Tag: SEC
SEC adopts final rules on compensation clawbacks in the event of financial restatements—“Big R” and “little r” [UPDATED]
[This post revises and updates my earlier post primarily to reflect in greater detail the contents of the adopting release. For a discussion of the comments and criticisms of the SEC Commissioners at the open meeting at which the rules were adopted, see my earlier post.]
At an open meeting last week, the SEC adopted, by a vote of—surprise—3 to 2, rules to implement Section 954 of Dodd-Frank, the clawback provision. Clawback rules were initially proposed by the SEC back in 2015, but were relegated to the long-term agenda, until they suddenly reemerged on the SEC’s short-term agenda in 2021 (see this PubCo post) with a target date for a re-proposal of April 2022. Instead of a re-proposal, however, a year ago, the SEC simply posted a notice announcing that it was re-opening the comment period and posing a number of questions for public comment. (See this PubCo post.) One possible change suggested by the SEC’s questions was a potential expansion of the concept of “restatement” to include not only “reissuance,” or “Big R,” restatements (which involve a material error and an 8-K), but also “revision” or “little r” restatements. Then, in June of this year, DERA issued a new staff memorandum addressing in part the restatement question, which led the SEC to once again re-open the comment period. Finally, the SEC concluded that, after more than seven years, the proposal had marinated long enough. Time to serve it up. The new rules direct the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. 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. Commissioners Hester Peirce and Mark Uyeda dissented, contending that, among other problems, the rule was too broad and too prescriptive. According to SEC Chair Gary Gensler, the key word here is “erroneously,” that is, the rule requires recovery of compensation to which the officers were never entitled in the first place. In his statement at the meeting, Gensler indicated that he believes “that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors….Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”
SEC adopts final rules on compensation clawbacks in the event of financial restatements—“Big R” and “little r”
You might remember back to 2015 when the SEC initially proposed rules to implement Section 954 of Dodd-Frank, the clawback provision. The SEC did not then consider adoption of the proposal in the ordinary course, instead relegating it to the long-term agenda, where it was never heard from again. Until, that is, the topic found a spot on the SEC’s short-term agenda in 2021 (see this PubCo post) with a target date for a re-proposal of April 2022. Instead of a re-proposal, however, a year ago, the SEC simply posted a notice announcing that it was re-opening the comment period and posing a number of questions for public comment. (See this PubCo post.) One possible change suggested by the SEC’s questions was a potential expansion of the concept of “restatement” to include not only “reissuance,” or “Big R,” restatements (which involve a material error and an 8-K), but also “revision” or “little r” restatements. Then, in June of this year, DERA issued a new staff memorandum addressing in part the restatement question, which led the SEC to once again re-open the comment period. Finally, the SEC has concluded that, after more than seven years, the proposal has marinated long enough. Time to serve it up. Accordingly, at an open meeting yesterday, the SEC adopted, by a vote of—surprise!—three to two, new rules that direct the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. 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. Commissioners Hester Peirce and Mark Uyeda dissented, contending that, among other problems, the rule was too broad and too prescriptive. According to SEC Chair Gary Gensler, the key word here is “erroneously,” that is, the rule requires recovery of compensation to which the officers were never entitled in the first place. In his statement at the meeting, Gensler indicated that he believes “that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors….Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”
NAM celebrates victory over SEC on non-enforcement of proxy advisory firm rules—what did it really win?
Last week, in an action by the National Association of Manufacturers against the SEC and Chair Gary Gensler, the U.S. District Court for the Western District of Texas held that the SEC violated the Administrative Procedure Act when, in June 2021, Corp Fin stated that it would not recommend enforcement of the 2020 proxy advisory firm rules while those rules were under reconsideration. In 2022, however, the SEC formally adopted new amendments to the 2020 rules reversing some of the key provisions and, at the same time, rescinding Corp Fin’s non-enforcement statement. You might think that the adoption of the new 2022 rules and rescission of the non-enforcement statement would make NAM’s suit moot? At least, that’s what the SEC seemed to think when it moved to dismiss NAM’s complaint in August 2022, contending that the relief NAM sought would now be “meaningless.” But, in mid-September, the Court denied the SEC’s motion—citing West Virginia v. EPA—and late last week, the same Court granted NAM’s summary judgment motion for declaratory and injunctive relief: the SEC’s “suspension” of the rules was vacated because it violated the APA, and the SEC was enjoined from refusing to acknowledge or recognize the 2020 rule’s compliance date. NAM declared victory. But was it a hollow victory? Not according to NAM.
Fifth Circuit hears oral argument on challenge to Nasdaq board diversity rules—will the rules survive?
On Friday, August 6, 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) As anticipated, a court challenge to these rules didn’t take long to materialize. On Monday, August 9, the Alliance for Fair Board Recruitment filed a slim petition under Section 25(a) of the Exchange Act in the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post.) That petition was soon followed by a new petition challenging the rules filed by the National Center for Public Policy Research and subsequently transferred to the Fifth Circuit where the earlier filed petition was pending. (See this PubCo post.) Last week, a three-judge panel of the Fifth Circuit heard oral argument in the case, Alliance for Fair Board Recruitment, National Center for Public Policy Research v. SEC. Did it signal a result?
SEC adopts final pay-versus-performance disclosure rule [updated]
[This post revises and updates my earlier post primarily to reflect in greater detail the contents of the adopting release.]
