(The news featured
below is a selection from the news covered in SEC Today, which is distributed to
subscribers of SEC
Today.)
SEC Chair Says CD&A Disclosure is Disappointing So Far
The retail disclosure system has devolved into a
self-serving exercise for issuers, underwriters, and their lawyers, according to
SEC Chair Christopher Cox, and nowhere is this more evident than in the new
Compensation Discussion & Analysis sections being filed with the Commission.
After reviewing the first of this year's crop of proxy filings containing the
CD&A, he noted, "alarm bells are ringing" as the staff is seeing
examples of over-lawyering that are leading to 30 to 40 page long executive
compensation sections in proxy statements. His remarks were made at a recent
corporate governance seminar at the USC Marshall School of Business.
The SEC is disappointed with the lack of clarity in much of
the narrative disclosure that has been filed so far. Based on the early returns,
Cox said the average CD&A section is not anywhere close to plain English. In
fact, according to objective third-party testing, he said, most of it is as
"tough to read as a Ph.D. dissertation."
This lack of clarity is particularly troubling since the
CD&A is the centerpiece of the SEC's new executive compensation disclosure
regime. The CD&A is designed to be a principles-based narrative overview
explaining the policies and material elements related to the company's executive
officer compensation.
Since mandating the CD&A as part of its comprehensive
overhaul of executive compensation disclosure, the SEC has been adamant that the
CD&A be written in Plain English. But a private sector investor relations
firm analyzed the CD&A of 40 companies and determined that they all fell far
short of accepted standards of readability. In fact, Cox said the firm found
that most of the disclosure documents failed even to meet the readability
standards that states require for insurance forms. Among other things, the
CD&A disclosures were verbose and fell well below a plain English threshold.
While the SEC was expecting that the CD&A would be just a few pages long,
the median length came in at 5,472 words, with the longest at more than 13,500
words.
This private analysis, in addition to the SEC's own
qualitative review of the proxy statements, indicates that there is a long way
to go before legalese and jargon are truly replaced by plain English. The SEC
believes that many companies are letting lawyers have the final say on the
CD&A. As the firm that undertook the study pointed out, many of the problems
could easily have been fixed in just a few hours by a qualified copy editor.
The SEC intends to employ readability metrics tools to
judge the level of compliance with the plain English rules. These tools, similar
to the Black-Scholes model for stock options, measure the readability of English
prose based on sentence length and the number of complex words. This is one
indication that the SEC is "dead serious" about shedding 70 years of
accumulated bad habits in writing, according to Cox.
The CD&A is a brand new creation, he noted, so there is
no tested boilerplate out there to be picked up and used. There are no judicial
or regulatory precedents to mark up and reuse, so there is no reason for a
company to match up its disclosure to that of its peers or competitors. There
are no magic words to recite from court opinions and SEC interpretations. Cox
urged every company to take this opportunity to start CD&A with a clean
slate and to plainly tell its executive compensation story to investors.
James Hamilton
|