Category: Executive Compensation
Corp Fin posts three new CDIs on Rule 10b5-1
Last week, Corp Fin posted (and then deleted and reposted—but that’s another story) three new CDIs regarding the affirmative defense under Rule 10b5-1. As you may recall, in December last year, the SEC adopted new amendments to the rules regarding Rule 10b5-1 plans. These amendments added new conditions to the affirmative defense of Rule 10b5-1(c) designed to address concerns about abuse of the rule by opportunistic trading on the basis of material non-public information. Among other changes, Rule 10b5-1(c)(1) was amended to apply a cooling-off period to persons other than the issuer, impose a good-faith certification requirement on directors and officers, limit the ability of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans, limit the use of single-trade plans by persons other than the issuer to one single-trade plan in any 12-month period, and add a condition that all persons entering into Rule 10b5-1 plans must act in good faith with respect to those plans. In addition, the amendments included requirements for new disclosures regarding (1) companies’ insider trading policies and procedures, and the use of 10b5-1 plans and certain other similar trading arrangements by directors and officers; (2) director and officer equity compensation awards made close in time to company to disclosure of MNPI; and (3) bona fide gifts of securities on Forms 4 by Section 16 filers and transactions under 10b5-1 plans on Forms 4 and 5. (See this PubCo post.) The new CDIs relate to the timing of compliance and the use and termination of multiple plans.
SEC adopts “better-than-it-might-have-been” final rules for stock buyback disclosure [UPDATED]
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted three to two to adopt a proposal intended to modernize and improve disclosure regarding company stock repurchases. Issuers have something to be relieved about and something to be mildly anxious about. The good news is what the SEC didn’t do: the new rule does away with the proposed Form SR for domestic companies and backs off the proposed requirement for almost real-time (daily) reporting of share repurchases. Instead, the final rule moves to quarterly reporting of detailed quantitative information on daily repurchase activity, filed as exhibits to issuers’ periodic reports. The more vexing aspect is that domestic issuers will be required to begin this reporting, along with the new narrative disclosure, starting with the first Form 10-Q or 10-K covering the first full fiscal quarter (i.e., for the 10-K, the 4th quarter) that begins on or after October 1, 2023. That means that companies will need to get on the stick to begin to develop processes and procedures for collection of that data. In addition, the information will be deemed “filed” and not “furnished,” as originally proposed, which means that it could be subject to Section 18 and Section 11 liability. The amendments will also revise and expand the narrative requirements and add a new requirement for disclosure regarding a company’s adoption and termination of Rule 10b5-1 trading arrangements. In the press release, Chair Gary Gensler observed that “[i]n 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022….Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities. Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets.” Commissioners Hester Peirce and Mark Uyeda dissented, with Peirce remarking that “better-than-it-might-have-been is not my standard for supporting a final rule.”
SEC adopts “better-than-it-might-have-been” final rules for stock buyback disclosure
At an open meeting yesterday, the SEC voted three to two to adopt a proposal intended to modernize and improve disclosure regarding company stock repurchases. Issuers have something to be relieved about and something to be mildly anxious about. The good news is what the SEC didn’t do: the new rule does away with the proposed Form SR for domestic companies and backs off the proposed requirement for almost real-time (daily) reporting of share repurchases. Instead, the final rule moves to quarterly reporting of detailed quantitative information on daily repurchase activity, filed as exhibits to issuers’ periodic reports. The more vexing aspect is that domestic issuers will be required to begin this reporting, along with the new narrative disclosure, starting with the first Form 10-Q or 10-K covering the first full fiscal quarter (i.e., for the 10-K, the 4th quarter) that begins on or after October 1, 2023. That means that companies will need to get on the stick to begin to develop processes and procedures for collection of that data. The amendments will also revise and expand the narrative requirements and add a new requirement for disclosure regarding a company’s adoption and termination of Rule 10b5-1 trading arrangements. In the press release, Chair Gary Gensler observed that “[i]n 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022….Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities. Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets.” Commissioners Hester Peirce and Mark Uyeda dissented, with Peirce remarking that “better-than-it-might-have-been is not my standard for supporting a final rule.”
Mild reprieve on timing of clawback policy
As noted in TheCorporateCounsel.net blog, this week, the SEC posted notices that it is extending the time period for approval of the NYSE and Nasdaq proposed listing standards for clawback policies for listed issuers. Originally, the SEC was expected to approve (or disapprove or institute proceedings to determine whether to disapprove) the proposed new standards by April 27, 2023; the approval date is now extended to June 11. The SEC is extending the time period to allow “sufficient time to consider the proposed rule change and the comments received.” What does that time delay mean for companies? Under the SEC final rules and the proposed listing standards, each listed issuer must adopt the required clawback policy no later than 60 days following the effective date of rule, which, under the exchange proposals, is the approval date. That approval date now moves to June 11, which looks to be a Sunday, allowing companies a brief extension of time until around August 10 or so (depending on the date of the actual approval) to get their policies together.
