The first quarter of 2017 saw quite a few new developments in the Capital Markets & Public Companies regulatory landscape. President Trump’s nominee to be the new Chair of the Securities and Exchange Commission (SEC), Jay Clayton, has signaled that his focus may be deregulation and easing the burdens on companies attempting to access the US capital markets. Meanwhile, the SEC adopted final versions of several of the proposed rules that we covered in 2016. Read on for details.
On March 22, 2017, the SEC announced the formal adoption of its proposed amendment to Rule 15c6-1(a) under the Securities Exchange Act of 1934, as amended (Exchange Act), reducing the standard settlement cycle for most broker-dealer securities transactions from three business days (i.e., T+3) to two business days (i.e., T+2) after execution of a trade. Potential benefits of the shortened settlement cycle include reduced credit, market and liquidity risk for market participants. The underlying logic is that a shorter settlement cycle will reduce the amount of unsettled transactions outstanding at any given time that pose settlement risk to counterparties. The amended rule also aligns the US standard settlement cycle with other developed markets.
As was the case with the proposed amendment, the final amendment provides that the parties to a transaction can agree by contract at the time of the transaction to a longer settlement period than provided by amended Rule 15c6-1(a). The new settlement cycle does not apply to certain categories of transactions, including exempted securities, government securities, municipal securities, commercial paper, banker’s acceptances, commercial bills and other securities subject to one of the exemptions set forth in sections (b) through (d) of Rule 15c6-1.
You can refer to our Q3 2016 Capital Markets & Public Companies Quarterly for further discussion of the rule and the benefits the SEC expects the shortened settlement cycle will provide to market participants. The SEC acknowledged in the text of the original notice of proposed rulemaking that a move to a T+1 settlement cycle could provide similar benefits, but that the immediate costs of implementation would be too significant to make the change all at once. Therefore, we suspect the SEC will revisit the topic after the market has had time to adjust to the T+2 settlement cycle to assess the potential benefits of a move to T+1.
Broker-dealers must comply with the amended rule by September 5, 2017.
A Report from the SEC Speaks Conference
As is the case in many corners of Washington, change is in the air at the SEC. But exactly how that change will take shape is as yet to be determined. That was the message from senior officials and current and former commissioners at PLI’s annual “SEC Speaks” conference held February 23 and 24 in Washington DC.
The SEC Speaks conference serves a dual purpose for the SEC staff: to highlight and elucidate the SEC’s policy and enforcement actions taken during the previous year and to foreshadow its priorities for the year ahead. However, as panelists were quick to point out, those priorities remain largely dependent on the direction chosen by the new administration and the new Chair.
In his opening remarks, Acting Chair Michael Piwowar extended William Graham Sumner’s image of the “forgotten man,” or those who suffer the collateral damage of reform and regulatory movements, by coining a new character: the “forgotten investor,” who bears many of the burdens of a regulated securities market without enjoying a proportionate share of the benefits.
In identifying such burdens, Acting Chair Piwowar reiterated his request that the SEC reconsider current implementation of the conflict minerals and pay ratio disclosure requirements, provisions adopted under the Dodd-Frank Act, which, along with resource extraction disclosure, have come under the cross-hairs of the new administration.
In fact, since the new administration took office in January, the resource extraction rules have been vacated and the SEC’s Division of Corporation Finance has issued a statement indicating that it will no longer pursue enforcement proceedings against companies that do not comply with the conflict mineral source and “chain of custody” due diligence disclosure required by Item 1.01(c) of Form SD. Though the Division of Corporation Finance will continue to enforce compliance with Items 1.01(a) and 1.01(b) of Form SD, those requirements are generally less burdensome than those of Item 1.01(c). As a general matter, this means that companies that determine conflict minerals are necessary for the functionality or manufacture of their products still must make a good faith effort to identify the country of origin of those minerals and briefly describe their efforts and findings in a Form SD. The Form SD must be filed with the SEC and also made available on the company’s website. Nonetheless, the decision not to enforce Item 1.01(c) of Form SD will benefit many companies by reducing the associated compliance burden.
Additional highlights from the conference included discussion of the commission’s Small Business Initiatives, including the ongoing rollouts of Regulation A+ and Regulation Crowdfunding offerings as well as new amendments to Rule 147 and the adoption of Rule 147A for intrastate offerings to make it easier for smaller companies to raise private capital. The SEC staff also discussed newly proposed amendments to the definition of “smaller reporting company” which would result in an upward adjustment of the public float and revenue caps applicable to qualifying smaller reporting companies.
Revised Cover Pages for SEC Forms and New Emerging Growth Company Revenue Threshold
On April 5, 2017, the SEC issued final rules that, among other things, require changes to the cover page of nearly all registration statements and periodic reports filed with the SEC. The final rules and form amendments were adopted to implement certain requirements included in Title I of the Jumpstart Our Business Startups (JOBS) Act.
