The use of non-GAAP financial measures continues to be one of the
disclosure areas that routinely generates comments from the SEC
staff, according to Shelley Parratt, the Division of Corporation
Finance’s deputy director for disclosure operations. She said the
staff is seeing companies back out expenses that should not be
backed out, and has sent comment letters objecting to the practice.
Parratt joined a panel discussion on recent disclosure trends at the
Practising Law Institute’s recent conference on securities
regulation.
Parratt reminded filers that the disclosure of
performance targets and benchmarks must be tied to a company’s
specific circumstances. A general discussion about targets is not
what the staff is looking for in the disclosure documents. She also
reminded companies to be specific in their segment reporting. Where
the staff does not see disclosure on how a company determined its
reportable segments, it will ask for it, she said.
Parratt said the staff often issues comment
letters on restatement disclosures. She advised that these
disclosures must appear in all filings subsequent to the restatement
until the company files its next annual financial statements. With
respect to MD&A disclosure, she said the staff often has to remind
companies to disclose the amount of cash they have in foreign
subsidiaries that is not available for general corporate use.
Parratt said the staff sees many filings in
which the risk factor disclosure has not been updated. Risk factors
must be kept current, she said, which means right now a company
should be discussing the specific challenges it faces due to the
current economic conditions.
Martin Dunn of O’Melveny & Myers and Compensia’s
Mark Borges discussed trends in proxy disclosure. Dunn noted that
2011 was the first time that companies prepared their CD&A for the
people reading it and not for the SEC. Companies wanted a positive
vote on their compensation programs, he said, so they had to tell
their story.
Borges agreed that the proxy statement has
transitioned to a communication document from a disclosure document,
with say-on-pay as the catalyst. The key change that he observed in
the 2011 proxy statements was the introduction of a proxy summary. A
number of large companies put a summary at the front of proxy
statement that highlighted key items in the document. Borges expects
the use of proxy summaries to continue going forward.
Dunn said that last year many companies received
a negative vote on their compensation packages, then filed
supplemental proxy materials in which they provided effective
disclosure on the issue. This was okay for the first year of
say-on-pay, he said, but in 2012 companies should work that
information into the original disclosure.
He also addressed the issue of proxy advisory
firms, and noted that they do have some power in the shareholder
voting process. He pointed out, however, that in 2011 they
recommended votes against 300 to 400 companies’ compensation plans,
but only about 40 received negative votes.
Dunn said that proxy advisory firms look at a
company’s peer group to see if there are places where a company does
not match the median of the group. He advised companies to try to
figure out their peer group, determine what the median pay practices
are, and be prepared to explain if and why they are different. On
this and many other proxy disclosure issues, Dunn said it is always
a good idea for a company to reach out to its shareholders directly.
Keir Gumbs, a partner at Covington & Burling,
discussed companies’ increasing use of social media and its
disclosure implications. He said that about 79% of companies now use
some form of social media such as blogs, Twitter or Facebook. A
company’s disclosure policy should apply to this area, he advised.
In particular, Gumbs reminded companies to be
aware of Regulation FD, which states that a company cannot disclose
certain information to certain persons without also making it widely
known. In his opinion, if a company uses social media, it should be
as a complement, not as the sole means of satisfying Regulation FD.
The SEC is keeping an eye on what companies are saying through their
social media. Gumbs cited a recent comment letter to a company whose
CEO sent a tweet pre-announcing the company’s quarterly earnings.