The Securities and Exchange Commission may be swamped with rulemaking chores thanks to the Dodd-Frank Act, but companies shouldn’t think that means they’ll get a pass during SEC staff reviews of corporate filings this winter.
That was the message from Meredith Cross, director of the SEC’s Division of Corporation Finance, during a recent update of the division’s activities at the Practising Law Institute’s Securities Regulation Conference in New York. With the Sarbanes-Oxley mandate to review the filings of reporting companies at least every three years “mastered,” Cross said the staff is taking a “fresh look” at its review program.
Cross
She said the Corporation Finance Division is now considering other types of legal reviews, such as governance or risk-related analyses. “We’re also looking at our reviews of smaller companies to see if we’re doing those as effectively as we could … or whether we should make any changes to those reviews,” Cross added.
The division also plans to expand its continuous reviews of the periodic reports filed by some of the largest bank holding companies and other large financial institutions to other industries. The staff has been conducting real-time reviews of the largest financial services companies since 2008.
The Corporation Finance Division is beefing up corporate governance capabilities in anticipation of a busy and contentious proxy season. A taskforce of 20 lawyers has been marshaled to handle no-action requests by companies on shareholder proposals. One issue expected to emerge again in 2011: proof of ownership required by investors to file proxy resolutions. That issue drew fresh scrutiny in March, when Apache Corp. went to court and won the right to exclude a proposal filed by activist John Chevedden. Cross emphasized that the staff is “not inclined to grant no-action requests based on technical proof of ownership arguments.”
Rulemaking: What’s Coming
Certainly, Dodd-Frank rulemaking will dominate the SEC’s agenda for the coming months, since the law requires many of those rules to be issued by July 2011. “It’s been a very busy year and it’s getting busier,” Cross said of the SEC’s rulemaking plans.
New rules for shareholder say-on-pay votes and whistleblower protections and bounties are already out for comment, among others. The staff is also working on a Dodd-Frank mandate to revise its rules governing asset-backed securities, says Paula Dubberly, Corporation Finance’s deputy director for policy and capital markets.
Next up are rules for independence standards for boards’ compensation committee members, as well as the use of outside compensation consultants. Some of the most contentious requirements, such as disclosure of the ratio of CEO pay to the median total compensation of all employees, pay-for-performance disclosure, and “clawback” policies, won’t be proposed until next summer. According to Cross, the SEC is already seeking comment on those and other Dodd-Frank provisions in advance of its rulemaking.
“It’s been a very busy year, and it’s getting busier.”
—Meredith Cross,
Director,
SEC Division of Corporation Finance
While Dodd-Frank will dominate its agenda, the Corporation Finance Division has other items on its rulemaking schedule. For example, previous SEC proposals to amend proxy solicitation procedural rules “are still live,” Cross said.
Those changes were proposed in July 2009, along with changes to the SEC’s proxy disclosure rules, but weren’t included in the final rule adopted last December. One proposed amendment would allow dissidents to send unmarked copies of management’s proxy without triggering the proxy rules.
The Commission is also considering whether any further amendments are needed to the so-called “e-proxy” rules that allow companies to use notice-and-access to distribute their proxy materials to investors. The SEC adopted amendments to those rules in February to help reverse a drop in retail investor voting following their adoption.
The staff has already set up teams to work on issues related to the SEC’s proxy plumbing concept release. Comments on the release, which sought feedback on accuracy and transparency in the proxy-voting process, shareholder-issuer communications, and the relationship between voting power and economic interest, officially closed Oct. 20, although Cross noted that the SEC is still getting letters. “We’re determined to keep this one on track,” Cross said. “We’re looking at some discreet things we can move forward with even while we’re doing Dodd-Frank.”
