I don’t know when Congress decided that every piece of legislation had to have a nifty acronym, but the House Financial Services Committee recently passed (on a partisan basis) what old-fashioned TV ads might have called the new, improved version of the “Financial CHOICE Act”.  The word “choice” is in solid caps because it stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs”.

Whether and for whom it creates hope, opportunity or something else entirely may depend upon your perspective, but whatever else can be said of the Act, it is long (though at 589 pages, it is slightly more than half as long as Dodd-Frank), and it addresses a very broad swath of issues.  Here’s what it has to say about some key issues in disclosure, governance and capital formation, along with some commentary.

Topic The CHOICE Act would: Comments
CEO pay ratio disclosure Repeal this provision

Companies will applaud; most institutional investors don’t care, but at least a few will be very unhappy and may submit shareholder proposals if feasible (see below)


Hedging policy disclosure Repeal this provision

Seems unnecessary; many companies already discourage or prohibit hedging, and disclosure is viewed favorably by most investors


Say on pay Limit say on pay votes to cases of “material change” to the executive compensation program

Unnecessary and possibly unwise, as companies and investors alike have used say on pay as lever to engage, and are likely to continue even if not required; if investors don’t have the “safety valve” afforded by say on pay, they may vote against compensation committee members or full boards (particularly problematic for companies that have majority voting)



Limit to executive officers with “control or authority” over financial reporting


Seems reasonable, but it’s not clear whether this change will have much if any impact
Conflict minerals, extractive and mine safety disclosures Repeal these provisions

With the exception of a very limited group of investors, all would applaud


Proxy access Repeal authority for the SEC to issue proxy access rules

The barn door has long since closed; what’s the point?


Board leadership disclosure Repeal this requirement

Ditto; and in any case, investors want it and it’s become routine


Shareholder proposals

Require 1% ownership for three years (vs. current requirement of $2,000 worth of voting securities for one year)


There’s no doubt that shareholder proposals can be abusive and that the existing thresholds need to be changed, but these thresholds would prohibit all but the very largest investors (at big cap companies) from submitting proposals; in the absence of shareholder proposals, will holders have any recourse but to engage in “vote no” programs or to exercise proxy access rights?


On the other hand, this change would have little or no impact at many small- and mid-cap companies, where it’s not unusual for one or more holders to own 1% or more.


Shareholder proposals

Increase the resubmission thresholds to 6%, 15% and 30% (from 3%, 6% and 10%)


Changes in the resubmission thresholds are long overdue; these are modest – perhaps too modest?


Shareholder proposals

Permit issuers to exclude proposals submitted by a proxy, representative, agent or otherwise acting on behalf of a shareholder


I’ll wager that there will be lots of anguish about this one from the proponent community, but it seems a reasonable change
Universal proxy

Prohibit the SEC from requiring use of universal proxies in proxy contests


Despite the fact that some people think this is the most burning issue facing the SEC, it’s only a concern in proxy fights and doesn’t affect the overwhelming majority of companies


’33 Act registration exemptions

Revise the definition of “general solicitation” in Reg D to exclude various items and change definition of “accredited investor” to adjust the income and net worth tests for inflation


Changes would ease burdens, but it’s unclear where easing burdens may conflict with investor protection concerns


’34 Act registration exemptions

Increase the registration trigger from 500 to 2,000 non-accredited holders and permit deregistration at 1,200 holders vs. current 300; private companies would be able to issue up to $20 million to employees without having to provide robust disclosure (including financial statements)


Same – would ease burdens, but it’s unclear where easing burdens may conflict with investor protection concerns; note that this lines up with existing bank holding company requirements


Regulation “A+”

Increase permitted amount of offering from $50 million to $75 million, to be indexed for inflation


Seems reasonable
IPO “on-ramp” provisions

Make “testing the waters” and confidential filings available to all IPO issuers and reduce from 21 to 15 days timeframe in which roadshow can begin


Seems reasonable
Form S-3 eligibility

Make any issuer of securities listed on a national securities exchange eligible to use Form S-3 (regardless of float)


Seems reasonable
Blue Sky preemption

Extend preemption to any security listed on any national exchange (including any tier or segment)


State securities commissioners may balk, but this could be helpful
Small issuer exemptions

Would exempt emerging growth companies and companies with less than $250 million in gross revenues from XBRL rules


Too bad it doesn’t extend to all companies!
SOX 404(b) exemption

Extend the exemption until the earlier of average gross revenues above $50 million and 10 years after IPO and to any issuer with total market cap of less than $500 million


Seems reasonable
Proxy Advisory Firms Would require proxy advisory firms to register with the SEC

It is unclear what, if anything, this would accomplish absent more details.  ISS is already registered as an investment adviser, but that does not seem to influence its behavior or actions.


D&O bars

Would repeal the SEC’s authority to bar persons from serving as directors or officers of publicly held companies


A long-standing weapon in the SEC’s enforcement arsenal

It’s anybody’s guess whether the CHOICE Act will continue to rumble through Congress and the extent to which the above provisions will change – or whether additional provisions will be added.  Watch this space for further news!