Corporate & Securities Law

By James Hamilton

As the SEC staff?s review of the new executive compensation disclosures in companies' proxy statements is winding down, Corporation Finance Director John White urged companies and their counsel to focus on the idea that disclosure in this area can be clear and understandable yet not meaningful or responsive to the new SEC disclosure regime for executive compensation. And, on the other hand, disclosure can be responsive in content but not clear and understandable. Though manner of presentation does not refer only to plain English, he added, plain English is a key part of all of this as well. He also discussed shareholder access to nominate directors and the expanded use of company websites to deliver information to investors. The director?s remarks were delivered at the Securities Regulation Institute in San Diego.

The new executive compensation disclosure rules require, for the first time, that companies include a Compensation Discussion and Analysis (CD&A) section to give investors a principles-based overview explaining the policies and decisions related to executive officer compensation. It is a narrative disclosure that puts the compensation picture in context.

Mr. White reiterated that the staff?s review of the analysis portions of the CD&A revealed frequent shortcomings. There is a real lack of disclosure in the CD&A of the how and why of compensation decisions, he emphasized. The new CD&A section is much like the MD&A, he said, and is intended to put into perspective for investors the numbers and narrative that follow it. He remains optimistic that the second year of CD&A disclosures will be more faithful to the SEC?s objectives when it adopted the new executive compensation disclosure rules.

On the separate issue of shareholder nomination of directors, the SEC official said that the Commission is gearing up to continue work in this area in 2008 based on Chairman Cox?s admonition that the broad question of shareholder access to nominate company directors remains vital. With the current proxy season impending, and a federal appeals court ruling that had to be addressed, the SEC codified its longstanding interpretation of the election exclusion. This exclusion allows companies to exclude from their proxy materials proposals that would result in an immediate election contest or would set up a process for shareholders to conduct an election contest in the future by requiring the company to include shareholders' director nominees in the company's proxy materials for subsequent meetings.

The director noted that the SEC has already seen a few no-action requests concerning shareholder proposals to set up procedures for shareholder director nominations from, among others, Bear Stearns and JP Morgan Chase. He said that the staff will be responding to those in the coming month or so in accordance with normal processes.

The codification of the SEC?s election exclusion position addressed a 2006 Second Circuit panel ruling that a shareholder proposal seeking to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot did not relate to an election within the meaning of SEC proxy rules and thus could not be excluded from corporate proxy materials. AFSCME v. American International Group, Inc.

Essentially inviting the SEC to take up the issue, the appeals court had reasoned that a 1976 SEC interpretation reflected the view that the election exclusion is limited to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election and rejects the somewhat broader interpretation that the election exclusion applies to shareholder proposals that would institute procedures making such election contests more likely.

On issues involving the expanded use of corporate websites, Mr. White related that the SEC is seriously considering whether to update the interpretive guidance that the Commission issued in 2000 concerning the use of corporate websites for disclosures of information. In the past seven years, the avenues by which investors receive financial data has broadened to include blast emails, webcasts of meetings, blogs, RSS feeds, electronic shareholder forums, podcasts, XBRL, and electronic proxy solicitation. At the same time, he noted, technology can make it easier and more efficient for investors to find the financial data and analysis they are looking for.

Legal issues that may need to be addressed or updated in connection with the review of the use of corporate websites include the treatment of hyperlinked information on a company's website, liability for disclosures, and Regulation FD. The SEC?s review is affected by a draft recommendation of its Advisory Committee on Improvements to Financial Reporting that the Commission issue new interpretive guidance encouraging further creative use of corporate websites and promoting industry best practices.

Full post as published by Jim Hamilton's World of Securities Regulation on January 24, 2008 (boomark / email).