The following are notable events that have occurred in the last week or two:
Jay Clayton – On to Full Senate Vote
The Senate Banking Committee voted this past Tuesday 15 to 8 to advance Jay Clayton’s nomination as the Chair of the SEC. The next step is for the full Senate to vote on the nomination.
EGC Status – Threshold Raised and Changes to SEC Cover Pages
Five years ago, former President Obama signed into law the Jumpstart Our Business Startups Act (the JOBS Act), which provided that “emerging growth companies” could take advantage of substantially reduced financial reporting and executive compensation disclosure requirements in connection with their IPOs and continue to enjoy these benefits during a post-IPO transition period of up to five years. The benefits of “emerging growth company” status originally could be enjoyed by companies with total annual revenues just short of $1 billion. Last Friday, the SEC made an inflation adjustment to raise the threshold to total annual revenues of $1.07 billion. The SEC will make an inflation adjustment every five years.
The SEC also amended its rules and forms to reflect certain JOBS Act provisions. For example, Item 303 of Regulation S-K (MD&A requirements) has been amended to reflect the fact that EGCs may provide the required disclosure for the most recent two (as opposed to three) fiscal years if that corresponds to financial statements in their IPO, to conform to the EGC rules. Additionally, to provide a uniform method for companies to indicate EGC status and whether they have elected not to use the extended transition period for compliance with new or revised financial standards, the SEC has added two check boxes on the cover of certain Exchange Act reports and registration statements.
Conflict Minerals – SEC Considering Next Steps
For the last three years, companies have been following SEC staff guidance allowing them to file Conflict Mineral Reports (Form SDs) without stating whether products are “DRC Conflict free” (or some variation of that terminology) as a result of a finding by the U.S. Court of Appeals for the D.C. Circuit that the requirement for such designation violated first amendment rights. On April 3, 2017, the D.C. District Court, to which the case had been remanded for any further proceedings, entered a final judgment in accordance with the decision of the Court of Appeals. The SEC must now consider its next steps. What happens next may be influenced by a GAO report published on April 5, 2017, prepared for the House Subcommittee on Africa and Global Health Policy and Senate Committee on Foreign Relations, available here. The report provides insights from company conflict mineral disclosures and describes agency actions. In the meantime, the SEC’s guidance remains in effect, at least until the SEC takes further action based on Acting Chair Piwowar’s direction to the staff – for which four Democratic senators have sought an independent investigation of his authority – to consider whether the rules and guidance are still appropriate and whether any additional relief is appropriate in the interim. Consistent with the staff’s April 2014 guidance, companies are not required to obtain an independent private-sector audit for the calendar year 2016 reporting period unless they choose voluntarily to use the label “DRC Conflict free” in their Conflict Minerals Reports to describe products containing “necessary conflict minerals.”
NYC Comptroller – Opposes Virtual-Only Annual Meetings & Urges Gender Pay Equity Disclosure
On April 2, 2017, NYC Comptroller Scott Stringer, noting the rapid increase in “virtual only” annual stockholder meetings, announced that the Comptroller’s Office has sent letters to over a dozen S&P 500 companies that host “virtual-only” meetings (as opposed to in-person or hybrid meetings), one of which can be accessed here. The Comptroller’s Office will be recommending that the New York City Pension Funds adopt a policy to vote against governance committee members at companies that hold virtual-only meetings. The policy would apply to S&P 500 companies in 2017 and to all U.S. portfolio companies in 2018.
This past week, the Council of Institutional Investors began a letter-writing campaign to companies moving from an in-person to a virtual-only meeting and urged them to give shareholders the choice to physically or virtually attend meetings (the so-called “hybrid” approach). Certain institutional investors, such as the California Public Employees’ Retirement System, have endorsed the hybrid approach, stating that virtual meetings should only be used as a supplement to in-person meetings. For the upcoming proxy season, shareholder proposal activists such as John Chevedden have submitted proposals to companies requesting that the company’s board of directors adopt a governance policy to initiate or restore in-person annual meetings. The SEC staff granted no-action relief to HP Inc. and Alaska Air Group, Inc., allowing the companies to exclude the shareholder proposal on the basis of the ordinary business exemption (14a-8(i)(7)). In light of the SEC no-action relief, activist James McRitchie has voiced that the only option remaining is to vote against directors serving on governance committees. ISS and Glass Lewis do not have policies opposing virtual-only annual meetings.
The NYC Comptroller announced on April 4, 2017 that it had reached agreements with six major healthcare and insurance companies, to which it had sent shareholder proposals last November, to disclosure information on gender pay equity. The information the companies agreed to provide varies by company. Two companies released information on their review of salaries and efforts to ensure women and men are paid equally. Another company agreed to disclose female to male salary ratios, opportunities for advancement and details on board oversight of compensation and benefits. A fourth company agreed to disclose its annual compensation review process, gender pay equity policies, opportunity for future advancement, and details on board oversight. Two companies agreed to conduct additional analysis. The announcement stated that three companies would not agree to the NYC Comptroller’s demands, and will be including a shareholder proposal from the NYC Pension Funds requesting such disclosure.