The SEC’s Investor Advisory Committee met last Thursday. As Dave shared, the major agenda topics included pass-through voting/engagement with beneficial owners and non-GAAP financial disclosures. Here are some of the most interesting tidbits I took away from the commentary on pass-through voting by panelists Jill Fisch of University of Pennsylvania Carey Law School, John Galloway of Vanguard, Will Goodwin of Tumelo, Katie Sevcik of EQ Shareowner Services, and Paul Washington of the Society of Corporate Governance:
– The challenges with offering true voting choice (not just policy choice) for retail investors are largely engagement-related, not due to technology limitations.
– For institutional investors, the biggest issue with the traditional system is that there’s often a discrepancy between how their shares are voted in their separate account and how their shares held in pooled vehicles are voted, which dilutes their input. Pass-through voting can solve this discrepancy.
– There are more options when pass-through voting is offered to institutions, including true pass-though voting (voting their own individual ballots), creating a tailored voting policy or choosing among policies.
– Pass-through voting may present some challenges for issuers that need to be addressed. Those include: (i) identifying, communicating and engaging with upstream investors, (ii) educating retail investors about the choices offered, (iii) difficulties getting a quorum, (iv) implications for loaned shares and (v) other proxy plumbing considerations.
– There are many hurdles to greater retail investor participation. Those include: (i) access to information/information overload, (ii) limited time, (iii) intermediation issues (for example, that beneficial owners can’t attend a meeting without documentation from the broker), and (iv) the need for nuanced analysis on a proposal by proposal basis.
Law Prof Jill Fisch also pointed out that the voting instruction forms sent by brokers sometimes inadequately describe proposals, presenting another hurdle to retail investor participation because they have to do more digging. For example, a voting instruction form might just list “racial equity audit” or “health and safety governance” with no explanation of what the proposal is actually seeking to accomplish.
The panelists didn’t necessarily agree on the best outcome or path forward, but they seemed to acknowledge the importance of each other’s ‘must-haves’ and ‘need-to-haves’ as the proxy voting system evolves. Those include strong turnout, an informed voting base, that the system is cost-effective and efficient, that voting outcomes are accurate, and that there’s a democratic process for beneficial owners.
During last Thursday’s meeting, the Investor Advisory Committee also discussed non-GAAP financial measures, including whether current requirements related to non-GAAP disclosures (Regulation G and Item 10(e) of Regulation S-K) should be strengthened and whether greater standardization would benefit investors. Here are a few notable points made during the discussion by panelists Timothy Brown of KPMG, Steven Grey of Grey Value Management, Jeff Mahoney of the Council of Institutional Investors, Vanessa Teitelbaum of the Center for Audit Quality and Jose R. Rodriguez, independent board and audit committee chair.
– As Liz shared yesterday on CompensationStandards.com, Jeff Mahoney gave a strong reminder that transparency of non-GAAP measures in the context of executive compensation disclosures remains a priority for CII and its members. It’s one of the three main advocacy priorities that CII has identified for 2025. (CII previously submitted a rulemaking petition and follow-up letter on this topic.) Specifically, CII wants the Compensation Discussion & Analysis section of the 10-K or proxy statement to include an explanation of why non-GAAP measures are better than GAAP for determining executive pay and to include a quantitative reconciliation (or hyperlink) — not just the qualitative disclosure as to how the number is calculated from the audited financial statements that is currently required under Instruction 5 to Item 402(b) of Regulation S-K for disclosure of target levels that are non-GAAP financial measures.
– One of the questions presented to the panelists was “What challenges or benefits exist in implementing industry-specific non-GAAP reporting guidelines?” Jose Rodriguez suggested that the SEC release industry-wide guidance after issuing a comment letter to a company that discloses KPIs and non-GAAP measures that have become industry standard. He noted that, when a comment letter is issued, the company receiving the comment pivots its approach accordingly but its competitors often do not — meaning the problematic KPI or non-GAAP measure continues to be disclosed by others.
– Much of the discussion surrounded controls over non-GAAP numbers and the very limited role of a company’s auditors with respect to non-GAAP measures and disclosures. Some committee members expressed concern that investors may not always understand that non-GAAP numbers are unaudited. Some panelists suggested that companies consider engaging external support to weigh in on non-GAAP numbers to check calculations and consider consistency year-over-year, etc., but didn’t go so far as to say that mandating additional review of non-GAAP numbers was appropriate.
