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Glassman Reviews Five SEC Initiatives At ALI-ABA Institute 

SEC Commissioner Cynthia Glassman, in remarks to the ALI-ABA Financial Services Institute, reviewed five recent initiatives that are intended to improve the information available to shareholders, investors and the market, including executive compensation, Sarbanes-Oxley Act section 404, a new point of sale disclosure document, the investment adviser/broker-dealer rule and the SEC's new corporate penalty guidelines. Everyone benefits when disclosure meets not only the letter, but also the spirit of the disclosure requirements, she said.

The SEC's proposed rules to improve disclosure about executive compensation are intended to provide clear and comprehensive information in a form that is useful to the market and investors, according to Glassman. The gap between executive pay and the average worker has increased dramatically over the last couple of decades, Glassman noted, which is particularly disturbing when executives are highly compensated at a company that performs poorly. The current disclosure rules make it difficult to determine total compensation. The proposed rules will require the disclosure of a single number representing the total compensation for the highest paid officers and employees and will include a new narrative called compensation discussion and analysis in which the compensation policies and decisions will be described.

Glassman said the proposed disclosure should make boards or management teams think twice about the levels of compensation. If they are not comfortable with the amount they must reveal, they may be paying too much, she explained. Glassman expects a lot of comments will focus on the disclosure of perks, which must be detailed at lower thresholds under the proposal.

She noted that the valuation of stock options may raise questions such as whether it should be assumed that the named executives stay through the vesting period. This approach would permit more accurate comparisons across companies but would raise the estimated value of the options, she noted. Glassman supports the initiative to improve the disclosure of executive compensation and hopes that a final rule can be quickly adopted.

Many of the Sarbanes-Oxley Act rules have achieved positive results, according to Glassman, including the CEO and CFO certification requirements and the independent regulatory structure for auditors. Section 404, however, resulted in some unintended consequences that led to widespread criticism of its costs and burdens. Glassman said there is little doubt that the assessment of internal controls had shifted from a risk-based assessment by management to a non-risk-based exercise by the auditors with a focus on controls for controls' sake. She hopes the joint SEC/PCAOB guidance will refocus companies and their auditors on the appropriate approach to section 404 in the second year of compliance.

Glassman said she is still concerned about the misfocus of the section 404 process and its costs. She will be watching for a more risk-based approach in year two in which the scope of the audit is related to the level of risk. By risk, Glassman said she means in the context of management's perspective on what is important to the business and to the financial reports. If there is not a significant refocus in year two, Glassman said the SEC and the PCAOB should consider ways to make the process more effective and efficient, including a revisit of Auditing Standard No. 2.

Glassman is enthusiastic about the SEC's proposed point of sale disclosure proposal that would deliver information about fees, costs and broker conflicts of interest at the time investors are making their investment decision. The balancing of costs and benefits has been a challenge, she said. Glassman said disclosure was also an important part of the analysis of the investment adviser/broker-dealer rule that was adopted last year to make clear the different duties and obligations of investment professionals. A number of investor protection concerns were raised during the rulemaking process. The SEC decided to conduct a study on the differences in the regulatory framework applicable to broker-dealers and investment advisers. Glassman said she believes the study is critical and hopes it will be organized as quickly as possible.

Glassman reviewed the SEC's guidelines on the issuance of corporate penalties. She is pleased with the guidelines, but acknowledged that applying them is easier said than done. The SEC will have to figure out whether the shareholders benefited from a fraud or were victimized by it, she explained, which is not always a simple analysis.

Finally, Glassman reported that the SEC is continuing to work with the banking agencies to find a solution under Regulation B that protects investors without overburdening the compliance framework.