Securities Snapshot: 3rd Quarter 2019

In this edition of KMK Law’s Securities Snapshot we review the ongoing rulemaking of the U.S. Securities and Exchange Commission (SEC) and its Division of Corporation Finance. While its rules on disclosure of hedging policies became effective in the third quarter, the SEC proposed amendments to modernize disclosures of business, legal proceedings and risk factors, including amendments that would require disclosures on human capital resources. The SEC also issued an interpretation and guidance related to the applicability of certain proxy rules to proxy advisory firms. In addition, the SEC issued various statements outlining securities law considerations related to opportunity zones and the transition from LIBOR. Finally, the SEC adopted rules permitting all companies to gauge market interest in registered offerings to "test the waters." As some of these third quarter initiatives reflect the SEC’s continued principles-based approach to disclosures and the disclosure framework, others illustrate the SEC’s evolving focus on the proxy process and responsiveness to particular market developments.

SEC Rules Relating to Disclosure of Hedging Policies

On July 1, 2019, SEC rules regarding the disclosure of hedging policies or practices became effective. New Item 407(i) of Regulation S-K requires public companies to provide, among other items:

  • A summary of the company’s hedging policies or the full text of such policies;
  • The categories of hedging transactions that are either specifically allowed or disallowed;
  • The effect of hedging policies on all employees and directors; and
  • If no hedging policy is in effect, a statement that no such policy is in effect.

The new rule applies to proxy statements for fiscal years beginning on or after July 1, 2019, with the exception of smaller reporting companies and emerging growth companies, who must begin making the disclosures for fiscal years beginning on or after July 1, 2020.

Statement Highlighting Risks for Market Participants to Consider In Transition from LIBOR

On July 12, 2019, the SEC staff published a statement seeking to encourage public companies to actively prepare for the transition away from LIBOR. Among other considerations, the SEC statement provides that such preparation should include determining current contractual exposure to LIBOR and evaluating possible alternatives to LIBOR in future contracts. The Division of Corporation Finance also provided specific advice to public companies that they should consider disclosures relevant to investors pertaining to LIBOR’s expected discontinuation.

For more information, the statement issued by the SEC can be found here.

Statement on Opportunity Zones: Federal and State Securities Laws Considerations

On July 31, 2019, the SEC and North American Securities Administrators Association published a staff statement on “opportunity zones” and related compliance implications under federal and state securities laws considerations.

In general, the statement indicated that interests in a “qualified opportunity zone” (QOF), which is an investment vehicle organized as a corporation or partnership to invest in qualified opportunity zone property, will be considered securities within the purview of federal and state securities laws, except under limited circumstances.

As such, QOF offerings are required to be registered with the SEC and applicable states, provided an exemption from registration is not available. Similarly, there may be broker and investment company registration requirements for QOFs.

For more information, the statement issued by the SEC and NASAA can be found here.

Proposed Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K

On August 8, 2019, the SEC proposed rule amendments to modernize the business, legal proceedings and risk factors disclosures that public companies are required to make pursuant to Regulation S-K.

The proposed amendments to Items 101(a), 101(c) and 105 would focus on a principles-based approach to allow companies to address the particular aspects of these disclosures that are material to each company. Under amended Item 101(a), companies would be required to disclose information only to the extent it is material to an understanding of the development of the company’s business. The proposal to Item 101(c) would require more detailed disclosures on a company’s human capital resources, including human capital measures or objectives that management focuses on in managing the business. Finally, Item 105, as amended, would require companies to disclose “material” factors, as opposed to the “most significant” factors, and require summary risk factor disclosure if the section is longer than 15 pages.

The proposed amendments are currently subject to a 60-day comment period.

The press release issued by the SEC to announce these proposed rule amendments can be found here.

Interpretation and Guidance Regarding the Applicability of the Proxy Rules

On August 21, 2019, the SEC issued an interpretation and related guidance regarding the applicability of certain rules to proxy advisory firms. The SEC interpretation imposes new regulatory oversight on proxy advisory firms that clarifies that proxy advisers are subject to Rule 14a-9 and the anti-fraud rules concerning materially false or misleading statements.

We expect proxy advisory firms will provide additional disclosures in in their reports in response to the guidance, such as:

  • Explanations of the methodology used to formulate voting advice;
  • Disclosures of peer group companies used by proxy advisory firms, including the names of those companies that are different than the ones selected by issuers and why firms decided to use those peers;
  • Disclosures of third party information sources, such as publications, databases, ratings or rankings published by third parties; and
  • Disclosures about material conflicts of interest in reasonably sufficient detail.

Although some proxy advisory firms have become increasingly transparent in recent years, the most significant updates to the disclosures by proxy advisory firms will likely relate to conflicts of interest. The SEC has recently issued guidance to investment advisers on fulfilling their proxy voting responsibilities to clients, which included a more thorough discussion about how to evaluate and consider the proxy advisory firms’ conflicts of interest. We expect the discussion in that guidance on how to analyze and evaluate potential conflicts of interest will likely inform related SEC expectations of proxy advisory firms.

SEC Rules Expanding "Testing the Waters" For Registered Offerings

On September 26, 2019, the SEC adopted final rules permitting all companies to gauge market interest in registered offerings (including possible initial public offerings) through “testing the waters” by reaching out to certain institutional investors before filing a registration statement. Prior to these rules, only emerging growth companies had been able to engage in this activity under provisions of the JOBS Act. New Securities Act Rule 163B will allow any issuer to engage in oral or written communications with potential investors who are (or are reasonably believed to be) institutional accredited investors (IAIs) or qualified institutional buyers (QIBs), either before or after the filing of a registration statement, to determine whether such investors have an interest in a contemplated registered securities offering. The rule is non-exclusive and an issuer may rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate about a contemplated securities offering. The rules will be effective in 60 days after publication in the Federal Register.

Securities Regulation & Compliance Group Overview

Should you have any questions or need assistance, please contact us.


James C. Kennedy

F. Mark Reuter

KMK Legal Alerts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.

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