Acting Director of Corporation Finance Reviews Likely New Disclosure Rules

Shelley Parratt, the acting director of the SEC's Division of Corporation Finance, reviewed developments in corporate governance at the Practising Law Institute's June 3 program on hot issues in executive compensation. SEC Chair Mary Schapiro has stated that she wants shareholders to have the information they need to make sound proxy voting decisions.

Schapiro has asked the staff to draft recommendations for Commission consideration to require additional information on nominees for directors about their qualifications and skills. The staff is also considering new disclosure about how a compensation structure may create an incentive for management to take huge risks. Schapiro also urged the staff to recommend more disclosure about issuers' overall compensation approach and how it relates to risk management.

The staff is also considering a proposal to require additional information about potential conflicts of interest where compensation consultants may receive fees for other services or may play a role in other company policies. The additional disclosure may also include information about why a company chose a particular leadership structure such as combined chair and CEO positions.

Parratt reported that 250 companies that received Troubled Asset Relief Program funds filed proxies that included the TARP disclosure. Full and fair disclosure is not what it used to be, she said. The direction is toward more information about executive compensation.

Parratt urged registrants to read former director John White's speech on the second year of the enhanced executive compensation disclosure which called for better analysis in the Compensation Discussion & Analysis section of their proxies. If companies choose to omit their performance targets for executives, they must justify that choice. Claims of competitive harm must be specific. The staff closely monitors disclosure following the adoption of new requirements, she said.

Parratt also suggested that interested parties read the staff comment letters. Some companies are reviewed more frequently than every three years, she added. Parratt said there is no better information than the staff comment letters and the registrant responses in learning about the problem areas.

In drafting this year's CD&A, Parratt urged registrants to consider how market conditions have affected their compensation decisions and what they have done differently, including the adoption or modification of plans. They should consider whether their compensation structures contain incentives that may lead to excessive risk-taking.

Parratt also suggested that registrants take into consideration what shareholders want, which may not be required by SEC rules. Many disclosure decisions should be based upon what a reasonable shareholder expects to see, and that information changes over time, she said. Executive compensation priorities are changing fast and are in the spotlight right now.

Parratt also recommended reading Schapiro's June 2 testimony to the Senate Appropriations Subcommittee on strengthening shareholder rights. Her testimony outlines the corporate governance disclosure improvements which may be considered as early as next month.

One of the panelists noted that the staff comment letters on executive compensation after the first two years they were in effect asked registrants to improve their disclosure the following year. This year, they're being told to fix the current proxy. Parratt explained that the staff tries to be helpful when there are new disclosure requirements and it adheres to a high level of materiality in requiring amendments. However, after two-and-a-half years of issuing the same comments and finding that the matter has not been addressed, she said the staff is asking for an amendment. The staff will not ask a registrant to amend a definitive proxy. Those amendments must appear in the Form 10-K, she said.