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Article | Executive Pay Memo North America

SEC scorecard of regulatory goals issued

Governance Advisory Services |Executive Compensation
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By Steven Seelig and Gary Chase | June 29, 2021

Most items won’t be finalized this year, so there is time to prepare

Readers of a certain age will recall the leather-lunged fella at the ballpark entrance touting: “Scorecard! Scorecard! One dollar! You can’t tell the players without a scorecard.” Of course, that was before the days of electronic scoreboards and high-definition TVs in the concourse.

The Securities and Exchange Commission (SEC) is still formal that way. Earlier in June, the Democratic-controlled SEC issued a beefed-up Agency Rule List – Spring 2021 that gives us a better sense of its priorities for the coming year. We have highlighted those items that could be relevant to those working in the human resources and executive compensation space, if the SEC moves forward; note, there are many items outside of that realm we do not mention here.

Most of the items on this list will require a formal SEC rulemaking process, which means it will take longer before final regulations could be issued, with interim steps of proposed regulations and a typical 60-day public comment period. New stock exchange listing requirements take longer, as the listing exchanges must propose changes to their rules that are then subject to SEC approval before going into effect. A few items on the list have been published as proposed regulations for which comments have been received, so it would only take the approval of final regulations to make these rules effective.

A. Finalizing Dodd-Frank Rules

It is hard to believe it has been 12 years since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was enacted, and we are still awaiting regulations from the SEC to implement some of its provisions. The Division of Corporate Finance (Corp Fin) is considering items 1 – 3 below as reproposed regulations, so those will have a longer time frame until finalization.

  1. Clawbacks of erroneously awarded compensation: Regulations to implement section 954 of the Dodd-Frank Act to require listing exchanges to mandate that companies disclose and enforce a policy to claw back incentive-based compensation in certain circumstances, including upon a material restatement of company financials.
  2. Enhanced reporting by institutional investors of “say on pay” and other proxy votes: Regulations to implement section 951 of the Dodd-Frank Act to enhance the information reported on Form N-PX detailing how institutional investment managers voted on any shareholder vote on executive compensation or golden parachutes.
  3. Limits on financial institution incentive compensation that promotes inappropriate risk taking: Regulations and guidelines from the SEC together with the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency and the National Credit Union Administration (the agencies), to implement section 956 of the Dodd-Frank Act that apply only to covered financial institution ($1 billion or more in total assets). These reproposed regulations and guidelines would prohibit incentive-based payment arrangements, or any feature of any such arrangement, that the agencies determine encourage inappropriate risks by a covered financial institution by providing excessive compensation or that could lead to a material financial loss for the institution. Because this is a multi-agency effort, getting all parties to agree to uniform rules may take longer than if the SEC must act on its own.
  4. Pay versus performance disclosure: This would be a finalization of previously proposed regulations to implement section 953(a) of the Dodd-Frank Act, which would require proxy disclosure of the relationship between executive compensation actually paid and the financial performance of the registrant. Because the next step is finalization of a prior proposal, it would appear the SEC won’t make significant changes to the original proposed regulations before they are finalized, which could come before the end of 2021, effective for 2022 calendar-year proxies. There remain a number of questions about the proposed approach, which we detailed in our comment letter to the SEC back in 2015.

B. Initiatives to undo Trump-era SEC actions

The following items would seek to undo Trump-era SEC actions:

  1. Human capital management disclosure: Corp Fin is considering recommending that the commission propose rule amendments to enhance registrant disclosures regarding human capital management. Companies already were required to provide human capital disclosures when material to an understanding of the business for 10-Ks or 10-Qs filed on or after November 9, 2020, under a Trump-era rule. The SEC appears poised to adopt a more directive rule it believes would necessitate a new rule proposal rather than an amendment. See speech by Commissioner Allison Herren Lee for a detailed discussion of why she thinks the materiality standard needs to be revisited.
  2. Proxy advisor voting advice: The division is considering recommending that the commission propose rule amendments governing proxy voting advice. The SEC recently announced it would not enforce the Trump-era proxy advisor rules as it explores alternative approaches.

C. New initiatives

The following are items Corp Fin is considering as recommendations to the commission, including additional disclosure requirements for registrants and guidance to investment companies and investment advisors on environmental, social and governance (ESG) factors.

  1. Climate change disclosure: Proposed rule amendments to enhance registrant disclosures about registrants’ climate-related risks and opportunities. The SEC has already begun sifting through public comments on the best approaches to provide climate change information that would adequately inform investors and other market participants: Commissioner Lee stated the SEC would issue its proposal before year-end.
  2. ESG requirements for investment companies and investment advisors: Proposed requirements for investment companies and investment advisors related to ESG factors, including ESG claims and related disclosures. It appears the rules governing investment companies and advisors would tie to the disclosures the SEC may mandate for registrants on ESG topics. Presumably, those rules would then provide structure on how investment companies and advisors address these issues for clients and could also be required as issues to be considered when voting on proxies and for directors.
  3. Corporate board diversity: Proposed rule amendments could enhance registrant disclosures about the diversity of board members and nominees.
  4. Cybersecurity risk governance: Proposed rule amendments could enhance registrant disclosures regarding cybersecurity risk governance.
  5. Disclosure regarding beneficial ownership and swaps: Proposed amendments could enhance market transparency, including disclosure related to beneficial ownership or interests in security-based swaps. The current disclosure regime was last updated in 2011.
  6. Share repurchase disclosure modernization: Proposed amendments to modernize disclosure of share repurchases, including Item 703 of Regulation S-K.
  7. Universal proxy access: Final regulations that adopt amendments to the proxy rules to allow a shareholder voting by proxy to choose among all duly nominated candidates in a contested election of directors. On April 16, 2021, the SEC reopened the comment period on the original proposal that was put forth back in 2016.

We will keep you posted as these items move along the regulatory track.

Authors

Senior Director, Executive Compensation (Arlington)

Director, Retirement and Executive Compensation

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