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.
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.
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.
PIPE transactions have provided a useful capital-raising alternative when the public markets are inhospitable. A PIPE transaction also has become the financing of choice when it comes time to raise capital to finance an acquisition, recapitalize a company through a change-of-control transaction, or effect an orderly exit for an existing stockholder with a significant percentage ownership of the company. We summarize the PIPE activity for 2017 in our infographic.
In his remarks today, in addition to addressing initial coin offerings and blockchain related matters, Chair Clayton discussed the Securities and Exchange Commission’s remaining Dodd-Frank Act rulemaking mandates. Chair Clayton identified four categories of rulemaking. He noted that, with respect to the remaining security-based swap rules, the remaining rules are being considered holistically and harmonization with CFTC rules is under review. The second category relates to executive compensation rules. Chair Clayton notes that the Commission is likely to take a serial approach to completing the rest of the mandatory executive compensation rules. The third category relates to specialized disclosure rules, and Chair Clayton focused his remarks on the resource extraction rules and the need to navigate the Congressional Review Act limitations. The fourth category he identified relates to measures, such as clawbacks, which, Chair Clayton notes some companies already have taken steps to address. Here is a link to the full transcript of the remarks: https://www.sec.gov/news/speech/speech-clayton-012218.
The Securities and Exchange Commission’s Division of Economic and Risk Analysis is hosting a session in collaboration with New York University’s Salomon Center for the Study of Financial Institutions to discuss shareholder engagement and corporate governance related matters, including the roles of institutional and activist investors. The session will be held on January 19th. Additional details and information on registration are available here: https://www.sec.gov/news/press-release/2018-3.
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:
A Framework for Thinking about Leidos
In “Ask Me No Questions and I Will Tell You No Lies: The Insignificance of Leidos Before the United States Supreme Court,” Joseph Grundfest addresses the issues arising in Leidos, Inc. v. Indiana Public Retirement System. The Supreme Court had agreed to hear the case; however, it was settled before it reached the Court. In Leidos, the Court would have considered whether a separate Section 10(b) action may exist as a result of a pure omission (even if the omission does not render any affirmative statement false or misleading) to address Item 303 of Regulation S-K to discuss known trends. The Second Circuit has held that an omission of Item 303 disclosure is actionable under Rule 10b-5, while the Ninth Circuit has taken a contrary view. Grundfest notes that the importance of the case has been overstated as it is of no practical significance as to whether a material pure omission is actionable because it is a pure omission or because it results in a half-truth. More importantly, the paper provides an excellent discussion of Rule 10b-5 liability and the standard under Item 303.
The US Chamber of Commerce submitted a letter to the SEC noting the challenges that may exist for many public companies, especially those with complex global operations, by the recent passage of the tax changes. The letter notes that it may be quite difficult for public companies that have a December 31 fiscal year to take into account and reflect in their SEC filings, including in their Forms 10-K, the effects of the tax law changes on their financial results. See the letter here: https://www.centerforcapitalmarkets.com/wp-content/uploads/2017/12/US-Chamber-of-Commerce-Public-Company-Reporting-and-H.R.-1.pdf
Today, FINRA announced that its Board of Governors had approved publication of a Regulatory Notice seeking comment on rule amendments that would remove certain impediments to capital formation that are unnecessary to protect investors. Specifically, the proposal would amend Rules 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and 5131 (New Issue Allocations and Distributions) to exempt additional persons and types of transactions from the scope of the rules, modify current exemptions to enhance regulatory consistency, and address unintended operational issues. The statement does not refer to the proposed amendments to FINRA’s Corporate Financing Rule that were released earlier in the year however. See the notice here.
The SEC’s recently released rulemaking agenda (see: https://goo.gl/psRmG5) includes a number of matters that will affect capital formation. For example, the agenda references as priorities modernization of disclosures for mining registrants, amendments to the smaller reporting company definition, finalizing certain proposed changes to Regulation S-K and S-X to remove outdated requirements, Industry Guide 3 changes for bank holding company disclosures, Regulation S-X related changes, and amendments to implement the recommendations in the FAST Act study.
A few items of interest to readers of this blog were moved to the long-term action items. These include amendments to the accredited investor definition, extending the ability to test-the-waters to companies that are not EGCs, and the broader disclosure effectiveness related amendments to Regulation S-K.