The new pay versus performance disclosure requirements will become effective 30 days following publication of the adopting release in the Federal Register. Companies (other than emerging growth companies, registered investment companies, or foreign private issuers, which are all exempt from the rule) will need to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.
Companies (except for smaller reporting companies) will be required to provide the information for three years in the first proxy or information statement in which they provide the disclosure, adding another year of disclosure in each of the two subsequent annual proxy filings that require the Item 402(v) disclosure.
Smaller reporting companies will initially be required to provide the information for two years, adding an additional year of disclosure in the subsequent annual proxy or information statement that requires this disclosure. In addition, a smaller reporting company will only be required to provide the required Inline XBRL data beginning in the third filing in which it provides pay versus performance disclosure, instead of the first.
The adoption of the pay versus performance disclosure requirements with a tight implementation schedule for the upcoming proxy season makes it now more important than ever for you to sign up for our conferences in October. The agenda for our “19th Annual Executive Compensation Conference” coming up on October 14th already includes a dedicated panel on Pay Versus Performance, during which Bindu Culas of FW Cook, Howard Dicker of Weil Gotshal, Renata Ferrari of Ropes & Gray and Maj Vaseghi of Latham will dive into these new disclosure requirements and provide you with practical implementation guidance. We will also be addressing this topic during “The Top Compensation Consultants Speak” and “SEC All-Stars: Executive Pay Nuggets” panels at the 19th Annual Executive Compensation Conference.
With the avalanche of SEC rulemaking now upon us, you also certainly do not want to miss the “Proxy Disclosure Conference,” coming up on October 12th & 13th, and our “1st Annual Practical ESG Conference,” taking place on Tuesday, October 11th. You can bundle all of these Conferences together for a discount, so please register today!
Yesterday, the SEC announced the release of its draft strategic plan for fiscal years 2022 – 2026. The agency requests public comment on the plan during a period ending 30 days after the request for comment is published in the Federal Register. The SEC notes in its announcement:
The draft strategic plan establishes three primary goals:
• Protecting working families against fraud, manipulation, and misconduct;
• Developing and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and
• Supporting a skilled workforce that is diverse, equitable, inclusive, and is fully equipped to advance agency objectives.
Among the initiatives to meet these goals, the SEC intends to enhance the use of market and industry data to prevent, detect, and prosecute improper behavior. The SEC also seeks to modernize design, delivery, and content of disclosures to investors so they can access consistent, comparable, and material information while making investment decisions.
The agency aims to update existing SEC rules and approaches to reflect evolving technologies, business models, and capital markets. To support its diversity and inclusion efforts, the SEC will focus on recruiting, training, and retaining staff with the right mix of skills, experience, and expertise.
The draft strategic plan lays out an ambitious agenda for the SEC over the next four years, with a significant focus on the impact of technology on the Commission’s operations and the administration of the federal securities laws.
The SEC recently announced that Lori Price has been named Director of the Office of Credit Ratings. Lori served as Acting Director since February 2022 and has more than 30 years of experience in various roles at the SEC, including many years in the General Counsel’s office.
The SEC’s Office of Credit Ratings is responsible for oversight of nationally recognized statistical rating organizations (NRSROs), including examinations of NRSROs and developing and administering rules affecting NRSROs. The Office of Credit Ratings was mandated by the Dodd-Frank Act to address the many concerns that arose from the financial crisis regarding the process for assigning credit ratings, which had not been previously regulated by the SEC.
I owe an enormous debt of gratitude to Lori, because she gave me my first job at the SEC. Lori and I both went to the University of Maryland Francis King Carey Law School (where I serve on the Board of Visitors today), and she had graduated a few years before me and began working at the SEC. Lori contacted one of her former professors with an internship opportunity in the SEC’s Office of Administrative Law Judges, and he thought that I might be interested. Looking back today, I cannot figure out how I did it, but somehow I managed to keep my regular paying job, do the SEC internship in the Office of Administrative Law Judges and go to law school at night, all at the same time. I went on to get my first job in Corp Fin largely because the Office of Administrative Law Judges was located on the same floor as Shelley Parratt’s office, and I got to know Shelley from seeing her in the hallways. And the rest, as they say, was history.
