Securities Snapshot: 4th Quarter 2019

In this edition of KMK Law’s Securities Snapshot, we review the ongoing rulemaking of the U.S. Securities and Exchange Commission and its Division of Corporation Finance along with other developments outlined below. The SEC and the Division have recently issued guidance or proposed amendments related to the following:

  • Certain shareholder proposal exclusions;
  • Procedural requirements and resubmission thresholds for shareholder proposals;
  • Proxy advisory firm solicitations;
  • Definition of “accredited investor”;
  • Confidential treatment applications; and
  • Disclosure of intellectual property and technology risks in international operations.

The New York Stock Exchange also filed with the SEC a revised rule change proposal relating to direct listings by issuers, which is summarized below. Finally, a reminder of various considerations companies should take into account when preparing annual reports and proxy statements in 2020 is provided.

SEC Guidance Relating to Exchange Act Rule 14a-8(i)(7)

On October 16, 2019, the Division issued a bulletin providing guidance on certain issues arising under Exchange Act Rule 14a-8.  The bulletin addressed the “ordinary business” exception under Rule 14a-8(i)(7), which allows a company to exclude from its proxy statement certain proposals that “deal[ ] with a matter relating to the company’s ordinary business operations.” The applicability of the exception is based on (1) the subject matter of the proposal and (2) the degree to which the proposal involves the “micromanagement” of the company. A bulletin is not a rule, regulation or statement of the SEC and merely represents the view of the Division.

Regarding the first consideration of determining the applicability of this exception, the Division clarified its approach to provide that the focus should be on whether the proposal deals with a matter relating to the company’s ordinary operations or addresses a policy issue that goes beyond ordinary operations.  The Division will take a company-specific approach in determining the significance of a particular issue to a company, as opposed to classifying certain issues as universally significant. As such, documentation of a board of directors’ analysis and discussion of an issue’s significance will assist the Division in determining that a proposal may be excluded, including discussion of the factors outlined in SLB No. 14J, including the following:

  • Whether the company has already addressed the issue in some manner, including the differences between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the difference presents a significant policy issue for the company; and
  • Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results, and how the company’s subsequent actions, intervening events or other objective indicia of shareholder engagement on the issue bear on the significance of the underlying issue to the company.

Under the second consideration, the Division will review the proposal to see whether it seeks extensive detail or imposes a specific strategy, process or outcome, which would serve to bypass the judgment of management and the board and would support a determination that the proposal involves micromanaging. To support an assertion that a proposal should be excluded due to micromanagement, a company should include an analysis regarding “how the proposal may unduly limit the ability of management and the board to manage complex matters with a level of flexibility necessary to fulfill their fiduciary duties to shareholders.”

The bulletin issued by the Division can be found here.

Proposed Amendments of Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8

On November 5, 2019, the SEC proposed amendments to certain procedural requirements and resubmission thresholds under the shareholder proposal rule of Rule 14a-8.

Under the proposed amendments, a shareholder would be eligible to submit a Rule 14a-8 proposal for inclusion in a company’s proxy statement if the shareholder has continuously held at least:

  •  $2,000 of the company’s securities entitled to vote on the proposal for at least three years;
  • $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or
  • $25,000 of the company’s securities entitled to vote on the proposal for at least one year.

Additionally, the proposed rules would require the shareholder to provide a statement that he or she is able to meet with the company no less than 10 days, nor more than 30 days, after submission of the shareholder proposal and would apply the one proposal limit to “each person” rather than “each shareholder” who submits a proposal.

Finally, the SEC is proposing to increase the applicable resubmission thresholds, pursuant to which a company is required to resubmit shareholder proposals from previous years if the proposals received a certain percentage of the votes cast. As such, the resubmission thresholds of 3%, 6%, and 10% under Rule 14a-8(i)(12) would be increased to to 5%, 15%, and 25%, respectively.

The proposed amendments are currently subject to a 90-day comment period and can be found here.

Proposed Amendments on “Proxy Advisor” Exemptions

On November 5, 2019, the SEC proposed amendments to its rules governing proxy solicitations to require proxy advisors to provide to their clients more extensive disclosure of material conflicts of interest.

First, the SEC is proposing to amend Rule 14a-1(l) to have the terms “solicit” and “solicitation” include any proxy voting advice that makes a recommendation to a shareholder regarding its vote on a matter by a person who markets its expertise as a provider of such voting advice and sells such advice for a fee.  As a result, proxy advisory recommendations may be deemed solicitations subject to the SEC’s proxy rules.

Second, the proposed amendments to Rule 14a-2(b) would require any proxy advisory firm relying on the exemptions from the information and filing requirements of the proxy rules pursuant to this Rule to comply with the following conditions:

  • Proxy advisors must disclose material conflicts of interest in their proxy voting advice;
  • Registrants must be given at least three business days to review the proxy voting advice and provide feedback, provided the registrants file their proxy statements less than 45 but at least 25 days before the date of the shareholder meetings; and
  • Registrants may request that proxy advisors include in their voting advice a hyperlink or similar medium directing the recipient of the advice to written statements that contain the registrants’ views on the advice.

The proposed amendments can be found here.

