Capital Markets & Public Companies Quarterly


Although the SEC was closed during the first few weeks of the year, they came back strong to close out the quarter with a flurry of final and proposed rulemakings. Over the first quarter of 2019, the SEC adopted additional amendments to modernize and simplify the public company disclosure regime.

The SEC also proposed the expansion of the “test the waters” accommodations to all companies seeking to access the public markets. In addition, companies should note new amendments to NASDAQ and NYSE rules and platforms, which may affect both listed companies and companies seeking to list in the future.

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SEC Adopts More Rules under Modernization and Simplification Mandate

On March 20, 2019, the US Securities and Exchange Commission (SEC) adopted amendments that simplify and update certain disclosure requirements intended to improve the readability and navigability of disclosure documents and discourage repetition and disclosure of immaterial information. The amendments illustrate the SEC’s continued efforts to implement its mandate under the Fixing America’s Surface Transportation (FAST) Act, which requires the SEC to identify disclosure requirements that are redundant, outdated or excessive in that they require the disclosure of immaterial information. The amendments were first proposed in October 2017 and they follow on the heels of last year’s adoption of the Disclosure Update and Simplification Amendments.

One of the significant changes in the amendments is the elimination of the requirement to submit a confidential treatment request to the SEC when a company chooses to omit certain confidential information contained in material agreements filed as exhibits to an applicable reporting document. While a company no longer needs to submit a confidential treatment request in connection with the omission, the location of the redacted information in the agreement must be clearly identified in such filings. Similar to the current procedures for submitting a confidential treatment request, omitting information from an agreement is permitted only to the extent that the information is not material and that it would likely cause competitive harm if publicly disclosed. An unredacted version of the material agreement must be made available to SEC staff upon request. The amendments also permit companies to omit schedules to material agreements, if such schedules do not contain material information and the information therein has not otherwise been disclosed.

Other changes include amendments to Item 303 of Regulation S-K, covering the Management’s Discussion and Analysis of Financial Position and Results of Operations, that allow companies to omit discussion of the earliest of the three years covered by their financial statements, provided that such discussion was included in a prior filing with the SEC, the information is no longer material and the company references the location of the omitted information within the prior filing. The SEC also adopted amendments to Item 601(b)(4) of Regulation S-K requiring companies to attach as an exhibit a description of the class, characteristics and rights of all company securities that have been registered under the Exchange Act.

The amendments relating to the redaction of confidential information in material agreements filed as exhibits are effective April 2, 2019. All other amendments are effective May 2, 2019.

For additional commentary on the SEC’s Modernization and Simplification Amendments, see our On the Subject.

Phase-In Inline XBRL Starting with Large Accelerated Filers’ First Form 10-Q after June 15

In addition to the revised disclosure requirements listed above, the SEC’s adopting release further amended the requirements for a public company to tag data on the cover page to its EDGAR filings using Inline XBRL. The SEC aligned the phase-in periods for adoption of Inline XBRL in cover pages with the phase-in periods for adoption of Inline XBRL in operating company financial statement information, which the SEC adopted in 2018.

Both requirements are phased-in based upon the company’s filer status as follows:

In both adopting releases, the SEC clarifies that companies that are domestic filers will be required to comply with Inline XBRL requirements beginning with their first Form 10-Q (not the first form) for a fiscal period ending on or after the applicable compliance date. For example, a company with a calendar fiscal year end that files a Form 10-Q for the period ending June 30, 2019, must tag data on the cover page and within the financial statement information included therein in Inline XBRL. A domestic company with a June 30 fiscal year end will be required to tag cover page and financial statement information starting in its Form 10-Q for the period ending September 30, 2019.

SEC Proposes Rule to Expand “Test-the-Waters” to All Companies

On February 19, 2019, the SEC proposed a new rule, Rule 163B, as well as related amendments to existing rules, that would allow all companies to engage in “test-the-waters” communications with certain qualified investors. Under the proposed rule, either prior to or following the filing of a registration statement related to a contemplated offering, issuers would be permitted to engage in oral or written communications with investors that are Qualified Institutional Buyers, as defined by Rule 144A, or Institutional Accredited Investors, defined as an institutional investor that is an “accredited investor” under Rule 501 of Regulation D.

Such communications, commonly known as “test-the-waters” communications, would be exempt from the gun-jumping restrictions imposed by Sections 5(b)(1) and 5(c) of the Securities Act of 1933 (the Securities Act), which prohibit written or oral offers prior to the filing of a registration statement and without a prospectus meeting the requirements of the Securities Act. “Test-the-waters” communications that comply with the proposed rule would not need to be filed with the SEC and would not need to include cautionary legends. However, issuers subject to Regulation FD who may wish to engage in “test-the-waters” communications prior to conducting follow-on and other registered offerings would need to evaluate if they would trigger disclosure obligations. In addition, communications made in reliance on the proposed rule would still be considered “offers” subject to Section 12(a)(2) of the Securities Act in addition to the anti-fraud provisions of the federal securities laws.

