June 3, 2015

Clawbacks: SEC Planning to Propose Rules Soon!

The big news comes from this WSJ article, which says that the SEC will “soon” propose the clawback rules required by Section 954 of Dodd-Frank. If it happens as rumored, this surely is Exhibit A that the SEC’s Reg Flex Agenda is meaningless (as I hammer home down below) – because the SEC’s new Reg Flex Agenda had an April ’16 date for this activity. Here’s my quote in the WSJ piece:

Broc Romanek, a former SEC attorney who edits the websites and, said the SEC should make sure it implements the new clawback requirements in a way that makes practical sense for companies and allows them discretion in determining whether it is economically efficient for them claw back pay, given legal, administrative or other expenses that may be involved. “It would not be ideal if a company is forced to spend more resources clawing back than [what] they would get in return,” he said.

The critical issue is whether the proposed clawback rules will be principles-based or prescriptive (remember how the recent P4P rule proposal was proscriptive, which was surprising to some). “Principles-based” means “just disclose what you have that you treat as a clawback.” And there are lots of tough questions about how a financial misstatement impacts compensation that may be indirectly – but not directly – based on financial performance, such as stock options (ie. how much is the stock price influenced by a restatement, as compared to performance criteria that is tied to EPS which is much more directly influenced). Remember this blog from last year: “Clawbacks & The New Revenue Recognition Rules: On a Collision Course?”

Whether the proposal is prescriptive or principles-based will in turn impact how much the rules drive a certain type of conduct – the more prescriptive, the more the SEC is making a judgment call and companies will have to come in line with what the SEC determines to be encompassed. And remember as to timing, the SEC’s rulemaking will just be the first step – because SEC will be proposing rules that the stock exchanges then have to adopt standards to implement…

With all this SEC rulemaking in the compensation arena, I have rejiggered the two-day agenda for our big pair of “Proxy Disclosure/Executive Pay Practices” conferences – 2000 attendees in-person and more online – for which a 20% discount expires at the end of this Friday, June 5th! Register now!

Pay Ratio & More: Senator Warren Lights a Fire

Yesterday, Senator Elizabeth Warren wrote this 13-page letter to SEC Chair White expressing her unhappiness with the pace of the SEC’s rulemaking. Warren isn’t happy – and even used the Reg Flex Agenda as one reason why she feels that White hasn’t been truthful with her (see my blog below about how that is meaningless). Pretty wild stuff.

Here’s an excerpt from this WSJ article (also see this Boston Globe article & Huffington Post piece – also see this Politico article that wonders if Warren went too far):

Though the SEC has recently reported it now expects to complete the rule by next spring, Ms. Warren said that deadline—revealed in a list of agency projects published by an arm of the White House—appears to contradict what Ms. White said in a face-to-face meeting last month with Ms. Warren. In that meeting, the SEC chairman predicted the SEC would complete the rule “by fall,” Ms. Warren wrote. “I am perplexed as to why you told me personally that the rule would be completed by the fall of 2015 when it appears that you were or should have been aware of additional delays,” Ms. Warren wrote.

The SEC’s New Reg Flex Agenda is Out (But It’s Meaningless!)

I continue to see so many people citing the SEC’s Regulatory Flexible Agenda as an indication for when the agency will propose and adopt rules. Don’t believe that – it’s not true! As I’ve blogged about before, all kinds of whacky and aspirational stuff makes it into the Reg Flex Agenda, which then winds up as part of the OMB Unified Agenda (in this blog, Keith Bishop explains what the OMB Unified Agenda is). And then the timelines for proposing & adopting rules are rarely accurate.

The internal process at the SEC (and other agencies) is complicated – maybe one day I’ll explain it in detail (eg. pet projects get thrown in that have zero chance of moving; timelines thrown in simply to fill out the form). But trust me, it has NEVER been a reliable source for when things might move at the SEC. But go ahead and keep citing it if it makes you happy – even though it will likely prove you wrong in the end (as it does over and over). I find it funny how the Reg Flex Agenda is now a newsworthy item after being completely ignored for decades.

I mention all this because the latest Reg Flex Agenda is now out and it indicates that adoption of pay ratio, investment managers pay voting disclosures, hedging and crowdfunding rules won’t happen until April ’16 (the prior Reg Flex Agenda said October ’15) – with clawback rules being proposed by April ’16. There is no timeline for adopting pay-for-performance rules included since that rulemaking’s comment period is still open. Of course, remember that this is all pulp fiction

Meanwhile, this article ticks off the SEC’s accomplishments over the past year based on Chair White’s recent testimony on the SEC’s 2016 budget…

– Broc Romanek