CURRENT MONTH (November 2023)
By Carlos E. Juarez, Mayer Brown LLP
On November 22, 2023, the Securities and Exchange Commission (SEC) announced that it issued an order to postpone the effective date of its final share repurchase disclosure rule (the “Share Repurchase Final Rule”). The Share Repurchase Final Rule, discussed further at this link, requires quantitative and qualitative disclosure of share repurchases on a quarterly or semi-annual basis, depending on the type of issuer. The Share Repurchase Final Rule also revised and expanded the existing periodic disclosure requirements for share repurchases.
The Commission’s actions are in response to the U.S. Court of Appeals for the Fifth Circuit’s opinion in Chamber of Com. of the USA v. SEC, in which the petitioners challenged the Share Repurchase Final Rule. The Fifth Circuit granted the petition for review, calling the adoption of the Share Repurchase Final Rule “arbitrary and capricious,” and compelled the Commission to correct the defects the court identified in the rule by November 30, 2023. On November 26, 2023, the Fifth Circuit denied the SEC’s request for an extension.
PCAOB Updates Standard-Setting, Research, and Rulemaking Agenda; Approves 2024 Budget
By Thomas W. White, Retired Partner, WilmerHale
The Public Company Accounting Oversight Board (PCAOB) published an updated Standard-Setting, Research, and Rulemaking Agenda in November. The agenda continues to reflect the Board’s ambitious efforts to modernize auditing standards and address other issues. Noteworthy items include:
- 2023 Standard-Setting: The Board has completed auditing standards on use of other auditors (approved by the SEC) and audit confirmations (SEC approval pending). It has four proposed standards pending—quality control, noncompliance with laws and regulations, general responsibilities of the auditor, and audit procedures involving technology-assisted analysis.
- 2024 Standard–Setting: The four pending standards are targeted for approval in 2024. The Board also projects proposing four more standards in 2024. Most notably, these include a revised “going concern” standard and a standard on firm and engagement performance metrics. The Board is also considering other standard-setting projects but has not specified target dates. These include possible revision of existing standards on consideration of fraud and of ethics and independence standards.
- Research Projects: Notably, the Board added a research project on critical audit matters (CAMs) reported by auditors in their audit reports. This appears to respond to comments from the Board’s Investor Advisory Group about the usefulness of CAMs and whether the current standard and guidance should be modified.
- Rulemaking: The Board has proposed a rule modification to change the legal standard for contributory liability for others’ legal violations, which is pending. It contemplates proposing amendments to four PCAOB rules in 2023 and 2024, including changes to firm reporting requirements.
The Board also approved its 2024 budget. The budget is $384.7 million, an 11 percent increase over 2023. Board Member Christina Ho expressed concern about the size of the budget increase but voted to approve the budget. The budget is subject to approval by the Securities and Exchange Commission.
SEC Adopts Rules to Enhance Clearing Agency Governance and Address Conflicts of Interest
By Beau Raymond-Iaquinto, 2024 J.D. Candidate, University of St. Thomas School of Law
On November 16, 2023, the Securities and Exchange Commission (SEC) adopted rules aimed at bolstering the governance structure of clearing agencies, including efforts to promote board independence, consider the views of relevant stakeholders, and reduce the potential for conflicts of interest with respect to the board and senior management.
The cornerstone of these regulations lies in strengthening governance structures within clearing agencies, particularly as to conflicts of interest, pursuant to Section 765 of the Dodd-Frank Act. Recognizing the potential for conflicts of interest to undermine market stability, the SEC’s new rules set forth governance requirements with respect to board composition, independent directors, nominating committees, and risk management committees. New policies and procedures will also be required regarding conflicts of interest, managing risks from core service provider relationships, and a new board obligation to consider stakeholder viewpoints.
The adoption of these rules is poised to have far-reaching implications for the financial industry. Clearing agencies will need to adapt their governance structures, risk management protocols, and operational frameworks to align with the SEC’s new requirements. As SEC Chair Gary Gensler noted, the adoption of these rules “helps foster more resilient clearinghouses.”
Compliance with the new rules will be required twelve months after their publication in the Federal Register, except for the new independence requirements, which take effect twenty-four months after publication in the Federal Register.
