As I noted in the blog back at the end of November, the PCAOB announced the adoption of a set of new requirements regarding public reporting of standardized firm and engagement metrics, as well as a separate set of amendments regarding the PCAOB framework for collecting information from audit firms. These amendments were subject to approval by the SEC.
As this Thomson Reuters Tax & Accounting article notes, the PCAOB requirements have faced significant pushback from the accounting industry. Right before Christmas, the AICPA submitted a comment letter to the SEC, stating:
As we expressed to the PCAOB in our comment letter dated June 18, 2024, the recently adopted rules mandate the disclosure of performance metrics for audits of accelerated and large accelerated filers, and expanded operational and financial condition reporting by registered accounting firms. These rules will disproportionately affect smaller and medium-sized audit firms. We believe these rules will have unintended negative consequences, including driving small and medium-sized firms out of the public company auditing practice. This would result in fewer firms performing such audits which are critically important for smaller and medium size companies seeking to access the U.S. capital markets. Consequently, companies will face greater challenges and higher costs in meeting necessary audit requirements to access the U.S. capital markets. The PCAOB acknowledges that mid-sized and smaller accounting firms serving small to mid-sized public companies will incur substantial, if not prohibitive, costs in complying with the proposed amendments. The final rules reaffirm the PCAOB’s belief that these rules will disproportionately affect smaller firms.
Other groups have opposed the PCAP rulemaking, including the U.S. Chamber of Commerce, which stated in its letter:
Unfortunately, conditions for sound rulemaking have not been followed in this instance. The PCAOB rushed to adopt these transformative and controversial rules without appropriate consideration of comments, adequate economic analysis, and respect for due process. Despite attempts to address some issues raised in the comment process substantive issues remain.
The SEC also rushed due process and ignored options to give stakeholders sufficient time to participate in a robust comment process. The SEC submitted the Proposed Rules to the Federal Register within two business days of Board adoption and allowed only a few weeks for comments (i.e., twenty-one days from publication in the Federal Register). Other factors likewise reinforce the need for an extended comment period.
On the flip side, the Thomson Reuters article notes that investor groups, including the Council for Institutional Investors, have supported the PCAOB’s action.
Given this comment file, I imagine that this might be a tough one to squeeze under the wire before January 20!
With Gary Gensler set to step down as Chair of the SEC in a week and a half, we have entered the final countdown for his time as Chair. All in all, it has been a pretty quiet past few months at the SEC from a rulemaking perspective, which may have come as a surprise to some, given the very active rulemaking agenda that marked the past three and a half years.
As I have mentioned before, there now seems to be two schools of thought as to SEC rulemaking activity in a Presidential election year. The conventional wisdom that had prevailed during most of my time practicing securities law was that the Commission would significantly curtail its rulemaking activity beginning in the summer before the Presidential election, and that status would continue after the election, even when the same party held onto the White House. That approach was generally not followed at the end of the last Trump administration, when the agency continued to consider a number rulemakings during the time before the 2020 election, and even after the election was over. For example, the SEC adopted the third try at the controversial resource extraction issuer disclosure rules in December 2020, and proposed changes to the Rule 144 holding period and the filing Form 144 filing requirements in that same month. By contrast, we have not seen any significant new proposed or final rulemaking actions affecting public companies over the past six months or so, other than the adoption of the annoying EDGAR Next rules back in September.
With all of that said, the business of the Commission must trudge on, even with an impending change in leadership, and last week the SEC issued an order approving the PCAOB’s amendment to Rule 2107 with respect to withdrawal from registration. The amendment “permits the Board, under specified conditions, to treat a registered firm’s failures both to file annual reports and to pay annual fees for at least two consecutive reporting years as a constructive request for leave to withdraw from registration and to deem the firm’s registration withdrawn.” In a statement, Chair Gensler expressed his support for the PCAOB action, and PCAOB Chair Erica Williams issued a statement noting that the amendment “will not only make PCAOB registration information more useful for investors, audit committees, and other stakeholders, it will also help our organization use its staff time and resources more efficiently and effectively.”
