SEC adopts final pay-versus-performance rules

In August 2022, the US Securities and Exchange Commission announced its adoption of final rules requiring public companies to disclose information regarding the relationship between executive compensation actually paid to their named executive officers and company financial performance. The new disclosure will be required in any proxy or information statement (in which disclosure under Item 402 of Regulation S-K is required) of public companies, except foreign private issuers, registered investment companies and emerging growth companies. Smaller reporting companies are subject to scaled disclosure requirements. The disclosure will not be required in registration statements filed in connection with an initial public offering.

The final rules require companies to provide a table disclosing executive compensation information and financial performance measures for their last five fiscal years (three years for smaller reporting companies). In the first year of disclosure, companies that are not smaller reporting companies will only be required to provide disclosure for three years (two years for smaller reporting companies) with an additional year added in each of the two subsequent years (one subsequent year for smaller reporting companies). The table must contain the measure of total compensation included in a company’s existing summary compensation table, as well as executive compensation actually paid, as calculated by the new rule. Companies (other than smaller reporting companies) also will be required to provide a list of three to seven financial performance measures that they determine are the most important measures used to link company performance to compensation actually paid. Covered companies must comply with the final rules in proxies and information statements covering fiscal years ending on or after December 16, 2022. For more information on the final rules, including how to calculate compensation actually paid and how the table should appear, refer to our pay-versus-performance client alert, this Cooley PubCo blog post on the pay-versus-performance disclosure rule, and the SEC’s pay-versus-performance fact sheet.

PCOAB issues audit committee resource

In August, the Public Company Accounting Oversight Board issued a new resource for audit committees, including questions that public company audit committees may consider as part of their ongoing auditor engagement. The publication is divided by topic and includes questions relating to fraud and other risks, initial public offerings and M&A activity, audit execution, auditor independence requirements, quality control systems, and technology. Some notable questions from the report include:

• How have economic factors (e.g., supply chain disruption, inflation) influenced the auditor’s risk assessment for the current year’s audit?
• How does the lead auditor anticipate handling work going forward that was previously done by other auditors in Russia, Ukraine or Belarus?
• How has the auditor considered the accounting implications of the key provisions in the debt and equity instruments that are issued to founders, sponsors, and private and public investors?
• In the auditor’s view, how has staff turnover at the company impacted:
  • The quality of the company’s accounting and financial reporting processes and internal controls?
  • The company’s preparation for the audit?
• What are the audit firm’s policies or procedures for identifying, evaluating and addressing any threats to independence that may impact the services provided to the company?
• What is the audit firm doing to promote continuous education to keep audit staff abreast of changes, notably in standards and methodologies, but also in emerging topics or specialized industries?
• Which policies and procedures does the audit firm have regarding conducting and monitoring audit engagements involving digital assets (e.g., crypto mining), including considering the risks associated with performing such audits?
• What is the auditor’s view on management’s cybersecurity risk assessment approach, overall cybersecurity assessment, and conclusions?

SEC adopts inflation adjustments

On September 9, the SEC announced that it had adopted amended rules for implementing inflation adjustments mandated by the Jumpstart Our Business Startups (JOBS) Act. Pursuant to the statutory definition of “emerging growth company” (EGC), the SEC is required to adjust the annual gross revenue amount used to determine EGC status for inflation every five years.

The amendments increased this amount from $1,070,000,000 to $1,235,000,000, which may affect companies’ disclosure regarding their EGC status. The amendments also contain adjustments for inflation to Section 4(a)(6) of the Securities Act, which includes dollar amounts for certain crowdfunding transactions that are used to determine eligibility for an exemption from registering securities under the Securities Act. For more information, refer to the SEC’s fact sheet on JOBS Act inflation adjustments.

Division of Corporation Finance to add offices for crypto and industrial applications and services

On September 9, the SEC announced that it plans to add an Office of Crypto Assets and an Office of Industrial Applications and Services to the Division of Corporation Finance’s Disclosure Review Program (DRP). The Office of Crypto Assets will be responsible for reviewing filings involving crypto assets, as “[a]ssigning companies and filings to one office will enable the DRP to better focus its resources and expertise to address the unique and evolving filing review issues related to crypto assets.” The Office of Industrial Applications and Services is intended to lighten the load of the Office of Life Sciences, which currently oversees filings from the largest number of companies, and will be responsible for “the non-pharma, non-biotech, and non-medicinal products companies currently assigned to the Office of Life Sciences.” The DRP expects the new offices to be established later this fall.

ISS publishes proxy season key takeaways

On September 1, Institutional Shareholder Services published its key takeaways from the 2022 proxy season. Highlights include:

• Virtual-only shareholder meetings remained the majority format in 2021, even while usage declined.
• While the number of “vote no” campaigns targeting directors of companies in the Russell 3000 reached a new high, the percentage of directors who received less than 80% support remained similar year over year.
• Lack of racial and ethnic diversity seems to have been a significant factor for directors who did not receive majority support.
• More than 50% of all governance-related shareholder proposals that made it to the ballot related to special meeting rights.
• To ensure passage of charter amendments, smaller companies have increasingly been issuing preferred stock with enhanced voting rights, sometimes due to challenges in achieving a quorum.

S&P Global highlights rise in investor activism

S&P Global recently published an infographic showing the striking rise in investor activism during the first half of 2022. According to the publication, an all-time high of 777 activist campaigns were launched during such period, surpassing the previous record of 696 campaigns during the first half of 2020. Seventy-five percent of the 777 campaigns launched had an environmental, social and governance (ESG) component, with social campaigns almost quadrupling since 2018 (from 46 campaigns in 2018 to 182 campaigns in the first half of 2022). Campaigns with an environmental aspect also increased from 6% in 2018 to 13% in the first half of 2022. Consistent with the general theme of the 2022 proxy season, investor campaigns during the first half of the year had the lowest success/settled rate in the last five years (12%), though the information technology sector had the highest success rate at 19%.

ISS reports on key themes from climate disclosure comment letters

On August 31, Institutional Shareholder Services posted an article – SEC Climate Disclosure Comments Reveal Diversity of Views – that explores key topics addressed in a “representative” range of comments to the SEC’s proposed climate-related disclosure rules. The article highlights eight themes that the comments largely revolved around:

1. Strong support for the proposed rules’ alignment with the Task Force on Climate-Related Financial Disclosures.
2. Support for the proposed rules’ alignment with the Sustainability Accounting Standards Board and the International Sustainability Standards Board frameworks.
3. Corporate concerns over compliance burdens (in terms of time and money).
4. Questions about the material relevance of the SEC proposals, including scenario analyses and whether data should be furnished or included in a company’s filed financial accounts.
5. Diverse views on mandating indirect emissions (Scope 3) disclosures.
6. Concerns over the speculative nature of greenhouse gas disclosures and risks.
7. Broad support for board oversight of climate risks, but differences over granular disclosure requirements.
8. Disagreement over the SEC’s authority to require such disclosures.

The article further notes that most form letter comments expressed full support for the rules, while others were supportive but suggested that the requirements be aligned with other countries’ disclosure regimes.

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