I participated in Panel 2 of the SEC’s roundtable on executive compensation disclosure requirements, and we had an interesting discussion of how the latest iteration of the executive compensation disclosure rules came to be, how investors use the information, the challenges that issuers face when preparing the disclosures and observations on things that could change.
I focused on the executive compensation rules that were adopted after the 2006 amendments, which I referred to as “the rules that everybody loves to hate.” I mentioned that a consistent theme with many of those Dodd-Frank Act requirements that were adopted by the SEC after an extended period of time is that largely the world had moved on with respect to the issue that the legislative directive was seeking to address, so the Commission had the difficult task of adopting rules against a backdrop of practices that had been in place for some time through private ordering. I note that the one Dodd-Frank Act provision that probably had the most meaningful impact on executive compensation disclosure was Say-on-Pay, because it ushered in sort of a golden age of engagement between companies, not just on executive compensation by also on a wide range of other important governance topics. This engagement inevitably led to more disclosure, as companies have tried to address the many hot button issues that investors are focusing on, and I think that has contributed to much longer executive compensation disclosures that go well beyond just compliance with the SEC rules. So when we talk about the length and complexity of executive compensation disclosures, there is a certain element where even if the SEC disclosure rules were to be revisited to reduce some of the disclosure burdens, that does not necessarily mean that disclosures will automatically become shorter because of the desire to meet investor expectations for transparency. I then discussed the Dodd-Frank Act rules that most frequently came up during the course of the afternoon – CEO pay ratio, pay-versus-performance and clawback – highlighting the key areas of concern with those requirements.
Our panel also focused on a couple of “hot button” executive compensation topics, including perquisites and named executive officers. The treatment of executive security as a perquisite dominated the conversation over the course of the afternoon, and I talked about why the Commission provided the guidance that it did on executive security in the 2006 adopting release. The SEC has a long history of grappling with the question of whether providing executive security arrangements constitute a reportable perquisite under the SEC’s executive compensation disclosure rules. Prior to the 2006 executive compensation disclosure rule changes and the 2006 interpretive guidance, companies would sometimes argue that all security arrangements were necessary benefits provided to executives and not perquisites, bolstered by “security studies” undertaken to support the determination of whether the benefit must be taxed as income to the executive. I noted that the SEC decided to draw a line in the sand in 2006 that the tax outcome does not necessarily have any bearing on the disclosure outcome under Item 402 of Regulation S-K, creating very different outcomes for benefits like personal security and personal use of corporate aircraft.
On the topic of named executive officers, I explained how we got to the current lineup of the CEO, CFO and three highest paid executive officers, and we discussed what should be the lineup of NEOs, including how investors consider the compensation of executive officers other than the CEO – not surprisingly, the investor representatives believe that the information about the other NEOs is important.
My panel and the other two panels were all very interesting and it was great to get the varying perspectives of each of the panelists. The group certainly raised a number of important issues for the Commissioners and the Staff to consider as they decide their next steps (if any) with respect to the executive compensation disclosure rules.
As this recent Mayer Brown Free Writings + Perspectives blog notes, earlier this week the House of Representatives passed seven bills relating to capital formation:
The House passed H.R. 3394, the Fair Investment Opportunities for Professional Experts Act, by a bipartisan vote of 397-12. This bill will expand the “accredited investor” definition under the Securities Act of 1933 (as amended, the “Securities Act”) to include individuals with certain licenses, qualifying education, or job experience.
H.R. 3422, the Promoting Opportunities for Non-Traditional Capital Formation Act, passed the House by a bipartisan vote of 321-87. H.R. 3422 requires the Securities and Exchange Commission’s (“SEC’s”) Advocate for Small Business Capital Formation to provide educational resources and host events that promote capital-raising options for traditionally underrepresented small businesses and businesses in rural areas.
The following remaining five bills each passed unanimously by voice vote, indicating the House’s bipartisan support for capital formation:
– H.R. 1190, the Expanding Access to Capital for Rural Job Creators Act, would amend the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) to require that the SEC’s Advocate for Small Business Capital Formation include rural small businesses among the categories it monitors for capital access challenges.
– H.R. 2225, the Access to Small Business Investor Capital Act, would allow a registered investment company to exclude from the calculation of “acquired fund fees and expenses” those fees and expenses incurred indirectly from investment in a business development company (“BDC”).
– H.R. 3301, the ELEVATE Act of 2025, would amend the Exchange Act to specify that emerging growth companies, or EGCs, would only need to present two years, rather than three years, of audited financial statements in both initial public offerings (“IPOs”) and spin-off transactions. The bill would also allow a spin-off of an EGC to benefit from the two-year financial statement accommodation, which is currently only available during an IPO.