Last month, BlackRock released its updated its voting guidelines that will apply to 2025 annual meetings – including updates to its guidelines for U.S. securities as well as its “Global Principles.” The policy changes are effective as of January 2025.
As this Fenwick alert notes, “while the 2025 proxy voting guidelines are largely consistent with last year’s version, there are a few notable changes, particularly to BlackRock’s policy on board diversity.” On the important topic of board composition, the Fenwick alert goes on to state:
Perhaps the most notable changes to the proxy voting guidelines appear in this section, where the focus is now on “board composition” rather than “diversity” and achieving a variety of “experiences, perspectives, and skillsets.” Going forward, companies are urged to explain how their approach to board composition supports the company’s governance practices.
The updated guidelines (other than a footnote) no longer include references to gender, race/ethnicity, and age. Additionally, the recommendations that boards aspire to at least 30% diversity and include at least two women and one director from an underrepresented group have been removed.
However, the updated guidelines do indicate that to the extent an S&P 500 company board is an outlier and does not have a mix of professional and personal characteristics (including, but not limited to, gender, race/ethnicity, disability, veteran status, LGBTQ+, and national, Indigenous, religious, or cultural identity) that is comparable to market norms, BlackRock may vote on a case-by-case basis against members of the nominating/governance committee.
For companies with smaller market capitalization and those in certain sectors facing more challenges in nominating directors from different backgrounds, BlackRock will look for a relevant mix of professional and personal characteristics.
The alert highlights changes to a number of other governance-related voting guidelines relating to: boards and directors; the oversight role of the board; board term limits and director tenure; capital structure proposals – equal voting rights; material sustainability related risks – climate change; and corporate political activities.
As Liz noted yesterday on The Advisors’ Blog available on CompensationStandards.com, BlackRock made incremental updates to its voting policies that relate to executive compensation, with some of those changes identifying factors that the BlackRock investment stewardship team was already applying in practice to its voting decisions. Liz provides the following highlights for the compensation-related changes:
– Focus on financial value: When it comes to linking pay to performance, BlackRock now specifies that it means “financial” value creation.
– Your rationale for compensation decisions: New language encourages companies to clearly explain how compensation outcomes have rewarded performance (versus basing pay increases solely on peer benchmarking). The policy clarifies that companies should consider rigorous measure(s) of outperformance in addition to peer benchmarking.
– Clawbacks: BlackRock built on its existing policy to say that it expects boards to exercise limited discretion in forgoing, releasing or settling amounts subject to recovery for executives and not to indemnify or insure executives for losses they incur.
– Equity compensation plans: BlackRock added a new paragraph – “We find it helpful when companies submit their equity compensation plans for shareholder approval more frequently than required by listing exchange standards to facilitate the timely consideration of evolving plan governance practices. Particularly when share reserve requests grow significantly versus prior plans, boards should clearly explain any material factors that may potentially contribute to changes from the company’s past equity usage. We may support an equity plan share request if we determine that support for such plan is in the best interests of shareholders; however, we may also vote against members of the compensation committee to signal our concerns about the structure or design of the equity compensation plan or the company’s equity grant practices and the imprudent use of equity.”
– Repricings: For option repricings and exchanges, the policy specifies that BlackRock may vote against members of the compensation committee where a board implements or approves a repricing or option exchange without shareholder approval. Where such a repricing or option exchange includes named executive officers, we may also vote against the company’s annual advisory vote on executive compensation. This builds on BlackRock’s existing policy of voting against equity plans that permit repricing without shareholder approval.
The latest issue of The Corporate Executive newsletter is on its way to subscribers. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. In this issue, we highlight key takeaways from the 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences. Here is an excerpt from my “A Word from the Editor” describing the topics covered in this issue:
Beginning on page 2, we highlight the SEC’s agenda based on an interview with Erik Gerding, Director of the SEC’s Division of Corporation Finance. We then focus on the insights shared by our SEC All-Stars on a wide range of important issues that public companies face as we enter the 2025 annual reporting and proxy season. We next drill down on some of the most critical topics that our expert panelists addressed during two days of conferences, including shareholder activism, effective proxy statement and Form 10-K disclosures, cybersecurity disclosures, artificial intelligence, perquisites disclosure, the policies of the proxy advisory firms and a grab bag of important executive compensation hot topics that you should consider as we approach the 2025 proxy season.
