Category: Executive Compensation
SEC proposes new rules on stock buybacks [updated]
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting last week, the SEC voted three to two to propose new rules regarding company stock repurchases. (At the same time, the SEC also voted unanimously to propose new rules regarding Rule 10b5-1 plans. See this PubCo post.) The amount that companies have spent on stock repurchases has generally increased substantially over the years—in 2020, companies spent almost $700 billion to repurchase their own shares, which, the SEC asserts, “has been accompanied by public interest in corporate payouts in the form of share repurchases.” These repurchases can impact the market, and, the SEC suggests, questions have been raised as to the adequacy of buyback disclosure. The proposal is intended to modernize and improve that disclosure, taking into consideration the academic literature and the SEC’s own analysis, according to the remarks of Corp Fin Director Renee Jones at the open meeting. The proposal would enhance transparency around stock repurchases, including by requiring daily reports of stock repurchases on a new Form SR and expanding the disclosure required regarding repurchases in periodic reports, including a requirement for use of Inline XBRL. According to SEC Chair Gary Gensler, “[s]hare buybacks have become a significant component of how public issuers return capital to shareholders….I think we can lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosures that today’s proposal would provide.” Dissenting Commissioners Hester Peirce and Elad Roisman seemed to view the proposal as a rulemaking without much of a reason. There is a 45-day comment period after publication in the Federal Register, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
Happy holidays and happy new year!!
SEC proposes new rules on 10b5-1 plans [updated]
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting last week, the SEC voted—unanimously—to propose new rules regarding Rule 10b5-1 plans. (The SEC also voted three to two to propose new rules regarding issuer stock repurchases. The proposing release on stock buybacks will be discussed in a subsequent post.) Concerns about potential abuse of Rule 10b5-1 plans have been percolating for many years, and the proposal to add new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: 10b5-1 plans, he said back in June, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post and the SideBar below.) And in the related press release, Gensler again highlighted concerns about “gaps in Rule 10b5-1—gaps that today’s proposals would help fill.” What wasn’t anticipated was that the vote to issue the proposal would be unanimous! (Remember, though, even former SEC Chair Jay Clayton had discussed the need for “good corporate hygiene” in connection with Rule 10b5-1 plans. See this PubCo post.) But how likely is it that this newfound spirit of unanimity will carry forward to adoption? Time will tell. But do the statements on the proposal, discussed below, of Commissioners Hester Peirce and Elad Roisman already give us a preview of issues they might raise in possible future dissents on adoption of the rulemaking? There is a 45-day comment period after publication in the Federal Register, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
SEC proposes new rules on 10b5-1 plans and stock buybacks
At an open meeting yesterday, the SEC voted to propose new rules addressing trading in the market by insiders and companies. The commissioners voted—unanimously—to propose new rules regarding Rule 10b5-1 plans and voted three to two to propose new rules regarding issuer stock repurchases. The proposal to add new conditions to use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: 10b5-1 plans, he said back in June, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post.) Yesterday, Gensler again highlighted concerns about “gaps in Rule 10b5-1—gaps that today’s proposals would help fill.” What wasn’t anticipated was that the vote to issue the proposal would be unanimous! (Remember, though, even former SEC Chair Jay Clayton had discussed the need for “good corporate hygiene” in connection with Rule 10b5-1 plans. See this PubCo post.) But how likely is it that this newfound spirit of unanimity will carry forward to adoption? Time will tell. But do the statements on the proposal, discussed below, of Commissioners Hester Peirce and Elad Roisman already give us a preview of issues they might raise in possible future dissents on adoption of the rulemaking? The second proposal, stock buyback disclosure, is designed to enhance transparency around stock repurchases, including by requiring daily reports of stock repurchases on a new Form SR and expanding the disclosure required regarding repurchases in periodic reports, including a requirement for use of Inline XBRL. According to Gensler, “[s]hare buybacks have become a significant component of how public issuers return capital to shareholders….I think we can lessen the information asymmetries between issuers and investors through enhanced timeliness and granularity of disclosures that today’s proposal would provide.” Both Peirce and Roisman seemed to view the proposal as a rulemaking without much of a reason. There is a 45-day comment period after publication in the Federal Register for both of these proposals, a time period that Roisman (perhaps taking a cue from Peirce) found to be of insufficient duration.
