September 28, 2015

Disclosure Effectiveness: SEC Seeks Reg S-X “Other Than a Registrant” Input

On Friday, the SEC posted this 35-page “request for comment” about Regulation S-X for entities other than a registrant, including acquired companies, unconsolidated subsidiaries, guarantors & more (as this blog notes, there are four Reg S-X requirements being focused upon). This is the first step in the SEC’s disclosure effectiveness project. The comment period runs 60 days. And no, I don’t know why they didn’t call this a “concept release”…

As noted in this blog, the SEC’s Advisory Committee on Small & Emerging Companies has come up with three written recommendations, one seeks to enlarge the smaller company universe by revising the threshold to become one to a $250 million float…

Consultant Independence: What to Make of the Korn Ferry/Hay Group Merger?

In the wake of last week’s merger announcement, a reporter sent me this question: “What do you make of Korn Ferry’s acquisition? Does this raise independence issues under Dodd-Frank for companies that might pay a substantial amount to Korn Ferry for CEO, board search etc. who also consult with Hay Group on executive compensation? Most companies use the same consultant for executive and director compensation consulting. Is there extra due diligence required by the comp committee if they use the same firm for both services? Additional disclosure? Will boards have to start reporting how much they pay for executive and board searches?”

Here’s an answer that I received from Mark Borges:

I wouldn’t think board recruiting would trip a comp consultant’s independence. As you know, advisor “independence” must be considered, but there’s no requirement that a Compensation Committee use an independent advisor. So the assessment is really all about whether, in the opinion of the Compensation Committee, the highlighted relationship with the company impairs independence.

As you note, there is, on its face, a possible independence issue where a company retains Korn Ferry for specific services (such as a CEO, director search) while the Compensation Committee also uses the Hay Group for its executive compensation consulting. It’s really no different than the issue that the major HR firms faced a few years ago when they had to choose between their retirement and health care consulting services and their executive compensation consulting services. They chose the former because it presented a larger revenue stream and spun off their consulting businesses.

You can argue that an organization such as Korn Ferry is large enough to establish an effective barrier between its general services and its consulting business to avoid actual conflict situations (and, I suspect, that’s exactly what they will do). However, for many companies, it’s the appearance rather than the reality of a conflict which caused them to shy away from relationships with companies where they may have been receiving both consulting and non-consulting services. This may, in fact, happen here.

While the rules don’t prevent anyone from using Korn Ferry for their general services and Hay Group for their compensation consulting, it’s probably going to lead to a little extra diligence to justify the arrangement to be able to respond to inquiries about independence.

SEC Girds for Government Shutdown

Even though it now looks likely that Congress will not shut down the government – they have three days to avoid that result – the SEC has posted a note on its home page that it will remain “open and operational” if there is a lapse in appropriations on October 1st. If a shutdown is extended, the SEC has posted this 19-page operations plan if this “worst case” scenario happens. The operations plan doesn’t cover a partial shutdown if the SEC still has some funds available, which is what happened in 2013

– Broc Romanek