We had previously reported on a Securities and Exchange Commission open meeting that had been scheduled for today.  The open meeting was cancelled.  The Commission approved the issuance of an interpretive release to provide guidance to public companies when preparing disclosures about cybersecurity risks and incidents.  The release (available here: https://goo.gl/QVhwSG) discusses the Commission’s views regarding the importance of maintaining robust policies and procedures relating to cybersecurity risks and incidents.  The guidance in the release updates and reinforces the guidance provided in 2011 by the Commission’s Division of Corporation Finance.

In a speech given early in the week at Stanford University’s Rock Center for Corporate Governance, titled, “Mutualism: Reimagining the Role of Shareholders in Modern Corporate Governance,” Commissioner Stein addressed a broad range of topics, including cybersecurity issues and shareholder engagement.  Commissioner Stein also commented on dual class capital structures.  Commissioner Stein, not speaking on behalf of the Commission, noted that in her view, dual class capital structures were not democratic and created a disconnect between the interests of shareholders and control parties.

Later in the week, Commissioner Jackson, speaking at Berkeley and making his first public remarks since joining the Commission, commented on perpetual dual class structures.  Commissioner Jackson cited statistics showing that the trend was on the rise, noting that 14% of the 133 companies that listed on U.S. exchanges in 2015 had dual class voting structures, compared to 12% in the prior year.  Commissioner Jackson outlined some of the benefits of dual class structures that have been noted in academic literature, as well as some of the disadvantages, and focused his comments on companies that adopt dual class structures and provide for these in perpetuity, as opposed to allowing for some sunset provisions.  The Commissioner cited research from a review of 157 dual-class IPOs that were undertaken in the last 15 years and noted significant differences in performance between those companies that had sunset provisions and those that did not.  Included in the remarks are additional data points and analyses.  While solely voicing his own views, Commissioner Jackson seemed to favor seeing modified listing standards from the national securities exchanges that would address the inclusion of sunset provisions.

Here are the links to the two speeches: https://goo.gl/zTccUU (Commr. Jackson); and https://goo.gl/TuCRMe (Commr. Stein).

Yesterday, the Securities and Exchange Commission announced that it will hold an open meeting on February 21st at 10 a.m. to consider various matters, including whether to approve the issuance of an interpretive release to provide guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.  The details may be found here.

A bill, H.R. 3978, that includes various disparate measures passed in the House of Representatives by a vote of 271 to 145.  Among the measures included in H.R. 3978 are the Fostering Innovation Act of 2017, about which we have previously written, which amends Sarbanes-Oxley Section 404(b) attestation requirements extending the exemption available to EGCs for a longer period—until the earlier of ten years after the EGC went public, the end of the fiscal year in which the EGC’s average gross revenues exceed $50 million, or when the EGC qualifies with the SEC as a large accelerated filer.  In addition, H.R. 3978 includes the National Securities Exchange Regulatory Parity Act, which modernizes Section 18 of the Securities Act.

In late January 2018, MSCI reopened a consultation with the investment community on the treatment of unequal voting structures. Under the MSCI’s proposal, the weights of shares with unequal voting rights in the MSCI Equity Indexes would be adjusted to reflect company level listed voting power in addition to free float. MSCI also released a discussion paper examining the theoretical and practical issues of the application of the “one share, one vote” principle. MSCI’s proposal follows the recent decisions of stock exchanges in Hong Kong and Singapore to allow dual-class voting structures in the face of increasing competition among exchanges to list companies. In contrast, in July and August 2017, S&P Dow Jones Indices and FTSE Russell excluded from some of their indices companies that have multiple voting classes.

Feedback on the MSCI’s proposal may be submitted on or before May 31, 2018 and MSCI will announce the results of the consultation on or before June 21, 2018. In the meantime, MSCI will continue to apply the temporary treatment of unequal voting structures until further notice, which does not affect any current index constituents (for more information on the temporary treatment, see our prior blog post available here).

A copy of the discussion paper is available here.

On February 12, 2018, in no-action relief granted to a mortgage REIT, the Staff of the SEC acknowledged that the real estate finance business has evolved substantially since the enactment of the Investment Company Act, with the creation and use of new debt financing techniques and mortgage-related products.  In the relief, the Staff indicates that a particular mortgage REIT’s assets, sources of income, historical development, and public representations of its policy, and the activities of its officers, directors, and employees (and other relevant factors), may evidence that the mortgage REIT is primarily engaged in the real estate finance business and, therefore, should be able to rely on the Section 3(c)(5)(C) exemption.

