November 26, 2018

Smaller Reporting Companies: SEC Lists 43 Rules for Review

One of the top priorities for SEC Chair Jay Clayton – and Corp Fin Director Bill Hinman – has been the easing of the burdens of being a public company, with the ultimate goal of convincing more companies to go public. This theme has been mentioned many times over the past few years – including raising the threshold for the definition of “smaller reporting company” earlier this year.

So it’s no surprise that the SEC published a larger list than usual to be reviewed last week as part of the SEC’s annual exercise – as required under the Regulatory Flexibility Act – to review how the agency’s rules are faring for smaller reporting companies. This year’s list boasts 43 rules (compare that to 2004; only 7 rules). Like in prior years, the rules listed for review aren’t limited to rules that affect small companies. Notably, the list doesn’t include the elimination of quarterly reports entirely for smaller companies – which I do think will eventually be proposed based upon comments made by Bill at the ABA meeting a few weeks ago.

Although some of the listed rules don’t apply to public operating companies (ie. apply to mutual funds, etc. instead), some do apply to our community including:

1. Executive pay & related-party disclosures (this is the “biggie” on pages 5-6; rethinking the 2006 rule amendments)
2. Shareholder proposals regarding director nominations by shareholders
4. E-delivery
5. E-proxy (aka “notice & access”)
6. E-forums
7. Proxy disclosure enhancements (ie. board leadership, comp consultants, board oversight of risk)
8. E-filing of Form D
9. S-3 eligibility

Although this list is open for public comment, the annual list typically results in only an average of one comment per year, as noted in this statement by then-Commissioner Piwowar in ’16…

The Latest “Director Views” Stats

We’ve added this directors survey from BDO to our comprehensive library of governance surveys. The highlights include:

– Total Tax Liability: Only 44% indicate a strong understanding of their organization’s total tax liability and how it impacts the company’s tax strategy.
– Non-GAAP Measures & KPIs: More than three-quarters (76%) of corporate board directors say they do not believe additional guidance from regulators on non-GAAP and other KPIs in their financial statements is necessary. However, when asked if auditor involvement would promote higher investor confidence in non-GAAP measures, a majority (54%) of public company directors say that it would.
– Diversity & Service Limits: When asked if their board was addressing the issue of board diversity, more than 8-in-10 (81%) directors said yes, an increase from 2017, when only 66 % of respondents said the same. Nearly one-fifth (19%) of directors believe their board has room to grow on this measure.
– Sustainability Reporting: While sustainability disclosures were a priority for public company board members in last year’s survey, data indicates the focus on sustainability has perhaps temporarily been put on the back-burner. 74% of public company board directors surveyed do not believe that disclosures regarding sustainability matters are important to understanding a company’s business and helping investors make informed investment and voting decisions.
– Tax Law: 61% of directors note a favorable impact from the Tax Cuts &Jobs Act of 2017, while 39% say this law change had no impact at all on their business.

Broc Romanek