For companies that trade in the U.S. securities markets, one of the many public policy questions arising from the recent change in Administration is how President Trump’s promise to engage in significant deregulation will affect the Securities and Exchange Commission’s disclosure requirements. Some answers are beginning to emerge. During the past several weeks, Congress and the President have invalidated one controversial SEC disclosure rule, and the SEC has announced that two others are under reconsideration. Legislation is reportedly being drafted to scale back a fourth requirement.
Resource extraction payment disclosure
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directed the SEC to require reporting companies that engage in in the commercial development of oil, natural gas, or minerals to file annual reports with the SEC disclosing payments made to the U.S. federal government or to foreign governments for natural resource development activities. The SEC adopted such a rule in 2012, but it was invalidated by a federal court. The court held that the SEC’s reasons for requiring resource extraction payment reports to be made public were arbitrary and capricious, particularly since public disclosure could violate the laws of some countries in which resource extraction payments were made. The SEC issued a revised version of the rule in 2016. My August 30, 2016 The Capital Trend Blog post discusses the rule in more detail.
In early February, both houses of Congress passed a joint resolution disapproving the new resource extraction payment disclosure rule. The Congressional Review Act empowers Congress to void agency rules within 60 days of receiving notice of the adoption of a rule. On February 14, President Trump signed the resolution. This is the first time in 16 years that Congress has exercised its authority to cancel an agency rule.
Conflict minerals reporting
The Dodd-Frank Act also directed the SEC to adopt disclosure requirements applicable to SEC-reporting companies that manufacture products that contain “conflict minerals” (tin, tantalum, tungsten, or gold). If the company concludes that its conflict minerals did (or may have) originated in the Democratic Republic of the Congo or its neighbors, it must perform due diligence to determine whether the supply chain includes armed groups engaged in violence. If so, the company must file a Conflict Minerals Report with the SEC listing the affected products. Since the filing requirement took effect in 2013, companies have struggled to collect the supply-chain information required by the rule, and compliance levels have been uneven.
On January 31, Acting SEC Chair Piwowar issued a statement directing the SEC staff to reconsider the SEC’s guidance on conflict minerals reporting “and whether any additional relief is appropriate.” While the guidance relates to the impact of litigation challenging the conflict minerals rule, Commissioner Piwowar made clear that his concerns go much farther, referring to the rule as “misguided” and suggesting that it had done more harm than good. In addition, press reports have indicated that President Trump is considering issuing an executive order suspending conflict minerals reporting. The Dodd-Frank Act authorizes the SEC to waive conflict minerals reporting for up to two years if the President determines that a waiver is in the U.S. national security interest.
Pay ratio disclosure
Another provision of the Dodd-Frank Act required the SEC to adopt a CEO pay ratio disclosure rule. That rule, which takes effect this year, requires U.S. SEC-reporting companies (but not foreign private issuers) to disclose the median employee total annual compensation; the annual total compensation of the CEO; and the ratio of the two amounts. Subject to limited exceptions, the determination of the median employee’s total compensation must include all full-time, part-time, seasonal, and temporary employees of the company and its subsidiaries worldwide. During the SEC’s pay ratio rulemaking, many companies asserted that data-gathering to support compliance would be burdensome, particularly for companies with multinational operations, and could in some cases violate foreign privacy laws.
On February 6, Acting Chair Piwowar issued a directive, similar to his statement with respect to conflict minerals, instructing the SEC staff to reconsider the implementation of the pay ratio rule. He stated that “some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline” and invited public comment.
Internal Control Audits
The Sarbanes-Oxley Act of 2002 required the managements of all companies that report to the SEC to prepare a management assessment of the effectiveness of the company’s internal control over financial reporting and to obtain an auditor’s attestation on control effectiveness. Many smaller companies objected that obtaining a internal control audit was unduly costly, and the Dodd-Frank Act exempted companies with market capitalizations of less than USD75 million from the audit requirement. Press reports have stated that the Chairman of the House Financial Services Committee, which has jurisdiction over securities legislation, is planning to introduce legislation that would raise the market capitalization threshold for the internal control audit requirement to USD500 million.
These developments may be only the beginning. Last year, the SEC embarked on a far-reaching review of its public company disclosure requirements. My May 10, 2016 The Capital Trend Blog post discusses the Disclosure Effectiveness Initiative in more detail. President Trump has nominated a new SEC Chair and, once the nominee takes office, it is likely that the Commission will re-start that review. Both U.S. and foreign companies that file reports with the SEC will want to follow the progress of disclosure reform. Significant changes in the SEC’s disclosure rules are a significant possibility.