August 2022 in Brief: Securities Law

Securities Regulation

SEC Adopts Pay Versus Performance Disclosure Rules

By Rani Doyle

On August 25, the SEC adopted amendments to its rules to require registrants to disclose information reflecting the relationship between executive compensation actually paid by a registrant and the registrant’s financial performance. The rules implement a requirement mandated by the Dodd-Frank Act. The Commission proposed pay versus performance disclosure rules in 2015 and reopened the comment period on the proposal in January of this year.

New Item 402(v) of Regulation S-K will require registrants to provide a table disclosing specified executive compensation and financial performance measures for the registrant’s five most recently completed fiscal years.

Registrants will be required to include in the table, for the principal executive officer (“PEO”) and, as an average, for the other named executive officers (“NEOs”), the Summary Compensation Table measure of total compensation and a measure reflecting “executive compensation actually paid,” calculated as prescribed by the rule.

The financial performance measures to be included in the table are:

• Total shareholder return (“TSR”) for the registrant;
• TSR for the registrant’s peer group;
• The registrant’s net income; and
• A financial performance measure chosen by the registrant and specific to the registrant (the “Company-Selected Measure”) that, in the registrant’s assessment, represents the most important financial performance measure the registrant uses to link compensation actually paid to the registrant’s NEOs to company performance for the most recently completed fiscal year.

New Item 402(v) also will require a registrant to provide a clear description of the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to its PEO and, on average, to its other NEOs over the registrant’s five most recently completed fiscal years. The registrant will be required to also include a description of the relationship between the registrant’s TSR and its peer group TSR.

Additionally, a registrant will be required to provide a list of three to seven financial performance measures that the registrant determines are its most important measures (using the same approach as taken for the Company-Selected Measure). Registrants are permitted, but not required, to include non-financial measures in the list if they considered such measures to be among their three to seven “most important” measures.

These disclosure rules do not apply to emerging growth companies, registered investment companies, or foreign private issuers.

The Final Rules state that companies will need to comply for fiscal years ending on or after December 16, 2022.

Reminder: New Rules for Universal Proxy Cards in Contested Director Elections Go into Effect

By Bella Zaslavsky, K&L Gates LLP

As a reminder, compliance with the SEC’s final rules requiring the use of universal proxy cards in contested director elections is required for any shareholder meeting held after August 31, 2022. See last November’s Month-In-Brief: Securities Law post regarding the rule amendments. Among other things, the new rules (i) require the use of a universal proxy card containing the names of all director nominees on one ballot; (ii) create deadlines by which the company and dissidents are required to provide notice to one another of their candidates; (iii) prescribe presentation requirements for the design of the universal proxy; and (iv) amend prior proxy and proxy statement disclosure requirements related to voting options and standards in all director elections. Companies that have not already done so should be reviewing these new requirements and timelines carefully in preparation for proxy season.

SEC Issues C&DIs on Universal Proxy

By Rani Doyle

On August 25, the SEC issued three compliance and disclosure interpretations (C&DIs), in new section 139, related to Exchange Act Rule 14a-19.

• Question 139.01 addresses the ability of a dissident shareholder to change its slate of nominees after the Rule 14a-19(b) notice deadline due to a nominee’s decision to withdraw or a change in the number of director seats up for election.
• Question 139.02 deals with the registrant’s obligation to comply with Rule 14a-19(b)’s notice requirements in the case of a contested election in which more than one dissident shareholder intends to present a slate of director nominees.
• Question 139.03 addresses the registrant’s obligation under Rule 14a-5 to disclose in its proxy materials Rule 14a-19(b)(1)’s requirement that a dissident provide notice of its nominees at least sixty calendar days before the anniversary of the prior year’s annual meeting in situations where the registrant’s advance notice bylaw provides for an earlier notification date.

The summary above was posted in thecorporatecounsel.net blog dated August 29, 2022.

SEC Filing Fee Increases

By Rani Doyle

On August 26, the SEC announced that the fees that public companies and other issuers pay to register their securities with the Commission will increase from $92.70 per million dollars to $110.20 per million dollars, effective October 1.

PCAOB Announces Agreement with Chinese Regulator

By Thomas W. White, Retired Partner, WilmerHale

After lengthy negotiations, the Public Company Accounting Oversight Board announced on August 26 that it had reached an agreement with Chinese securities regulators to permit inspection and investigation of accounting firms based in mainland China and Hong Kong. If implemented to the satisfaction of the PCAOB and the Securities and Exchange Commission, the agreement will alleviate the threat of trading bans on US-listed Chinese companies under the Holding Foreign Companies Accountable Act (HFCAA).

The HFCAA, which was enacted in December 2020, requires the Securities and Exchange Commission to prohibit trading in companies that are audited by foreign public accounting firms that the PCAOB has determined it is unable to inspect or investigate completely due to a position taken by a foreign jurisdiction (“Commission-Identified Issuers”) for three consecutive years. The PCAOB identified mainland China and Hong Kong as jurisdictions that do not provide adequate access to the Board’s inspection and investigative functions. The SEC has designated a number of Commission-Identified Issuers this year. The trading prohibitions would apply beginning in 2024, if the issuer has been a Commission-Identified Issuer for the three consecutive years 2022, 2023, and 2024. (See prior reports on regulatory actions under the HCFAA by the PCAOB and the SEC.)