– H.R. 3352, the Helping Angels Lead Our Startups (“HALOS”) Act of 2025, would codify SEC Rule 148 so communications made at certain “demo day” events would not constitute a “general solicitation” under the Securities Act. The bill also defines “angel investor group” and clarifies the types of sponsors and conditions under which issuers may present without triggering offering restrictions.
– H.R. 3381, the Encouraging Public Offerings Act of 2025, if passed, would codify Rule 163B under the Securities Act and allow any issuer (not just EGCs) to communicate with potential investors to determine interest in a securities offering, either before or after the filing of a registration statement (i.e., “test the waters” communications). The bill also codifies the current SEC Staff position regarding confidential submissions and would allow any issuer to submit a confidential draft registration statement to the SEC for review prior to public filing and updates the public filing condition to allow any IPO issuer to file its registration statement publicly 10 days before the effective date of the registration statement.
I am heading to the SEC’s headquarters in Washington, DC today to join an all-star group of panelists for the SEC’s roundtable on executive compensation disclosure. If you are unable to attend this event in person, you can access a live webcast beginning at 1:00 pm Eastern Time today.
Heading to the SEC for this event later today reminds me of one of my all-time favorite stories from my time at the SEC. When the SEC considered amendments to the executive compensation disclosure rules back in 2006, I had the great honor of working on that rulemaking under the direction of then-Corp Fin Director Alan Beller and my wonderful boss and mentor, Paula Dubberly. This rulemaking initiative had generated some significant media interest at the time, because ever-rising executive pay had found its way into the zeitgeist of the mid-2000s, as the U.S. economy struggled following the Dot-Com bust while CEOs and other executives continued to receive what were perceived as outsized pay packages.
When I showed up in the SEC’s auditorium to assist with presenting the proposed rules for consideration by the Commission, I was surprised to see television cameras in the room, which is unusual for Commission open meetings. Alan and Paula also arrived, with Alan wearing an eye patch after suffering a serious eye injury just a few days before the open meeting. We sat down and went about the fairly mundane task of presenting our proposed rule amendments to the Commission, to be followed by the usual give-and-take with the Commissioners (including then-Commissioner Paul Atkins). Unbeknownst to me, the entire proceeding was being broadcast live on C-SPAN, and some alert C-SPAN watcher called my wife to tell her that I was on television. My wife then watched the program with my then five-year-old son John, who was very intrigued to see his dad appearing on television along with his SEC colleagues.
When I arrived home that night, my son met me at the door, visibly excited, and blurted out “Dad, I didn’t know you work with a pirate!” It took me a moment to figure out what he was talking about, but I quickly realized that Alan’s eye patch had given John the false impression that Alan’s profession was something other than Director of the Division of Corporation Finance. Given that my son was in his full “Pirates of the Caribbean” phase and was a huge admirer of Jack Sparrow, I took advantage of my fatherly prerogative to refrain from disabusing him of his notion, allowing me to bask in the glow of his admiration and avoiding the inevitable disappointment associated with explaining to him that I was actually on live television talking about executive compensation disclosure.
Many of the issues that were raised by Chairman Atkins in his statement regarding today’s roundtable certainly ring true for those of us who are involved in the preparation of executive compensation disclosures, as well as the investors who are reviewing those disclosures when making investment and voting decisions. I have always observed that approaching executive compensation disclosure requires a delicate balancing act – while the amounts paid for salaries, bonuses and equity awards are not quantitatively material for most companies, the qualitative materiality is important to consider when an investor is trying to understand how the company is governed, and how the executives are incentivized toward achieving business success. While that qualitative materiality element is important, the risk for information overload is high, given the fact that compensation programs often include numerous elements that can be very complex in some situations.
For my observations on areas that the Commission should consider if it decides to proceed with rulemaking, be sure to check out the upcoming May-June 2025 issue of The Corporate Executive. For the latest on comment letters that have been submitted to the SEC on this topic, check out this recent blog post from Liz on The Advisors’ Blog on CompensationStandards.com.
At this time each year, I selfishly dedicate some blog space to a tribute for my dear friend and mentor Marty Dunn, who passed away five years ago this month. Marty was a distinguished member of this community and a legendary member of the SEC Staff.
I have been thinking a lot about mentorship these days as Liz and I record our podcast series “Mentorship Matters with Dave & Liz,” and today I want to focus on how Marty’s generous mentoring continues on for me to this day, even though he is no longer able to serve as my mentor in the traditional sense. I often find myself asking “What Would Marty Do?” when confronted with a tough question or situation, and then I try to remember how he would approach that question or situation, break down a problem or pursue an opportunity. While I do not always come out on things the same way that Marty would have, stepping back and adopting his analytical approach is often very useful for me when seeking an answer or solution. Asking this simple question also keeps his legacy alive for me, and that is comforting in and of itself.
