SEC Moves Ahead on Disclosure Proposals - 7 July 2009

SEC Moves Ahead on Disclosure Proposals

By



Melissa Klein Aguilar —
July 7, 2009

orporate
secretaries and chief legal officers should sharpen their pencils: The
Securities and Exchange Commission has just proposed a raft of new
disclosures it wants companies to start making.

On the table are plans for yet more disclosure of executive
compensation, including compensation to important non-executive
employees; better disclosure of board directors’ experience and
qualifications; discussion of potential conflicts of interest with
compensation consultants; and, as always, more information about how a
company’s pay policies do or do not encourage managers to take
excessive risks.

The SEC unanimously voted to publish all those proposals, and more, at
a jam-packed meeting last week. The Commission also voted 3-2 to
approve a New York Stock Exchange rule that bans broker-dealers from
voting in all director elections unless shareholders give them specific
voting instructions, and proposed a shareholder say-on-pay rule for all
companies receiving government bailout funds from the TARP program.

Schapiro

In total, the SEC has set the stage for a long summer of comment and
debate on the future of corporate governance—reforms that SEC Chairman
Mary Schapiro has promised to address since she took office six months
ago.

Much of the proposed new disclosure would end up in the
Compensation Discussion and Analysis section of a company’s Form 10-K.
For example, a company would discuss and analyze its broader
compensation policies and overall pay practices for employees
generally, including non-executive officers, if the risks arising from
those policies could have a material effect on the company. That idea
is similar to the so-called “Katie Couric Rule” proposed in the last
batch of executive pay reforms passed in 2006, although the Couric rule
itself was widely panned and omitted from the final rule reforms.

Other proposed amendments:

• 
  

  
  Results of a shareholder vote would be disclosed within four business
  days after the meeting when the vote was held, and disclosure would be
  made in a new line item on Form 8-K rather than in a Form 10-Q or Form
  10-K.
  

  
  

• 
  

  Stock and option awards would still be disclosed in
  the Summary Compensation and Director Compensation Tables, but they
  would be stated according to the fair value of awards on the dates they
  were granted according to Financial Accounting Standard No. 123R, Equity-based Compensation. Current rules require disclosure of the dollar amount recognized on financial statements for that fiscal year.

  
  

• 
  

  
  For every sitting director or nominee, companies would need to disclose
  that person’s experience, qualifications, attributes, or skills that
  qualify him or her to serve as a director and committee member, and any
  public-company directorships held during the past five years (rather
  than just currently held directorships).

  
  

• 
  

  
  Companies would need to provide enhanced disclosure of their leadership
  structure, including a discussion of why that structure works best for
  the company, whether and why the company has (or has not) separated its
  CEO and chairman roles, and whether the company has a lead independent
  director.

  
  

• 
  

  
  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.

  
  

Compensation consultants would also get even more scrutiny. Companies
would need to provide more detail about the fees and services such
consultants provide—especially any other services beyond the standard
help in creating executive pay packages—and more information about
whether management recommended hiring the consultant, and whether the
board’s compensation committee approved using the consultant for any
additional services.

The SEC also proposed rules to mandate a shareholder advisory vote on
executive pay packages for all companies receiving government bailout
funds under the TARP program. This is largely a pro forma bit of
rulemaking, since the Emergency Economic Stabilization Act passed in
2008 already requires such say-on-pay votes from TARP recipients. The
SEC’s proposed rule simply requires the recipients to say in their
proxy statements that they are allowing the say-on-pay vote as required
under the ESSA law.

The SEC’s proposals for TARP recipients have
already been posted on the Commission’s Website (possibly a new speed
record for the agency) but texts of the other proposed amendments have
not yet been published. Comments on all proposals will be due 60 days
after publication in the Federal Register, and the SEC is likely to take a final vote on them sometime this fall.

The SEC also is already debating a companion
reform to give shareholders limited rights to place their nominations
for director in the company proxy statement. That proposal is currently
out for public comment until Aug. 17.

Broker-Dealer Votes, Farewell

The only concrete action taken last week was
final approval of a rule to ban broker-dealers from voting in director
elections unless their clients provide specific voting instructions.
Shareholder activists have long complained that such “broker votes”
were essentially a thumb on the scale in favor of corporate
managements, since most shareholders don’t provide instructions and
most broker-dealers then vote as management suggests.

Last week’s vote specifically amends New York
Stock Exchange Rule 452, which governs broker-dealer voting.
Broker-dealers had already been banned from voting in contested
director elections; the rule change expands that to prohibit the
practice in uncontested elections as well. The rule change will be

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