As you may recall, auditors of large accelerated filers will be required to report on CAMs—critical audit matters—in their auditor’s reports for fiscal years ending on or after June 30, 2019 and in auditor’s reports for all other companies (except EGCs) to which the requirements apply for fiscal years ending on or after December 15, 2020. (See this PubCo post.) As SEC Commissioner Kara Stein observed in her statement on approval of the new rule, the new “standard marks the first significant change to the auditor’s report in more than 70 years.” In Europe, a similar concept has been in operation since 2016: “key audit matters.” What has been the experience so far?
Here is the lede from this WSJ article: “A stubborn paradox reigns across U.S. boardrooms: Companies are appointing more women to board seats than ever, yet the overall share of female directors is barely budging.” In comments to the WSJ, the managing director for corporate governance research at the Conference Board indicated that, in “the last two decades, there’s been a sweeping revolution in the field of corporate governance…. Yet if you look at the composition of the board, at its core, it remains the same at many public companies and quite resistant to change.’” Why is that? It’s not, as some have suggested, a lack of qualified women board candidates. Rather, according to the Conference Board, it’s that “average director tenure continues to be quite extensive (at 10 years or longer), board seats rarely become vacant and, when a spot is available, it is often taken by a seasoned director rather than a newcomer with no prior board experience.”
An op-ed co-authored by SEC Commissioner Robert Jackson (who is reportedly planning to leave the SEC this fall, although he’s eligible to stay until the end of 2020) and MIT senior lecturer (and former president of Fidelity) Robert Pozen lambasts the use of non-GAAP targets in determining executive pay, absent more transparent disclosure. The pair argue that, although historically, performance targets were based on GAAP, in recent years, there has been a shift to using non-GAAP pay targets, sometimes involving significant adjustments that can “be used to justify outsize compensation for disappointing results.” What’s the bottom line? Where comp committees base comp on a different scorecard than GAAP, they argue, the committee should have to explain their decision by reconciling to GAAP in the CD&A. Will the SEC take heed?
As noted in this PubCo post, SCOTUS recently heard oral argument in Kisor v. Wilkie, a case involving the interpretation of a regulation issued by the Department of Veteran’s Affairs. In Kisor, a Vietnam vet, suffering from service-related PTSD, sought retroactive disability benefits from the VA. Interpreting the meaning of the term “relevant” as used in one of its own regs, the VA denied his claim for retroactive benefits. Why is this case important to public companies? Because the question presented to the Court was whether to continue the decades-long deference of courts to the reasonable interpretations by agencies (such as the SEC) of their own ambiguous regulations, often referred to as Auer deference (or Seminole Rock deference, referring to Auer’s antecedent). The decision, expected by this summer, could narrowly restrict, or even completely undo, that deference.
The case represents yet another example of concentrated efforts to dismantle or severely limit the administrative state—or the “deep state,” depending on your point of view. As explained in the opening of the amicus brief of the Cato Institute, quoting Chief Justice Roberts in dissent, “[o]verturning Auer would be a modest but important check on the ‘the danger posed by the growing power of the administrative state.’ City of Arlington, Tex. v. F.C.C.” What’s more, in his cert. petition, Kisor argued that “‘[r]evisiting Auer deference [would be] an appropriate place to begin’ a more complete ‘reconsideration’ of ‘existing doctrines of agency deference,’ including under Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc.” (quoted from the amicus brief of a group of Professors of Administrative Law and Federal Regulation in support of neither party).
Once again, guidance is under the gun. In this recent speech, SEC Commissioner Hester Peirce expressed her concern for SEC staff guidance and interpretation that she seems to view as sometimes runaway or out-of-control and, sometimes, too much under the radar. A few days later, the Acting Director of the Office of Management and Budget joined in, distributing a memo designed to limit rules and guidance that federal agencies issue, particularly outside of the notice-and-comment process. But potentially the most significant impact could result from an important case that SCOTUS is now considering (to be discussed in a separate post), which could undo the historic deference that courts have generally given to agency interpretations of their own regulations, often referred to as Auer deference. In this highly politicized environment, what will be the impact on staff guidance?
No sooner had Corp Fin advised us that there was no easy way to do an extension for a confidential treatment order then, lo and behold, they create one. Today, Corp Fin posted a new streamlined procedure for confidential treatment extensions.