November 9, 2020

What Will the Election Mean for the SEC?

This Bloomberg Law article lays out some thoughts on what the Biden administration might mean for the SEC & its rulemaking and enforcement priorities. This excerpt points out that the recent amendments to the proxy rules targeting proxy advisors & shareholder proposals top the list of rules that could be undone by a reconstituted SEC:

In July 2020, the SEC made significant changes to the proxy advisor rules. Critics, such as Commissioner Allison Herren Lee, argued that the new rules were unwarranted, as they addressed no identifiable problem. The scope of the opposition to this measure makes it a candidate for early reversal in 2021. A to-do list of similar measures could also include recent changes to the shareholder proposal rules that make it more difficult for a small investor to submit or resubmit a proposal for inclusion in company proxy materials.

The article also predicts a more receptive environment for ESG-related disclosure requirements, and a more aggressive enforcement posture.  Whether a Democratic led SEC can find a way to reach consensus on issues like these and end its string of 3-2 votes on rulemaking proposals remains to be seen, but I sure wouldn’t bet the farm on it.

Disclosure: Prescriptive v. Principles-Based Approaches

Since the S-K modernization amendments just became effective, I thought this recent Bass Berry blog provided a timely illustration of the differences in disclosure practices that might result when a principles-based rule replaces a prescriptive one.

The blog reviewed a Staff comment letter & response involving a company that disclosed its dependence on a handful of 10%+ customers.  In its comment letter the Staff requested the company to disclose the identities as required – until recently – by the prescriptive language of Item 101(c) of S-K. However, as a smaller reporting company, the company was permitted to adopt the principles-based approach sanctioned by Item 101(h).  Here’s an excerpt from the company’s response to the Staff:

The Company respectfully asserts that disclosure of the names of its customers is not required by Item 101(h)(4)(vi) of Regulation S-K, nor does the Company believe the identity of its largest customers is material to an understanding of its business taken as a whole or necessary for investors to make an informed investment decision. Unlike Item 101(c)(1)(vii) of Regulation S-K, Item 101(h)(4)(vi) does not require a smaller reporting company to identify the name of any customer that accounts for 10% or more of its revenue. The Company also believes that the identities of its customers are of significantly less importance than a qualitative and quantitative description of the extent to which revenue from such customers is relied upon.

Each of the Company’s top three customers in 2019 have been customers for many years. The Company’s largest customer, representing 36.8% of revenue in 2019, has been a customer for 30 years. The second and third largest customers in 2019 have been customers for approximately 10 years and 7 years, respectively. While the Company does consider the loss of revenue from any one of its largest customers significant, warranting appropriate risk factor disclosure of the potential consequences of such loss, the Company does not believe investors will be more informed of these risks by knowing the customers’ identities.

The Company also indicated that both it & its customers regarded their identities to be highly confidential and commercially sensitive, but also agreed to provide additional disclosure about the percentage of its revenue derived from sales to those customers during the prior year. The Staff did not comment further on the company’s disclosure.

Stock Buybacks: Guidance for Your Repurchase Program

The SEC’s recent enforcement action against Andeavor LLC arising out of internal control lapses relating to the company’s stock repurchase plan has caused many companies to take a hard look at the mechanics of their own plans. If you’re working with one of those companies, take a look at this recent Mayer Brown memo, which reviews the application of the Rule 10b-18 safe harbor and a variety of other potential issues that may arise under the federal securities laws, state corporate law, and – for some issuers – applicable provisions of the CARES Act.

John Jenkins