NYSE Revised Rule Change Proposal on Direct Listings

On December 11, 2019, in response to the SEC’s rejection of its initial primary direct listing proposal, the NYSE filed a revised rule change proposal that would allow issuers to sell newly issued primary shares in a direct listing. A direct listing refers to the listing of a privately held company’s stock for trading on a national stock exchange without conducting an underwritten offering, spin-off or transfer quotation from another regulated stock exchange. The proposal would delay, until 90 trading days after the direct listing, the requirement that an issuer have 400 round lot holders at the time of listing.

Additionally, issuers may meet the NYSE’s market value requirement for a primary direct listing by selling $100 million of shares.

The proposal submitted to the SEC by the NYSE can be found here.

Proposed Amendments to Accredited Investor Definition

On December 18, 2019, the SEC announced it voted to propose amendments to the definition of “accredited investor” to add new categories of individuals and entities.

Among other new categories, the amendments would include within the definition of “accredited investor” those individuals who have obtained certain professional certifications, such as a Series 7, 65 or 82 license or who are “knowledgeable employees” of a private fund that is being invested in. Furthermore, limited liability companies would qualify for accredited investor status if they have total assets in excess of $5 million and were not formed for the specified purpose of acquiring the securities being offered.

“Spousal equivalents”, which would be classified as cohabitants occupying relationships generally equivalent to that of spouses, are also included in the “accredited investor” definition, thereby allowing spousal equivalents to pool finances for the purpose of meeting the “accredited investor” thresholds.

The proposed amendments can be found here.

SEC Guidance on Confidential Treatment Applications

On December 19, 2019, the SEC issued guidance regarding the process for applying for confidential treatment of information filed with the SEC. The guidance offers an alternative to the SEC’s rules issued in April 2019 under Regulation S-K Item 601(b) permitting companies to file redacted material contracts without applying for confidential treatment of the redacted information provided the redacted information (i) is not material and (ii) would be competitively harmful if publicly disclosed.

To apply for confidential treatment under Rules 406 and Rule 24b-2, a registrant must omit all confidential information from an exhibit attached to a filing and must mark the exhibit to indicate where it has omitted information. The filing must also indicate, where appropriate within the exhibit, that the confidential information has been filed separately with the SEC. The registrant must also send a written application to the SEC requesting confidential information, which must include, among other items, an unredacted copy of the exhibit with the confidential portioned identified, the Freedom of Information Act exemption upon which confidentiality is requested, the time period for which confidentiality is sought and the rationale for why public disclosure is unnecessary.

The guidance issued by the SEC can be found here.

SEC Guidance on Intellectual Property and Technology Risks Associated with International Operations

On December 19, 2019, the SEC issued guidance regarding considerations companies should take into account with respect to disclosing risks related to intellectual property and technology associated with international operations.

If relevant to a company’s international business operations, the SEC is advising that disclosure of risks of theft of technology, data and intellectual property by private parties or foreign actors should be considered, including direct theft by state actors or by reverse engineering or similar means.  Companies should assess whether agreements with foreign parties or legal or administrative requirements, such as license agreements granting atypical rights to foreign persons or regulations that require data to be stored in foreign jurisdictions, serve to compromise intellectual property or technology.

Consideration should be given to the effect potential theft may have on a company’s business, including reputation, stock price or business value, and to the measures the company has adopted to protect against such risks.

The guidance issued by the SEC can be found here.

Reminders for Annual Reports and Proxy Statements

Finally, it is important for companies to take into consideration the following when preparing annual reports and proxy statements in 2020:

 Annual Reports:

  • Management's Discussion and Analysis of Financial Position and Results of Operations: Exclusion of discussing the earliest of the three years of financial results if a discussion of that year is included in a prior SEC filing.
  • Description of Properties: Disclosure only required about physical properties that are material to the company.
  • Exhibits: Inclusion of a description of securities as an exhibit.
  • Cover Page: Disclosure of national exchange or principal U.S. market for the company’s securities, the trading symbol and class of securities and elimination of the checkbox whether the company indicates that there is no disclosure of delinquent Section 16 filers.
  • Inline XBRL: Cover page data must be tagged in Inline XBRL
  • Hyperlinks: EDGAR documents incorporated by reference must be hyperlinked, instead of being attached as exhibits.
  • Risk Factors: Special consideration should be given to risk factors related to the following risks and quality of related disclosures:
    • Brexit
    • LIBOR
    • Cybersecurity
    • Sustainability

Proxy Statements:

  • Hedging Disclosure: Disclosure of a company’s practices or policies that affect the ability of a company’s employees or directors to engage in hedging transactions or of the fact that the company does not have any such practices or policies in place.
  • Pay Ratio Median Employee Determination: Determination of whether the median employee has changed for purposes of determining the pay ratio calculation or disclosure that the same median employee as the previous year is being used and the basis upon which the company has determined that such use will not significantly affect its pay ratio disclosure.
  • Board Diversity: Disclosure of the diversity characteristics considered by the board or nominating committee in evaluating board nominees.
  • Environmental, Social and Governance (ESG) Issues: Determination of whether voluntary disclosure of ESG issues is necessary.

Securities Regulation & Compliance Group Overview

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


James C. Kennedy

F. Mark Reuter

KMK Law articles and blog posts 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. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.


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