1SEC top seven 2020 |

Introduction

The 2020 agenda of the Securities and Exchange Commission (SEC), under the leadership of Chairman Jay Clayton, includes a range of rulemaking activity aimed at improving the process for raising capital in the United States. The agenda is intended to help achieve some of Clayton’s top goals since taking office: increasing the attractiveness of the US public capital markets for companies and facilitating more investment options for retail investors. Planned rulemaking activity includes potential changes to modernize disclosure requirements, promote the ability of companies to focus on long-term value creation and address the burdens on smaller companies. The SEC also will reconsider aspects of the proxy process. Outside of the formal rulemaking agenda, areas of emphasis include the role of the audit committee in overseeing the financial reporting process, technological evolution in the market and enforcement of the securities laws. This document highlights SEC activity expected in 2020 that may be of interest to

investors, board members and other public capital market stakeholders.

1. Disclosure effectiveness efforts continue

Clayton seeks to encourage companies to raise capital in the public capital markets, improving investment opportunities for “Main Street” or retail investors. The SEC has indicated it will continue work in 2020 to modernize disclosure requirements to reduce regulatory burdens for companies while maintaining investor protections. These actions carry forward efforts that began under previous SEC Chair Mary Jo White and encompass financial and nonfinancial disclosures. While the changes are evolutionary rather than revolutionary, this sustained effort should have a meaningful cumulative impact on the SEC’s disclosure requirements.

SEC top sevenWhat public companies, boards and investors should watch for in 2020.

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Activity expected in 2020 to further this goal includes:

• Financial disclosures:

• Final rule amendments to reduce the cost and complexity of disclosures relating to significant acquisitions and dispositions by issuers as well as to enhance certain disclosures for investors. The SEC’s proposed rule in this area, issued in May 2019, focused primarily on changes intended to reduce compliance burdens such as reducing the maximum number of years of financial statements required to be filed for the acquired business.1

• Implementation of final rule amendments issued in March 2020 to reduce financial disclosure requirements for companies that conduct certain registered debt offerings. The amendments include changes to narrow the circumstances requiring separate financial statements of subsidiary issuers and guarantors, replacing this information with summarized financial information and narrative disclosures. The amendments also streamline the disclosure requirements when companies pledge securities of their affiliates as collateral for registered debt.2

• Nonfinancial disclosures:

• Final rule amendments to modernize and simplify disclosures relating to the description of business, legal proceedings and risk factors. The August 2019 rule proposal would accomplish this by making a number of these requirements more principles-based, in part by requiring them only if material.3

• Consideration of pending comments on proposed revisions to Management’s Discussion and Analysis (MD&A), including elimination of the contractual obligations table and elimination of selected financial data disclosures. The proposed amendments, issued in January 2020, are intended to enhance the usefulness of MD&A for investors and simplify its preparation for issuers. In March 2019, the SEC made other changes to MD&A requirements, including making disclosure requirements relating to historical periods more flexible.4

• Auditor independence: The SEC will consider comments on proposed rule changes to update certain auditor independence rules. The proposed changes are

1. “To the Point: SEC proposes changing disclosure requirements for acquisitions and disposals of businesses,” Ernst & Young LLP, May 2019, accessed February 2020.1. EY‘s To the Point publication on this rule can be accessed on the EY AccountingLink website.2. “To the Point: SEC proposes further modernization of Regulation S-K disclosure requirements,” Ernst & Young LLP, August 2019, accessed February 2020.3. “To the Point: SEC proposes eliminating certain Regulation S-K requirements and enhancing MD&A disclosures,” Ernst & Young LLP, February 2020, accessed February 2020.

While some of these rule changes may appear technical, I anticipate that, collectively, they will yield substantial benefits for public companies and investors, both in themselves and when taken together with other capital formation initiatives at the Commission.

Clayton, testimony before the US Senate Banking Committee, 10 December 2019

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intended to focus the independence analysis on those relationships and services most likely to pose threats to independence. Clayton indicated that these changes in large part would codify certain exemptions to the independence rules that now are routinely granted through individual consultations with the SEC staff, streamlining the process.

