Disclosure

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4532941987_9004c36616_mIn a June 27 speech to the International Corporate Governance Network, SEC Chair Mary Jo White engaged in a bit of full disclosure herself:

“I can report today that the staff is preparing a recommendation to the Commission to propose amending the rule to require companies to include in their proxy statements more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors.”

As noted in her remarks, the SEC adopted the current disclosure requirements on board diversity in 2009.  However, the requirements were added to other board-related disclosure requirements at the last minute, when it was reported that Commissioner Aguilar refused to support the other requirements unless diversity disclosure was also mandated.  As a result, the diversity requirements were never subjected to public comment, did not define “diversity,” and seemed to require disclosure only if the company had a diversity “policy”.   When companies failed to provide the disclosure because they had no policy, the SEC clarified that if diversity was a factor in director selection then, in fact, the company would be deemed to have a policy, thus requiring disclosure.Continue Reading Coming soon to an SEC filing near you: board diversity (but not sustainability…for now)

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Photo by Rachita Singh

A little over two years ago, the Council of Institutional Investors (“CII”) asked the SEC to review its proxy disclosure rules related to director compensation received from third parties, which we had blogged about here. At the time, the CII was concerned that the existing proxy rules did not capture compensation that may be paid to directors serving on the board of a public company by a third party, such as a private fund or an activist investor, which are typically referred to as “golden leashes.”

In its letter to the SEC, the CII cited concerns that compensation under golden leash arrangements is not generally covered by the existing proxy disclosure rules, but could be material to investors due to the potential conflicts of interest arising under such arrangements. We had noted many of these issues in a prior blog post discussing the performance-based compensation arrangements of hedge fund-nominated directors for the boards of Hess Corporation and Agrium, Inc. in 2013. As we predicted would be the case, nothing really transpired on this topic in the wake of the CII’s request. That is until recently, when Nasdaq filed a proposed rule change, subsequently approved by the SEC, attempting to address this issue.
Continue Reading Nasdaq-listed companies must now disclose director “golden leash” arrangements

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© Michael Sutton-Long

In recent weeks, the SEC has given public companies some new menu items, including the following:

  • On June 1, the SEC adopted an “interim final rule” that permits companies to include a summary of business and financial information in Annual Reports on Form 10-K.  The rule implements a provision of the Fixing America’s Surface Transportation Act, or FAST Act, in keeping with the new trend to give statutes names that someone thinks make nifty acronyms. (Of course, the connection between this rule and surface transportation remains a mystery.)
  • On June 13, the SEC issued an order permitting companies to file financial statement data in a format known as “Inline XBRL” rather than filing such data in exhibits to a filing.

Here is a quick review of these new menu items.

The new, improved 10-K summary – The rule permitting a 10-K summary is interesting in several respects.  First, companies have long been able to provide summaries; in other words, there doesn’t seem to have been any reason for the “new” rule.  Second, as noted, it permits but does not require the use of summaries; thus, companies that have not provided summaries in the past and don’t want to now don’t have to.
Continue Reading The SEC’s summer menu

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©killaee

Over the years, the PCAOB has developed a reputation for pursuing zombie proposals – proposals that appear to be dead due to widespread opposition and even congressional action.  Remember mandatory auditor rotation?  It practically took a stake through the heart to kill that one off, and I’m informed that even after it was presumed to be long gone some PCAOB spokespersons were telling European regulators that it might yet be adopted.

Well, here we go again.  The latest zombie proposal (OK, reproposal) would modify the standard audit report in a number of respects, the most significant of which would be to require disclosure of “critical audit matters”.  The headline of the PCAOB’s announcement of the reproposal says that it would “enhance” the auditor’s report; not clarify, just “enhance”.   And, as is customary whenever the PCAOB proposes to change the fundamental nature of the audit report, the proposal starts out by sayng that’s not the intention at all: “The reproposal would retain the pass/fail model of the existing auditor’s report,” it says.  It seems to me to lead to the opposite result – the introduction of critical audit matter (“CAM”) disclosure could easily lead to qualitative audit reports; one CAM would be viewed as a “high pass”, two would be ranked as a medium pass, and so on, possibly even resulting in numerical “grades” based upon the number of CAMs in the audit report.  And let’s not fool ourselves into thinking that any audit firm would ever issue a clean – i.e., CAM-free – opinion.  I just can’t envision that happening, ever.Continue Reading Another zombie from the PCAOB

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Until recently, I’ve firmly believed that the SEC’s use of the bully pulpit can be effective in getting companies to act – or refrain from acting – in a certain way.  Speeches by Commissioners and members of the SEC Staff usually have an impact on corporate behavior.  However, the use of non-GAAP financial information – or, more correctly, the improper use of such information – seems to persist despite jawboning, rulemaking and other attempts to stifle the practice.

