By Jennifer L. Howard
On December 14, the Securities and Exchange Commission (SEC) adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 and new disclosure requirements to enhance investor protections against insider trading. The amendments include updates to Rule 10b5-1(c) (1), which provides an affirmative defense to insider trading liability under Section 10(b) and Rule 10b-5.
On December 13, the SEC Division of Corporation Finance posted an update to several Non-GAAP Financial Measures Compliance & Disclosure Interpretations (C&Dis). The up- dated C&Dis are included here.
On December 7, the SEC reopened the comment period on proposed amendments intended to modernize and improve the disclosure required about an issuer's repurchases of its equity securities, commonly referred to as stock buybacks. The comment period was reopened to allow for time to con- sider the proposal in light of the potential tax impacts of the Inflation Reduction Act of 2022, which, beginning on January 1, 2023 imposes upon certain corporations a non-deductible excise tax equal to one percent of the fair market value of any stock of the corporation repurchased by such corpora- tion during the taxable year. The comment period will remain open for 30 days from publication in the federal register.
On December 1, Institutional Shareholder Services (ISS) announced updates to its benchmark voting polices that will be effective for the 2023 proxy season. Among other significant announcements, many updates relate to climate disclosure and related emissions targets, board diversity, officer exculpation of personal liability in certain situations, unequal voting rights, governance structures, political expenditures and share issuance mandates. Highlights include:
- ISS will generally recommend a withhold or against vote for directors individually, committee members or the entire board (except new nominees, who would be considered on a case-by-case basis), if the company has a common stock structure with unequal voting rights (including classes of common stock that have additional votes per share, classes of shares that are not entitled to vote on all the same ballot items or nominees, or stock with time-phased voting rights).
- Where a Delaware company proposes to amend its charter to provide for officer exculpation provisions (based on recent changes to Delaware law that allow companies to adopt charter provisions that eliminate personal liability of specified officers for breach of the duty of care), ISS will make its recommendations on a case-by-case basis, considering a number of factors, including the stated rationale for the change.
- ISS is introducing a new policy for shareholder proposals requesting company transparency on alignment of its political contributions, lobbying and election spending with its public commitments, stated values and policies, such as the alignment between climate lobbying and expressed climate goals. ISS will generally vote on a case-by-case basis on these matters, taking into account board policies and oversight, disclosure, inconsistencies between expenditures and publicly stated values/ priorities, and any recent significant controversies related to the company's political activities.
On November 2, the SEC adopted amendments to Form N-PX to enhance the information mutual funds, exchange-traded funds, and certain other registered funds report about their proxy votes. The rulemaking will also newly require institutional investment managers to disclose how they voted on executive compensation, or so-called "say-on-pay" matters. The new rules and form amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024.
On October 7, the SEC reopened the public comment periods for 11 SEC proposed rules and one request for comment due to a technological error that resulted in a number of public comments not being received by the SEC. Notable comment periods that were reopened include those relating to the Share Repurchase Disclosure Modernization Rule, the Climate-Related Disclosure Release, the SPAC Release and the Investment Company ESG and Names Rule Releases. The comment periods for each remained open for an additional 14 days after publication in the Federal Register.
On September 26, the SEC announced that the EDGAR filing system can now accept electronic Form 144 filings. The SEC recently adopted rules that require most Forms 144 to be filed electronically by March 2023.
On August 26, the SEC adopted two amendments to its whistleblower rules. The first rule change allows the SEC to pay whistleblowers for their information and assistance in connection with non-SEC actions in additional circumstances. The second rule affirms the SEC's authority to consider the dollar amount of a potential award for the limited purpose of increasing an award but not to lower an award.
On August 26, the SEC announced that the fees that public companies and other issuers pay to register their securities with the SEC will increase from $92.70 per million dollars to $110.20 per million dollars. The new filing fee rate became effective on October 1.
On October 26, a sharply divided SEC proposed a new rule governing outsourcing of certain services by investment advisers. Services covered by the proposed rule include: services necessary for an adviser to provide services in compliance with law; and services, if not performed or performed negligently, which would likely impact the adviser's clients or the ability for the adviser to provide advisory services.
Specifically, an adviser would be required:
- to conduct due diligence on the outsourced service provider and to update that due diligence periodically. Such due diligence would have to include (a) the scope of the outsourced services; (b) potential risks and mitigation of those risks; (c) the service provider's competence; (d) any subcontracting by the service provider; (e) the service provider's legal compliance efforts; and (f) plans for orderly termination of the arrangement;
- to keep records of the adviser's due diligence;
- to report information about outsourcing on the adviser's Form ADV; and
- for third-party record-keepers, in addition to the above due diligence, to obtain reasonable assurances the record-keepers will meet the following four standards:
- certain record-keeping requirements; (b) that they ensure records are kept in compliance with the record- keeping rules; (c) that they provide access to electronic records; and (d) they ensure records are kept even if the record-keeper is fired by the investment adviser.
- The comment period for the proposed rule will remain open until the later of (i) December 27, 2022 and (ii) 30 days after publication in the Federal Register.
On October 26, the SEC adopted new rules governing certain reporting and advertising by regulated funds. The new rule requires the semi-annual and annual reports of open-end funds to highlight certain information in these filings to make it easier for shareholders to review. This information will have to be delivered to shareholders, repealing a rule that permitted funds merely to inform their shareholders the filings are available on the fund's website. Funds will also be required to make available online and in Form N-CSR certain in- formation about fund investments and financial information. All investment companies (including registered closed-end funds and business development companies) will be required to present fund fees and expenses in advertising materials in a manner that is consistent with the presentation of this information in the fund's prospectus. The new rule becomes effective 18 months after publication in the Federal Register.