2. Encouragement of long-term focus in the capital markets

Expected action in 2020: Possible revisions to earnings releases and quarterly reporting

Clayton on various occasions has expressed his concern that “Corporate America’s” focus on short-term results may come at the cost of longer-term value creation, and that SEC requirements may be contributing to that focus. He has suggested this short-term focus would harm long-term investors and could be a factor disincentivizing companies from going public. To address this, the SEC may consider rule amendments relating to earnings releases and quarterly reporting. The SEC held a roundtable on this subject with investors, issuers and other market participants in July 2019, and it sought feedback through its request for comment in December 2018 on how the existing periodic reporting system might incentivize market participants to disproportionately focus on short-term results.5 While Clayton has indicated that the frequency of quarterly reporting is unlikely to change for large companies, the Commission may consider actions such as allowing semiannual reporting for other issuers and streamlining interim reporting requirements.

Expected action in 2020: Consideration of new disclosure requirements relating to human capital

The SEC is considering a new disclosure requirement relating to human capital, in light of high investor interest in this topic and the view that human capital is a significant driver of long-term value. Clayton has noted the increasing importance of human capital to company performance across the economy. In 2020, the SEC will consider next steps in light of comments received on possible new human capital-related disclosure requirements that were proposed in August 2019. The

5. “To the Point: SEC seeks input on earnings releases and quarterly reports,” Ernst & Young LLP, December 2018, accessed February 2020.

Main Street … investors are increasingly responsible for funding their own retirement and other financial needs, and we should be examining both whether the companies they invest in have a similar perspective on their performance horizon and whether our regulations are inappropriately or unnecessarily affecting that perspective.

Clayton, testimony before the US Senate Banking Committee, 10 December 2019

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proposal sought comment on whether the SEC should require companies to disclose information about human capital resources and related measures or objectives on which management focuses, such as development and/or retention, if material. This principles-based approach could expand current disclosure requirements for many companies. Based on research by the EY Center for Board Matters, companies are already beginning to provide human capital-related disclosures voluntarily.

3. Focus on improving smaller companies’ ability to raise capital

Expected action in 2020: Rule to expand the number of companies that are considered non-accelerated filers and subject to scaled disclosure requirements

Consistent with prior actions intended to reduce burdens on smaller companies in the public capital markets, in 2020 the SEC plans to consider a final rule to raise the thresholds in the definitions of “accelerated filer” and “large accelerated filer.” This would allow more companies to qualify as non-accelerated filers, which are subject to less stringent regulatory requirements. Chief among these is that non-accelerated filers are not required to provide an auditor’s attestation report regarding internal control over financial reporting. The SEC is now considering comments on its related May 2019 rule proposal, which would define companies that have lower annual revenue – below $100 million per year – as non-accelerated filers, even if their market capitalization is relatively large, up to $700 million.

Expected action in 2020: Consideration of comments on proposal to harmonize and streamline the private offering exemptive framework

The Commission will consider comments on a rule proposal issued in March 2020 intended to harmonize and simplify the complex regulatory framework for private offerings exempt from SEC registration. The proposed

The proposal recognizes the significant changes that have taken place in our economy in the 30 years since adoption of the disclosure rules for public companies, including that, in certain industries, intangible assets, and in particular human capital, often are a significant driver of long-term value in today’s global economy.

Clayton, press release, "SEC Proposes to Modernize Disclosures of Business, Legal Proceedings and Risk Factors under Regulation S-K," 8 August 2019

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changes include raising the offering and investment limits for certain exemptions. They also would set consistent rules regarding communications with investors and harmonize other disclosure and eligibility requirements relating to certain exempt offerings.

Expected action in 2020: Consideration of changes to the definition of “accredited investor” and other changes to expand investment options for individual investors

Clayton has repeatedly expressed concern over the disparity in opportunities available to institutional as compared to retail investors in terms of investing in unregistered securities, which can offer the prospect of higher financial returns. One way of addressing this is to expand the definition of “accredited investor” to allow additional categories of individual and institutional investors to invest in private companies and funds. In 2020, the SEC will consider comments on a December 2019 rule proposal that would expand the definition of “accredited investor.” Among other modifications, the proposal would permit individuals with relevant investing expertise or professional certifications to be considered accredited investors, in lieu of meeting existing criteria relating to income and wealth. The proposed expanded definition also would incorporate new types of smaller institutional investors, such as family offices.

