What SEC Disclosure Reforms Mean to You

Corporate secretaries, compliance officers, and other governance executives have a new item to put on their summer reading list: The Securities and Exchange Commission’s proposals for extensive new corporate disclosure.

The SEC unveiled a flurry of ideas on July 1, covering everything from more detail about executive compensation and risk management to faster reporting of results from shareholder meetings. The full texts of the proposals were published on the agency’s Website on July 10, and portend a significant increase in paperwork companies will confront, probably starting in the 2010 proxy season.

The plans call for disclosure of how a company’s compensation policies relate to risk; more detail about board directors’ experience and qualifications; discussion of how and why a company selected the leadership structure it has; and disclosure of potential conflicts of interest with any compensation consultants the company uses.

The good news: While companies may not welcome the additional work, experts don’t expect the proposals to create any major compliance headaches once they are approved (which they most likely will be, sometime later this summer or fall). Most of the proposals are in response to recent events or seek more disclosure in areas already on regulators’ radar.

Fackler

“A lot of the proposed changes had been telegraphed by the SEC, so there are no big surprises,” says Stephen Fackler, a partner at the law firm Gibson Dunn & Crutcher. “I don’t expect any uproar … although I do expect some potentially vigorous comment.”

Colin Diamond, a partner at the law firm White & Case, notes that the reforms “are very much focused on risk and governance structures.” Those are the two areas that have received the most attention from Congress, the SEC, and other players in Washington striving to prevent a repeat of the current recession, and should catch nobody by surprise, he says.

Jones

But Julie Jones, head of the federal securities practice at Ropes & Gray, says “there are some real worries about the build up of boilerplate [language] in the proxy statement.” She says issuers should be mindful of remarks by SEC Chairman Mary Schapiro stressing the concept of “better or more timely disclosure—not simply additional disclosure.”

Compensation Disclosures

One SEC proposal is an expanded Compensation Discussion & Analysis where companies discuss and analyze their compensation policies and overall pay practices for employees generally—including non-executive officers—if the risks arising from those policies may have a material effect on the company.

Diamond

Diamond warns that depending on how it’s drafted, that proposal could require some “substantive action.”

“Companies may have to engage in a new internal risk assessment to make a determination of whether those risks may have a material affect,” he says. It also remains to be seen whether the discussion would pertain only to named executive officers or to other important non-executive employees.

Fackler, however, notes that many programs for rank-and-file employees don’t have a material effect on the company, so that requirement may not produce much additional disclosure.

COMP DISCLOSURE

The following excerpts are from the SEC’s proposing release on proxy disclosure:

Under the proposed amendments, the situations that would require disclosure will vary

depending on the particular company and its compensation programs. We believe situations that potentially could trigger discussion and analysis include, among others, compensation policies and practices:

At a business unit of the company that carries a significant portion of the company’s risk

profile;

At a business unit with compensation structured significantly differently than other units

within the company;

At business units that are significantly more profitable than others within the company;

At business units where the compensation expense is a significant percentage of the

unit’s revenues; or

That vary significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while the income and risk to the company from the task extend over a significantly longer period of time.

Examples of the issues that companies may need to address regarding the compensation policies or practices that may give rise to risks that may have a material effect on the company would include the following:

The general design philosophy of the company’s compensation policies for employees whose behavior would be most affected by the incentives established by the policies, as such policies relate to or affect risk taking by those employees on behalf of the company, and the manner of its implementation;

The company’s risk assessment or incentive considerations, if any, in structuring its

compensation policies or in awarding and paying compensation;

How the company’s compensation policies relate to the realization of risks resulting from the actions of employees in both the short term and the long term, such as through

policies requiring claw backs or imposing holding periods;

The company’s policies regarding adjustments to its compensation policies to address changes in its risk profile;

Material adjustments the company has made to its compensation policies or practices as a result of changes in its risk profile; and

The extent to which the company monitors its compensation policies to determine

whether its risk management objectives are being met with respect to incentivizing its

employees.

HOW TO COMMENT:

Electronic Comments:

Use the Commission’s Internet comment form at http://www.sec.gov/rules/proposed.shtml .

Send an e-mail to rule-comments@sec.gov. Please include File Number S7-13-09 on the subject line; or

Use the Federal Rulemaking ePortal, http://www.regulations.gov. Follow the

instructions for submitting comments.

Paper Comments:

Send paper comments in triplicate to:

Elizabeth M. Murphy

Secretary

Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549-1090

All submissions should refer to File Number S7-13-09. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Website.

Source

SEC Proposing Release on Proxy Disclosure (July 10, 2009).

The proposal would also change how equity compensation (stock or stock options) is disclosed in the Summary Compensation and Director Compensation Tables. The new plan would require the value of that compensation to reflect the fair value of awards on the date they are granted, as calculated according to Financial Accounting Standard No. 123R, Equity-based Compensation. Currently companies must disclose the dollar amount recognized for financial statement reporting purposes for the fiscal year.

That change would revert back to a method proposed by the SEC as part of its 2006 overhaul of compensation disclosure—an approach it ultimately scrapped, to the dismay of many issuers.

Jones says companies should pay attention to the revision, since it will change who’s in the tables for some companies. Fackler says the change is simply “one sub-optimal approach replacing another,” since fair-value accounting standards don’t necessarily reflect the true economic value of equity compensation grants.

“It’s just an educated guesstimate … and it doesn’t incorporate restriction on vesting and transferability,” he says. “If you just roll that number up into the total annual compensation number, it’s just going to create more distortion.”

Another question: how to compare these new compensation numbers to previous years’ reports calculated under the old method. “We’ll have three years of historical data and the new requirements will result in different values being reported,” Diamond says. “It remains to be seen whether the revised requirement will apply retroactively or whether the SEC will let the prior disclosures stand.”

Other Disclosures

Another proposal would require companies to disclose the experience, qualifications, attributes, or skills of every sitting director or nominee, as well as any public-company directorships that person has held in the last five years.

Companies would also have to provide more detail about the fees paid to, and services provided by, compensation consultants, if those consultants provide consulting services beyond those related to executive or director pay. The disclosures would include the aggregate fees paid for compensation consulting and other services, and information about whether management made or recommended the decision to engage the consultant for other services and whether the board or the compensation committee approved the other services.

Burgdoerfer

Jerry Burgdoerfer, co-chair of the securities practice at Jenner & Block, says those proposals aren’t terribly controversial, but companies will need to modify their director-and-officer questionnaires “to pick up the necessary facts for the additional disclosures.” To avoid any awkward admissions, he suggests compensation consultants only be hired and used by the board’s compensation committee; management should have nothing to do with it.

Companies would also need to disclose their leadership structure, including an explanation of why it is best for the company, whether the company has split the CEO and chairman roles (and if not, explain why); and whether the company has a lead independent director. The proposal would require additional disclosure about the board’s role in the company’s risk-management process and the effect, if any, that has on the way the company organizes its leadership structure.

“Cleary the SEC is angling for disclosure of why some companies don’t have an independent chair, but companies have already had to answer that question to some of their constituencies and they know how to do it,” Jones says.

Others say this particular idea seems ripe for producing boilerplate disclosure that doesn’t really say much. “It may result in ‘motherhood and apple pie’ type of answers that are formulaic or pat, rather than meaningful disclosures,” Fackler says.