On a personal note, I am thankful for the opportunity to see so many members of our community in person at the annual conferences in San Francisco. It was very nice to be freed from the confines of the Zoom screen!
Be sure to mark your calendars for the 2025 Proxy Disclosure and 22nd Annual Executive Compensation Conferences, which will be held in Las Vegas, Nevada on October 21-22. Also, please note that you can still access the archives and transcripts from our 2024 Conferences by emailing sales@ccrcorp.com.
Be sure to email sales@ccrcorp.com today to subscribe to The Corporate Executive newsletter if you are not already receiving the important updates we provide in this essential resource.
I hope everyone had a joyous holiday season as we trudge back to work in 2025. I am still writing 2024 on checks (does anyone else still write checks?), but I will hopefully come to accept 2025 by the end of January.
Later this week, the nation will honor former President Jimmy Carter, who, as John noted last week, passed away on December 29, 2024. I think of Carter as the first President that I was really conscious of in terms of his policies and actions, because I was nine years old when he took office. I was still too young to remember much about Nixon and Ford, so former President Carter was my first introduction to the power of the Presidency and the role that a President can play for a nation in turmoil. He also served as a great example of someone who took his post-Presidential role very seriously and made a difference in the world as a result. Former President Carter even inspired me to participate in a Habitat for Humanity project in Baltimore back in the 1990s.
Last Monday, President Biden issued an Executive Order providing that all executive departments and agencies of the U.S. federal government will be closed on Thursday, January 9, 2025, as a mark of respect for the passing of former President Carter.
Following the Executive Order, the SEC published an announcement indicating that the EDGAR system will be closed on Thursday, January 9, 2025 as a mark of respect for former President Carter. The announcement indicates that January 9, 2025 “will be treated as a federal holiday for filing purposes.” EDGAR will resume normal operations on Friday, January 10, 2025. The announcement notes:
Please be aware that on January 9, 2025:
• EDGAR filing websites will not be operational.
• Filings will not be accepted in EDGAR.
• EDGAR Filer Support will be closed.
We have covered similar SEC closures with respect to former President Ronald Reagan in 2004, former President Gerald Ford in 2007 and former President George H.W. Bush in 2018.
The New York Stock Exchange and Nasdaq also announced last week that all equity and options markets will be closed on January 9 in honor of former President Carter, so plan accordingly if you have equity market transactions occurring this week.
At the risk of facing derision from my colleagues here on the blog who hail from much snowier parts of the country, I must say that I have always loved a good snow day. Living in the Baltimore area all of my life, I have never known the workings of the much heartier parts of the country, where snowfall is measured in feet rather than inches and you do not see the ground from November to April. We in the mid-Atlantic are a much more fragile people, and a few inches of snow can wreak havoc on the roadways and cause regional shutdowns of schools, businesses and governments without a second thought. And not to engage in any sort of regional squabbling (although I will anyway), there is a marked difference between how snowfall is dealt with in the Baltimore area as compared to DC. Less than an inch of snow falling in DC is often deemed to be “Snowmageddon,” turning roadways into a Mad Max-style free-for-all and making life miserable for commuters like me. Thankfully, there is now the option of just staying home.
Which brings me to today, where the region is experiencing anywhere from four to ten inches of snow, with more falling in the DC area than near my home. Given the impact of the storm on DC, the U.S. Office of Personnel Management has announced an “Office Closure” in Washington, DC. The notice states:
Federal Offices in the Washington, DC area are Closed. Maximum Telework is in effect.
Telework Employees are expected to work. Generally, telework employees may not receive weather and safety leave.
Remote Workers are expected to work. Generally, remote workers may not receive weather and safety leave.