For example, one of the many things that Marty had mastered during his life was how to entertain and engage an audience. In his many speaking engagements over the years, he was always able to make things both fun and interesting, which audiences appreciated when sitting through a day of otherwise very dry panel presentations. When I was involved with planning the Northwestern Law Securities Regulation Institute that took place in January of this year, we were looking for an interesting and entertaining way of presenting the many issues that practitioners encounter when dealing with executive officers and directors. I of course asked myself “What Would Marty Do?” and recalled a panel that he and I had done way back in 2013, when Marty had conceived of conducting an entire panel in the format of the ESPN show “Pardon the Interruption,” which provided a very fast-paced format for covering a significant amount of substantive material. Fortunately, the panel was so popular back in 2013 that the organizers of the Securities Regulation Institute had distributed a thumb drive with a recording of the panel, so adopting that format for this year’s program was an easy sell once everyone saw how well it had worked in the past. We did the program earlier this year using Marty’s PTI format and it received great reviews, thus confirming my belief that still looking to Marty for inspiration and mentorship provides me with valuable insights, along with an opportunity to maintain our connection.
I am not certain about many things in this world, but one thing that I am certain about is that we will have many things to talk about this year at our “Proxy Disclosure & 22nd Annual Executive Compensation Conferences,” which are taking place on October 21-22 at Virgin Hotels Las Vegas and via a virtual option if you are unable to attend in person.
Here are just a few of the great panels that I am looking forward to on our extraordinary agenda and involving our expert speakers:
– The SEC All-Stars: Proxy Season Insights
– The SEC All-Stars: Executive Pay Nuggets
– E&S: Balancing Risk & Reward in Today’s Environment
– How Activists Think: Understanding Activism Podcast LIVE
– The Proxy Process: Avoiding Surprises — On Time, On Budget & On Value
– Compensation Disclosures You Need to Fix
If you plan to attend in person, be sure to arrive early enough on Monday to attend the Welcome Party + CCRcorp’s 50th Anniversary Celebration, which will take place from 4:00 pm to 7:00 pm PT on October 20. Register today and take advantage of our Early Bird Rate by emailing info@ccrcorp.com or calling 1.800.737.1271.
Kevin LaCroix recently highlighted on The D&O Diary Blog a recent WSJ opinion piece titled “Quarterly Reports are Written for AI” by Hebrew University Business School Professor Keren Bar-Hava, which describes how the use of AI has changed the way analysts review MD&A. Kevin’s blog notes:
Professor Bar-Hava studied 108 MD&A reports from 27 top U.S. firms during the period 2021-24. She found that, by contrast to the earlier studies noted above, in which better-performing companies tended to have simpler, shorter reports, a different pattern has emerged. She found that positive tone has steadily increased, even when financial performance declined. Words like “growth,” “resilient,” “opportunity” have become more common. Terms signaling uncertainty, such as “might” or “could,” have declined.
Even “more strikingly,” she observed, the “most positive reports often came from the worst-performing firms.” Professor Bar-Hava says this is “no coincidence,” it is, rather, “strategy.” Tone, she says, has “become a tool to manage how algorithms ‘feel’ about performance.” It also “creates a risk” – that is, “the growing gap between what’s said and what’s true.”
What is happening, Professor Bar-Hava explains, is that companies are responding to “AI-induced disclosure pressure – the incentive to write in a way that performs well under algorithmic scrutiny.” The result “isn’t always more transparency.” It may be the opposite; the result may be “performative optimism crafted to influence machines, not people.”
Professor Bar-Hava identifies three levels on which the “AI-induced disclosure pressure” operates:
– Exposure pressure. AI flags vague or evasive language. Companies feel compelled to sound confident, even when the outlook is uncertain.
– Competitive pressure. Algorithms benchmark tone across peer firms. If a competitor sounds stronger, you look weak by comparison.
– Reputational pressure. AI feeds analyst dashboards, investor platforms and news summaries. One poorly framed sentence can ripple fast.
Professor Bar-Hava rightly notes the potential implications of these developments for possible liability under the securities laws. She notes that the SEC in the past has issued rules intended to improve narrative disclosure, “encouraging clarity, conciseness, and plain English.” But tone, she says, is “now a powerful drive of perception,” and it remains unregulated. That, she says, is a “blind spot.” AI driven tone scores are “influencing market behavior.” And if markets are being gamed, she says, “investors are misled.”
Professor Bar-Hava suggest that “tone” should be treated as “a material disclosure element.” We should monitor linguistic choices, as we do accounting choices, especially as “algorithms become the first line of interpretation.” Otherwise, we risk “building a world where clarity is polished but meaning is lost.”