The most significant change that will impact almost all issuers are revisions to the cover pages of Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3 and F-4 under the Securities Act of 1933, as amended (Securities Act), and Exchange Act Forms 10, 8-K, 10-Q, 10-K, 20-F and 40-F. Specifically, the cover pages of these forms must now include two check boxes that allow an issuer to indicate whether, at the time of the filing, the issuer is an emerging growth company (EGC) and whether it has elected not to use the extended transition provided to EGC’s for complying with any new or revised financial accounting standards.
In addition to the form revisions discussed above, the final rule adjusts the annual revenue threshold for an issuer to qualify as an EGC. Section 2(a)(19) of the Securities Act and Section 3(a)(80) of the Exchange Act were amended by the JOBS Act to define an “emerging growth company” as an issuer that has total annual gross revenues of less than $1 billion. Pursuant to the JOBS Act, the SEC is required to adjust the EGC revenue threshold every five years to reflect the change in the Consumer Price Index for All Urban Consumers (CPI-U) since the last adjustment to the threshold. Based on the change in the CPI-U from 2011 to 2016, the SEC established the new EGC revenue threshold at $1.07 billion. The final rules revised Securities Act Rule 405 and Exchange Act Rule 12b-2 to reflect the updated EGC revenue threshold.
The final rules also include several amendments to Exchange Act rules intended to further clarify the scaled reporting requirements for EGCs. Specifically, Section 102(b)(1) of the JOBS Act amended Section 7(a) of the Securities Act to provide that an EGC is permitted to present only two years of audited financial statements in its initial public offering (IPO) registration statement and it need not present audited financials for any period prior to that in any subsequent registration statement, notwithstanding the requirements of Item 301 of Regulation S-K. The final rules include amendments to several Securities Act and Exchange Act rules that clarify the availability of the scaled disclosure relief afforded to EGCs by expressly providing that an EGC is not required in connection with its ongoing reporting obligations or any subsequent registration statement to provide audited financials for years prior to the earliest year reported in its IPO registration statement.
We expect the SEC has made these changes at this time because of both (1) the requirement that the SEC update the EGC revenue threshold every five years and (2) because companies that qualified as EGCs immediately after passage of the JOBS Act are approaching the fifth anniversary of their first sale of registered securities. If you are an EGC that conducted your initial public offering shortly after passage of the JOBS Act in April 2012, you should remember to assess your EGC status for future filings.
The final rules were effective when published in the Federal Register, which occurred on April 12, 2017. Therefore all filings made after April 12, 2017, must be made using the revised forms.
SEC Makes Available IFRS XBRL Taxonomy for Foreign Private Issuers
On March 1, 2017, the SEC announced that it had made available on its website a new eXtensible Business Reporting Language (XBRL) taxonomy so that foreign private issuers that prepare their financial statements in accordance with the International Financial Reporting Standards issued by the International Accounting Standards Board may submit their financial statements using XBRL. Foreign private issuers may begin submitting their financial statements in XBRL immediately, but are not required to do so until they file their financial statements for fiscal periods beginning on or after December 15, 2017.
SEC Adopts Final Rules to Require Hyperlinks to Exhibits in Filings
On March 1, 2017, the SEC announced the adoption of final rules and form amendments requiring issuers to include a hyperlink to each previously filed exhibit in the exhibit index of registration statements and periodic reports.
The final rules largely correspond to the proposed rules that we discussed in our Q3 2016 Capital Markets & Public Companies Quarterly. Most of the comments received were supportive of the rule change as it will improve the ability of investors to navigate an issuer’s filings and access relevant information that is incorporated into a filing by reference to a previously filed exhibit.
Issuers must comply with the final rules for filings submitted on or after September 1, 2017. Smaller reporting companies that are neither large accelerated filers nor accelerated filers and that submit filings in American Standard Code for Information Interchange (ASCII) do not need to comply with the final rules until September 1, 2018.
AN ANNUAL REPORT SEASON REMINDER – NO HARD COPIES REQUIRED
As discussed in our Q4 2016 Capital Markets & Public Companies Quarterly, the SEC published a new Compliance & Disclosure Interpretation in November 2016 providing that reporting companies no longer need to mail hard copies of their annual reports to the SEC. Instead, a reporting company can satisfy the notice requirements of Rules 14a-3(c) and 14c-3(b) under the Securities Exchange Act of 1934 as well as the requirements of Form 10-K by posting an electronic version of the required materials to its website and keeping those materials available for one year from the date of posting. This is a welcome change from the prior physical mailing requirement and represents yet another example of the SEC’s willingness to modernize its rules and guidance in response to technological advances.