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As I noted in yesterday’s blog, the opinion of the U.S. Court of Appeals for the District of Columbia Circuit in the appeal of National Association of Manufacturers, et al., v. Securities and Exchange Commission upheld the U.S. District Court’s judgment with respect to the Administrative Procedures Act and Exchange Act claims raised by the plaintiffs/appellants. This outcome was particularly notable given the hostility that this Court has shown to the SEC’s rulemaking efforts over the years, including in 2011 when the Court invalidated the SEC’s proxy access rule (Rule 14a-11).

As for the conflict minerals rulemaking, the Court could find no fault with the SEC’s process and with the cost-benefit analysis, and thus could not hold that the SEC’s action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law[, or] in excess of statutory jurisdiction.” The Court analyzed the claims made by the plaintiffs/appellants regarding the lack of any de minimis exception, the due diligence threshold, the “persons described” provision with respect to persons who contract to manufacture, and the length of the “DRC conflict undeterminable” temporary phase-in period, and found that the SEC was not arbitrary and capricious in the judgments that were made in adopting the final rule.

With regard to the cost-benefit analysis, the Court noted that “the Commission exhaustively analyzed the final rule’s costs . . . [and] [i]t considered its own data as well and cost estimates submitted during the comment period . . . and arrived at a large bottom line figure that the Association does not challenge.” On the benefit side of the equation, the Court stated “we find it difficult to see what the Commission could have done better,” noting that the SEC determined that Congress intended the rule to achieve “compelling social benefits” which the agency was “unable to readily quantify” due to a lack of data about the rule’s effects. The Court noted that the SEC had to promulgate the rule based on the statute, and thus necessarily relied on Congress’s determination that the costs were necessary for achieving the goals.

With this outcome, the rule writers at the SEC are no doubt breathing a sigh of relief, as they still have a relatively full plate of Dodd-Frank Act and JOBS Act mandated rulemakings that continue to percolate. After a string of high profile losses in this Court and the U.S. District Court for the District of Columbia, this outcome is probably the best that the SEC and the Staff could have hoped for and may serve to pave the way for moving forward with the rest of the rulemaking agenda.

More on the SEC’s Disclosure Reform Project

At the ABA Spring Meeting last Friday, Corp Fin Director Keith Higgins broke the mold of the tried and true “Dialogue with the Director” program and took part of the time to deliver a speech outlining the SEC’s efforts on disclosure reform. In the speech, he noted that efforts to reduce the volume of disclosure is not the sole end game, particularly given that many investors have expressed an appetite for more information, not less. The SEC has now launched a spotlight page on sec.gov where the public can provide input on how the SEC can make disclosure more effective.

In terms of priorities, the Staff has started reviewing the business and financial disclosures in current and periodic reports and transactional filings, considering, among other things, whether disclosures should be scaled for certain types of issuers like smaller reporting companies and emerging growth companies. In a later phase of the project, the Staff will consider ways to update and modernize proxy disclosures.

As examples of potentially outdated disclosures that might be revisited, he noted the ratio of earnings to fixed charges and the table of historical stock prices. The Staff will also be looking for disclosure requirements that result in redundancy or duplicative disclosures, as well as looking at whether a more principles-based approach (such as in MD&A) would be better for certain disclosure items.

The Staff is also looking at Regulation S-X requirements, including requirements to include financial statements of entities other than the registrant, such as acquired businesses, equity method investees and guarantors. The Staff will also examine differences in disclosure requirements under the 1933 Act and 1934 Act, as well as potential areas of overlap between GAAP requirements for footnote disclosure and the SEC’s other disclosure requirements.

Also on the agenda will be efforts to improve the navigability of disclosure documents and whether the long-standing notions of “company disclosure” or “core disclosure” should be implemented.

Obviously this project is going to be a huge undertaking by the Division, and notably this effort has been started before, but always overtaken by events. We will see if this latest effort will actually yield any tangible results.

Engagement as a Household Word: The New IRRC Institute/ISS Study

A new study by the IRRC Institute and ISS finds that the level of engagement between investors and public companies is at an all time high, and that both investors and corporate officials surveyed believe that the increased level of engagement is successful. The study, which follows up on an initial study done on the topic in 2011, concludes that the most significant factor driving high levels of engagement is mandatory say-on-pay votes at U.S. public companies. The study is worth reviewing, because it provides some useful insights on how engagement is being initiated and conducted and what is being talked about in the course of engagements.

– Dave Lynn