Thursday, March 14, 2024

CII urges SEC to prioritize agenda items

By Rodney F. Tonkovic, J.D.

The Council of Institutional Investors has written to the SEC in response to the agency's invitation to comment on its latest semiannual regulatory agenda. CII notes its continued support of long-deferred action on "proxy plumbing" regulations as well as a proposal to address non-GAAP financial measures. Other items covered by the letter include CII's recent petition for rulemaking on the traceability of shares and proposals on Regulation Best Execution and Regulation NMS.

Regulatory Flexibility Agenda. The SEC most recently published its agenda of rulemaking actions in August 2023. The Regulatory Flexibility Act requires each federal agency to publish in the Federal Register a list of the rules it expects to consider in the following year. The Commission invites comments on the agenda and the individual entries, and comments should be received 30 days after publication.

Penned by CII's general counsel, Jeffrey P. Mahoney, the letter reflects the organization’s priorities with respect to SEC rulemaking: investor rights and protections; corporate disclosure; and market systems and structure. The letter is, accordingly, divided into these three categories and under these headings addresses five subtopics.

Investor rights. The letter first urges the SEC to add a project to its agenda to protect investor rights to recover losses under Securities Act Section 11. CII itself recently petitioned the Commission for rulemaking on traceability of shares in part as a response to the Supreme Court's Slack decision affirming that shareholders must be able to "trace" their shares to a registration statement. One approach under consideration would be to amend Rule 144 to limit sales of unregistered securities for a certain period after the effectiveness of a registration statement. CII's petition suggests requiring the use of technology to facilitate tracing. There is no shortage of options, CII says, and the issue is "not whether, but how to do so."

Corporate disclosure. Under the rubric of corporate disclosure, CII notes its continued support of a new agenda item closing the regulation loophole governing non-GAAP financial measures. To that end, the letter reiterates a 2019 request that the Commission require disclosure of: quantitative reconciliation to GAAP of non-GAAP financial measures used to determine executive compensation; and a qualitative description of why the non-GAAP financial measures are better for determining executive pay than GAAP financial measures.

CII states that the use of non-GAAP adjustments to determine incentive plan payouts is a common practice. Plus, recent research indicates that companies use non-GAAP earnings to justify higher executive compensation. The letter asks the SEC to promptly propose a rule requiring, at minimum, that companies include a hyperlink to a quantitative GAAP reconciliation for any non-GAAP financial measures contained in their CD&A.

Market systems and structure. CII also praises the Commission for its adoption of amendments updating Rule 605 disclosures. This should be followed by rules on Regulation Best Execution and Regulation NMS, the letter says. Concerning Regulation Best Execution, CII has concerns with two provisions (which it has discussed in-person with Chair Gensler): a proposed exemption for an institutional customer; and omission of a proposed requirement for order-by-order decision making.

The letter says that CII broadly supports the provisions of the Regulation NMS proposal. In particular, CII supports the proposed uniform reduction in the access fee cap set by Rule 610.

Finally, the letter expresses CII's continued disappointment that "Proxy Access Amendments" remain categorized as a long-term action on the agenda. CII believes that the SEC should prioritize improving "proxy plumbing," first by proposing the above-noted rulemaking to facilitate tracing. Secondly, the SEC should prioritize addressing end-to-end vote confirmation: this could be as simple as requiring all participants in the voting chain to provide issuers with access to voting record information for the limited purpose of confirming how a particular shareholder's shares were voted.