CFOs & The Comp Rule; Proxy Access; More

CFOs are the latest group to get an earful from the Securities and Exchange Commission’s head of Corporation Finance on how the agency’s new compensation disclosure rules will affect them, along with some specific actions to take.

Last month, division director John White shared his views on the new rules with corporate directors and attorneys in remarks at two separate Practising Law Institute conferences. This month, in a speech to members of the CFO Executive Board, White spoke on how the rules will touch CFOs and their colleagues in the executive suite.

He detailed three instances where CFOs should be involved with the new rules: in the substance of company disclosure, particularly the new Compensation Discussion & Analysis; in refining and adjusting disclosure controls and procedures; and in the new Compensation Committee Report.

Under the new rules, which apply to the next proxy statement for most businesses, companies have to include a new principles-based CD&A section explaining their policies and decisions related to executive compensation, which will be deemed “filed” and incorporated into annual reports on Form 10-K.

“I hope you become involved and take a leadership role in this new and critically important disclosure,” White said. “In this compensation world which is often dominated by lawyers and compensation specialists,” White said CFOs “bring a different perspective,” since they’re familiar with the Management Discussion & Analysis and the principles-based theme from the accounting world.

Since the CD&A is a filed company disclosure, and consequently covered by the required Section 302 certifications of Sarbanes-Oxley, “You each are personally on the hook [through your certifications] for what it says,” White said.

“This is his call to arms for CFOs to make sure they get involved with the disclosure and controls processes that will now be required for preparing the CD&A,” says Grace Hinchman, senior vice president of public policy for Financial Executives International. “He’s trying to get the word out that the accountability threshold is different than it has been before. We’re trying to get that same message out to our members.”

White said CFOs should “especially care about disclosure controls and procedures,” since they provide much of the support CFOs need in making their required certifications, and CFOs have potential criminal liability under their Section 906 certifications. White also added that the Section 302 certification specifically speaks to responsibility for disclosure controls and procedures and to CFOs and certifying officers having evaluated and disclosed conclusions about them in their company’s public filing. As he summed it up, “You cannot hide your head in the sand on this one.”

“I would urge you all … to be actively involved in those [disclosure controls and procedures] updates and make sure you’re satisfied with how they’ve been planned and how they’re progressing,” he said. “Make sure your team is thinking outside the box.” Because of the new requirements, he said, companies may need to include more people in the disclosure process than in the past, and may need to set up new processes for gathering, compiling, and analyzing information even before making disclosure determinations.

Lastly, while the new Compensation Committee Report will appear over the names of the committee members and will be furnished rather than filed (and so not covered by Section 302 certifications), he said the report should help CFOs with “the background and comfort” needed in making their certifications. CFOs use that committee report as “an important part of your process (your controls) of getting comfortable with the whole of your company’s disclosure,” he noted.

SEC Delays Action On Proxy Access Until Dec.

December apparently will be a busy month for rulemaking. The SEC has delayed its original plans to tackle proxy-access issues this week until Dec. 13, and will address several other issues at the same time.

On the agenda are recommendations on long-awaited guidance to help corporations understand how they should comply with the internal controls testing under Section 404 of Sarbanes-Oxley, and final rules on making proxy materials available via the Internet. And most pressing: proposed revisions to the SEC’s rules on using the proxy statement to nominate board directors under Securities Exchange Act Rule 14a-8.

The SEC originally proposed a rule in 2003 that would have given shareholders more power to put their nominees for director in corporate proxy statements—an idea detested by much of Corporate America, which lobbied furiously, and successfully, to kill the idea. But a federal appeals court decided last month that shareholder groups can at least submit proposals to loosen up access to the proxy statement, sowing confusion over how Rule 14a-8 should be interpreted and opening the door to proxy fights next spring. Following that court decision, the SEC said it will propose new guidance to clarify the proxy-access process.

SEC Seeks Comment On NYSE’s Proposed Treasury-Share Rule

The SEC is seeking comment on amendments to a proposed New York Stock Exchange rule change that would eliminate its controversial treasury-share exception, a provision often criticized because it potentially allows companies to store up large reserves of stock against a future issuance of shares in transactions that could significantly dilute existing shareholders without their approval.

As Compliance Week reported previously, the NYSE’s self-regulatory arm voted in April to abolish the exception after a bitter fight between Sovereign Bancorp and its largest shareholder, Relational Investments. Sovereign had sough a merger with an overseas bank using the treasury-share exception, a move Relational opposed. The NYSE first filed the rule proposal to eliminate the exception in May.

The rule is written so that a provision under Section 312.03 of the NYSE’s Listed Company Manual requires companies to get shareholder approval before issuing stock in certain situations or in significantly large amounts, including issuance of more than 20 percent of the current outstanding shares in any transaction other than a public offering or “bona fide” private financing.

But the rule historically hadn’t been applied to a reissuance of shares once issued, but then reacquired by the company. The NYSE had taken the view that once listed, shares remain listed even if they’re repurchased by the company and taken back into “treasury.” So, when treasury shares are reissued, the NYSE doesn’t require that they be “relisted,” and the provision requiring shareholder approval isn’t triggered.

The NYSE proposed a limited transition period for companies that execute a binding contract with respect to the issuance of common stock prior to the date that’s five business days after the date that the SEC publishes notice of the filing in the Federal Register.

Comments are due 21 days after publication of the SEC notice in the Register.