I recently blogged about the US District Court for the District of Colorado’s decision in Cupat v. Palantir Technologies, Inc. that dismissed a Section 11 claim arising out of a direct listing after applying the strict tracing requirement from SCOTUS’s decision in Slack Technologies v. Pirani. This Bloomberg article from Fried Frank’s Samuel Groner and Katherine St. Romain points out that there have been conflicting decisions from District Courts on this topic following the Slack decision.
In the September 2024 In re Coinbase Glob., Inc. Sec. Litig. decision, the US District Court for the District of New Jersey refused to dismiss Section 11 claims in a putative class action against cryptocurrency exchange Coinbase, which also went public via a direct listing.
In the [complaint], Plaintiffs allege they “acquired Coinbase common stock pursuant and/or traceable to the Offering Materials.” Additional Plaintiffs specifically allege: they purchased Coinbase stock on April 14, 2021, the first day of Coinbase’s Direct Listing, at prices near the opening price; and 88% of shares outstanding were registered pursuant to the Offering Materials when they purchased the Company’s stock. Lead Plaintiff alleges it purchased the Company’s stock on November 30, 2021, when 74% of the shares outstanding were registered pursuant to the Offering Materials. The Court finds Plaintiffs have plausibly alleged that they purchased shares pursuant and/or traceable to the Offering Materials.
As I shared in April, the Cupat v. Palantir Technologies, Inc. decision from the District of Colorado suggested that “nothing short of” chain-of-title allegations would be sufficient to plead traceability after Slack. Notably, Coinbase has appealed the District Court’s decision to the Third Circuit, “arguing the district court erred in allowing the case to proceed based on ’a possibility that the plaintiff purchased registered shares, not that a plaintiff actually purchased registered shares.’”
It feels like a lifetime ago, but you may remember that a coalition of investors led by ICCR filed a lawsuit in 2021 challenging the SEC’s 2020 amendments to Rule 14a-8, which, among other things, had changed the submission and resubmission thresholds in the rule. The complaint questioned the SEC’s economic analysis and argued that the SEC exceeded its authority to unfairly impede the shareholder proposal process. The lawsuit was supported by many institutional investors.
As Reuters reports, last Thursday, a District Court granted the SEC’s motion for summary judgment.
U.S. District Judge Reggie Walton in Washington, D.C. rejected arguments that the SEC arbitrarily and capriciously adopted the changes, including on the alleged pretext it supported corporate opposition to reforms on contentious issues such as climate change and workplace diversity.
The SEC was required to determine whether the changes would “promote efficiency, competition, and capital formation, and it did so,” Walton wrote in a 64-page decision . . .
In a joint statement following Walton’s decision, the plaintiffs said the changes “only serve to hurt shareholders and companies alike. Despite this decision, shareholders will continue to engage with corporations on their environmental and social impacts.”
House Committee on Financial Services Chairman French Hill and Subcommittee on Capital Markets Chairman Ann Wagner issued a statement applauding the decision and noting, “The House Financial Services Committee will continue working to streamline the proxy process and reduce burdens for companies seeking to compete in our public markets.”
At the end of last month, the SEC submitted its fiscal 2026 budget request to Congress. As SEC Chairman Paul Atkins said in his statement before the House Appropriations Subcommittee on Financial Services and General Government, the agency’s request for $2.149 billion for SEC operations is flat compared to both the FY 2025 and FY 2024 funding levels.
The budget anticipates approximately 4,100 full-time equivalents (FTEs), representing a net reduction of 447 FTEs compared to fiscal 2025 levels. Taking a look at the budget justification (thanks to the Daily Update from Securities Docket for highlighting!), it appears that the Enforcement Division is expected to be down to approximately 83% of its fiscal 2024 staffing levels, while Corp Fin staffing levels are expected to be around 86%.
Why then is the budget flat compared to prior years? Chairman Atkins’ statement notes that about $100 million is included in case the SEC absorbs the PCAOB’s functions:
At this lower FTE level, the budget request actually is approximately $100 million more than the amount that would be required to maintain our current state of operations. There is some uncertainty regarding the FY 2026 budget, including the potential transfer of the functions of the Public Company Accounting Oversight Board (PCAOB) into the SEC. If Congress approves this budget request, we anticipate that this funding could support such a transfer of the PCAOB functions into the SEC in FY 2026.
I was curious how this $100 million compares to the PCAOB’s current operating budget, so I Googled it. According to Reuters, the PCAOB’s 2025 budget was almost $400 million, which is not funded through the federal budget. It is funded by accounting support fees that would be eliminated by merging the PCAOB’s responsibilities into the SEC, meaning, as Dan Goelzer notes, future appropriations would be needed in perpetuity to support the SEC’s ability to do this work.