Earlier this week, I participated in a panel discussion for the first day of Professor David Hamm’s Securities Regulation class at Colorado Law. We had a lively discussion of our careers as securities practitioners. One of the questions that we were asked was how we came to be securities lawyers, and when I tell that story, it strikes me how so many random events can lead one to their chosen career.
I completed my undergraduate education in 1989 with a degree in Business Economics, and at the time we were in the grips of a recession and entry level jobs for college graduates were not plentiful. So I decided to stay in school and pursue a master’s degree in finance, with the possibility of then going on to get an advanced degree in economics. But when I took the “subject” portion of the GRE exam, I decided then and there that economics was really not for me.
While casting about for jobs during my master’s degree studies, I came across a job posting from the SEC which indicated that the SEC hired people with finance degrees to serve as financial analysts in the SEC’s Division of Corporation Finance (sadly this is no longer done). I dug a little bit deeper into what Corp Fin did, and I thought that sounded like an interesting possibility, but I realized that doing the job as a lawyer would be much more interesting than doing it as a financial analyst. I had also seen the movie “Wall Street,” and I thought the SEC lawyers looked pretty cool in their windbreakers with “SEC” on the back. So I decided to apply to law school with the express purpose of getting a job in the Division of Corporation Finance at the SEC, with no Plan B.
I did manage to get a job in finance after getting out of school, so I ended up going to law school at night while working as a financial analyst by day. Thankfully, I met Lori Price through our law school connection and I got my foot in the door at the SEC, and a securities lawyer’s career was born!
If you want more on careers and critical tips for your practice, check out The Mentor Blog on TheCorporateCounsel.net. If you are not already a member with access to The Mentor Blog and our other critical resources, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The prices for an annual membership increase on September 1st, so please act now.
Last week, the PCAOB released a draft of its five-year strategic plan for public comment. The plan lays out the PCAOB’s roadmap built around four goals: (i) modernizing standards; (ii) enhancing inspections; (iii) strengthening enforcement; and (iv) improving organizational effectiveness. These are the same themes that PCAOB Chair Erica Williams spoke about back in July during a SOX-themed speech hosted by the Council of Institutional Investors. The PCAOB request comments on the draft strategic plan by September 15, 2022.
This Spotlight serves as a timely reference point for auditors, audit committee members, investors, and others. It offers questions that audit committees of public companies might want to consider as part of their ongoing engagement and discussion with their auditors, including how the auditors are responding to the financial reporting and audit risks posed by the current economic environment. Stakeholders may also consider other Spotlights as reference points for relevant discussions, including our June 2022 Spotlight: “Staff Overview for Planned 2022 Inspections.”
The Spotlight addresses a number key areas that are of interest audit committees, including fraud and other risks, IPOs and M&A, audit execution, auditor independence, quality control systems and technology issues (including auditing digital assets, responding to cyber threats and the use of data and technology in the audit.
Barry Summer is retiring from the SEC this week, after spending 36 years, 9 months and a few days in the Division of Corporation Finance.
Barry has held a number of roles in Corp Fin over the years, including serving as an Associate Director, Assistant Director and Special Counsel in the Division. During his time in these roles, Barry has been integrally involved in the evolution of Corp Fin’s disclosure operations function, has led various rulemaking projects and worked on various interpretive and policy initiatives. Barry has also been an adjunct professor of law at the Georgetown University Law Center since 2007. Over the years, Barry also taught at the American University Washington College of Law, Howard University Law School and the University of Virginia Law School.
