I provided insight in a recent Law360 article on the CEO pay ratio disclosure requirements mandated by the Dodd-Frank Act. The disclosure requires that public companies disclose the compensation of its chief executive and its median average employee, as well as the ratio between the two. Companies will soon have to comply by disclosing the pay gap for fiscal 2017 in their annual 10-K reports and in their 2018 proxy statements.
In a recently published Accounting Today article, I provided insight on the impact of the new audit report standard from the Public Company Accounting Oversight Board (PCAOB), which was approved by the Securities and Exchange Commission (SEC) on October 23. The new standard — which is the first significant change to the audit report in over 70 years – expands the scope of the audit report by requiring a discussion of “critical audit matters” and a disclosure of auditor tenure.
In monitoring SEC comment letters, we came across this SEC comment letter made public this month. It serves as a reminder to registrants that, when calculating a company’s public float, there is an informal presumption that a 10% or greater stockholder is an affiliate of the company; however, this presumption is rebuttable by the registrant.
The letter stated that “[t]he Staff has consistently taken the position that the determination of ‘control’ status is dependent in large part on the facts and circumstances involved and, therefore, has declined to state definitively what circumstances will result in a person being deemed to be in ‘control’ of an issuer. While the Company recognizes that, as a rule of thumb, more than 10% ownership has become an informal benchmark at which control should be evaluated, such ownership, standing alone, is not dispositive.”
In a Bloomberg BNA article, I provided insight on what future additional updates the SEC Staff could be focusing on following the Commission’s announcement of proposed amendments to Regulation S-K last week. The article quotes Elizabeth Murphy, an associate director in the SEC Division of Corporation Finance, from an October 18 Association of Corporate Counsel conference discussion saying the SEC has “more to come from our Reg S-K disclosure initiative,” but did not specify any particular recommendations to Regulation S-K the Commission plans to focus on. I noted that the Staff might continue to focus on MD&A disclosures and Regulation S-K’s Item 101, the narrative description of the business. In those areas, many comments on the concept release urged the SEC to “move from prescriptive rules to a more principles-based approach,” I explained in the article. “Given how fundamental these S-K sections are to SEC filings generally, it seems reasonable to believe the SEC Staff would develop recommendations to these rules for Commission consideration.”
The full article, “More SEC Proposals on Disclosure Rule Coming, Official Says,” was published on October 18, 2017, by Bloomberg BNA and is available online.
On October 11, the SEC proposed amendments to modernize and simplify disclosure requirements in Regulation S-K, which were mandated by the Fixing America’s Surface Transportation (FAST) Act. In large part, the proposed amendments follow the recommendations of a November 2016 report from the SEC staff. As one SEC commissioner put it, the incremental adjustments to Regulation S-K are meant to “prune” the SEC’s existing disclosure regime rather than as “an exercise in slash-and-burn clearcutting.”
Below are six highlights from the SEC’s proposed amendments to Regulation S-K:
- Rules for Management’s Discussion and Analysis (MD&A) would be amended to clarify that a registrant need only provide a period-to-period comparison for the two most recent fiscal years presented in the financial statements and may hyperlink to the prior year’s annual report for additional period-to-period comparison. The proposed amendments would require hyperlinks to information that is incorporated by reference if that information is available on EDGAR. Instruction 1 to Item 303(a).
On August 5, 2015, the SEC adopted new rules implementing the pay ratio disclosure requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Section 953(b) of the Dodd-Frank Act required the SEC to adopt rules requiring reporting companies to disclose the ratio of the annual compensation of the company’s median employee to the annual compensation of its principal executive officer. These rules will become effective generally for companies in their Form 10-K for the 2017 fiscal year or in their proxy statement for the 2018 annual meeting. Below are some frequently asked questions that companies should be considering now in preparing for this new disclosure.
