The SEC’s newly-published set of Corporate Finance Interpretations (CFIs) will give governance professionals a refreshed view on how to comply with mandates governing shareholder activism, activism and proxy matters, experts have advised.
Released on July 9, the updates do not introduce new rules or amend existing regulations. Instead, the staff interpretations explain how the SEC's Division of Corporation Finance interprets and applies existing securities laws. While the guidance is not legally binding in the same way as existing legislation, it gives an indication of how the regulator expects market participants to comply with existing mandates.
The guidance has generally been viewed as a way to modernize established interpretations without changing the underlying regulatory framework. In a client alert, Gibson Dunn said the update provides 'important guidance on shareholder activism, tender offers [and] proxy matters’ and clarifies how existing rules apply to evolving market practices.
A significant focus is shareholder activism. The SEC expanded its guidance on when investors may be deemed participants in a proxy solicitation or subject to beneficial ownership reporting requirements. One new interpretation confirms that investors providing financial support to an activist campaign may themselves be considered participants in the solicitation. The SEC said this applies where a person or entity 'provides financial support to a participant in a solicitation by means of a gift, loan, stock purchase or otherwise' and the support is provided 'with the intent to finance the solicitation and actively participates in the solicitation.' Those investors may therefore be required to file participant information under the federal proxy rules.
The SEC also provided additional clarity around the use of cash-settled total return swaps in activist investor campaigns. The regulator reaffirmed that a person does not become the beneficial owner of securities simply by entering into a cash-settled swap that provides no voting, investment or dispositive power. However, the guidance warns that investors cannot use such arrangements to avoid disclosure obligations. The SEC noted that Rule 13d-3(b) may apply where securities are acquired or held 'with the purpose or effect of changing or influencing the control of the issuer' or 'as part of a plan or scheme to evade the reporting requirements' of Section 13(d) or 13(g).
There is also updated guidance on tender offers to reflect changes in how information is distributed. Two new interpretations state that the SEC 'will not object' if eligible cash tender offers are commenced through 'a press release issued as soon as practicable' that includes the required disclosures and 'an active hyperlink' directing investors to the full offer materials. The approach applies to both third-party and issuer tender offers, provided the transaction is not subject to Rule 13e-3 and investors requesting paper copies receive them promptly. Gibson Dunn said the update reflects the SEC's recognition that digital communications have become a standard method of distributing transaction information.
In a separate update, the SEC clarified the treatment of crowdfunding vehicles when determining whether an issuer can suspend its ongoing reporting obligations under Regulation CF. The staff determined that issuers cannot count a crowdfunding special purpose vehicle as a single holder of record where it was established under Rule 3a-9. Instead, issuers must look through the vehicle and count each underlying investor individually when assessing eligibility to terminate reporting.
The July 9 interpretations also arrive as the SEC considers broader changes to the US proxy voting system. Speaking at the SEC's Investor Advisory Committee in June, commissioner Hester Peirce said the agency is exploring a range of approaches to address concerns over the concentration of voting power among passive asset managers, including so-called mirror voting. Under the suggested framework, fund managers would vote shares in the same proportion as all other shareholders rather than exercising independent discretion. While no official proposal has been published, the discussion suggests the SEC is continuing to review the US proxy system alongside its latest interpretive guidance.
Natalie Bannerman
Natalie is a former telecoms and infrastructure journalist, a role she held for nearly seven years. Before this, she worked in the B2C startup space, covering lifestyle, arts and culture reporting. As senior reporter for Governance Intelligence she...