According to the PCAOB, the agreed Statement of Protocol “grants the PCAOB complete access to the audit work papers, audit personnel, and other information we need to inspect and investigate any firm we choose, with no loopholes and no exceptions.” However, the PCAOB emphasized, and SEC Chair Gary Gensler reinforced, that the agreement is just a “first step,” and the “real test will be whether the words agreed to on paper translate into complete access in practice.” The PCAOB indicated that it intends to have personnel on the ground by mid-September and that whether its teams are able to complete work without obstruction will inform the PCAOB’s determinations as of the end of the year whether China and Hong Kong now satisfy the HFCAA’s requirements.

SEC Approves PCAOB’s Revised Auditing Standards for Use of Other Auditors

By Thomas W. White, Retired Partner, WilmerHale

On August 12, the Securities and Exchange Commission approved the Public Company Accounting Oversight Board’s revised auditing standards to govern the use by the principal auditor in an audit (“lead auditor”) of the work of auditors of accounting firms and individual accountants from outside the lead audit firm (“other auditors”). As discussed in a prior item, the revised standards seek to beef up the lead auditor’s responsibilities when it uses the work of other auditors. The revised standards are intended to improve existing standards by:

• applying a risk-based supervisory approach to the lead auditor’s oversight of other auditors for whose work the lead auditor assumes responsibility; and
• specifying procedures that the lead auditor should perform when planning and supervising an audit that involves other auditors.

The Board also adopted a new standard covering the lead auditor’s responsibilities in the relatively infrequent situation where the lead auditor divides responsibility for a portion of the audit with another audit firm that is separately referred to in the audit report. The revised standards will apply to all audits conducted under PCAOB standards, including audits of emerging growth companies. They will take effect for audits for fiscal years ending on or after December 15, 2024.

SEC Chair Gary Gensler noted in a statement that the revised standards were the first auditing standards adopted since the PCAOB was reconstituted. He added, “I look forward to the additional standard-setting work the PCAOB will undertake to live up to its founding vision under the Sarbanes-Oxley Act. If Sarbanes-Oxley, signed into law 20 years ago, meets its full potential, trust in our markets can grow — and that benefits investors and issuers alike.”

PCAOB Articulates Key Goals and Priorities in Draft Strategic Plan

By Thomas W. White, Retired Partner, WilmerHale

The Public Company Accounting Oversight Board has issued for public comment a draft Strategic Plan for the five years 2022–26. The draft Plan brings together in one document key goals and priorities of the current Board, which was reconstituted last year with a new chair and three other new members appointed by the Securities and Exchange Commission under Chair Gary Gensler.

The draft Plan identifies three “organizational priorities” that guided the Board in crafting the plan:

• Investor Protection: Continuing to “boldly pursue our investor-protection mission through our standard-setting, inspections, and enforcement programs.”
• Engagement: “[I]nteracting with our stakeholders, including investors, investor advocates, audit firms and individual auditors, audit committee members, financial statement preparers, other regulators, Congress, and academics.”
• Adaptability: Continuing to “anticipate and respond to developments in the audit profession.”

The draft Plan then describes the following specific goals and objectives:

• Goal 1: Modernize Standards: The Board notes that many of its current audit standards, which were adopted by the PCAOB as “interim” standards in 2003, were written by the audit profession itself and have not been updated. It intends “to modernize and streamline our existing standards and to issue new standards where necessary to meet today’s needs.”
• Goal 2: Enhance Inspections: The Board’s objectives include continuing to perform quality inspections, increasing transparency in reporting inspection results, improving the timeliness of inspection reports, delivering useful guidance to the audit profession, and placing greater focus on firms’ remediation efforts.
• Goal 3: Strengthen Enforcement: The Board states that it “will take a more assertive approach to bringing enforcement actions.” It will “use all of the statutory tools available to our enforcement program, and, when the conduct warrants it, we will use them to maximum extent possible.” The Board also will increase transparency in enforcement actions and “collaborate with other regulators to bring concurrent actions.”
• Goal 4: Improve Organizational Effectiveness: The Board’s objectives include “radically” improving the employee experience, enhancing stakeholder engagement, and improving internal processes to make it easier for PCAOB staff to advance the PCAOB’s mission.

SEC and CTFC Propose Amendments to Required Reporting by Private Funds

By Melissa Sanders, Fox Rothschild LLP

On August 10, in response to the growth of the private fund industry over the last decade, the SEC and Commodity Futures Trading Commission (“CTFC”) jointly proposed amendments to Form PF. The amendments are intended to assist the SEC in expanding its oversight related to private fund advisors and to provide additional investor protections as the industry continues to grow. Notably, the proposed amendments will require advisers and their funds to disclose additional details, including listing beneficial ownership of the fund, assets under management, and asset values (net and gross). The proposed rule would also impact hedge funds by changing the reporting requirements in a manner designed to allow the SEC and CTFC to better analyze risks related to such funds. Among other requirements, hedge funds would no longer be able to utilize aggregate reporting and would be required to report each component of complex fund structures (such as master-feeder arrangements) separately.