The Section 3(c)(5)(C) exemption generally excludes from the definition of “investment company” any entity primarily engaged in, among other things, purchasing or otherwise acquiring mortgages and other interests in real estate.  In order to qualify for this exemption, a mortgage REIT must comply with strict asset tests, including having at least 55% of its assets consist of mortgages and other liens on, or interests in, real estate that are the functional equivalent of mortgage loans (including certain mortgage-backed securities), referred to as “qualifying assets,” and at least 80% of its assets consist of qualifying assets and real estate-related assets.  Over time, the Staff has provided guidance to mortgage REITs in the form of no-action letters regarding the types of securities that it deems to be qualifying assets.

However, in this new principles-based grant of relief, the Staff focuses on the business activities of the particular issuer, instead of whether a particular asset is a qualifying asset, in determining the availability of the Section 3(c)(5)(C) exemption.  Mortgage REITs should consider obtaining confirmation from the SEC Staff regarding their own particular business activities in order to avoid any potential future uncertainty with respect to any securities held as part of the mortgage REIT’s portfolio.

For a copy of the no-action relief, please see the link below:
https://www.sec.gov/divisions/investment/noaction/2018/great-ajax-funding-021218-3c5.htm.

 

In the recently released Congressional Budget Justification, the Securities and Exchange Commission highlights a number of priorities.  In discussing the Division of Corporation Finance’s activities, the request notes that the Division remains focused on measures designed to promote capital formation.  Among these, the report notes that the Division will consider and propose amendments to modernize disclosure requirements under Regulation S-K as part of the Disclosure Effectiveness Initiative and will implement recommendations resulting from the FAST Act-mandated Regulation S-K study.  The budget request also references the Commission’s intent to “propose amendments to further facilitate capital formation through exempt and registered offerings.”  The request also refers to proposed amendments to modernize industry-specific disclosures applicable to real estate companies, including REITs.  While changes to Industry Guide 7 (mining) and Industry Guide 3 (financial institutions) have been underway, this is the first reference to changes to the REIT industry guide.  Reference is also made to the Commission’s efforts to establish the Office of the Advocate for Small Business Capital Formation.

See the request here:  https://www.sec.gov/files/secfy19congbudgjust.pdf.

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:

Undue Prominence?

Lin Cheng, Darren Roulstone, and Andrew Van Buskirk consider whether the manner in which information is placed in public company disclosures influences investors’ reactions.  Their paper, “Are Investors Influenced by the Order of Information in Earnings Press Releases?” finds that generally positive information is given more prominence in press releases.  Positive information often appears first rather than being dispersed throughout a release.  The placement of the information conditions investor response.  Given the SEC’s focus on undue prominence given to non-GAAP measures now, such measures would not be emphasized at the expense of GAAP measures.  However, other information may be subject to the same approach by reporting companies.  On a positive note, the study finds that investors do not place undue reliance on the positive information emphasized by management.

Bill Hinman, Director of the Securities and Exchange Commission’s Division of Corporation Finance delivered the keynote address at the Practising Law Institute’s annual Securities Regulation in Europe program.  During his speech, Mr. Hinman touched on various topics, including the types of measures that may be undertaken in order to make the capital markets and the public company alternative more attractive.  He discussed the accommodations available to foreign private issuers (FPIs), as well as the Division’s policy changes extending the confidential submission process to companies other than emerging growth companies (EGCs).  Mr. Hinman noted that since adoption of the new policy in the summer of 2017, the Commission has received draft submissions for more than 20 IPOs of companies that exceed $1 billion in revenue or otherwise do not qualify to submit as EGCs, and from over 35 companies engaged in follow-on offerings.  Mr. Hinman also reiterated the willingness of the Division staff to review and consider requests made under Regulation S-X Rule 3-13 for accommodations relating to financial statement presentation.

Addressing future areas of focus, Mr. Hinman noted that the Staff is discussing ways in which internal processes, such as filing reviews and the consideration of no-action letter requests, as well as possible updates to the Financial Reporting Manual and the Compliance and Disclosure Interpretations in order to make these more user-friendly.  Turning to disclosure, Mr. Hinman noted that the Staff is considering whether additional guidance would be helpful regarding cybersecurity disclosure.  Mr. Hinman also provided some insight on future rulemaking.  He noted that the Staff is:

  • preparing recommendations for a proposal to implement the resource extraction issuer disclosure provision of the Dodd-Frank Act;
  • considering rulemaking to raise the threshold companies for smaller reporting company eligibility;
  • recommending final rules to update and simplify disclosure requirements that are outdated, or are overlapping or duplicative with other Commission rules or U.S. GAAP;
  • preparing recommendations for proposals to amend the rules for financial information required for acquired entities (Regulation S-X Rule 3-05), as well as Regulation S-X Rule 3-10 for disclosures by guarantors and issuers of guaranteed securities; and
  • developing recommendations for updating Industry Guide 3 to modernize the disclosure requirements for financial institutions.

The full text of Mr. Hinman’s remarks are available here:  https://www.sec.gov/news/speech/speech-hinman-020118.