What we need to know about corporate governance—but don’t
In this paper, Seven Gaping Holes in Our Knowledge of Corporate Governance, from the Rock Center for Corporate Governance at Stanford, the authors observe that it “is extremely difficult to produce high-quality, fundamental insights into corporate governance.” Why is that? Well there are lots of reasons. According to the authors, instead of the theory, measurement and analysis that you might expect—given that corporate governance is a social science—the “dialogue about corporate governance is dominated by rhetoric, assertions, and opinions that—while strongly held—are not necessarily supported by either applicable theory or empirical evidence.” And even empirical work from academics has serious shortcomings, often detecting a pattern that is not amenable to specific application or making findings that are too specific to generalize. Or, studies might find correlation but not permit attribution of causation; or it may be hard to suss out key variables that may not be publicly observable. As a result, there remain “central issues where insufficient or inadequate study has left us unable to answer basic questions, and where key assumptions relied upon by experts have not been verified or validated.” The paper attempts to identify some of them and home in on potential further areas of study.
Audit committee oversight of non-GAAP financial measures
According to audit firm PwC, non-GAAP financial measures play an important role in financial reporting, “showing a view of the company’s financial or operational results to supplement what is captured in the financial statements,” and help to tell the company’s financial story, as the SEC has advocated in connection with MD&A, “through the eyes of management.” Yet, they also have the potential to open the proverbial can of worms, subjecting the company to serious SEC scrutiny and possible SEC enforcement if misused. Just a couple of weeks ago, the SEC announced settled charges against DXC Technology Company, a multi-national information technology company, for making misleading disclosures about its non-GAAP financial performance. According to the Order, DXC materially increased its reported non-GAAP net income “by negligently misclassifying tens of millions of dollars of expenses ” and improperly excluding them from its reported non-GAAP earnings. In addition to misclassification, DXC allegedly provided a misleading description of the scope of the expenses included in the company’s non-GAAP adjustment and failed to adopt a non-GAAP policy or to have adequate disclosure controls and procedures in place specific to its non-GAAP financial measures. Consequently, DXC “negligently failed to evaluate the company’s non-GAAP disclosures adequately.” DXC agreed to pay a civil penalty of $8 million. (See this PubCo post.) So what can a company’s audit committee do to help prevent the types of problems that have arisen at DXC and elsewhere? Audit committees may find helpful this recent article from PwC providing guidance for committees tasked with oversight of the use of non-GAAP financial measures.
What have studies shown so far about PvP disclosure?
In August last year—12 years after the Dodd-Frank mandate— the SEC finally adopted a new rule that requires disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance: the pay-versus-performance rules. To a significant extent, the approach taken by the SEC in this rulemaking was prescriptive and some of the prescriptive aspects of the rules were quite complex; the SEC opted not to take a “wholly principles-based approach because, among other reasons, such a route would limit comparability across issuers and within issuers’ filings over time, as well as increasing the possibility that some issuers would choose to report only the most favorable information.” But there was some flexibility built into the new rules. How would companies implement the more flexible disclosure requirements? That was the question considered by Compensation Advisory Partners, which published a report on the versions of pay-versus-performance disclosure from the earliest filers among the S&P 500. A similar study of a slightly larger group was conducted by equitymethods. The goal in each case was to try to get a sense of how companies were responding to the new disclosure requirements. What choices were companies making on peer groups, financial measures or “Company-Selected Measures”? How were companies describing the relationship between pay and performance? Just what did the new disclosure look like?
Corp Fin posts update to tender offer CDIs
Corp Fin has posted an update to the CDIs related to the tender offer rules and schedules. Below are brief summaries.
SEC posts NYSE and Nasdaq proposals for clawback listing standards
It was just November last year when the SEC finally adopted rules to implement Section 954 of Dodd-Frank, the clawback provision. (Remember that Dodd-Frank dates to 2010 and the clawback rules were initially proposed by the SEC back in 2015.) The new rules directed the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with clawback policies and to provide disclosure about their policies and implementation. Under the rules, the clawback policy must provide that, in the event the listed issuer is required to prepare an accounting restatement—including a “little r” restatement—the issuer must recover the incentive-based compensation that was erroneously paid to its current or former executive officers based on the misstated financial reporting measure. (See this PubCo post.) The final rules required any covered exchanges to file proposed listing standards with the SEC no later than February 27, with the listing standards to be effective no later than one year after publication. On Tuesday, the SEC posted the listing standards proposed by Nasdaq and by the NYSE. They’re largely the same, with some differences, both tracking the SEC requirements closely. Both proposals are open for comment until 21 days after publication in the Federal Register.
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