
There has been no lack of news since the President was re-inaugurated in January. However, until very recently, little of the news seemed to be coming from the SEC. Perhaps that is because the new SEC Chair, Paul Atkins, was not sworn in until April 21 (happy birthday to me) or for some other reason, but in any case things now seem to be moving a bit.
One area of movement is cryptocurrency. In contrast to Gary Gensler, who seems to have believed that crypto was evil incarnate, Chair Atkins is reputed to think that it’s not so bad, or maybe even that it’s fine. Although I can’t write about SEC initiatives without mentioning crypto, I don’t understand it, and I suspect that many other people don’t either (including many who claim to get it), so I’ll leave it to Chair Atkins and others to figure it out.
But I do understand two areas where the SEC has started to move, and those are the areas I’d like to comment on.
Executive Compensation
First and foremost is executive compensation disclosure. The SEC held an executive compensation roundtable on June 26, and the buzz is that Chair Atkins and his Republican colleagues aren’t very happy with the existing disclosure regime, likening it to a Frankenstein monster (an apt analogy, IMO). I have mixed feelings on the subject; on the one hand, executive compensation is where the governance rubber meets the road, and consequently should be the subject of good disclosure. On the other hand, I’ve drafted and/or read many proxy statements over the years, and it’s a gross understatement to say that most compensation disclosure is impenetrable and unhelpful. The situation has not been helped by SEC interpretations and comments that have caused the Compensation Discussion and Analysis to become bloated and uninformative, sometimes focusing on trivial matters at the expense of more important ones. (And yet…. One of my pet peeves is that many companies continue to get away with reporting that time-vested equity grants are “performance-based,” when the only “performance” is that the recipient is still breathing; however, the SEC doesn’t seem to think this is a problem.)
It’s way too early to make predictions, but the areas of focus at the roundtable included both the “Pay versus Performance” and CEO Pay Ratio disclosures. The SEC more or less ignored the congressional mandate for PVP disclosures for a while, but when the Gensler regime took it up, it did so with a vengeance, and the rules it conjured up went far beyond what anyone thought they should be. CEO pay ratio disclosures appeared to be little more than a very complicated shame game. And, with some exceptions, actual investors (as opposed to the SEC’s imaginary ones) don’t seem to have paid much attention to either set of disclosures.
I haven’t digested all of the reports of the roundtable discussions, but so far I haven’t seen anything suggesting that CD&A reform was discussed. Hopefully it will be, because I just don’t understand why a 30-page (or longer) CD&A is necessary or tolerated.
The road ahead may be bumpy. Some of the disclosures that we love to hate were mandated by legislation, and it may be difficult for the new, reform-minded SEC to cut back on the excesses perpetrated by previous commissions. Also, there will always be some investors who will claim that they need to have such-and-such information to properly evaluate the appropriateness of executive pay at a given company. That said, let’s hope that the SEC effects some improvements.
Scaled Disclosure
While it hasn’t gotten as much publicity as executive compensation, the SEC has also been thinking about fixing its questionable approach to scaled disclosure. For one thing, the dollar thresholds for determining whether a company is a “Smaller Reporting Company” are woefully out of date. And many of us have long questioned why the sole metric that determines SRC status is public float.
I went back to the 2007 proposing release and was disappointed to see that the SEC’s rationale was pretty lame, for lack of a better word. Specifically, public float was selected as the basis for determining SRC status
“… because we… have several rules using the $75 million public float metric to distinguish smaller companies. In addition to the use of this public float metric in the definition of accelerated filer, the $75 million public float requirement is used to determine expanded eligibility in Form S–3 and Form F–3. Further, issuers are required to provide their public float on the cover page of their Exchange Act annual reports.”
If this sounds similar to the parental “because I said so,” it gets worse when the release “explains” (using the term very loosely) why a revenue test was not considered:
“Our proposed definition of ‘‘smaller reporting company’’ does not include a revenue test for most companies. While our current definition of ‘small business issuer’ includes a revenue standard, the classification of an issuer as a large accelerated filer, an accelerated filer, or… a non-accelerated filer does not involve a revenue standard. We chose not to propose a revenue standard to qualify for ‘smaller reporting company’ status for most companies to provide greater simplicity, consistency, and certainty.”
In other words, “we chose not to use a revenue standard because we chose not to use a revenue standard.” (Please excuse the sarcasm, but it seems appropriate in the circumstances.)
The good news is that the SEC has reached out to my favorite professional organization, the Society for Corporate Governance (and possibly others), for thoughts and observations, and the Society has submitted a very well written and thoughtful letter and a related appendix in response.
So far so good. However, even if the SEC accepts the Society’s recommendations (as I hope it does), the companies that would qualify as SRCs range in size from nano- or micro-caps to companies of a substantial size. As a result, compliance with requirements applicable to SRCs generally may be relatively easy for companies at the larger end of the range but very challenging for those at the smaller end of the range. We have seen this time and again in the past, perhaps most clearly in the climate disclosure rules that have, thankfully, ridden off into the sunset, but the problem will unquestionably arise again and again in the future.
The current and proposed standards raise another concern that I believe to be greater, at least in the long run, than compliance by companies that are already publicly held. Specifically, they will continue to deter companies seeking to raise capital from going to the public markets. The number of companies that have gone public has diminished significantly over time, and the SEC and others have expressed concern with this development. However, treating all SRCs alike from the regulatory perspective will, in my view, perpetuate this problem. Personally, while I’m a staunch supporter of accessing the public markets, I tend to tell clients and prospective clients who want to go public that they should think long and hard before they do so. And several have gone ahead, only to tell me years later that they wish they’d paid more attention to my warnings.
I have reason to believe that the SEC’s reforms in this area will not be limited to those suggested in the Society’s letter, but it’s still early days.
Fingers crossed!