person and describe the nature of any relationships.  Previously, if a selling securityholder was not a natural person, a registrant only needed to identify in its registration statement the person or persons who had voting or investment control over the registrant’s securities owned by such selling securityholder.  In addition to revising Question 140.02, the SEC concurrently withdrew Question 240.04, which had stated that an issuer with a resale registration statement naming several investment funds as selling shareholders must name the natural persons who have or share voting or investment power for each fund as part of its Item 507 disclosure, even if voting or investment power for any fund is controlled by an investment committee consisting of a large number of individuals who each have a vote to approve the exercise of such power.

Revised Question 140.02 is available at:  https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm#140.02.