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What Ever Happened to That SEC Proposal?

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June 03, 2021 | Barbara Baksa

What Ever Happened to That SEC Proposal?

The SEC has a number of pending rulemaking proposals that relate to stock compensation, some of which are nearly six years old. Here’s an update on where things stand.

Pay-for-Performance Disclosures

This was one of several compensation-related rulemaking proposals required under the Dodd-Frank Act. You remember Dodd-Frank, right? It brought us Say-on-Pay, the CEO pay ratio disclosure, and the hedging policies disclosure. Dodd-Frank also directs the SEC to promulgate rules requiring public companies to disclose how NEO pay compares to company performance.

The SEC issued proposed rules in April of 2015, nearly five years after Dodd-Frank was signed into law. The proposed disclosure would have required companies to compare, in tabular format, total shareholder return to NEO realized pay. The proposed disclosure itself seems fairly straightforward, but comments on the proposal criticized it for being too prescriptive and inflexible. For example, some commenters noted that TSR is not the only reasonable method by which to measure performance.

The SEC’s progress on these rules seems to have stalled out with the change in administrations after the 2016 election. With a Democratic administration now in place and a new SEC chair, however, the SEC may take these rules up again.

Compensation Clawbacks

Another long-neglected requirement of the Dodd-Frank Act, this proposal would direct US exchanges to require listed companies that have had to restate their financials to recover incentive-based compensation paid to executive officers that exceeded what would have been paid pursuant to the restated financials.

This sounds reasonable and simple enough, but the devil is in the details—which, in this case, proved to be quite complicated and problematic. For example, the proposed rules would have applied to payments tied to TSR and would have required companies to estimate the effect of the restatement on their stock price.

Just as with the pay-for-performance disclosures, the SEC issued proposed rules in 2015 but has not yet issued final rules. Perhaps we will see some action on them under the Biden administration.

Back for More Rulemaking: Proxy Advisor Rules

As noted in the NASPP webcast “What’s Next for Equity Compensation in 2021,” last summer the SEC finalized rules governing proxy advisors. These rules require proxy advisors to:

  • Disclose conflicts of interest that are material to their objectivity with respect to the companies they are advising on, such as a situation in which they provide consulting services to companies and advise investors on those same companies.
  • Ensure that companies subject to their advice have access to that advice before it is disseminated to the proxy advisor’s investor clients.
  • Provide a mechanism by which their investor clients can be made aware of any written statements made by companies subject to their advice in response to said advice.

All of the above seems reasonable to me, but the SEC is now rethinking their decision. As noted by Liz Dunshee in TheCorporateCounsel.net Blog (“Proxy Advisors: SEC Won’t Enforce Last Year’s Rules, Pending Possible Reversal”), the SEC has announced that it is considering whether to amend last summer’s rules. Moreover, the SEC staff won’t recommend enforcement action to the Commission while the SEC is contemplating the rules.

More Recent Proposals

Loyal blog readers will recall that the SEC recently proposed rule changes for Form S-8, Rule 701, and Forms 144, 4, and 5. The comment periods for these proposals closed just this spring (see the NASPP’s comment letter on the Form S-8 and Rule 701 proposals). I expect that the SEC won’t issue final rules until next year, at the earliest.

- Barbara

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