Alas, the Information Age has robbed us of many of life’s little pleasures, including access to hard copies of glossy annual reports. Nonetheless, the glossy annual report remains a fixture of the proxy solicitation materials that are required to be delivered to shareholders during each annual meeting cycle. In an effort to save costs and in recognition of the fact that the glossy annual report likely serves much less of an investor relations purpose when it is available electronically to shareholders, some companies have transitioned to a “wrap” format, where the Annual Report on Form 10-K is wrapped with a few extra pages that include the extra glossy annual report information and some additional IR messages, such as a letter from the CEO and/or the Chairman. I always try to remind folks of a couple things about their glossy annual report:
– Make sure the glossy annual report satisfies all of the informational requirements of Rule 14a-3 (or Rule 14c-3 in the case of information statements).
– The glossy annual report is a public document, so it is subject to the non-GAAP financial measure disclosure requirements in Regulation G. It is not a “filed” document, so it is not subject to the more stringent non-GAAP financial measure disclosure requirements in Item 10 of Regulation S-K.
– The glossy annual report should be subjected to the same disclosure controls and procedures as your SEC filings, even though it is not a “filed” document.
– Treat the statements in the glossy annual report as you would any other public statements, and try to avoid any material misstatements or omissions in the glossy annual report that could subject the company to liability under the antifraud provisions of the federal securities laws.
Yesterday, the SEC announced that Paul Munter has been appointed as the agency’s Chief Accountant. He has previously served as the SEC’s Acting Chief Accountant since January 2021.
Paul Munter joined the SEC in 2019 as Deputy Chief Accountant, leading the international work of the Office of Chief Accountant. Before joining the agency, he was a senior instructor of accounting at the University of Colorado Boulder. He had previously retired from KPMG, where he served as the lead technical partner for the U.S. firm’s international accounting and IFRS activities and served on the firm’s panel responsible for establishing firm positions on the application of IFRS.
During Munter’s time as Acting Chief Accountant, he delivered a number of notable speeches, some of which we have covered in The Corporate Counsel, including:
I had the good fortune to curate an exhibit for the SEC Historical Society which reviews the history of the SEC’s regulation of financial disclosure by focusing on the important work of the SEC’s Office of Chief Accountant. In a featured program for that exhibit, I moderated a panel of current and former Staffers who worked in the Office of Chief Accountant that included: Paul Munter, SEC Chief Accountant; Joe Ucuzoglu, Chief Executive Officer, Deloitte US and former Senior Advisor to the SEC Chief Accountant; and Paul Beswick, EY Americas IFRS Leader and former SEC Chief Accountant. I encourage you to view that program and check out some of the interesting materials in the exhibit to get an in-depth perspective on the work of the Office of Chief Accountant and its importance in the SEC’s regulation of financial disclosure.
Back in December, FASB announced an Accounting Standards Update that extends the period of time preparers can utilize the guidance in Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. That ASU provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance had a sunset date of December 31, 2022, but now FASB has extended that sunset date to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.
The new pay versus performance disclosure requirement is a big focus right now, as issuers begin preparing their proxy statements for 2023 annual meetings. As with any new rule, there are inevitably quite a few interpretive questions that come up when trying to apply the SEC’s disclosure requirements to real world situations.
Often (although not always) the Staff in Corp Fin will endeavor to provide guidance on new rules through Compliance and Disclosure Interpretations or some other form of Staff guidance. It is not too late for that to happen in the context of the pay versus performance rules, although many expected Staff guidance to be released some time last month. In the absence of formal Staff guidance, we fortunately still have the good old word-of-mouth method, where members of our community report on conversations that they have had with the Staff on interpretive issues.
One interpretive issue that came up pretty early on relates to the presentation of a peer group TSR in the pay versus performance table. The rule provides two options: (1) the same index or issuers used for purposes of the performance graph; or (2) the companies used as a peer group for purposes of the issuer’s disclosures under paragraph Item 402(b) of Regulation S-K, which presumably is referring to Item 402(b)(2)(xiv), which states “whether the registrant engaged in any benchmarking of total compensation, or any material element of compensation, identifying the benchmark and, if applicable, its components (including component companies).”
The logical conclusion that some drew from this regulatory text was that they could use the companies comprising the peer group discussed in their CD&A as the same peer group for which TSR is presented in the pay versus performance table. However, as we discussed during our November program on CompensationStandards.com “Special Session: “Tackling Your Pay Vs. Performance Disclosures,” the Staff’s initial reaction to that interpretive question was that the peer group disclosed in the CD&A could only be used for the pay versus performance table if that peer group was used for “benchmarking” purposes. For purposes of the CD&A, “benchmarking” refers to the tying of specific elements of compensation to a benchmark, as opposed to, for example, simply using comparable company data as a market check after arriving at compensation decisions based on some other method. Today, most companies avoid “benchmarking” as that term is contemplated in Item 402(b), and instead reference a peer group of companies in the CD&A for broader purposes. As a result, for most companies, this informal Staff interpretive guidance limits the peer group used for the pay versus performance table to the same peer group that is used for purposes of the performance graph.