Early last week, I attended Northwestern’s Corporate Counsel Institute in Chicago. Programming kicked off with two panels — “Steady On: Strengthening the Board-GC Relationship and Maintaining Effective Board Governance through Times of Change” and “The Many Hats of the In-House Lawyer” — that discussed why and how GCs and Corporate Secretaries need to have black belts in relationship building. The panels highlighted some of the less glamorous aspects of being in-house counsel that can be surprisingly important to the uninitiated.
For example, the GC panelists described two of their lesser-known responsibilities and why they shouldn’t be written off as unimportant or administrative:
– Board driver: Sometimes your board members are stranded and need to be picked up at the airport, etc. These are excellent opportunities for more casual, one-on-one interactions with a director that don’t come around often. You should take advantage of them.
– Seating chart manager: The GC panelists said seemingly inordinate amounts of time go into setting the seating chart for board dinners. But, while this may seem purely administrative, it’s a key step in strengthening relationships for board members and management. They stressed the importance of making sure directors sit with members of management and rotate for each dinner. And that GCs need to make sure they are part of that rotation and getting the opportunity to sit near each director.
They also identified some times when the strength of the relationships you’ve developed with your directors and colleagues are especially important. For example:
– When you need to say no. Hopefully, you already have a reputation for being a “yes, but…” lawyer, but if you know you need to deliver bad news, get others aligned with your perspective before that meeting so you’re not the only one thinking about and raising risks.
– When a board member takes on a new leadership role. Two independent directors on the first panel stressed the importance of knowing that they could reach the GC — or hear back from them quickly — if they needed to discuss something, especially when taking on a new board leadership role. (They stressed that going from a committee member to a committee chair is a huge shift!)
– During director recruitment. A GC or Corporate Secretary who knows all the directors well will have invaluable insight on director candidates since he or she has a deep understanding of the board’s culture.
Finally, for something completely off-topic, if you find yourself with a reason to visit Chicago in the summer, take it! My trip was too short and mostly in conference rooms, but I was reminded of how special Chicago summers are. It inspired me to plan a return trip!
FINRA filings are about to get significantly more expensive! Under a rule change submitted last fall, they are going to phase in higher fees over the course of the next few years. FINRA doesn’t receive tax dollars – it relies on fees to fund its mission of regulating brokers. It’s been over a decade since some of the fees have last increased. Not surprisingly, FINRA says that the current fee structure isn’t keeping up with costs.
For Section 7 – which spells out the fees that apply to reviews of proposed underwriter arrangements for public offerings under FINRA Rule 5110 – FINRA is hiking the fee cap for non-WKSIs by 400%! Here’s more detail:
Section 7 of Schedule A to the FINRA By-Laws sets forth the fees associated with filing documents pursuant to the Corporate Financing Rule. It currently provides for a flat fee of $500 plus .015% of the proposed maximum aggregate offering price or other applicable value of all securities registered on an SEC registration statement or included on any other type of offering document (where not filed with the SEC), with a cap of $225,500; or a fee of $225,500 for an offering of securities filed with the SEC and offered pursuant to Securities Act Rule 415 by a Well-Known Seasoned Issuer (“WKSI”) as defined in Securities Act Rule 405. The fee associated with any amendment or other change to the documents initially filed with Corporate Financing is also subject to the current $225,500 cap.
FINRA has not raised the fee cap since 2012. FINRA is proposing to increase and modify the fee cap beginning in July 2025 as follows:
Corporate Financing Public Offering Review Fee Cap – Proposed Implementation
IPO
2024
2025
2026
2027
2028
2029
Non-WKSI
$225,000
$1,125,000
$1,125,000
$1,125,000
$1,125,000
$1,125,000
WKSI
$225,000
$270,000
$324,000
$389,000
$467,000
$560,000
This proposed rule change would raise the fee cap to $1,125,000, which would account for the significant growth in the size of offerings since the cap was last raised in 2012. However, for WKSIs, the cap would be raised to $560,000 over a period of five years. FINRA notes that raising the caps would also create more consistency with the SEC IPO review fee, which has no cap.
FINRA projects that increasing the cap as proposed would capture 81% of the incremental revenues if there were no cap while bounding the impact on WKSIs whose offerings tend to be less resource intensive for Corporate Financing to review. FINRA believes such fees are and would continue to be paid for by, or passed through to, issuers. When the proposed fee increase is fully implemented, it is designed to generate an additional $31 million in annual revenue by 2029.
