On Friday, I blogged about this recent speech from SEC Chairman Paul Atkins in the risk factors context. Today, I’m blogging about what the Chairman said about executive compensation disclosure. You will recall that last summer, the SEC solicited comment on modernizing Item 402 of Regulation S-K as part of a roundtable held on that topic (here’s the Cooley Alert about that roundtable). Here are the numerous comments that the SEC received about possible changes to Item 402.
Since considerable time has passed now, we shouldn’t be surprised if we saw a proposal from the SEC looking to change Item 402 in the near future – although maybe that will be part of a broader rule proposal that encompasses more of Regulation S-K since the SEC solicited comment on the entirety of that regulation last month.
Here’s what Chairman Atkins said about the SEC’s reconsideration of Item 402:
- The problem with Item 402:
- Item 402 epitomizes the problems with the SEC’s disclosure rules overall in that the rules themselves are lengthy and complex, driven in part by piecemeal additions over the last two decades without a holistic review of how everything fits together.
- The rules sometimes drive corporate behavior, rather than reflect the outcome of corporate decisions – the resulting information may not benefit or protect investors because of its volume, complexity, and lack of relevance.
2. Three principles that the SEC can apply throughout its Reg S-K rethinking including Item 402: - There are three principles – rationalizing, simplifying, and modernizing – when it comes to reforming the disclosure rules.
- “Rationalizing” means the rules should be sensible, with materiality as their North Star. Executive pay for up to seven executives in a given year may be too much for example.
- “Simplifying” means disclosure requirement should be intelligible by a reasonable investor and practical for a company to comply. PvP disclosure, for example, needs a cottage industry of ultra specialized consultants.
- “Modernizing” need look no further the treatment of executive security as a perk as the world has changed as security threats have emerged for some executives.
Authored by
Broc Romanek