Back to the Future: SEC Proxy Disclosure Reform (Again)
September 19, 2014
By Bob Romanchek and Tony Meyer, Meridian Compensation Partners
In a speech at the 41st Annual Securities Regulation Institute on January 27, 2014, Securities and Exchange Commission (“SEC”) Chair Mary Jo White stated that the SEC is reconsidering proxy disclosure requirements and is seeking comments from the public.
Specifically, Chair White stated that “we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.” If this statement instills a sense of déjà vu, do not be alarmed. In fact, the SEC has periodically proposed changes to proxy disclosure requirements since the first rules went into effect in 1938. Yet, relatively few changes have been made.
History of Proxy Disclosure Requirements
The first disclosure requirements were implemented as a part of Schedule A of the Securities Act of 1933 and Section 12(b) of the Securities Exchange Act of 1934. These Acts listed the items required, but did not state the format in which they were to be depicted. Further, the Acts only applied to registration statements.
The SEC promulgated its first proxy disclosure requirements in 1938 as a part of SEC Release No. 34-1823. Since the enactment of SEC Release No. 34-1823, the SEC has “on a number of occasions explored the best methods for communicating clear, concise, and meaningful information about executive and director compensation and relationships with the company” (SEC Release No. 33-8732A). These format changes have centered on determining whether narrative format, tabular format, or a combination of the two is preferable to convey information to potential investors in a manner that is useful and easy to understand.
Originally, SEC-regulated companies were allowed the discretion to determine the format that was best for their disclosures (SEC Release No. 34-1823). However, in 1942, the SEC began to favor a tabular method (SEC Release No. 34-4775). In 1952, a separate table was required for pension and deferred compensation (SEC Release No. 34-4775). By 1978, the tabular format requirement had been expanded to cover all forms of compensation (Uniform and Integrated Reporting Requirements: Management Remuneration, SEC Release No. 33-6003).
The SEC reversed directions in 1983, requiring mostly narrative format disclosures and limiting tabular disclosure to cash compensation (Disclosure of Executive Compensation, SEC Release No. 33-6486). Then, in 1992, the SEC reverted back to an almost strictly tabular format with limited narrative disclosure (Executive Compensation Disclosure, SEC Release No. 33-6962). Finally, in 2006, after years of vacillating between tabular and narrative disclosure requirements, the SEC adopted the current regulations which require disclosures in both formats (Executive Compensation and Related Person Disclosure, SEC Release 33-8732A). The current rules require a narrative overview disclosure (Compensation Discussion and Analysis), along with three years of pay shown in a tabular format (Summary Compensation Table).
What New Proxy Disclosure Requirements Can Be Expected?
In a speech at the 2013 National Association of Corporate Directors Leadership Conference on October 15, 2013, Chair White shed more light on her concerns about the current proxy disclosure requirements. She used the term “information overload” to describe her concerns that “ever increasing amounts of disclosure” can make it “difficult for an investor to wade through the volume of information she receives to ferret out the information that is most relevant.” Chair White specifically expressed concern that executive compensation disclosures have expanded to be, in some cases, “more than forty detailed pages.” Not only are the disclosures becoming lengthy, but Chair White believes they are often repetitive. In a speech at the 41st Annual Securities Regulation Institute on January 27, 2014, Securities and Exchange Commission (“SEC”) Chair Mary Jo White stated that the SEC is requirements and is seeking comments from the public.
Chair White called out certain proxy requirements as potentially being onerous, including “specific details about large shareholders” (additional guidance on this topic was recently released on June 30, 2014 in a SEC Staff Legal Bulletin) and “descriptions of the background and experience of the officers and directors of the company, how much they are paid and why.” Additionally, certain disclosures were identified as possibly being outdated, now that investors can retrieve up-to-date data through the internet at the click of a button. However, most of those potentially antiquated disclosures appear in Form 10-K filings. Related to the new channels in which shareholders receive information, Chair White voiced concern that investors may not be getting data quickly enough. She was referring to the time it takes to file Form 4s or Form 8-Ks after an event, although it is apparent that the timing of all SEC required filings is a concern.
Chair White’s words raise the question of what reforms to the proxy disclosure rules, if any, can be expected? Unfortunately, the answer is not readily apparent and will likely be impacted by public response. That said, a potential outcome could be less overall disclosure. Chief White wants to simplify both to make the disclosure process easier on companies and to make data more easily retrievable for investors. Ironically, those words come at a time when additional Dodd-Frank mandated disclosures regarding clawbacks, pay for performance, hedging policies and the CEO pay ratio are pending. Nonetheless, the section that has added the most volume to proxy statements is the Compensation Discussion and Analysis narrative. Therefore, that section may be the most ripe for reconfiguration.
Another potential outcome of the SEC review is a streamlined process for electronic reporting and retrieval. A key tenet of Chair White’s speech is that the SEC is adapting to a market that has recently experienced rapid technological advancements. The SEC is using its own new technologies to review mass amounts oftransaction data quickly, devising policies to ensure the safety of technologies used in the market and developing regulations for new financial products. Therefore, it seems possible that the SEC may attempt to increase the efficiency of the reporting process, and thus the speed with which data reaches the market.
A final potential outcome is that nothing will come from the SEC review. In 2010, the SEC issued Concept Release on the U.S. Proxy System (SEC Release No. 34-62495). The concept release solicited public comment on the U.S. proxy voting system. The SEC review covered many different facets including the proxy distribution process, the accuracy and efficiency of the voting process, shareholder participation and the role of proxy advisory firms. The SEC received hundreds of responses from a broad range of public sources. Yet, to date, the SEC has not made any alterations to the proxy voting system. Similarly, a distinct possibility exists that no changes will be implemented from the SEC review of the proxy disclosure process.
Could the first major changes to the proxy disclosure rules since 2006 be coming soon? Possibly, although history reminds us not to hold our breath. Changes are seldom made. Nonetheless, the solicitation of comments allows the public to be heard and we encourage you to take advantage of that opportunity.
About the Authors
Bob Romanchek is a partner and senior consultant and Tony Meyer is a consultant at the executive compensation consulting firm Meridian Compensation Partners, LLC in Lake Forest, IL.