In addition, FINRA is implementing a private placement review fee for private offerings that exceed $25 million and that use a registered broker-dealer. The cap for those fees is around $40k.
The new fees go into effect on July 1st. This Alston & Bird memo offers a couple important action items:
Issuers and FINRA members are advised to prepare for the implementation of these increased and new fees and consider their impact on future offerings from a budgetary standpoint and, in the case of private placements, to update expense reimbursement provisions of placement agent agreements (e.g., to ensure clarity regarding treatment of FINRA filing fees, which we expect would be reimbursable by the issuer outside any expense cap).
As I shared yesterday, the SEC is seeking feedback on whether it should amend the definition of “foreign private issuer” to better balance capital formation and investor protection. Meanwhile, the New York Court of Appeals recently delivered two decisions that are welcome news under state corporate law for foreign entities doing business in the U.S. This Cleary memo explains:
Both disputes posed the question whether New York’s Business Corporation Law (BCL) allows a shareholder plaintiff to bring derivative claims on behalf of a foreign corporation in New York so long as it satisfies the BCL requirements for such a suit, even if the plaintiff lacks standing under the law of the place of incorporation. The Court of Appeals rejected that theory and held that the BCL does not displace the well-settled internal affairs doctrine, which applies the substantive law
of the place of incorporation (not the law of the forum) to, among other things, the question of who has standing to assert derivative claims on behalf of the corporation.
Here’s Cleary’s takeaway (also see this D&O Diary blog):
In Ezrasons, the New York Court of Appeals emphatically endorsed the internal affairs doctrine and thwarted plaintiffs’ attempts to turn New York courts into unofficial arbiters of the internal corporate governance of corporations around the world. Foreign corporations and their boards should take comfort that they will not necessarily subject themselves to derivative suits in New York simply by doing business here. That said, it is important to note that shareholders still have some ability to bring derivative claims on behalf of foreign corporations if doing so is consistent with substantive foreign law and if plaintiffs can show that any contrary foreign law rule is merely procedural, not substantive.
Yesterday marked the 40th anniversary of Ferris Bueller’s day off. Brilliantly, it was also “field day” at my kids’ elementary school. Who else remembers these parachute games from their own childhood? Wishing you all a few carefree moments to enjoy baseball games, popsicles, and pool parties in the months ahead!
At its open meeting yesterday, the SEC announced publication of this 71-page Concept Release – which seeks feedback on whether the Commission should amend the definition of “foreign private issuer” to better balance investor protection and capital formation.
Dave has blogged about “the plight of foreign private issuers” – as recent rulemaking hasn’t afforded as many accommodations as FPIs might hope for. Yesterday’s 2-page fact sheet highlights that the FPI population has changed over the last two decades:
• The two jurisdictions most frequently represented among Exchange Act reporting FPIs in fiscal year 2003 were Canada and the United Kingdom, both in terms of incorporation and the location of headquarters. In contrast, the most common jurisdiction of incorporation for Exchange Act reporting FPIs in fiscal year 2023 was the Cayman Islands, and the most common jurisdiction of headquarters in fiscal year 2023 was mainland China. The Commission staff also found a substantial increase in Exchange Act reporting FPIs with differing jurisdictions of incorporation and of headquarters, from 7% in fiscal year 2003 to 48% in fiscal year 2023.
• The Commission staff found that the global trading of Exchange Act reporting FPIs’ equity securities has become increasingly concentrated in U.S. capital markets over the last decade. As of fiscal year 2023, approximately 55% of Exchange Act reporting FPIs appear to have had no or minimal trading of their equity securities on any non U.S. market and appear to maintain listings of their equity securities only on U.S. national securities exchanges. As a result, the United States is effectively those issuers’ exclusive or primary trading market.
In light of these changes to the FPI population, and in line with remarks that Commissioner Uyeda made almost exactly a year ago, the concept release seeks input on the following possible approaches to amending the FPI definition:
• Updating the existing FPI eligibility criteria;
• Adding a foreign trading volume requirement;
• Adding a major foreign exchange listing requirement;
• Incorporating an SEC assessment of foreign regulation applicable to the FPI;
• Establishing new mutual recognition systems; or
• Adding an international cooperation arrangement requirement.
The comment period will be open for 90 days following publication of the comment request in the Federal Register. You can submit comments here. Each of the Commissioners also published statements on the concept release, which provide more color on their views.