SEC Releases New and Revised C&DIs on Pay Versus Performance Disclosures
On November 21, 2023, the staff (“Staff”) of the Securities and Exchange Commission’s Division of Corporation Finance released eight new Compliance and Disclosure Interpretations (“C&DIs”) and revised two C&DIs to clarify the pay versus performance (“PVP”) disclosure requirements in Item 402(v) of Regulation S-K. The new C&DIs include clarifications on the reporting of a peer group under Regulation S-K Item 402(v)(2)(iv) and the requirements applicable to smaller reporting companies and emerging growth companies. The key takeaways are summarized below, drawing on the original text. Companies should read the full text of the C&DIs before preparing their PVP disclosures. A link to the full text of each C&DI is provided in the header of each summary.
Summary of New C&DIs
Some stock awards entitle the holder to receive dividends or dividend equivalents paid on the underlying shares prior to the vesting date. These awards should be included in the calculation of executive compensation actually paid if the dollar value of dividends or dividend equivalents paid are not reflected in the fair value of such awards. Item 402(v)(2)(iii)(C)(1)(vi) of Regulation S-K requires the calculation of executive compensation actually paid to include dividends or dividend equivalents paid that are not already reflected in the fair value of stock awards or included in another component of total compensation.
When identifying a total shareholder return peer group under Regulation S-K Item 402(v)(2)(iv), the registrant must use either the same index or issuers used by it to comply with Item 201(e)(1)(ii) or the companies it uses as a peer group under Regulation S-K Item 402(b). If a registrant uses more than one “published industry or line-of-business” index for Item 201(e)(1)(ii) purposes, the registrant may choose which index it uses for pay versus performance disclosure purposes. To provide clarity to investors, the registrant should include a footnote disclosing the index chosen. If the registrant chooses to use a different published industry or line-of-business index from that used by it for the immediately preceding fiscal year, it is required under Item 402(v)(2)(iv) to explain in a footnote the reason(s) for this change and compare the registrant’s cumulative total return with that of both the newly selected peer group and the peer group used in the immediately preceding fiscal year.
Item 402(v)(2)(iv) does not contemplate the use of a broad-based equity index as a peer group for purposes of the pay versus performance disclosure. If the registrant discloses in its Compensation Discussion & Analysis (“CD&A”) that it determines the vesting of performance-based equity awards based on relative total shareholder return (“TSR”) compared to a broad-based equity index, the registrant cannot use that broad-based index as its peer group for purposes of Item 402(v)(2)(iv).
Pursuant to Regulation S-K Item 402(v)(2)(iv), if the registrant’s peer group is not a published industry or line-of-business index, the identity of the issuers comprising the group must be disclosed in a footnote. The returns of each component issuer must be weighted according to the respective issuers’ stock market capitalization at the beginning of each period for which a return is indicated. For purposes of Item 402(v)(2)(iv), the weighting requirement is applicable only if the registrant is not using a published industry or line-of-business index pursuant to Item 201(e)(1)(ii).
If a registrant that uses a peer group other than a published industry or line-of-business index as its peer group under Regulation S-K Item 402(v)(2)(iv) adds or removes any of the companies in the peer group, the registrant is required to footnote the change(s) and compare its cumulative total shareholder return with that of both the updated peer group and the peer group used in the immediately preceding fiscal year. However, consistent with Regulation S-K C&DI Question 206.05, comparison of the registrant’s cumulative total return with that of both the newly selected peer group and the peer group used in the immediately preceding fiscal year is not required if (1) an entity is omitted solely because it is no longer in the line of business or industry, or (2) the changes in the composition of the index/peer group are the result of the application of pre-established objective criteria. In these two cases, a specific description of, and the bases for, the change must be disclosed, including the names of the companies deleted from the new index/peer group.
