The House bill would impose limits on SEC rulemakings covering private offering exemptions reforms, shareholder resubmission thresholds, and proxy advisers.
The House passed a minibus appropriations bill containing the Financial Services and General Government (FSGG) legislation that provides annual funding for the SEC. As drafted, the SEC would receive an increase in its funding beyond what was requested in the SEC’s FY 2021 budget request. The minibus, however, also would restrict the SEC’s ability to finalize or implement key items on its regulatory agenda, including proposals to reform private offering exemptions and to increase the eligibility and resubmission thresholds for shareholder proposals. An amendment to the minibus also would limit the SEC’s ability to implement its recently adopted regulations for proxy advisers. The minibus (H.R. 7617), which passed by a vote of 217-197, faces an uncertain fate in the Senate and key federal funding needs may end up the subject of yet another last-minute minibus or omnibus package or a continuing resolution, depending on future negotiations over federal appropriations and the timing of a separate further COVID-19 aid package.
House Majority Leader Steny Hoyer (D-Md) commented on the precarious state of federal government funding as the current fiscal year draws to a close. "Unbelievably, the Republican-led Senate has not even marked up a single appropriations bill in committee. I would remind them that governing requires making tough choices – or even any choices – and their failure to move forward with the appropriations process reveals that Senate Republicans would rather do nothing and risk a shutdown than show the country what their funding priorities are," said Hoyer.
SEC funding. The FSGG portion of the House appropriations minibus would fund the SEC at $1.920 billion in FY 2021. The House bill also contains several earmarks, including $16.313 million for the SEC’s inspector general, $18.650 million for a replacement lease for the SEC’s Washington, D.C. headquarters building, and $12.677 million for a similar replacement lease for the SEC’s San Francisco regional office.
The House bill’s overall appropriation for the SEC, if enacted, would be $25 million more than the SEC’s budget request of $1.895 billion. For comparison purposes, the SEC’s FY 2020 enacted appropriation was $1.815 billion. The minibus also contains standard language permitting the SEC and the CFTC to use funds for a joint advisory committee on emerging regulatory issues.
Private offerings and proxies. An amendment to the minibus submitted by House Financial Services Committee Chairwoman Maxine Waters (D-Cal), and bundled with numerous other amendments that, in en bloc, were approved by voice vote, would bar the SEC from implementing its newly adopted regulation for proxy advisory firms. Although a small number of proxy advisers had previously registered with the Commission as pension consultants, most of these firms did not choose to register with the Commission.
The new regulation clarifies when proxy adviser recommendations are solicitations under the federal securities laws and provides companies that are the subject of a proxy adviser’s recommendation with an opportunity to submit their views on the recommendation to the proxy adviser. Legislation in previous Congresses had focused on a strict Republican-led House bill and a more modest Democrat-led Senate bill, suggesting some level of bipartisan support for proxy adviser regulations. The resulting SEC regulation ended up somewhere in between the two Congressional proposals and was less draconian than some supporters of proxy advisers had expected.
The Republican minority on the House FSC issued a press release objecting to the proxy adviser regulation defunding provision, noting that the SEC’s new regulation was the product of lengthy deliberations about proxy adviser accuracy and transparency. The minority statement also decried what it characterized as the Democrats’ lack of bipartisanship. Moreover, the statement objected to the rejection of Republican amendments to strip other SEC provisions from the minibus.
With respect to those other provisions, the minibus would bar the SEC from using funds to finalize its proposed private offering exemption reforms until the SEC strengthens the filing requirements for exempt offerings in a manner similar to that proposed in a 2013 release regarding Regulation D. The SEC had first hinted at the direction of its private offering exemption reforms in a concept release issued in June 2019. By March 2020, the SEC had issued its proposal, which would, among other things: (1) expand crowdfunding by raising the limit from the current inflation-adjusted $1.07 million to $5 million; (2) amend Regulation S-K to allow the redaction of information from some exhibits; (3) expand test-the-waters opportunities in advance of offerings; (4) raise the Regulation A Tier 2 limit from $50 million to $75 million; and (5) raise the Regulation D Rule 504 limit from $5 million to $10 million.
Likewise, another provision in the minibus would bar the SEC from finalizing its proposed revisions to the shareholder proposal eligibility requirements and resubmission thresholds. The proposed eligibility requirements would impose a tiered structure that makes it easier for large shareholders to submit shareholder proposals sooner than would be the case for smaller shareholders. The proposal also would increase the resubmission thresholds from 3, 6, and 10 percent to 5, 15, and 25 percent, levels similar to an old SEC proposal and just short of the levels proposed in the now-defunct Republican-led Financial CHOICE Act. A House discussion draft titled the Ensuring Shareholder Governance (ESG) Act of 2020, would require the Commission to retain existing eligibility requirements and shareholder resubmission thresholds.
Representatives Bill Huizenga (R-Mich) and Bryan Steil (R-Wis) had offered amendments to strip the private offering exemption and the shareholder proposal eligibility and resubmission thresholds provisions from the minibus. However, when House Appropriations Committee Chairwoman Nita Lowey (D-NY) offered the amendments en bloc for consideration, they were rejected by voice vote (the somewhat unusual procedure of having a Democrat offer Republican amendments put in place by a House rule adopted for purposes of facilitating consideration of the minibus).
However, the House minibus does not contain previously enacted language barring the SEC from finalizing regulations on corporate political spending disclosures, nor does it contain language directing the SEC to pursue such regulations. The minibus also does not contain language previously contained in a 2019 Democrat-led appropriations bill (See, Section 1003 in H.R. 3351) limiting the SEC’s ability to finalize or implement Regulation Best Interest, which the U.S. Court of Appeals for the Second Circuit recently upheld on the merits and for which compliance was required as of June 30, 2020.
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