SEC offers another packed agenda for Fall 2021
The SEC’s new Fall reg-flex agenda is posted and, no surprise, it’s packed. Here is the short-term agenda and here is the long-term version. And just as with the spring agenda, Commissioners Hester Peirce and Elad Roisman have lambasted it in a dissenting statement. The agenda is laden with major proposals that were on the Spring agenda, but didn’t quite make it out the door, such as plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, Rule 14a-8 amendments and SPACs, as well as a new, already controversial, proposal to amend the definition of “holders of record.” Some of the agenda items have recently been proposed, for example, new rules regarding mandated electronic filings (see this PubCo post) and amendments to the proxy rules governing proxy voting advice (see this PubCo post). Similarly, three items identified as at the “final rule stage” have already been adopted: universal proxy (see this PubCo post), filing fee disclosure (see this PubCo post) and amendments under the Holding Foreign Companies Accountable Act (see this PubCo post). The agenda also identifies a couple of topics that are still just at the pre-rule stage, such as exempt offerings (updating the financial thresholds in the accredited investor definition, amendments to Rule 701 and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda (see this PubCo post), nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
SEC staff issues SAB No. 120 regarding “spring-loaded” awards to executives
Yesterday, the staff of the SEC’s Office of the Chief Accountant and Corp Fin released Staff Accounting Bulletin No. 120, which provides guidance about proper recognition and disclosure of compensation cost for “spring-loaded” awards made to executives. According to the SEC press release, “[s]pring-loaded awards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information such as an earnings release with better-than-expected results or the disclosure of a significant transaction.” When these grants are not routine, according to the staff, they “merit particular scrutiny.” Notably, the staff advises that, in measuring compensation actually paid to executives, companies “must consider the impact that the material nonpublic information will have upon release. In other words, companies should not grant spring-loaded awards under any mistaken belief that they do not have to reflect any of the additional value conveyed to the recipients from the anticipated announcement of material information when recognizing compensation cost for the awards.”
SEC revisits 2015 Dodd-Frank clawback proposal—opens public comment period
It’s time to dig back into your mental archives for 2015. That’s when the SEC, by a vote of three to two, initially proposed rules to implement Section 954 of Dodd-Frank, the clawback provision. But the proposal was relegated to the SEC’s long-term agenda and never heard from again. Until, that is, the topic found a spot on the SEC’s short-term agenda this spring (see this PubCo post) with a target date for a re-proposal of April 2022. The SEC had scheduled an open meeting for Wednesday to consider re-opening the comment period, but instead cancelled the meeting and, on Thursday, simply posted a notice. Here is the original 2015 Proposing Release and here is the new fact sheet. SEC Chair Gary Gensler said that, with re-opening of the comment period, he believed “we have an opportunity to strengthen the transparency and quality of corporate financial statements as well as the accountability of corporate executives to their investors.” The questions posed by the SEC in the notice (discussed below) give us some insight into where the SEC may be headed with the proposal. It’s worth noting that one possible change suggested by the questions is a potential expansion of the concept of “restatement” to include not only “reissuance” restatements (which involve a material error and an 8-K), but also “revision” restatements (or some version thereof). The public comment period will remain open for 30 days following publication of the release in the Federal Register.
ISS releases results of 2021 broad policy and climate surveys
ISS has just released the results of its 2021 global benchmark policy survey, which, this year, actually comprises two surveys—one related to a broad array of policies and the other specifically addressing climate change. Along with issues related to executive pay and governance, the broad survey also addressed issues such as non-financial ESG performance metrics in executive compensation, racial equity audits and virtual-only shareholder meetings. The climate survey solicited views on topics such as board oversight of climate risks, say-on-climate proposals and other issues relevant to ISS’ climate voting policy.
Alliance Advisors wraps up the 2021 proxy season
Alliance Advisors has just released its 2021 proxy season review, a season they characterize as “dynamic,” as investors stepped forward to express their views on a variety of environmental and social topics. At least 34 E&S shareholder proposals won majority support, compared to 21 proposals last year. And over a dozen shareholder proposals on diversity, climate change and political spending won with votes in excess of 80%. There were also some new entries among the shareholder proposals—such as requests for racial audits, access to COVID-19 medicines and say on climate—that received support averaging around 30%, a level that Alliance characterizes as “remarkably” good for first timers. Alliance acknowledges that these results did not come entirely out of the blue, as large asset managers such as BlackRock and Vanguard had previously signaled that they might take steps this season to more closely align their proxy voting records with their advocacy positions.
Commissioner Lee discusses board’s role in ESG oversight
On Monday, in a keynote address before the Society for Corporate Governance 2021 National Conference, SEC Commissioner Allison Herren Lee discussed the challenges boards face in oversight of ESG matters, including “climate change, racial injustice, economic inequality, and numerous other issues that are fundamental to the success and sustainability of companies, financial markets, and our economy.” Shareholders, employees, customers and other stakeholders are now all looking to corporations to adopt policies that “support growth and address the environmental and social impacts these companies have.” Why is that? Because actions or inactions by our largest corporations can have a tremendous impact. According to Lee, a 2018 study showed that, of the top 100 revenue generators across the globe, only 29 were countries—the rest were corporations, that is, corporations “often operate on a level or higher economic footing than some of the largest governments in the world.”
Lots to see on the SEC’s Spring 2021 Reg Flex Agenda
Late Friday, the SEC announced that its Spring 2021 Regulatory Flexibility Agenda—both short-term and long-term—has now been posted. And it’s a doozy. According to SEC Chair Gary Gensler, to meet the SEC’s “mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.” That’s certainly an understatement. While former SEC Chair Jay Clayton considered the short-term agenda to signify rulemakings that the SEC actually planned to pursue in the following 12 months, Gensler may be operating under a different clock. What stands out here are plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, universal proxy and SPACs. In addition, with a new sheriff in town, some of the SEC’s more recent controversial rulemakings of the last year or so may be revisited, such as Rule 14a-8. The agenda also identifies a few topics that are still just at the pre-rule stage—i.e., just a twinkle in someone’s eye—such as gamification (behavioral prompts, predictive analytics and differential marketing) and exempt offerings (updating the financial thresholds in the accredited investor definition and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda, nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
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