Concerns about the (mis)use of non-GAAP information are not new.  In fact, abuses in the late 1990s and early 2000s led the SEC to adopt Regulation G in 2003.  It’s hard to believe that Reg G has been around for 13+ years, but at the same time it seems as though people have been ignoring it ever since it was adopted.  Over the last few months, members of the SEC and its Staff have devoted a surprising amount of time to jawboning about the misuse of non-GAAP information; for example, the SEC’s Chief Accountant discussed these concerns in March 2016; the Deputy Chief Accountant spoke about the problem in early May 2016; and SEC Chair White raised the subject in a speech in December 2015.  And yet, the problem seems to persist.Continue Reading Mind the GAAP

On April 13, the SEC authorized the issuance of a major concept release. Concept releases are trial balloons that the SEC publishes to elicit input on possible rulemaking, including whether rulemaking is needed and what form it should take if it happens. The April 13 concept release is entitled “Business and Financial Disclosure Required by Regulation S-K”. Given that Regulation S-K spells out many of the disclosure requirements applicable to all sorts of Exchange Act filings, it’s bound to be significant.

The concept release is a very large trial balloon indeed – it runs to nearly 350 pages – and I have yet to crack it open. However, I do intend to read it. And I urge you to do the same, as it’s likely to impact disclosure requirements for the next generation.

Some preliminary thoughts about the concept release, based upon press reports and the opening statements made by the Commissioners during the meeting at which the release was approved for publication:
Continue Reading Another SEC concept release

Two news items from the front lines:

First, you may recall my mentioning that the Council of Institutional Investors was considering adopting a new policy that would limit newly public companies’ ability to include “shareholder-unfriendly” provisions in their organizational documents (see “Caveat Issuer“, posted on February 13).  I just came back from Washington,…

According to SEC Chair White, regulators are looking – and not happily – at companies’ increasing use of customized financial disclosures.  In fact, her recent remarks suggest that additional regulation is not being ruled out to curb the use of such “bespoke” data.

For some of us it may seem like only yesterday – though it was actually in 2003 – that the SEC adopted Regulation G to address the then-growing concern that companies were developing odd ways of communicating financial information to make their numbers look better.   In general, Reg G says that companies

  1. cannot make non-GAAP disclosures more prominent than GAAP disclosures;
  2. need to explain why they use non-GAAP disclosures; and
  3. must provide a reconciliation showing how each non-GAAP measure derives from the GAAP financial statements.

So far, so good.  However, some companies give little more than lip service to these requirements.  For example, it’s not unusual to see Item 2 addressed by a statement along the lines of “investors who follow the company use this measure to assess its performance.”  And, more recently, companies seem to be developing more peculiar ways of showing performance, such as excluding the effects of some taxes but not others.  This creativity may not be as arch as excluding recurring items or turning losses into gains, but it still makes regulators uneasy.Continue Reading Bespoke financial data?

Those of you who’ve been following my postings know that I’m not a fan of Congressional interference in the workings of the SEC. Well, those same wonderful folks who’ve garnered the lowest opinion ratings in history are at it again.

First, you may recall that Congress acted a few weeks ago to avoid another federal government shutdown. Well, a few interesting provisions were added to that legislation and – you guessed it – one of them was precisely the kind of thing that sets me off; in this case, it was a prohibition against any SEC rulemaking requiring disclosure of political contributions.Continue Reading They're back…

It’s done. On August 5, the SEC adopted final rules that will require publicly traded companies to disclose the ratio of the CEO’s “total compensation” to that of the “median employee.” We’re still wending our way through the massive (294 pages) adopting release, but one piece of good news (possibly the only one) is that it appears that pay ratio disclosures won’t be needed until 2018 for most companies.

I’ve already posted my views on this rule (see “CEO pay ratios: ineffective disclosure on steroids”), so it’s no surprise that I’m not happy. However, what is surprising are the myths and madness that the mandate has already created. First, there’s the “median employee,” who may be a myth in and of him/herself. But that’s not all; the media (notably The New York Times) have begun to tout the rule and make all sorts of predictions about how it will impact CEO pay, many of which involve myths and madness of their own.

Myth: In an August 6 column, Peter Eavis wrote about the rule, saying “the ratio, cropping up every year in audited financial statements, could stoke and perhaps even inform a debate over income inequality”. Really? In the audited financial statements? I haven’t finished reading the rule, despite its being such a page-turner, but I didn’t see that in there and don’t think I will. Someone better tell the audit firms – and also tell Mr. Eavis that the ratio is not auditable.Continue Reading Pay ratio disclosure: Myths and madness