DODD-FRANK ACCOMPLISHMENTS, PLANS
The following excerpt from the SEC Website discusses what the Commission has accomplished in terms of rulemaking under Dodd-Frank and what’s to be done in November:
Most Recent Accomplishments
Proposed Whistleblower Incentives and Protection Program: The Commission proposed rules to reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions. (Nov. 3, 2010) [§922]
Proposed anti-manipulation rule for security-based swaps: The Commission proposed a rule to help prevent fraud, manipulation, and deception in connection with security-based swaps. (Nov 3., 2010) [§763]
Solicited Public Comment on transnational securities fraud: The Commission has solicited public comment on issues related to a study to determine the extent to which private rights of action under the antifraud provisions of the Securities Exchange Act of 1934 should be extended to cover transnational securities fraud. (Oct. 25, 2010) [§929Y]
Proposed rules regarding shareholder votes on executive compensation, golden parachutes (Oct. 18, 2010) [§951]
Proposed rules regarding disclosure by institutional investment managers of votes on executive compensation (Oct. 18. 2010) [§951]
Proposed Rules to Mitigate Conflicts of Interest Involving Security-Based Swaps: The Commission proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading. (October 13, 2010) [§765]
Upcoming Activity—November 2010
Diversity
§342: Complete process for establishing new Office of Women and Minority Inclusion
Oversight of Investment Advisers
§§407 and 408: Propose rules implementing the exemptions from registration for advisers to venture capital firms and for certain advisers to private funds
§410: Propose rules and changes to forms to implement the transition of mid-sized investment advisers (between $25 and $100 million in assets under management) from SEC to State regulation, as provided in the Act
Derivatives
§712: Propose rules, jointly with the CFTC, further defining key terms used in the Act
§§763 and 766: Propose rules on trade reporting, data elements, and real-time public reporting for security-based swaps
§763: Propose rules regarding the registration and regulation of security-based swap data repositories
Investor Advocate
§915: Complete process for establishing new Office of the Investor Advocate
Enforcement
§924: Complete process for establishing new Whistleblower Office; appoint head of Office
Credit Ratings
§932: Complete process for establishing new Office of Credit Ratings
Administrative/Internal
§963: Public report on management’s assessment of the effectiveness of the agency’s internal controls over financial reporting
Municipal Securities
§979: Complete process for establishing new Office of Municipal Securities
Source
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align="left">SEC: Implementing the Dodd-Frank Act.
The most controversial issue addressed in the release, said Cross, whether the SEC should conduct more oversight of proxy advisory firms such as Institutional Shareholder Services and Glass Lewis & Co. Other contentious items included the fees charged to issuers by intermediaries for forwarding proxy materials to shareholders, and advance voting instructions, also known as client-directed voting. That concept, which would enable beneficial owners to give brokers their voting decisions in advance, has a lot of support from issuers, but raises some concerns among investors, she said.
A Call for Better Disclosure
Cross also offered some thoughts on areas where companies should focus their attention when reviewing proxy disclosures for the upcoming season.
She insisted that companies could do a better job with director qualification disclosure, which is supposed to explain to investors why the company chose its particular directors for the board. Rather than generic or blanket statements tacked on to the end of their biographies, Cross said that disclosure should discuss why a particular director is a good fit for the company. “It’s an important opportunity to help shareholders understand why you have the directors you have on your board,” she said. “I encourage companies to look at that disclosure and keep improving it year over year.”
Goodman
According to Amy Goodman, a partner at law firm Gibson Dunn & Crutcher, some companies struggled with the disclosure of director qualifications in 2010 because it was new. But she also said some companies did a good job tying the information in their director biographies to their relevant experience, including Pfizer, UPS, and Motorola. She also suggests that issuers look at the National Association of Corporate Directors Template for Disclosure of Director Skills and Attributes for guidance.
Companies may also need to improve their proxy disclosure related to risks stemming from their compensation programs, Cross warned. Under SEC rules, companies have to assess whether risks arising from their pay programs are “reasonably likely to have a material adverse effect” and, if so, make disclosures about how they manage those risks.
Cross said the staff issued a lot of comments last proxy season asking companies for more information about their risk assessment process. “That’s not a one-time exercise,” she said. “It’s something people need to think about each year.”
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