SEC Lists Rules for Review

The Securities and Exchange Commission quietly proposed Wednesday afternoon to review whether dozens of corporate governance and proxy rules should apply to small filers: everything from executive compensation disclosure, to posting proxy materials online, to shareholders’ ability to nominate board directors, and more.

The timing of the notice — posted just a few hours before almost everyone left for a four-day Thanksgiving holiday — may raise suspicions about purity of the SEC’s motives. Nevertheless, the agency does have power to review its rules under the Regulatory Flexibility Act, a law that federal allows agencies to scale back regulatory requirements for smaller businesses. So corporate governance and compliance professionals who care about these issues should prepare for battle.

The notice lists 43 rules to be reviewed by SEC staff. Many apply to self-regulatory organizations (read: stock exchanges) and investment funds, or regard registered securities sales. We’ll put those aside since they don’t apply to a wide range of public companies and compliance professionals. The rules that are more relevant to more corporate governance and compliance folks include:

• Internet availability of proxy materials, where companies can publish proxy materials online and then provide written notice to investors where they can view those documents;
• Shareholder choice for proxy materials, where investors can then ask the company to provide printed copies of the proxy materials anyway;
• The infamous Rule 14a-8, allowing shareholders to place their own nominations for board director into the proxy;
• Reporting of certain oil and gas disclosures;
• Filing financial statements “tagged” in XBRL, a data reporting technology that lets investors and financial analysts find and study financial data more easily;
• The same XBRL requirement for certain mutual fund disclosures;
• The Model Privacy Form developed for financial firms to comply with the Gramm-Leach-Bliley Act;
• Proxy disclosures discussing how executive compensation policies might pose material risk to the company, how the board oversees those risks, and any conflicts of interest that might exist with compensation consultants.

Pro Forma or Not?

To a certain extent, this notice is a formality. The Regulatory Flexibility Act requires federal agencies twice a year to list rules they propose to review within the coming 12 months, and all an agency’s rules are supposed to be reviewed within 10 years of their adoption so the agency can revise any that are obsolete, duplicative, or “overly burdensome.”

The SEC could decide to take no action on a rule; or it could review other rules not named in this notice. And since this notice didn’t assign any specific dates to the 43 rules included, we don’t know when SEC staff might propose any substantive action, either — maybe next week, maybe next summer, maybe never.

Clayton

Then again, SEC chairman Jay Clayton is a member of the Trump Administration, so he’s not reviewing these rules just to look for typos. Clayton was put into office to deregulate. These are the regulations he’s targeting, and they’re no surprise. You could ask corporate governance activists to name all the measures they believe Clayton wants to repeal, and they’d give you pretty much the same list.

We should also be clear that this effort applies to smaller reporting companies only. The SEC raised the threshold for smaller reporting companies last June from $75 million in market cap to $250 million. Any repeal of the 43 rules identified in this notice would apply to those firms only. While that’s the majority of publicly traded firms on U.S. markets, the large public companies that constitute Corporate America (and that employ most corporate compliance officers) won’t be covered here.

On the other hand, smaller public companies are more vulnerable to fraud, weak internal control, and poor governance; so weakening those requirements for them will leave investors more vulnerable. We can expect full-throated criticism from institutional investors and good governance activists on exactly that point, I’m sure.

Then again, fights over investors’ rights and protections versus corporate profits — that’s what makes the corporate disclosure world go ’round.