A smaller reporting company (“SRC”) with a December 31 fiscal year end provided scaled pay versus performance disclosure covering fiscal years 2021 and 2022 in its proxy statement filed in April 2023. It subsequently loses its SRC status based on its public float as of June 30, 2023. The registrant proposes to rely on General Instruction G(3) of Form 10-K to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into its 2023 Form 10-K from its definitive proxy or information statement to be filed not later than 120 days after its 2023 fiscal year end. The Staff will not object if a registrant that loses SRC status as of January 1, 2024, continues to include scaled disclosure under Regulation S-K Item 402(v)(8) in its definitive proxy or information statement filed not later than 120 days after its 2023 fiscal year end from which the registrant’s Form 10-K will forward incorporate the disclosure required by Part III of Form 10-K. The pay versus performance disclosure in such filing must cover fiscal years 2021, 2022, and 2023.
Unless the registrant regains SRC status in subsequent years, any other proxy or information statement in which Item 402(v) disclosure is required and that is filed after January 1, 2024, must include non-scaled pay versus performance disclosure. For example, in the registrant’s annual meeting proxy statement filed in 2025, it must include non-scaled pay versus performance disclosure for fiscal year 2024. A non-SRC is required to provide Item 402(v) disclosure covering five years; however, the Staff stated that it will not object if the registrant does not add disclosure for a year prior to the years included in the first filing in which it provided Item 402(v) disclosure. The registrant generally is not required to revise the disclosure for prior years (in this example, 2021, 2022, and 2023) to conform to non-SRC status in such filings. However, because peer group TSR is calculated on a cumulative basis, the registrant should include peer group TSR for each year included in the pay versus performance table, measured from the market close on the last trading day before the registrant’s earliest fiscal year in the table. In addition, the registrant should include its numerically quantifiable performance under the Company-Selected Measure for each fiscal year in the table. The entirety of the Item 402(v) disclosure provided for all fiscal years must be XBRL tagged in accordance with Item 402(v)(7).
A registrant that previously qualified as an emerging growth company (“EGC”) loses that status as of December 31, 2024. Such registrant is required to provide pay versus performance disclosure in any proxy or information statement filed after it loses its EGC status and may apply the transitional relief in Instruction 1 to Item 402(v).
Two (or more) individuals served as a registrant’s principal financial officer (“PFO”) during a single covered fiscal year included in the pay versus performance table and related disclosure under Regulation S-K Item 402(v). Each such individual is included in the Summary Compensation table as a named executive officer (“NEO”) pursuant to Item 402(a)(3)(ii). For purposes of the calculation of average compensation amounts for the NEOs other than the principal executive officer reported pursuant to Items 402(v)(2)(ii) and (iii), the registrant may not treat the PFOs as the equivalent of one NEO. Each NEO must be included individually in the calculation of average compensation amounts. In such cases, the registrant should consider including additional disclosure on the impact of the inclusion of such individuals on the calculation in order to provide clarity to investors.
Summary of Revised C&DIs
The Staff revised this C&DI to clarify how a registrant should present changes in its peer group across reporting years. A registrant provided the same list of companies as a peer group in its CD&A in each of 2020 and 2021, but it provided a different list of companies in its CD&A for 2022. The prior C&DI explained that such registrant providing initial PVP disclosure in its 2023 proxy statement for three years (as permitted by Instruction 1 to Item 402(v) of Regulation S-K) should present the peer group total shareholder return for each year in the table using the peer group disclosed in its CD&A for such year.
The Staff made the following two additions: (i) in the 2024 proxy statement, if such registrant uses the same peer group for 2023 as it used for 2022, the registrant should present its peer group total shareholder return for each of the years in the table using the 2023 peer group; and (ii) if such registrant changes the peer group in subsequent years, it must provide disclosure of the change in accordance with Regulation S-K Item 402(v)(2)(iv).
This C&DI stated that if retirement eligibility is the sole vesting condition for accelerated vesting under a stock and option award, this condition would be considered satisfied for purposes of PVP disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible.
The Staff revised this C&DI to clarify that if retirement eligibility is not the sole vesting condition, other substantive conditions must be considered in determining when an award has vested. The Staff added a sentence to clarify that such conditions would include, but not be limited to, a market condition as described in C&DI #128D.16 or a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period.
SEC Issues Proxy-Related C&DIs
By Laura D. Richman, Mayer Brown LLP
On November 17, 2023, the staff of the Securities and Exchange Commission (“SEC”) issued one revised and five new proxy-related compliance and disclosure interpretations (“C&DIs”). These C&DIs are summarized below, with links to the full text provided.
