BUSY FOURTH QUARTER FOR SEC STAFF
During the fourth quarter of 2021, the Securities and Exchange Commission reopened the comment period for its controversial compensation clawback rule that it initially proposed in 2015 and continued its efforts to modernize the filing process. Unlike many organizations that implemented temporary COVID-friendly practices that became permanent, the SEC Staff has ceased its practice of responding orally to shareholder proposal no-action requests and reinstituted its longstanding practice of providing a written response for each request. ISS issued additional updates to its 2022 benchmark policies, mostly focused on climate-related disclosures and board diversity measures.
SEC Reopens Comment Period on Clawback Rules
Under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is tasked with adopting rules directing the national securities exchanges to prohibit the listing of any security that is not in compliance with certain provisions and requirements of Section 10D of the Securities and Exchange Act of 1934 (the “Exchange Act”). Section 10D requires listed companies to disclose their policy—often referred to as a clawback policy—on the recovery of incentive-based compensation that is received in excess of what would have been received based on restated financial statements.
On October 14, 2021, the SEC reopened a 30-day comment period requesting feedback on its 2015 proposed rules requiring listed companies to adopt and comply with clawback policies.
The full 19-page release from the SEC on October 14, 2021 can be found here.
Key provisions of the proposed rules include:
- The policy will apply to current and former executive officers (using the Exchange Act’s Section 16 definition of “executive officer”) who received incentive-based compensation during the three fiscal years preceding the date when the company is required to restate a material error in its financial statements.
- The policy must apply without regard to an executive officer’s culpability for the misstatement.
- The amount to be clawed back is the amount received by the executive officer that exceeds the amount the executive officer would have received under the restated financial statements.
- All recoveries are on a pre-tax basis.
- Companies are prohibited from indemnifying current or former executive officers against any clawback compensation.
- Companies are required to file the clawback policy as an exhibit to the annual report, proxy statement or other annual disclosure. Disclosure of the aggregate amount of any compensation clawed back under such policy will also be required.
The full 2015 proposed rules can be found here.
The SEC’s 2021 release also included a few notable new provisions requesting comment. The proposed rules only apply to restatements for material errors that require the reissuance of the company’s financial statements. The SEC has asked for comment on whether corrections for non-material errors should also be subject to the clawback rules. If adopted, this change could significantly extend the reach of the clawback policy. The proposed rules only require disclosure of the recoverable amount under the policy. The SEC has asked whether companies should be required to disclose the calculation of the recoverable and non-recoverable amounts, including the details and assumptions used to calculate the recovery.
The comment period was open from October 21 through November 22 and, to date, the SEC has not announced whether it will be extending the comment period or reviewing the comments received to date before publishing a final rule. If and when a final rule is adopted, stock exchanges will be required to issue their own proposed listing rules effecting the policy, which will in turn need to be vetted and approved by the SEC, a process that often takes months.
To prepare for a potential adoption of the proposed rule, boards should fully review the proposed clawback rule and analyze the potential impact on existing incentive-based compensation plans. Issuers should also consider how existing clawback policies may need to be amended to sufficiently address the requirements under the proposed rule.
SEC Updates Electronic Filing Requirements
On November 4, 2021, the SEC released proposed amendments to update its electronic filing requirements. Previously, the SEC required or permitted certain forms to be filed or submitted in paper format. The proposed amendments would require certain forms to be filed or submitted electronically, including the “glossy” annual report to security holders (in PDF format), Form ADV-NR, the certifications made pursuant to Section 12(d) of the Exchange Act, most of the documents that are currently permitted to be submitted electronically under Rule 101(b) of Regulation S-T, applications for orders under the Advisers Act, and confidential treatment requests for Form 13F filings. The proposal also includes a requirement for the financial statements and accompanying notes in Form 11-K to be filed using Inline XBRL.
The proposal is meant to modernize and increase the efficiency of the filing process and while most companies choose to electronically file where permitted, the proposed rule should come as welcome news that the SEC is continuing to modernize its filing process. Companies should be prepared to file electronically for any filings that they have previously made in paper format.
The full proposal can be found here.
ISS Announces 2022 Benchmark Policy Updates
In early December, ISS released updates to its 2022 benchmark proxy voting policies. The updates will generally be applied for shareholder meetings taking place on or after February 1, 2022. The majority of the updates focused on the results of ISS’s climate survey, which gathered input on proper board oversight of climate-related risks, views on shareholder votes on climate transition plans, and for assessing the quality of companies’ climate transition plans.
The 2022 updates introduce a board accountability policy for the assessment of and focus on the world’s highest greenhouse gas emitting companies. The new benchmark will focus on the companies currently identified as “Climate Action 100+ Focus” companies and will recommend “against” votes for responsible incumbent directors in cases where the company is not considered to have adequate disclosure, such as disclosure that does not follow the Task Force on Climate-related Financial Disclosures, or where the company does not provide quantitative greenhouse gas emission reduction targets.
“Say on Climate” shareholder proposals were common in 2020 and increased throughout 2021, generally asking companies to publish a climate action plan and put it to a regular shareholder vote. ISS updated its policy to establish a case-by-case approach toward such proposals and provides a transparent framework of analysis to allow for consistency. ISS’s updates also included a similar framework for management-offered climate transition plans.
ISS has also extended the U.S. board gender diversity requirements to a larger universe of companies in each market from 2023 and following a one year grace period. Other ISS board diversity policies previously announced in 2020 that will take effect in 2022 include the expectation that large companies in the U.S. will have at least one racially/ethnically diverse director.
A full list of the 2022 updates for ISS can be found here.
SEC Staff Responses to Rule 14a-8 No-Action Requests
On December 13, 2021, the SEC announced that it would reinstitute its practice of issuing a response letter in response to an issuer’s Rule 14a-8 no-action request. In 2019, the SEC staff discontinued the longstanding practice of responding to each shareholder proposal no-action request with a written, publicly accessible written letter. Instead, the SEC responded with a written letter only in limited instances and communicated the vast majority of responses via notations on a chart maintained on the SEC’s website.
The announcement stated that the SEC reconsidered its approach and believes that its prior practice provided greater transparency and certainty to shareholder proponents and companies. Effective as of December 13, the SEC will return to its prior practice and will respond to each shareholder proposal no-action request with a written letter. The response letters will be posted publicly on the website in a timely manner. The SEC will continue to publish a chart summarizing the responses but the publication will occur after completion of the proxy season.
Below are links to fourth quarter 2021 corporate and securities law publications and blogs posted on kmklaw.com.