Over on the Advisors’ Blog on CompensationStandards.com, John recently noted another nugget of Staff interpretation that relates to the level of detail that must be presented regarding the pension plan and equity award adjustments that are used to determine the amount of “executive compensation actually paid.” The Staff was asked whether the pension value adjustments and equity award adjustments could be disclosed in the footnotes to the pay versus performance table as aggregate amounts, rather than disclosing each of the amounts deducted and added. The Staff confirmed that it expects to see each of the individual adjustment amounts disclosed as part of the footnotes to the pay versus performance table.
If you have received some interpretive advice from the Staff on the new pay versus performance disclosure requirements, feel free to share it with us in the Q&A Forum or otherwise.
The SEC announced the appointment of Cristina Martin Firvida as Director of the Office of the Investor Advocate. Ms. Martin Firvida was most recently the Vice President of Financial Security and Livable Communities for Government Affairs at AARP.
As the Investor Advocate, she will “lead an office that assists retail investors in interactions with the Commission and with self-regulatory organizations (SROs) analyzing the impact on investors of proposed rules and regulations, identifying problems that investors have with financial service providers and investment products, and proposing legislative or regulatory changes to promote the interests of investors.”
As John noted last week, the SEC’s recently released Fall 2022 Reg Flex Agenda contemplates several significant final rule actions in the coming weeks of the first quarter of 2023, but it should also be noted that the SEC continues to list an extensive pipeline of potential proposed rules. The Corp Fin oriented proposals include:
The good news here is that there is not much new on this proposed rule list. Most of these proposals appeared in prior iterations of the Reg Flex Agenda and the Staff and Commissioners have discussed these rulemakings to some extent in the past. Further, in some cases, like the contemplated Rule 144 proposal and the rules regarding the disclosure of payments by resource extraction issuers, some level of rulemaking action has already occurred.
It is notable that three of these proposed rules are expected to be voted on by the Commission by April of this year, which is within the same timeframe that the SEC plans to adopt final rules on many of the most contentious rulemakings that remain on the SEC’s agenda.
Perhaps one of the most controversial proposals that the SEC has not yet acted on is a proposal to amend the “held of record” definition for purposes of Section 12(g) of the Exchange Act. The contours of this plan were originally floated by then-Commissioner Allison Herren Lee, who in a speech raised concerns about the “explosive growth of private markets.”
Today under the Exchange Act, a company that reaches either 2,000 holders of record or 500 holders of record that are not accredited investors (whichever happens first) must register a class of equity securities under the mandatory registration provision of Section 12(g) of the Exchange Act. Key to this calculation is how one determines what securities are “held of record,” which historically has not involved looking through to the beneficial ownership of the securities that are listed on the company’s stock records.
In the post-JOBS Act era, back when the SEC was compelled to try to actually encourage capital formation and promote the use of private markets, the SEC implemented the JOBS Act’s higher Section 12(g) mandatory thresholds (discussed above) and actually excluded persons from the definition of “held of record” if they hold only securities issued to them pursuant to an employee compensation plan in transactions exempted from the registration requirements of the Securities Act.
Now, the SEC is talking about going in the other direction. When she discussed the issue at SEC Speaks in 2021, Lee pointed out that most shares in U.S. markets are held in street name, with the result that “record ownership has plummeted and in most cases has no meaningful relationship to the number of actual investors.” Lee suggested that the Commission “should consider whether to recalibrate the way issuers must count shareholders of record under Section 12(g) (and Rule 12g5-1) in order to hew more closely to the intent of Congress and the Commission in requiring issuers to count shareholders to begin with. In other words, it’s time for us to reassess what it means to be a holder of record under Section 12(g).”
It should be noted that the practical effect of this recalibrating would be that more companies would get swept into the mandatory registration provisions of Section 12(g) of the Exchange Act, and would thus be forced to become public companies – that are then subject to all of the extensive disclosure requirements about climate change risk, etc. that the SEC is currently seeking to put in place.
Those of you who have been at this a while might recall that, prior to the JOBS Act amendments, a number of very large private technology companies were forced to go public by virtue of the “held of record” definition and the mandatory registration provision in Section 12(g), such as Facebook and Google. If the SEC were to ultimately adopt the proposed changes to the definition of “held of record,” we would likely see the same “forced” going public scenario for large private companies that played out in the mid-2000s.
Clearly, Lee’s departure from the SEC last year did not scuttle the SEC’s plans to move forward with this proposal, because it has remained on the SEC’s Reg Flex Agenda.
Yet another proposal that remains on the SEC’s Reg Flex Agenda is “Regulation D and Form D Improvements,” which the SEC describes as involving “amendments to Regulation D, including updates to the accredited investor definition, and Form D to improve protections for investors.” On this particular proposal, the exact scope of the amendments is less clear.
Undoubtedly, some surgery will be undertaken with respect to the accredited investor definition, based on concerns that today’s standards are too low, which in the eyes of some leads too many individual investors making risky bets without adequate protection. There has been discussion of raising the wealth threshold in particular, which currently stands at $1 million excluding the value of the individual’s personal residence.
Form D is also a likely target of the SEC’s rulemaking, particularly because of the abysmal compliance with Form D filing requirements. Making the filing of Form D a condition to relying on Reg D has been proposed before, but ultimately was not adopted. But one could envision an environment now where that approach, along with perhaps an earlier deadline for filing Form D, might be seen as more attractive alternatives for addressing the perceived gamesmanship that goes in Reg D land.