I first met Barry when I joined Corp Fin in 1995, and he was always a great person to learn from in Corp Fin. Barry was an outstanding colleague and friend while we worked together at the SEC, and he has been a practical, thoughtful regulator during his incredible 36+ years of service to the SEC. I wish Barry all the best for his retirement!
For those who practice in the capital markets area, it should come as no surprise that the WSJ reports IPOs are dead for now – in a big way. Citing recent Dealogic data, the WSJ notes that, so far this year, traditional IPOs have raised only $5.1 billion, way off the $33 billion pace that is typical at this point in the year (going back to 1995). Last year at this point, traditional IPOs had raised more than $100 billion.
Not surprisingly, the last time we saw the IPO market this slow was back in 2009, during the dark days of the post-financial crisis Great Recession. Even with the market window closed at the moment, there is certainly hope that companies will be clamoring again to go public. The article notes:
Even though the IPO market isn’t healthy right now, many companies still have a burning desire to go public, bankers say. Some need the cash. Others are running against a ticking clock for restricted stock units issued to employees through vesting plans. And some are eyeing acquisitions but need stock or money to complete offers.
A number of economic and market factors point to continued uncertainty in the financial markets and therefore a tough sell for risky assets such as IPOs – high inflation, rising interest rates, recession, the war in Ukraine and countless other reasons for a high degree of market volatility and as overall negative outlook.
One of the most frustrating things for those practicing in capital markets (and no doubt for the bankers and people working at companies seeking to go public) is the way in which the “window” for IPOs opens and shuts over time. As a result, you can be working hard to get an IPO to the finish line one day, and then the next day you get the inevitable order to go “pencils down.” Then, when the window cracks open again, a frenzied effort commences to try to get the IPO done before the window closes again. For some IPOs, this cycle can happen several times. My advice to those new to the practice or for those considering an IPO is pretty much “get used to it.” IPOs are viewed as among the riskiest of investments, and therefore they require the perfect set of market circumstances to facilitate their marketing. We will get through this latest IPO drought, and the IPO window will open again – it is just a matter of time.
A few weeks ago, I blogged about a number of statutory changes that went into effect in Delaware at the beginning of this month, including changes that will allow Delaware corporations to adopt charter provisions to exculpate officers from personal liability in certain contexts. Now the question is coming up, will Delaware corporations advance proposals at their next annual meeting to implement the exculpation provisions, and how will shareholders react to such proposals?
The short answer is that it is perhaps too early to tell. The concept of exculpation for officers in certain circumstances makes a great deal of sense and has been permitted for directors for some time, and implementing the new provision of the Delaware General Corporation Law should generally be a straightforward exercise of proposing a few tweaks to the Certificate of Incorporation. The need to seek shareholder approval of those amendments complicates matters, because institutional investors and the proxy advisory firms may not necessarily be completely sold on the idea of relieving officers of liability in certain circumstances, even though it is now permitted under Delaware law.
ISS, for its part, specifies in its proxy voting guidelines that it will take a case-by-case approach to proposals on director and officer indemnification and liability protection. More specifically, ISS indicates that it will vote against any proposal that would eliminate entirely directors’ and officers’ liability for monetary damages for violating the duty of care. Glass Lewis’s proxy guidelines are silent on the topic of exculpation, but note:
While Glass Lewis strongly believes that directors and officers should be held to the highest standard when carrying out their duties to shareholders, some protection from liability is reasonable to protect them against certain suits so that these officers feel comfortable taking measured risks that may benefit shareholders. As such, we find it appropriate for a company to provide indemnification and/or enroll in liability insurance to cover its directors and officers so long as the terms of such agreements are reasonable.
Institutional investors’ proxy voting guidelines vary in terms of whether they address liability protections, and in some cases are more focused on protections for directors rather than officers. We suspect that the proxy advisory firms and institutional investors may revisit their policies on exculpation proposals in the coming months, and the topic may therefore be a good one to float at shareholder engagement meetings coming up during the remainder of this year.