10 Calendar Days
Revised Question 126.03 clarifies the “10 calendar day” period in Rule 14a-6 between filing a preliminary proxy statement and the definitive proxy statement. As an example, this C&DI specifies that if a preliminary proxy statement is filed on or before 5:30 p.m. Eastern Time on Friday, October 20, 2023, then Sunday, October 29, 2023, would be day ten, allowing the company to send its definitive proxy statement to security holders starting at 12:01 a.m. on October 30, 2023. However, if the company files its preliminary proxy statement after 5:30 p.m. on Friday, October 20, 2023, the ten-day period does not start until the next business day, which would be Monday, October 23, 2023.
New Question 132.03 addresses Rule 14a-12, which permits solicitations before the furnishing of a proxy statement, provided that, among other things, written soliciting material includes the required participant information or a prominent legend advising shareholders where they can find that information. This C&DI specifies that general references in a legend to filings made or to be made by the soliciting party or participants do not sufficiently advise shareholders where they can obtain the required participant information. According to this C&DI, the legend should:
- clearly identify the specific filing(s) where participant information appears (including by filing date);
- clearly describe the specific locations of the participant information in such filings, whether by reference to the relevant section headings, captions or otherwise; and
- include active hyperlinks to the referenced filings, when possible.
New Question 139.07 notes that Rule 14a-19(e)(7) requires a universal proxy card to prominently disclose the treatment and effect of a proxy executed in a manner that grants authority to vote “for” the election of more nominees than the number of director seats up for election (an “overvoted proxy card”) or fewer nominees than the number of director seats up for election (an “undervoted proxy card”). This C&DI specifies that a soliciting party may not use discretionary authority to vote the shares represented by overvoted proxy cards in accordance with that party’s voting recommendation for the director. However, the shares represented by an overvoted proxy card can be voted on other matters included on the proxy card for which there is no overvote and can be counted for purposes of determining a quorum. The treatment and effect of the corresponding voting instruction form (“VIF”) should be the same as that disclosed on a universal proxy card. The staff indicated that this interpretive position does not prohibit intermediaries from contacting shareholders or beneficial owners to seek a correction of an overvoted proxy card or VIF before the meeting date.
New Question 139.08 explains that the shares represented by an undervoted proxy card can be voted in accordance with the shareholder’s specifications and therefore that a soliciting party may not use discretionary authority to vote the shares represented by undervoted proxy cards for the remaining director seats up for election in accordance with that party’s voting recommendation. The treatment and effect of the corresponding VIF should be the same as that disclosed on a universal proxy card.
New Question 139.09 provides that a soliciting party may use discretionary authority to vote the shares represented by a signed but unmarked proxy card in accordance with that party’s voting recommendations because the shareholder has not specified any choices. This C&DI notes that Rule 14a-19(e)(7) requires that a universal proxy card prominently disclose the treatment and effect of a proxy executed in a manner that does not grant authority to vote with respect to any nominees. The treatment and effect of the corresponding VIF should be the same as that disclosed on a universal proxy card.
Note A of Schedule 14A
New Question 151.02 addresses, for the purposes of Note A of Schedule 14A, the solicitation of security holder approval for the authorization of additional shares of common stock following an acquisition of another company in a transaction not requiring security holder approval where a portion of the consideration consists of securities convertible into shares of the company’s common stock or, at the company’s option, cash. This C&DI explains that a proposal “involves” another matter within the meaning of Note A when information about the other matter that is called for by Schedule 14A is material to a security holder’s voting decision on the proposal presented, which depends on all the relevant facts and circumstances. According to this C&DI, the authorization of additional shares of common stock is an integral part of the acquisition because it is necessary for the company to meet its obligation under the convertible securities issued as consideration for the acquisition. Therefore, the proposal to authorize additional shares of common stock “involves” the acquisition. In such circumstances, the company would have to include in the proxy statement information about the acquisition called for by Schedule 14A, unless such information has already been disclosed or sufficient time has passed so that the registrant’s historical filings fully reflect the acquisition.