4. Action on pending Dodd-Frank Act rules

The SEC plans to take action in two areas mandated by the Dodd-Frank Act of 2010. One action is to finalize rules, initially proposed in 2015, that would require the national securities exchanges – including NYSE and Nasdaq – to require listed companies to adopt policies to claw back incentive-based compensation from current and former executives in certain circumstances when material errors are found in recent financial statements.6 Most public companies have already adopted clawback policies.

The second action is rulemaking to require resource extraction issuers to make annual disclosures about payments to foreign governments or the US Federal Government for the commercial development of oil, natural gas or minerals. In 2020, the SEC will be considering comments on its reproposal issued in late 2019. Congress and courts overturned earlier versions of this rule.

5. Support for audit committee oversight of financial reporting

Clayton and senior SEC staff have communicated their view that “effective oversight by strong, active, knowledgeable and independent audit committees significantly furthers the collective goal of providing high-quality, reliable financial information to investors and our markets.” In a December 2019 statement, Clayton, SEC Chief Accountant Sagar Teotia and Director of Corporation Finance William Hinman reaffirmed the

6. “To the Point: SEC proposes requiring ‘clawback’ policies and disclosures,” Ernst & Young LLP, July 2015, accessed February 2020.

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importance of audit committees in promoting high-quality financial reporting through their oversight of auditors and management. The statement suggests that areas of focus for audit committees should include tone at the top, rigorous implementation of new accounting standards and auditor independence. The SEC officials also indicated audit committees should be engaged in overseeing internal control over financial reporting and having dialogue with auditors regarding critical audit matters (CAMs) to be included in the auditor’s report. While auditors have the sole responsibility for drafting CAMs, the statement’s expectation is “that the discussion of the CAM in the auditor’s report will capture and be consistent with the auditor-audit committee dialogue regarding the relevant matter.”

Another area of messaging to audit committees is with respect to key disclosure areas, including non-GAAP measures and the expected discontinuation of the use of the London Interbank Offered Rate (LIBOR). Clayton and senior SEC staff continue to highlight the need for “responsible” non-GAAP reporting. This includes using non-GAAP measures that are consistent and comparable from quarter to quarter and clearly explaining any adjustments. The December statement indicated that audit committees should review their company’s presentation of non-GAAP financial measures and metrics, including understanding how management uses the measures, period-to-period consistency and related disclosure controls and procedures. The statement also suggested audit committees should understand management’s plans to identify and address the risks associated with the transition from LIBOR, commonly referred to as reference rate reform, as well as its accounting and financial reporting effects.

6. Expect continued focus on the proxy

The SEC is expected to continue its actions to review and potentially modify various aspects of the proxy process in 2020. Clayton has observed that “while there are a wide range of viewpoints on these topics, one thing is clear — there is significant interest in modernizing and improving the proxy process.” Some of these actions have generated significant debate, including among members of the Commission.

Expected action in 2020: SEC consideration of changes to rules governing shareholder proposals

The SEC will consider next steps following its November 2019 proposal to modify the rules governing the eligibility of shareholder proposals to be included in proxy statements under Rule 14a-8. These changes include raising the percentage of votes a proposal must receive to be resubmitted for a future shareholder vote within specified time periods, as well as changing the criteria for submitting shareholder proposals to take into consideration both the number of shares held and length of time that a shareholder has held them.

Expected action in 2020: Movement on proxy plumbing

The staff is considering recommending various actions to the Commission on several proxy-related initiatives. One set of proposals is intended to enhance the quality of disclosures about material conflicts of interests provided by proxy voting advisory firms to their clients.

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The proposals also would require these firms to provide companies and other soliciting persons an opportunity to review and provide feedback on proxy voting advice (but not change it) before it is issued to maintain reliance on an exemption from proxy solicitation rules previously extended to such advisory firms. This follows several other recent actions related to proxy advisers, including Commission-level guidance published in 2019 on proxy voting, which discussed how investment advisers can meet their fiduciary responsibilities to vote in the best interests of their clients when using a proxy voting advisory firm.

Clayton suggested in his December testimony before the Senate Banking Committee that in 2020, the Commission may also consider rulemaking around proxy plumbing, which generally refers to the infrastructure supporting the proxy voting system, in particular the processes for tracking ownership, shares and votes. Clayton has indicated his view is that proxy plumbing needs a major overhaul. He also has stated that new technologies, including distributed ledger technology, could be leveraged to improve proxy voting.