Non-Telework Employees generally will be granted weather and safety leave for the number of hours they were scheduled to work. However, weather and safety leave will not be granted to employees who are on official travel outside of the duty station or on an Alternative Work Schedule (AWS) day off or other non-workday.
Emergency Employeesare expected to report to their worksite unless otherwise directed by their agencies.
Employees on Preapproved Leave (paid or unpaid) or other paid time off generally should continue to be charged leave or other paid time off and should not receive weather and safety leave.
Back in my days at the SEC, a notice like this would have meant a full fledged “snow day” for government workers, just like when we were kids in school. In retrospect, I loved snow days as both an adult and a child, because it gave us some time to enjoy the magic of the snow and get an unexpected break from school or work. But alas, as with so many things, technology has robbed us of this simple pleasure, because the reality is that the vast majority of folks in the SEC’s Division of Corporation of Finance are telework employees or remote workers, so they must continue to work today, notwithstanding the white stuff outside. This also means that today is still a “business day” for filing purposes and, as far as we know, EDGAR will remain up and running despite the precipitation.
We have posted the transcript for our webcast “Capital Markets: The Latest Developments.” Maia Gez from White & Case, Anna Pinedo from Mayer Brown, Richard Segal from Cooley and Andy Thorpe from Gunderson discussed the current state of the capital markets, explored financing alternatives and discussed IPO readiness and recent developments impacting public offerings.
On the topic of SEC comment letter trends, Andy Thorpe noted:
The top 3 areas of SEC comments were financial statement-related or financial metrics-related. The top area was non-GAAP financial measures, then MD&A, and finally, segment reporting. For non-GAAP measures, the SEC, in December of 2022, issued new C&DIs related to non-GAAP financial measures. Ever since then, there’s been a real focus and scrutiny on companies’ non-GAAP measures.
They look at whether you presented the GAAP measure with equal or greater prominence as the non-GAAP measure and appropriately reconcile to the most comparable GAAP financial measure. They also look at whether you eliminated cash-settled items on the basis that they aren’t part of core operations. The Staff may object to eliminating recurring items. When you have litigation expenses year in year out and you say, “Yes, but this isn’t part of our core operations,” that’s an area where they’re going to object if you remove those types of cash expenses.
Then another big one is the use of individually tailored accounting principles. This is basically saying, “Under GAAP revenue recognition, this is how we have to present revenue, but if we recognize all the revenue upfront, here is what the number would look like.” The Staff objects to that.
Finally, they want improved disclosure of why management believes the non-GAAP measure provides useful information to investors. Not just how management uses it, but why it is useful to investors.
Moving on to MD&A, the Staff goes back to the 2003 interpretive release. I can’t believe it’s been over 20 years since that release came out, but one of the things in that release and one of the typical areas of comment is to provide more description and quantification of each material factor that impacts a specific change in one of the line items in the financial statements. They don’t want you to say, “Revenue or this expense increased by X because of Y.” They want the intricate intermediate factors.
They want to improve disclosure around known trends or uncertainties. In particular, they were looking at supply chain disruptions, the effects of inflation, and increases in interest rates as well. They’re looking to improve disclosures around liquidity and capital resources.
Now, I will move on to segment disclosures. Basically, the SEC will look at your outside reports, outside press releases, and determine, “Okay, wait. You guys are talking about your business in one certain way, but then you’re presenting one reportable segment.”
They will kick the tires around whether you should break out your operations into multiple segments, and often they’re going to ask for the reporting package that’s delivered to the chief operating and decision maker. If that is basically reflective of segments, they’re going to push towards requiring additional segment disclosures. Then one of the other interesting factors on segments is the use of non-GAAP financial measures. When you’re reporting segments, of course you have to remove certain expenses related to overhead that are not applicable to that one segment.
Just in GAAP, in your financial statements as you report segments, you are using a non-GAAP measure, which of course is now sanctioned by GAAP. If the SEC is saying, “Okay, if you use that or a different measure outside of the financial statements, then that’s non-GAAP and you have to comply with Regulation G.” It’s very complicated, but it’s just something to look out for. It’s definitely a pitfall.
Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.