Debevoise Digest: Securities Law Synopsis – July 2023

12 July 2023

SEC Removes References to Credit Ratings from Regulation M

On June 7, the SEC adopted rules to replace references to third-party credit ratings that were previously included in certain exceptions to Regulation M. The adopted amendments remove exceptions in Rules 101 and Rule 102 of Regulation M that are dependent on the determination of a credit rating agency that a nonconvertible debt security, nonconvertible preferred security or asset-backed security is “investment grade.” In accordance with the mandate imposed by section 939A(b) of the Dodd-Frank Act, the final rule replaces those exceptions with new standards of creditworthiness based on the probability of default, as calculated by a distribution participant acting as a lead manager (or in a similar capacity) in the Regulation M distribution. In addition, a final amendment was adopted to aid the SEC in its examination of broker-dealers who previously relied on Rules 101 and 102 of Regulation M. New paragraph (b)(17) of Rule 17a-4 requires those affected broker-dealers to preserve their written probability of determination for a period of no less than three years, with the written probability of default determination supporting their reliance on the exception.

NYSE and Nasdaq Delay Effective Date of Clawback Rule to October 2, 2023

In February 2023, the New York Stock Exchange and Nasdaq Stock Market released their respective versions of proposed listing standards that implement the SEC’s clawback rule mandated by Section 954 of the Dodd-Frank Act. Originally, the rule was set to have an effective date in June 2023, requiring company compliance no later than August 2023. Following a comment memo submitted by Debevoise and several other leading law firms, the SEC approved the delayed effective date, providing companies with more time to adopt compliant clawback policies. The new standards will become effective on October 2, 2023, giving listed companies until December 1, 2023 to be compliant. The listing standards require each listed company to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers and to satisfy related disclosure obligations.

For more information, see Debevoise Insights.

SEC Delays Publication of Final Climate Change Rules until October 2023

In the most recent release of the SEC’s rulemaking agenda, the SEC announced that it would delay the anticipated final rule for climate change disclosure until October 2023. The proposed rule was released in March 2022 with a standard comment period, which was subsequently reopened in October 2022.

The proposed rule would add new, often prescriptive climate-related disclosure requirements to Regulation S-K, which primarily governs qualitative disclosures, and Regulation S-X, which governs financial statements. In general, these disclosures would address various climate-related risks to registrants’ businesses, operations and financial conditions, including disclosure of registrants’ greenhouse gas (“GHG”) emissions. The proposed rule draws heavily from the Task Force on Climate-Related Financial Disclosures, which has developed a climate-related reporting framework that is familiar to many registrants and investors, and the Greenhouse Gas Protocol, which the SEC identifies as the leading accounting and reporting standard for GHG emissions.

For more information, see Debevoise Insights.

Cybersecurity Disclosure Rules for Issuers Now Expected in October 2023

In the most recent release of the SEC’s rulemaking agenda, the SEC announced that it plans to release the final rules for cybersecurity disclosure for issuers in October 2023. The SEC had previously reopened the comment period on the proposed rule, delaying its finalization past the original expected date of April 2023, just over one year after its initial proposal. The proposed rule would add new Items 106 and 407 to Regulation S-K, which would require cybersecurity incident reporting by issuers following a determination of materiality of a cybersecurity incident, including periodic reporting to provide updates about previously reported cybersecurity incidents. The proposed rule would also require disclosure related to cybersecurity risk management, strategy and governance.

For more information, see Debevoise Insights.

SEC Expects to File Its Amicus Brief on Whether Term Loan Notes Are Securities by July 18

In Kirschner v. JP Morgan, the U.S. Court of Appeals for the Second Circuit had asked in March that the SEC share its views on whether the syndicated term loan notes are securities under Reves v. Ernst & Young, 494 U.S. 56 (1990). In its request to extend the deadline for filing its amicus brief until July 18, the SEC indicated that the short extension will allow it enough time to get required approval to file from the Commissioners, and the SEC does not anticipate needing another extension. As noted by Loan Syndications and Tradition Association’s (“LSTA”) Elliot Ganz, the issues briefed involve complex legal and policy issues, with potentially material consequences, and the LSTA (and presumably others) will likely respond to the SEC by a deadline of August 31.

For more information, see Debevoise Insights.

FCA Publishes a Proposed Reform of the UK Capital Market Regime

On June 28, 2023, the consultation period for the UK Financial Conduct Authority’s (the “FCA”) consultation paper CP23/10, which sought views on its proposed reforms to the UK equity listing regime, closed. The reforms envision a significantly different listing regime, with the goal of attracting issuers and investors to the London Stock Exchange.

The FCA’s key proposals include the following:

  • introducing a single listing category to replace the standard and premium listings segments for equity shares;
  • reducing the eligibility requirements of the new single listing category as compared to the eligibility requirements for a premium listing, such that issuers would no longer be required to provide (i) any three-year audited historical financial information covering 75% of the issuer’s business; (ii) a three-year representative revenue earning track; and (iii) a “clean” (or unqualified) working capital statement;
  • loosening the existing requirements for premium listed issuers by moving to a “comply or explain” policy in respect of relationship agreements entered into with controlling shareholders;
  • removing the requirement for shareholder approval for significant transactions and related party transactions currently applicable to premium listed issuers, and replacing this regime with a notification requirement only for Class 2 transactions (i.e., any transactions in excess of the 25% value threshold in the FCA’s “class tests”); and
  • reforming the dual class share structure regime currently applicable for premium listed issuers, including by expanding the types of matters that enhanced voting rights can be exercised on and extending the sunset period for the expiry of enhanced voting rights to 10 years from five years.

The proposals would not affect the listing regime for depositary receipts or debt securities, however, they raise a number of questions, including regarding the benefit to standard listed issuers, and whether issuers listed on the new single listing category will be eligible for inclusion on FTSE indices.

A draft handbook of rules and wider proposals is expected to follow in fall 2023.

These proposals form part of the UK government’s broader drive to modernize and reform the UK capital markets regime to make the UK more flexible and attractive to issuers and investors. More recently, this initiative includes the publication of legislation on prospectus reforms on July 11, 2023 for review before the implementation of the final rules by the end of 2023.

For more information, see Debevoise Insights.