The Securities and Exchange Commission staff have begun their promised review of 2007 proxy filings, to see whether companies’ Compensation Discussion & Analysis statements measure up to the new compensation disclosure rules that went into effect this year.
That’s according to the SEC Regulations Committee of the Center for Audit Quality, which met with the SEC staff on July 10. According to a CAQ summary of that meeting, while the staff has not issued any comment letters on the proxy reviews yet, they have issued comment letters on the executive compensation disclosures in transactional filings.
While registrants have generally been doing a good job in adhering to the new rules, the alert reported, the SEC staff said a number of recurring observations have been noted in comment letters:
The CD&A could provide better analysis of executive compensation decisions;
If registrants have an adequate basis for omitting incentive plan performance targets, they should provide alternate disclosure regarding the relative likelihood that those performance targets will be met;
Descriptions of incentive plan performance targets should be specific;
Regardless of the terminology used, “benchmarking” executive compensation should be accompanied by an identification of the other companies that were used for benchmarking purposes;
In disclosing executive compensation decisions, registrants should provide a clear description about the respective roles and responsibilities of the chief executive, compensation consultants, and the compensation committee in the decision-making process.
The report notes that the SEC staff is considering what guidance, if any, to issue addressing the results of the compliance reviews. A CAQ spokesman declined comment, deferring to the SEC. The Commission had no further comment.
Cox
A report on the staff reviews is expected in the fall. SEC Chairman Christopher Cox has already complained publicly that many companies are filing CD&As too long and complicated for the average investor to understand, undercutting the spirit of what the new disclosure rules are supposed to achieve.
Speaking to attendees at Compliance Week’s annual conference in June, Corporation Finance Director John White said the SEC may issue more interpretive guidance related to those rules, but additional rulemaking, if any, isn’t expected this year. White said most of the staff comments will be geared toward future compliance, although the SEC may ask companies to amend their 10-Ks in certain cases, for instance, if the staff concludes an issuer improperly withheld information about its performance targets.
SEC Updates Auditor Independence FAQs
The Office of the Chief Accountant at the SEC has posted new guidance for issuers on the application of the Commission’s auditor independence rules.
Eight new Frequently Asked Questions were added to the SEC Web site Aug. 6, to address questions on financial relationships; prohibited and non-audit services; independence issues related to Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities; audit committee pre-approvals; and fee disclosures. The staff also updated Question 2 of the section on the “cooling off” period, which illuminates how those rules apply for a non-public audit client that is planning to file an initial public offering.
Among other things, the new Question 7 in the section on prohibited and non-audit services clarifies that when a company hires a new auditing firm that had previously performed non-audit services for the company, the new auditor’s independence wouldn’t be impaired so long as the services relate solely to the prior period audited by the predecessor auditor and were performed before the new auditor was engaged to audit the current audit period.
Question 8 of the same section clarifies that an accountant isn’t independent if, at any point during the audit and professional engagement period, the accountant provided translation services to SEC audit clients based in foreign jurisdictions or U.S. clients with foreign operations.
Question 5 under “Other Matters” clarifies that auditors of the parent financial statements must be independent of entities consolidated solely due to the application of FIN 46R. The guidance notes that registrants may wish to consult with SEC staff in situations where an enterprise believes it does not “control” an entity that it is required to consolidate under FIN 46R.
Question 6 of the same section clarifies that the audit committee of a plan sponsor of an employee benefit plan doesn’t have to pre-approve the audit of the plan. However, the staff notes that audit committees aren’t precluded from establishing policies to do so.
Question 7 of the “Other Matters” section clarifies that audit committees are required to pre-approve services provided by the issuer’s principal accountant to variable interest entities that are consolidated under FIN 46R.
The Conference Board Gives New Guidance for Directors
Thanks to a flurry of rulemaking, an increasingly tough legal environment, and increased pressure from shareholder activists in recent years, being a director isn’t the clubby job it once was.
The Conference Board has decided to step into that breach, publishing new guidance for directors on carrying out their duties, derived from empirical research and its Directors’ Institute programs.
Tonello
“The haste and complexity of some rulemaking has created a strong need for interpretation and guidance in many areas,” says Matteo Tonello, a senior research associate at The Conference Board and co-author of the Corporate Governance Handbook 2007: Legal Standards and Board Practices.
The 200-page guide includes an overview of directors’ duties and board practices, as well as guidance for specific committees. Topics addressed include the nominee selection and election process; diversification of professional expertise and background; delegation of authority to board committees; conduct of board meetings; adoption of governance guidelines; succession planning; engagement of outside compensation consultants; disclosure procedure and internal control oversight; strategy design and risk governance, as well as issues to consider to ensure appropriate D&O liability insurance coverage.
The 11 accompanying appendices include samples of corporate governance principles, board committee charters, board assessment questionnaires, guidelines for the selection of independent compensation consultants, and a table of corporate governance policies adopted by major U.S. shareholder groups.
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