August 14, 2019

SEC Calendars ‘Open Meeting’: Proxy Advisors on the Agenda!

Yesterday, the SEC announced an open Commission meeting next Wednesday – August 21st – during which it will consider two agenda items. The first relates to potential guidance “regarding the proxy voting responsibilities of investment advisers under Rule 206(4)-6 under the Investment Advisers Act.” With this agenda item, the SEC may be considering guidance that revisits the extent to which an asset manager can outsource voting decisions to proxy advisors consistent with its fiduciary obligations. (See this Cydney Posner blog).

As this Gibson Dunn blog notes, the second agenda item also relates to proxy advisors:

The second agenda item is a Division of Corporation Finance matter captioned “Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice.” The notice describes this matter as follows:

The Commission will consider whether to publish an interpretation and related guidance regarding the applicability of certain rules, which the Commission has promulgated under Section 14 of the Securities Exchange Act of 1934, to proxy voting advice.

This item appears related to the rulemaking addressed in the SEC’s most recent Reg Flex agenda, which stated that the Division of Corporation Finance “is considering recommending that the Commission propose rule amendments to address certain advisors’ reliance on the proxy solicitation exemptions in Rule 14a-2(b).”

As I blogged at the time the SEC updated its Reg Flex Agenda, it’s unclear exactly what the SEC is going to propose about the ability of proxy advisors to continue rely on exemptions from proxy solicitation rules. Some commenters have called for the SEC to reconsider those exemptions – or at least impose additional conditions upon their use – as part of a broader initiative to regulate the proxy advisory industry.

These are controversial topics, so this should be an interesting meeting – well, I mean, if it goes forward. They seem to cancel these things with the same frequency as I cancel ‘Open Table’ reservations. We will be talking about the outcome of the SEC’s meeting at our “Proxy Disclosure Conference” coming up in a few weeks.

Fast Act S-K Simplification: Don’t Forget the New “Description of Securities” Exhibit!

In preparing an article for the most recent issue of “The Corporate Counsel” print newsletter, I looked at a bunch of 10-K filings made by large accelerated filers after the effective date of the Fast Act disclosure simplification rules.  One of the more interesting things that I found was that nearly half of the filers whiffed on the requirements of new Item 601(b)(4)(vi) of Regulation S-K – which requires companies to include an exhibit briefly describing all securities registered under Section 12 of the Exchange Act.

So, consider this a reminder that you’ve got to include this exhibit in your next 10-K if you’re a large accelerated filer. If you’re wondering what it should look like, check out this recent blog from Stinson’s Steve Quinlivan, which reviews the new exhibit requirement & provides some samples.

After I posted this, Hogan Lovells’ David Crandall reached out with an idea about why so many companies may be overlooking this requirement:

We noticed that form checks by our associates were not picking up the new requirement, and it turns out that the eCFR website for Reg S-K Item 601 incorrectly lists the exhibit requirement as applying to Form 10-Ds rather than 10-Ks.

The adopting release omitted the headers to the Item 601 exhibit table and had the incorrect number of columns (14 compared to 16), which undoubtedly contributed to the error on the eCFR website. I’m not aware of any source that correctly lists the new requirement as applying to 10-Ks, absent the discussion of the amendment in the adopting release. There may be many diligent registrants out there who looked at Item 601 and figured that the new requirement only applied to asset-backed issuers filing on Form 10-D.

. . . And now, just a few hours after posting David’s comments, the eCFR website reference has been fixed!  Thanks to David and to the folks in the government who addressed this so promptly.

Buybacks are Bad. Buybacks are Declining. The Decline in Buybacks is Bad.

The much criticized practice of corporate stock buybacks appears to have declined significantly this year. That’s great news, right?  This Axios Markets report says “not exactly.” Here’s an excerpt:

After buying back more than $1 trillion of their own stock last year, public companies are slowing their share repurchases in 2019, and that will add to troubles for the market and the economy.

Why it matters: Buybacks have been a major catalyst for the market’s rise in recent years and remain an important driver of higher prices, as earnings growth has slowed and investors have become net sellers of equities. With the trade war weighing on business spending and confidence and earnings growth expected to weaken into negative territory for companies in both the second and third quarters this year, the stock market’s legs look increasingly fragile.

By the numbers: The record buyback binge in 2018 accounted for almost half of stocks’ EPS growth, the highest share since 2007. S&P reported earlier this year that Q1 2019 was the first quarter in 7 that the pace of buybacks slowed. That theme has continued through the year, as the 4-week average pace of buybacks has fallen 30% from 2018’s pace as of this week, data from Bank of America Merrill Lynch shows.

The report quotes a recent client note from BAML that says that investors have become “less enamored with buybacks,” and that late 2018 was “the turning point in this cycle of expanding debt balance sheets, buying growth and rewarding shareholders.”  It says that the bottom line is that companies are preparing for the economy to slow and want to pare debt and hold cash in the event of a downturn.

John Jenkins