The public comment period proposed Rule 163B ends on April 29, 2019. For additional commentary on proposed Rule 163B, see our On the Subject.

SEC Issues Guidance Regarding Board Diversity Disclosure

On February 6, 2019, the SEC Division of Corporation Finance (the Division) issued two identical Compliance and Disclosure Interpretations (the C&DIs) regarding director and director nominee diversity disclosure under Items 401 and 407 of Regulation S-K. The C&DIs encourage public companies to be more forthcoming in their public filings regarding the extent to which self-identified diversity characteristics play a role in the director nomination process.

Under Item 401(e), public companies are directed to disclose in any proxy statement distributed for the purpose of electing directors of the company “the specific experience, qualifications, attributes or skills that led to the conclusion that the [director or nominee] should serve as a director.” Additionally, Item 407(c)(2)(vi) requires public companies to “[d]escribe the nominating committee’s process for identifying and evaluating nominees for director.” Item 407(c)(2)(vi) further instructs public companies to describe whether—and if so, how—the nominating committee considers diversity in identifying nominees for director, including how the nominating committee implements and assesses any policy it may have with regard to the consideration of diversity in identifying director nominees.

The new C&DIs clarify how public companies may satisfy these disclosure obligations in circumstances in which a director or nominee voluntarily provides self-identified diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background, and such director or nominee consents to the company’s public disclosure of these characteristics. The C&DIs state that, if a board or nominating committee considers the self-identified diversity characteristics in determining a person’s suitability for board membership, then the company’s response required by Item 401(e) should, at minimum, disclose the characteristics identified and explain the manner in which they were considered. The company’s discussion of its diversity policies required under Item 407(c) also should include “how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics.” In other words, when a nominating committee follows a specific policy, which considers diversity during the director nomination and selection process, the explanation required pursuant to Item 407 should sufficiently discuss how the self-identified diversity attributes, among other qualifications, are weighed.

The C&DIs are in line with increasing investor demands to promote board diversity and bring transparency to the board selection process. As discussed in our prior quarterly update, proxy advisors, large institutional shareholders and state governments have taken action in recent years to place increased emphasis on gender diversity in the boardroom. In their guidelines for 2019, both Institutional Shareholder Services and Glass Lewis adopted policies stating that adverse voting recommendations may be issued against nominating committee chairs for public companies that have no female members on their boards. Following on the heels of California’s board gender diversity law, the Illinois General Assembly and other state legislatures are taking up legislation to require public companies with headquarters in their state to have at least one female director on their boards.

With an upcoming proxy season likely to focus heavily on initiatives surrounding environmental, social and governance disclosure, the C&DIs are in harmony with growing shareholder calls for greater disclosure on board diversity.

NASDAQ Follows NYSE in Amending Rules for Direct Listings

On February 15, 2019, NASDAQ filed an immediately effective rule proposal to permit and clarify the listing requirements for listings on the Nasdaq Global Select Market exchange without conducting a traditional initial public offering, otherwise known as a “direct listing.” Under the rule changes, NASDAQ requires that a company conducting a direct listing to have an effective registration statement filed with the SEC that registers the resale of shares held by the company’s current shareholders. In addition, the company must comply with initial listing requirements and the corporate governance requirements set forth in the NASDAQ Rule 5600 Series, subject to applicable exemptions. Additionally, the NASDAQ rules require a company conducting a direct listing on the Nasdaq Global Select Market to provide NASDAQ with an independent third-party valuation to determine whether the company has met the market value requirements. Interest in direct listings has increased in recent years, with companies such as Spotify Technology S.A. seeking direct listings and these changes to Nasdaq listing rules follow on the heels of similar rule changes adopted by the New York Stock Exchange last year.

NYSE Decommissioned EGovDirect Website, Migrated Functions to Listing Manager

On March 29, 2019, the NYSE decommissioned its eGovDirect website and migrated functions to its Listing Manager portal. Functions that were previously available on the eGovDirect site, including updates to company officers, directors and contacts, submission of annual and interim written affirmations and confirmation of record and meeting dates, can now exclusively be performed on the Listing Manager portal. NYSE-listed companies should update their Listing Manager and account administrators should update their teams to ensure that all relevant personnel have access to the Listing Manager platform.