1. What are the new rules on pay ratio generally?
The new rules are contained in a new Item 402(u) of Regulation S-K added by the SEC. Item 402(u) generally requires companies to disclose
- the median of the annual total compensation of all company employees other than the company principal executive officer (PEO),
- the PEO’s annual total compensation, and
- the ratio between the two numbers.
I recently provided insight for an article published in Compliance Week on the SEC’s pay ratio rule, which will require companies to disclose for the first time in their 2018 proxy statements the ratio between the median annual total compensation of all employees and the annual total compensation of its CEO. While the rule has brought some opposition, companies should still keep an eye out for developments in Washington and the SEC, but should not have unrealistic expectations. As I point out in the article, “given all the dynamics and the make-up of the Commission still evolving, companies should proceed with things the way they are now, with the rule in effect.” While there may be possibilities for some type of alleviation, companies should not rely on that to avoid delaying any adjustments needed to be made in preparation.
Now that the SEC’s new rules on exhibit hyperlinks are live as of September 1, 2017, we have updated our March blog post with the frequently asked question below regarding exhibit indexes.
Where should we put the exhibit index now? Can we combine the list of exhibits and the exhibit index?
In connection with the SEC’s March 2017 amendments implementing the hyperlink requirement, the SEC also amended the rules pertaining to the placement of the exhibit index, which had previously required the exhibit index to “precede immediately the exhibits filed with such registration statement.” As amended, Rule 102(d) of Regulation S-T and Rule 601(a)(2) of Regulation S-K now require the exhibit index to “appear before the required signatures in the registrant statement or report.” Although exhibit index practice has varied, there is some ambiguity as to whether the new rules require a separate exhibit index before the signature page and the exhibits themselves. For example, while some companies are combining the exhibit table with the exhibit index and placing the latter before the signature page, others have been retaining a separate exhibit table and exhibit index and move the latter above the signatures.
As a result of this ambiguity and variance in practice, we reached out to the SEC staff to get interpretive guidance on how the list of exhibits (including the exhibit index) should now be presented in registration statements and reports. According to the SEC Staff in the Office of Chief Counsel, it is permissible to combine the exhibit table with the exhibit index and only present one list of exhibits with hyperlinks, and a separate exhibit index is not required. I think this is a good, practicable outcome and should dispense with the notion of having two lists of exhibits.
Click here to view an example of the approach applied on an 8-K.
It seems that lately there has been a noticeable uptick in Regulation A+ activity, including several recent Reg A+ securities offerings where the stock now successfully trades on national exchanges. In light of this activity, we have published a set of FAQs about Regulation A+ securities offerings to help companies better understand this “mini-IPO” offering process, as well as pros and cons compared to a traditional underwritten IPO.
What is Regulation A+?
Regulation A+ is the colloquial name given to a recently adopted SEC rule that amended and expanded a rarely used offering exemption named Regulation A. Regulation A+ can be thought of as an alternative to a small registered IPO and as either an alternative or a complement to other securities offering methods that are exempt from registration under the Securities Act of 1933.
Bass, Berry & Sims Releases Guide for Companies Considering Regulation A+
Our publication is organized in an easy to read FAQ format detailing the two types of Regulation A+ offerings, requirements, process and more.
Below is a sample of the questions that we answer in the document attached.
- Which companies are eligible to use Regulation A+?
- What is the general process for a Regulation A+ offering?
- What are the differences between a Tier 1 and a Tier 2 offering?
- Are there any ongoing reporting requirements?
- Can the company also list its securities on the NYSE or NASDAQ trading?
On a related note, earlier this month the House of Representatives approved a bill that would permit existing SEC reporting companies to use Tier 2 of Regulation A+. (Currently, the exemption is not available to Exchange Act reporting companies.)
If you would like to be mailed a hardcopy, please email us.
Last week, the SEC’s Division of Corporation Finance issued updated guidance on processing procedures for draft registration statements. Below is a FAQ summary table we have prepared related to this new guidance.
There are some nuances in the guidance, so please consult with outside securities counsel before omitting any financial statements in your filing. Contact any member of our Corporate & Securities practice for more information.