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.
Even though we are already one full week into the new year, I thought it was still appropriate to share some of my reflections for what we can expect for 2023.
As John pointed out in the blog on Friday, we are in for a “bomb cyclone” of SEC rulemaking in 2023, so it is time to batten down the hatches. Given the complexity of the rules that were adopted during 2022 and the significant reach of the rules that may potentially be adopted in just the next few months, it is a good time now to set some priorities on how you are going to approach these developments over the coming months. It is also a good time to consider whether you have the right resources on hand to quickly get up to speed on any new requirements that will be coming from the SEC. Many of the rule proposals that are expected to be adopted in the near term require multi-disciplinary teams (e.g., climate change, cybersecurity risk governance, share repurchase modernization), so having the team fully briefed and ready to go when the rules are adopted will be important. Finally, don’t forget all of the resources that we make available to you here on TheCorporateCounsel.net and through our other websites and publications – we will be providing you with the practical guidance that you will need as these rules are adopted.
It is also worth noting that the SEC staff will be looking very closely at your Form 10-K (and other) disclosures this year. Over the course of the past two years, we have been seeing an uptick in the extent to which the Staff has been issuing comments on filings, with a noticeable lowering of the level of materiality applied in determining whether to comment on disclosure in SEC filings, earnings releases, etc. As John noted in the blog back in December, the Staff issued updated and new Non-GAAP Financial Measure Compliance and Disclosure Interpretations, which could mean more scrutiny of non-GAAP financial measure disclosures in the coming months. Further, with new rules such as pay versus performance disclosure coming into effect this proxy season, the Staff will most likely undertake to monitor compliance with those new requirements. The Staff has also been focused on the impact of external events, such as COVID-19, the war in Ukraine and inflation, on company operations and liquidity. Given these developments, it is a good time take a fresh look at your disclosures going into the annual reporting and proxy season. Be sure to check out our “Annual Season Items” article in the November-December 2022 issue of The Corporate Counsel for guidance on this year’s disclosures.
Also in 2023, it is time to get ready for another dynamic proxy season. As we have now emerged from the lingering pandemic considerations, the proxy advisory firms, institutional investors and activist investors are going to be more focused than ever on the compensation and ESG issues that they care about, and companies will be feeling that pressure at their annual meetings. For the first time in a quite a while, we have experienced a prolonged negative trajectory in stock prices during 2022, so investors and proxy advisory firms are going to be laser-focused on how that change in direction has been reflected in executive compensation. When we had a pandemic-induced market correction back in 2020, the proxy advisory firms and investors were in a forgiving mood – now, things are very different. Be sure to check out our highlights of the 2022 Proxy Disclosure Conference and the 19th Annual Executive Compensation Conference in the November-December 2022 issue of The Corporate Executive for a discussion of the topics that are likely to dominate this year’s proxy season.
Finally, many indicators seem to point toward the strong possibility of a rough economic situation in the coming months. While it is impossible to say how bad things might get or how long a downturn may last, I encourage you to try to keep things in perspective as much as possible. We were fortunate to have experienced a prolonged period of growth and prosperity for about a decade, so a downturn at some point is all but inevitable. As we have done in past downturns, we just muddle through as best we can, telling ourselves “this too shall pass.”
Right before the holidays, the SEC voted to approve the 2023 budget of the PCAOB and the related annual accounting support fee.
As noted in the press release announcing the action, the 2023 PCAOB budget totals $349.5 million. The accounting support fee totals $329.4 million, of which $300.3 million will be assessed on public company issuers and $29.1 million will be assessed on SEC registered broker-dealers.
Join us tomorrow at 2:00 pm eastern time here on TheCorporateCounsel.net for our latest webcast, “ISS Forecast for 2023 Proxy Season.” Hear from ISS’s Head of US Research Marc Goldstein, Davis Polk’s Ning Chiu and Gunster’s Bob Lamm about what transpired during the 2022 proxy season and what steps to take to prepare for 2023 issues.
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