The final paragraph of Professor Bar-Hava’s article makes an important point, which is that corporate boards “must understand that they’re writing for two audiences, people and machines.” Machines she says, don’t read between the lines, “they read the lines.” If we care about truth in reporting, “we must care how it sounds, not merely what is says.”
It is a somewhat disturbing thought that we are moving down a path of having AI write our disclosures for analysis by AI. I feel that such a trend could only be welcomed by plaintiffs’ lawyers and SEC Enforcement lawyers. As Kevin notes in his blog, “if a company is using AI to improve the way the company’s MD&A is scored under AI-driven analysis, the board must try to ensure that there is no gap between what’s said and what’s true.”
Earlier this month, the Center for Audit Quality (CAQ) released the results of a survey of institutional investors that focused on opinions and preferences related to the use of GenAI in public company audits and opinions on the use of GenAI in portfolio companies among institutional investors. The survey was conducted by KRC Research. The survey was conducted in May and involved 102 investors. The survey revealed the following key takeaways regarding the use of AI in audits:
– Nearly all trust the use of AI to support the audit processes and say use of AI increases trust in the audit of public companies.
– Accuracy and efficiency is seen as the most important benefit of the use of AI in the audit, followed by enhanced risk assessment and prioritization.
– Regular audits of AI systems and outputs, and AI usage policies, are seen as most important to maintain trust in the use of AI in the audit process.
– Company management is seen as most responsible for ensuring the responsible use of AI in the audit process by a small plurality (38%).
– Increased accuracy and reduced errors when using AI increases trust in the audit.
– The most cited concerns about the use of AI in the audit process is data security and privacy, lack of human oversight, and lack of clear auditing guidelines
With regard to the use of AI in portfolio companies, the key takeaways were:
– Nearly all are confident in the ability of portfolio companies to manage the risks associated with the use of AI.
– Data privacy and cybersecurity are the biggest risks associated with the use of AI.
– Nearly six in ten feel federal regulations on the use of AI are clear and comprehensive, while one third say federal regulations lack comprehensiveness.
– Nearly all say it is very or extremely important for portfolio companies to have formal structures to govern the use of AI.
– Regularly assessing the risks of AI and formal policy guidelines on the use of AI are seen as the most important steps to manage the risks associated with the use of AI.
The SEC recently announced that the next Small Business Capital Formation Meeting will take place on July 22, 2025, beginning at 10:00 Eastern Time. The meeting will be conducted at the SEC’s headquarters and via a live webcast. An agenda for the meeting is forthcoming.
The Small Business Capital Formation Advisory Committee “is designed to provide a formal mechanism for the Commission to receive advice and recommendations on Commission rules, regulations and policy matters relating to small businesses, including smaller public companies.”
The SEC has announced the appointment of Kevin Muhlendorf as the agency’s new Inspector General, effective July 28. Muhlendorf leads the Securities Enforcement Practice at Wiley Rein LLP in Washington D.C. He previously served as Acting Inspector General for the Washington Metropolitan Area Transit Authority, and served as a Trial Attorney and Assistant Chief in the U.S. Department of Justice Fraud Section, and as Senior Counsel in the SEC’s Division of Enforcement. Acting Inspector General Katherine Reilly will return to her role as a Deputy Inspector General.
As noted on the SEC’s website, the SEC’s Office of Inspector General “seeks to prevent and detect any fraud, waste, abuse, and mismanagement at the SEC while promoting integrity, economy, efficiency, and effectiveness in Commission programs and operations.” The OIG accomplishes this mission by:
– conducting independent and objective audits, evaluations, and other reviews of SEC programs and operations;
– conducting independent and objective investigations of potential criminal, civil, and administrative violations that undermine the ability of the SEC to accomplish its statutory mission;
– preventing and detecting fraud, waste, and abuse in SEC programs and operations;
– identifying vulnerabilities in SEC systems and operations and making recommendations to improve them;
– communicating timely and useful information that facilitates management decision making and the achievement of measurable gains; and
– keeping Congress, the Chair, and the Commissioners fully and currently informed of significant issues and developments.
On Saturday, Texas Governor Greg Abbott signed into law Senate Bill 2337, which imposes new regulations on proxy advisory firms such as ISS and Glass Lewis. Liz and Meredith have been covering developments with this legislation over on the Proxy Season Blog. This new law will become effective on September 1, 2025. As described in this blog, the new Texas law will mandate certain disclosures when proxy advisory firms recommend casting a vote for “non-financial reasons” or provide conflicting advice to multiple clients. The “non-financial” reasons include a recommendation wholly or partly based on environmental, social or governance investing, diversity, equity or inclusion, social credit or sustainability scores or membership in or commitment to an organization or group that bases its assessment of a company’s value on nonfinancial factors.
