& Securities

The Financial CHOICE Act of 2017, or H.R. 10¹, generally referred to as CHOICE 2.0, has emerged largely intact from a third day of contentious markup hearings in the House of Representatives’ Financial Services Committee – via a party-line vote of 34-26 – and should progress to a vote of the full House. At the same time, strong Democratic opposition makes it unlikely that this comprehensive effort to amend or repeal various aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) will survive Senate scrutiny. Even if H.R. 10 fails in Congress, however, we believe that certain provisions of CHOICE 2.0 will resurface, whether in the form of future, more targeted legislation, the efforts of individual agencies headed by Trump Administration appointees, or some combination of the foregoing.

Jay Clayton, confirmed by the Senate on Tuesday, May 2, in a 61-37 vote, was sworn in as Securities and Exchange Commission (SEC) Chair earlier today, Thursday, May 4. Although it is difficult at this point to predict his priorities, Mr. Clayton stated, during his Senate confirmation hearing, that “a key focus will be on re-balancing regulation in a post-Dodd-Frank era,” including an evaluation of Dodd-Frank rules and their effectiveness. However, he has not yet indicated whether he will continue the course of action taken by former Acting Chair Piwowar on Dodd-Frank disclosure rules relating to the CEO pay ratio and conflict minerals (see our earlier Client Alerts here and here).

In addition to CHOICE 2.0’s proposed changes to financial services regulation and the Consumer Financial Protection Bureau, the bill contains various provisions that would make significant changes to existing SEC regulatory initiatives and Dodd-Frank provisions relating to shareholder proxy voting rights, executive compensation, governance and/or “special-purpose” disclosure requirements. These provisions of CHOICE 2.0, as outlined briefly below, have been met with intense criticism by the Council of Institutional Investors (CII) and other shareholder advocates.

CII has focused in particular on the obstacles that CHOICE 2.0 would create for shareholders who wish to submit proposals for inclusion in a company’s proxy statement in accordance with Rule 14a-8 under the Securities Exchange Act of 1934 (the Exchange Act). CII’s letter to the House Financial Services Committee² asserted that governance practices that are “considered standard today,” such as majority director independence requirements, annual director elections, majority vote standards for director elections and proxy access, “simply would not have occurred without a robust shareowner proposal process in place.” CHOICE 2.0 would raise the bar for submission of shareholder proposals by directing the SEC to amend Rule 14a-8 to:

• Increase the ownership eligibility requirement from the current requirement that a proponent hold at least $2,000 or 1% of a company’s stock for one year, to requiring that a proponent hold at least 1% for at least three years
• Increase the level of support a proposal would have to garner in order to be resubmitted (currently 3%, 6% and 10% for the first, second, and third times a proposal is submitted within the preceding five years) to 6%, 15% and 30%.
• Prohibit the inclusion of proposals submitted by a person acting on behalf of a shareholder

Other proposed executive compensation, governance and/or “special-purpose” disclosure-related changes contained in CHOICE 2.0 that would generally affect bank and non-bank public companies alike, or curb the rulemaking authority of agencies such as the SEC, include:

• Requiring companies to hold say-on-pay votes only for those years in which there has been a “material change” to executive pay, and eliminating the requirement to hold say-on-pay frequency votes
• Repealing the Dodd-Frank provision directing the SEC to require disclosures regarding pay ratio (the ratio of CEO to median employee compensation)
• Limiting the reach of required executive compensation clawback policies to only those executive officers who had “control or authority” over the financial reporting that resulted in the accounting restatement that led to an overpayment, rather than to all executives who received an overpayment
• Repealing the Dodd-Frank provision directing financial regulatory agencies to issue rules prohibiting certain types of risk-based compensation at certain financial institutions (including registered broker-dealers)
• Repealing the Dodd-Frank provision directing the SEC to require disclosures of whether employees and directors are subject to company policies regarding hedging of company stock
• Repealing the Dodd-Frank provision directing the SEC to require enhanced disclosures about board leadership, i.e., separate versus combined CEO and Chairperson roles
• Repealing Dodd-Frank provisions mandating disclosures regarding the use of “conflict minerals,” governmental “resource-extraction” payments relating to commercial development of oil, gas and mineral resources around the world (discussed in an earlier Client Alert available here) and mine safety
• Eliminating the SEC’s authority under Dodd-Frank to adopt rules relating to shareholder proxy access
• Prohibiting the SEC from advancing its proposal to require universal proxy ballots in contested director elections (described in an earlier Client Alert available here)
• Requiring proxy voting advisory firms such as Institutional Shareholder Services and Glass-Lewis to register with the SEC as investment advisers, disclose any non-proxy advisory consulting services provided to issuers and other potential conflicts of interest, and to meet certain standards
• Expanding exemptions from the requirement to have an external auditor attest to management’s assessment of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 for issuers with a market capitalization of less than $500 million and emerging growth companies
• Expanding exemptions from the requirement to use XBRL in financial statements and periodic reports for issuers with total gross revenues under $250 million (for at least three years and possibly longer) and emerging growth companies (indefinitely)
• Raising the threshold for registration under Section 12(g) of the Exchange Act (currently triggered when a company has more than $10 million in assets and at least 2,000 record holders of a class of equity securities, or 500 record holders who are not accredited investors) by eliminating the accredited investor test and directing the SEC to index the asset test to inflation every five years
• Raising the threshold, from the current level of 300 record holders to 1,200, below which a domestic company may deregister a class of equity securities registered pursuant to Section 12(g) of the Exchange Act and/or rely on the automatic statutory suspension of any duty to file periodic reports with the SEC pursuant to Section 15(d) of the Exchange Act arising from an effective registration statement filed under the Securities Act of 1933
• Requiring Congressional approval by joint resolution for any “major rule” proposed by the SEC and other agencies, meaning any rule having an effect on the economy of $100 million or more, before such rule can go into effect

We will provide further updates on the potential implications for public companies of CHOICE 2.0 or regulatory action from the SEC as these developments unfold.

¹ Copies of H.R. 10, The Financial CHOICE Act of 2017, as introduced by House Financial Services Committee Chair Jeb Hensarling on April 26, 2017, and as proposed to be amended by Chair Hensarling on May 2 , 2017, are available (respectively) here and here

² CII Executive Director Ken Bertsch also testified before the minority members of the House Financial Services Committee on April 28, 2017. That testimony and CII’s letter are available here