Last week, without an open meeting, the SEC finally adopted a new rule that will require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance—a new rule that has been 12 years in the making. In 2010, Dodd-Frank, in Section 953(a), added Section 14(i) to the Exchange Act, mandating that the SEC require so-called pay-versus-performance disclosure in proxy and information statements. The SEC proposed a rule on pay versus performance in 2015 (see this PubCo post and this Cooley Alert), but it fell onto the long-term, maybe-never agenda until, that is, the SEC reopened the comment period in January (see this PubCo post). According to SEC Chair Gary Gensler, the new rule “makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies. I am pleased that the final rule provides for new, more flexible disclosures that allow companies to describe the performance measures it deems most important when determining what it pays executives. I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies.” In the adopting release, the SEC articulates its belief that the disclosure “will allow investors to assess a registrant’s executive compensation actually paid relative to its financial performance more readily and at a lower cost than under the existing executive compensation disclosure regime.” For the most part, although there is some flexibility in some aspects of the new rule, the approach taken by the SEC in this rulemaking is quite prescriptive; 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.” Commissioners Hester Peirce and Mark Uyeda dissented, and their statements about the rulemaking are discussed below.
SEC adopts final pay-versus-performance disclosure rule
It’s been 12 years since Dodd-Frank mandated, in Section 953(a), so-called pay-versus-performance disclosure, and amazingly, no rules had been adopted to implement that mandate…until yesterday, when adoption of the final rule crept in “on little cat feet.” Well, ok, there was a press release, but it was still quite a surprise. Yesterday, without an open meeting, the SEC finally adopted a new rule that would require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance. The SEC proposed a rule on pay versus performance in 2015 (see this PubCo post and this Cooley Alert), but it fell onto the long-term, maybe-never agenda until, that is, the SEC reopened the comment period in January (see this PubCo post). According to SEC Chair Gary Gensler, “[t]oday’s rule makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies. I am pleased that the final rule provides for new, more flexible disclosures that allow companies to describe the performance measures it deems most important when determining what it pays executives. I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies.” Commissioners Hester Peirce and Mark Uyeda dissented.
Senate confirms two new SEC Commissioners
On Thursday, as reported by Thomson Reuters, the Senate unanimously confirmed Jaime E. Lizárraga and Mark Toshiro Uyeda to serve as SEC Commissioners. Lizárraga will fill the seat of departing Democratic Commissioner Allison Herren Lee (see this PubCo post), whose term ended June 5 (but who continued to serve until her successor’s confirmation), and Uyeda will fill the seat vacated in January by former Republican Commissioner Elad Roisman (see this PubCo post). In this statement, the current Commissioners congratulate Lizárraga and Uyeda on their confirmations. The SEC will now have a full complement of five Commissioners.
Paper debunks seven myths of ESG
As we anticipate new proposals from the SEC on human capital and climate disclosure, this recent paper from the Rock Center for Corporate Governance at Stanford, Seven Myths of ESG, seems to be especially timely. The trend to take ESG into account in decision-making by companies and investors, not to mention the focus on ESG issues by regulators and even associations like the Business Roundtable, is “pervasive,” say the authors. Still, ESG is subject to “considerable uncertainty.” In the paper, the authors set about debunking some of the most common and persistent myths about what ESG is, how it should be implemented and its impact on corporate outcomes, “many of which,” they contend, “are not supported by empirical evidence.” Their objective is to provide a better understanding of ESG so that companies, institutions and regulators can “take a more thoughtful approach to incorporating stakeholder objectives into the corporate planning process.” The authors’ seven myths are summarized below.
SEC adopts final amendments under the Holding Foreign Companies Accountable Act
In December 2020, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, was signed into law. The HFCAA amended SOX to prohibit trading on U.S. exchanges of public reporting companies audited by audit firms located in foreign jurisdictions that the PCAOB has been unable to inspect for three sequential years. (See this PubCo post.) According to SEC Chair Gary Gensler, “[w]e have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the [PCAOB]….This final rule furthers the mandate that Congress laid out and gets to the heart of the SEC’s mission to protect investors….The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible.” Last week, the SEC adopted final amendments to implement the HFCAA. The amendments will be effective 30 days after publication in the Federal Register.
SEC proposes to undo key provisions of 2020 proxy advisory firm rules
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting on November 17, the SEC voted, three to two, to propose amendments to the proxy rules that would reverse some of the key provisions governing proxy voting advice that were adopted in July 2020. Those amendments had codified the SEC’s interpretation that made proxy voting advice subject to the proxy solicitation rules. The intent was not, however, to cause ISS and other proxy voting advice businesses, which the SEC refers to as “PVABs,” to file a slew of proxy statements. To address the real issue that the SEC was targeting, the 2020 rules added to the exemptions from those solicitation rules two significant new conditions—one requiring disclosure of conflicts of interest and the second calling for PVABs to engage with the companies that are the subjects of their advice. The proposed amendments would rescind that second central condition—which some might characterize as a core element, if not the core element, of the 2020 amendments. The proposal would also rescind a note to Rule 14a-9, adopted as part of the 2020 rules, that provided examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading. According to SEC Chair Gary Gensler, PVABs “play an important role in the proxy process. Their clients deserve to receive independent proxy voting advice in a timely manner.” The U.S. Chamber of Commerce had quite a different take on the proposal, contending that the “rules finalized by the SEC last year created a level playing field and ensured that investors would have access to high quality information free of bias. If the SEC decides to roll back these rules, it will signal that it is not serious about rooting out and eliminating misinformation and conflicts of interest in the proxy process and will instead place special interests at the head of the line, harming investors and markets. We will engage with the SEC to stop these misguided proposals from moving forward.” The proposal will be open for public comment for 30 days after publication of the proposing release in the Federal Register.
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