Earlier this week, Corp Fin withdrew the guidance that the Staff would not object if a company posts an electronic version of its glossy annual report to its corporate website by the due date in lieu of mailing paper copies or submitting it on EDGAR.
As we noted in the November-December 2022 issue of The Corporate Counsel, the Staff’s action was prompted by the SEC’s adoption of a new electronic filing requirement for the glossy annual report that is required under Exchange Act Rules 14a-3 and 14c-3. As of Wednesday, January 11, 2023, it is now mandatory for glossy annual reports to be submitted to the SEC via EDGAR. Foreign private issuers that furnish their glossy annual report in response to the requirements of Form 6-K also have to submit those reports via EDGAR.
The annual report is filed under the EDGAR header submission type “ARS,” and, unlike your other EDGAR filings which must be filed in HTML format, the glossy annual report is submitted as a PDF file. Here are a few examples of submissions from this week:
I have to admit that I am kind of excited about seeing glossy annual reports on EDGAR. While it is unfortunate that clients now have to contend with yet another filing requirement, it is interesting to see these often highly stylized reports collected in one place that is relatively easily searchable.
My affinity for glossy annual reports traces back to my early days in Corp Fin at the SEC, when issuers were obligated to mail seven copies of the glossy annual report “for the information of the Commission.” One might ask, why were seven copies of the glossy annual report required, when just one would probably do the trick? I have no idea, I never went back to do the research, but in the old paper filing days, the filing rules typically called for the filing of multiple copies of the same document so that copies could be provided to various members of the filing review team. This glossy annual report submission requirement provided me with an early lesson in the unintended consequences of rulemaking.
As I reminisced in a blog back in June when this rule change was adopted, during the proxy season each year, glossy annual reports would come flooding in by the sevens, but there was basically no where to put them and no interest on the part of the Staff in reviewing them. Our administrative assistants would grumble loudly about the onslaught and would try in vain to cram the glossies into filing cabinets, but inevitably stacks of glossy annual reports would pile up in the file rooms, around desks and in various other corners of our office “pod.” Enterprising staffers would use the glossies to prop open doors, elevate their computer monitors and shim up wobbly desks. For some reason the concept of “keep one and throw away the other six” never seemed to cross anyone’s mind.
By far the best use of the glossy annual reports that flooded the Commission’s hallways each Spring was the effort undertaken by a group of Corp Fin Staffers who recognized the beauty in these documents and transformed them into works of art for the wall of the fourth floor Corp Fin conference room at the SEC’s old 450 5th Street building. One wall of the conference room was filled with the covers from glossy annual reports, and I have a lot of fond memories from that conference room that I associate with the glossy cover art on the wall. I don’t think that was what the Commission was thinking when it adopted the requirement to submit seven copies of the glossy annual report to the SEC, but at least there was one small positive unintended consequence from the SEC’s rulemaking!
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.
