New addition to the SEC
Allison Lee has finally been confirmed by the Senate as an SEC Commissioner. As a result, the SEC now has a full complement of Commissioners. Lee fills the Democratic seat formerly occupied by Kara Stein and, in fact, was her counsel for just over a year. In total, she was at the SEC for 13 years, including as Senior Counsel in Enforcement. Here is the statement of congratulations from the rest of the SEC.
Use of non-GAAP financial metrics increases in executive comp—will the SEC increase its scrutiny?
You might recall that, in April of this year, SEC Commissioner Robert Jackson co-authored an op-ed (with Robert Pozen, MIT senior lecturer and former president of Fidelity) that lambasted the use of non-GAAP financial metrics in determining executive pay, absent more transparent disclosure. The pair argued 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.” On the heels of that op-ed came a rulemaking petition submitted by the Council of Institutional Investors requesting, in light of this increased prevalence, that the SEC amend the rules and guidance to provide that all non-GAAP financial measures (NGFMs) used in the CD&A of proxy statements be subject to the reconciliation and other requirements of Reg G and Item 10(e) of Reg S-K. But how pervasive is the use of NGFMs in executive comp? This article from Audit Analytics puts some additional data behind the brewing controversy about the use of non-GAAP financial measures in executive comp—and the level of increase is substantial.
SEC modifies auditor independence rule regarding lending relationships with audit clients
The SEC has adopted final amendments to the auditor independence rules relating to lending relationships between the auditor and an audit client or certain shareholders of the audit client. As noted in the press release, the SEC had become aware of circumstances where the existing rules captured attenuated “relationships that otherwise do not bear on the impartiality or objectivity of the auditor. The amendments are intended to focus the rules on those lending relationships that reasonably may bear on external auditors’ impartiality or objectivity and, in so doing, improve the application of the Loan Provision for the benefit of investors while reducing compliance burdens.” Although the issues associated with this independence rule have created the severest compliance challenges for companies in the investment management industry, the final amendments will apply to entities beyond that industry, including operating companies and registered broker-dealers. The final amendments will become effective 90 days after publication in the Federal Register.
SEC posts concept release on harmonization of private securities offering exemptions
Today, the SEC posted its new, much anticipated concept release seeking public comment on ways to harmonize and streamline the patchwork universe of private placement exemptions and “to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.” The comment period will be open for 90 days from publication in the Federal Register.
ISS takes an early look at the 2019 proxy season
With 70% of the annual meetings for the Russell 3000 having now taken place (1,812 companies), in this article, ISS takes an early look at the 2019 proxy season. In brief, ISS found increases in opposition to director elections and to say-on-pay proposals, as well as increases in the number of, and withdrawal rates for, environmental and social (E&S) proposals relative to governance (the “G” in ESG) proposals. In addition, the disparity in the levels of support for E&S proposals relative to the historically more popular governance proposals has narrowed dramatically.
Exams for directors—will it be a thing?
Oh, I kid the directors! Who would think of such a thing?
Time to catch up on recent proposals at the Exchanges
Time to catch up on some of the recent proposals at the Exchanges.
PCAOB staff provides guidance on audit committee communications in wake of independence violations
Under PCAOB Rule 3520, the auditor “must be independent of the firm’s audit client throughout the audit and professional engagement period,” which includes satisfying the independence criteria of the SEC and the PCAOB. But what happens when the auditor violates one of the independence rules—let’s say one of the specific prohibitions under Rule 2-01(c) of Reg S-X? Can the auditor’s violation be “cured”? Can the auditor still affirm its independence? How is that determined?
Companies report financial impact of climate risk
Non-profit CDP (fka the Carbon Disclosure Project) has released its analysis of the responses to its climate change questionnaire for 2018 from two groups of companies—a large group of almost 7,000 respondents and, analyzed separately, a group of 366 respondents that were among the world’s 500 largest companies (by market cap). The analysis focused on the risks and opportunities presented by climate change and, for the first time, the analysis considered companies’ expectations regarding the potential financial impact of climate risk. In the aggregate, the amount reported was eye-popping, if not exactly surprising, and, given that many companies did not respond at all, is undoubtedly an underestimate. Notably, however, the aggregate amount companies attributed to potential climate-related opportunities was even “bigger than the risks.” The significance of the potential financial implications, together with the imminence of these risks, suggest that companies may need to think hard about climate risks and the associated financial implications in crafting their public disclosures.
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