SEC’s White Talks 404, IFRS, Executive Pay

ompanies preparing to issue their first proxies under the Securities and Exchange Commission’s new executive compensation disclosure rules, take note: Don’t expect any new rulemaking in that area this year.

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Speaking to roughly 500 attendees at Compliance Week’s annual conference in Washington D.C. today, Division of Corporation Finance director John White said that while the SEC may issue more interpretive guidance related to its rules, he doesn’t expect to see additional rulemaking in time for the next proxy season.

Some observers have questioned whether the SEC will tweak its rules to clarify some of the required disclosures, such as the reporting of equity awards. Under a controversial change unveiled in December, the Commission changed its rule to allow the awards to be expensed year by year, across the length of the grant—rather then fully expensed the year they’re awarded, as originally proposed. The move has been criticized for causing confusion.

The SEC's John White at Compliance Week 2007

“I don’t expect that we’ll see any additional rulemaking in the executive comp this year,” he said. “We need time to digest what’s happened.”

White added that, “Actual changes in the rules, if any, and I’ll underline if any, are probably off for another season.”

A review of the executive compensations disclosures of hundreds of companies, with a bias toward larger issuers, is already underway. White said the division intends to issue comment letters to those issuers in the near future. He added the bulk of the staff comments will be geared toward future compliance. “We understand that this is the first time through and that companies are trying in good faith to comply,” he said.

However, he noted the SEC may ask companies to amend their 10-Ks in certain cases. Companies’ proxy statements are incorporated by reference into their annual reports, so for example, if the SEC staff concludes that an issuer improperly withheld information about its performance targets, the staff could ask the company to amend its 10-K.

“That seems like an obvious place where if you didn’t meet the standard, you could end up with an amendment,” White said.

Some of the things the staff will look for in its reviews are: whether companies have “the right kind of analysis” or a lack of analysis; the adequacy of performance target descriptions, if included; and the justification for withholding that information if performance targets are excluded. The staff will also look at how “fulsome” the disclosure is about the CEO’s involvement in the compensation process and whether the disclosures are in plain English.

A report on those reviews should be out some time in the fall.

The SEC's John White fields questions from the audience at Compliance Week 2007, with some help from Compliance Week editor and publisher Scott Cohen.

Meanwhile, he said the SEC’s final guidance for management on implementing Section 404 of Sarbanes-Oxley should be out “soon.” White reiterated that the SEC doesn’t currently plan to extend the deadline for smaller companies. However, he noted that the SEC must still put the PCAOB's proposed Auditing Standard No. 5 out for comment, and must approve it. He also reminded listeners that larger companies already in compliance don’t have to change their procedures “unless they want to.”

Two other SEC releases are expected this summer related to International Financial Reporting Standards. One is a proposing release to eliminate the reconciliation requirement for foreign private issuers starting in 2009. The other is a concept release asking for input on whether U.S. domestic issuers should be given the option to report in either International Financial Reporting Standards or U.S. Generally Accepted Accounting Principles.

Referring to the concept release, White said, “We're hoping that people will take this as a wake-up call that this has become an important topic for U.S. domestic issuers and financial reporting generally.”

“There are a lot of questions to ask,” he said. “We want to be able to give everybody an opportunity to provide their input.”

“We've heard from investors, analysts, and from ratings agencies that they may well be driving you to go the IFRS route,” or at least the same way peer companies are going to get comparability within an industry, White said, adding, “So you might find yourself, whether you want to or not, driven by market forces toward this.