The SEC also may advance efforts to create a universal proxy. The starting point for the Commission’s consideration of creating a universal proxy is its proposed rule issued in 2016. That proposal was aimed at allowing shareholders to vote by proxy on both management’s and dissident shareholders’ director nominees, which often is possible only when voting in person under current rules.

7.Other focus areas: emerging technology, cybersecurity and enforcement

Emerging technology: The SEC is expected to continue monitoring the use of distributed ledger technology, digital assets and initial coin offerings (ICOs) in the capital markets, utilizing its Strategic Hub for Innovation and Financial Technology (FinHub) to address issues raised by new technology in the capital markets. The SEC continues to encourage market participants to engage with the SEC staff to discuss how to raise capital in the public markets through the use of innovative technologies.

Digital assets will remain a priority in 2020. In April 2019, FinHub staff issued a framework for analyzing whether a digital asset meets the definition of a security under US securities laws. The framework identifies characteristics that market participants should consider when determining whether and when a digital asset is offered or sold as an investment contract and therefore is a security. The Division of Corporation Finance also has issued several no-action letters that illustrate practical examples of applying the framework.

The Division of Enforcement also is actively scrutinizing ICOs and digital assets, focusing on fraud as well as failures to properly register these as securities offerings. One new type of digital asset transaction that may receive enforcement attention in 2020 is initial exchange offerings (IEOs), which involve digital assets offered by online trading platforms on behalf of companies, as IEOs have been the subject of an SEC Investor Alert. The Division has made it clear that “if a product is a security,

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regardless of the label attached to it, those who issue, promote, or provide a platform for buying and selling that security must comply with the investor protection requirements of the federal securities laws.” (SEC Division of Enforcement Annual Report, p. 6)

Cybersecurity: The Commission and its staff continue to monitor cybersecurity risks in the market. In January 2020, the Office of Compliance, Inspection and Examination (OCIE) issued Cybersecurity and Resiliency Observations, describing practices it has observed to manage and combat cybersecurity threats. While the report focuses on observations relating to non-issuer market participants such as exchanges and broker-dealers, issuers may also wish to consider whether the identified practices may be relevant. The report includes practices relating to governance and risk management, access rights and controls, data loss prevention, mobile security, incident response and resiliency, vendor management, and training and awareness.

Enforcement: SEC leadership has said that there will be no “sea change” in the Division of Enforcement’s priorities for 2020. Discussed below are two of these: accountability for individuals, including gatekeepers such as auditors, board members and lawyers as well as financial reporting issues.

• Holding individuals accountable, including gatekeepers: The Commission continues its efforts to hold individuals accountable for securities law violations. The SEC Division of Enforcement 2019 Annual Report highlights the high percentage of the SEC’s actions that involved charges against individuals. This reflects the

Commission’s belief that holding individuals accountable is its most effective method for achieving deterrence. Along with C-suite level executives, the SEC staff has noted that gatekeepers – including independent directors, accountants, auditors and attorneys – have been subject to SEC enforcement actions.

• Scrutiny of financial reporting, including non-GAAP measures and key performance indicators (KPIs): The Division has pursued cases against companies for problematic practices relating to all aspects of the disclosures about financial and operational performance. This includes failures in areas ranging from internal control over financial reporting to issuers’ improper use of non-GAAP measures and KPIs. The SEC also took action against several audit firms for failing to comply with auditor independence rules.

The seriousness of [cybersecurity] threats and the potential consequences to investors, issuers, and other securities market participants, and the financial markets and economy more generally, are significant and increasing.

OCIE Cybersecurity and Resiliency Observations

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ConclusionSince assuming his seat at the helm of the SEC, Clayton has guided the Commission to accomplish the majority of the regulatory actions planned for each year. Similar efforts can be anticipated in 2020 — although in previous presidential election years, rulemaking has tended to slow down in the second half of the year. Investors, board members and other stakeholders should continue to monitor SEC activities and consider opportunities to provide input to help shape it.

ContactsBridget Neill EY Americas Vice Chair, Public PolicyErnst & Young LLP bridget.neill@ey.com +1 202 327 6297

Chris Holmes National Director of SEC Regulatory Matters Ernst & Young LLP chris.holmes@ey.com +1 202 327 8890

Shauna Steele Director, Public Policy Regulatory Network Ernst & Young LLP shauna.steele@ey.com +1 202 327 6118

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