SEC Reopens Clawback Comment Period…Again
By Laura D. Richman & Christina M. Thomas, Mayer Brown LLP
On June 8, 2022, the US Securities and Exchange Commission (“SEC”) issued a release (“New Reopening Release”), reopening the comment period on the clawback listing standard rules that it proposed in 2015 (“2015 Proposal”). At the same time, the SEC made available a memorandum prepared by the staff of the SEC’s Division of Economic and Risk Analysis (“Staff Memorandum”) that discusses the increase in voluntary adoption of compensation recovery policies by issuers and provides estimates of the number of additional restatements that would trigger a compensation recovery analysis if the rules were extended to include all required restatements made to correct an error in previously issued financial statements, including “little r” restatements. The Staff Memorandum also addresses some potential costs and benefits of the proposed rules. The SEC reopened the comment period to allow interested persons to consider and comment on the analyses and data set forth in the Staff Memorandum.
The New Reopening Release represents the second time in less than a year that the SEC reopened the comment period on the 2015 Proposal. In October 2021, the SEC reopened the comment period on the 2015 Proposal (“Original Reopening Release”), which closed on November 22, 2021.
The 2015 Proposal requested comments on more than 100 specific questions. The Original Reopening Release raised additional requests for comment in ten multifacted areas. While the New Reopening Release is designed to allow comment on the Staff Memorandum, interested parties may also submit comments on any aspect of the 2015 Proposal, including on the additional requests for comments raised in the Original Reopening Release.
The new comment period closes thirty days after publication of the New Reopening Release in the Federal Register.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) added Section 10D to the Securities Exchange Act of 1934, requiring the SEC to direct national securities exchanges and associations to establish listing standards that prohibit the listing of any security of a company that does not adopt and implement a written policy requiring the recovery, or “clawback,” of certain incentive-based executive compensation payments. For additional information on the SEC’s 2015 Proposal, see our Legal Update, “US SEC Proposes Compensation Clawback Listing Standards Requirement,” dated July 16, 2015. For additional information on the SEC’s 2015 Proposal, see our Legal Update, “SEC Reopens Comment Period for Clawback Listing Standards,” dated October 18, 2021.
The New Reopening Release provides interested parties with another chance to provide input on, and perhaps influence, the SEC’s clawback listing standard rules before they are finalized. The Staff Memorandum provides data and analyses that the SEC will likely rely on as it develops its final clawback listing standard. Specifically, the Staff Memorandum is expected to inform the economic analysis that would serve as the justification for any final rule. Having this opportunity to review, consider, and respond to this presentation at this time can be very helpful to interested parties that may be impacted by the clawback listing standard rules.
Because the new comment period will close thirty days after publication in the Federal Register, interested persons should start reviewing the Staff Memorandum and thinking about possible comments right away. Previously submitted comments do not have to be re-submitted.
Because many investors and proxy advisory firms view clawback policies as an important corporate governance practice, many listed companies have already adopted corporate clawback policies, and others may adopt them before the listing standards envisioned by Dodd-Frank are effective. However, since this is an evolving regulatory area, listed companies need to monitor all clawback developments closely to determine whether amendments to their policies become necessary or advisable as this rulemaking proceeds.
PCAOB Adopts Revised Auditing Standards for Use of Other Auditors
By Thomas W. White, Retired Partner, WilmerHale
On June 21, 2022, the Public Company Accounting Oversight Board adopted 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 explained by the Board, “[t]he roles of other auditors have increased as companies’ global operations have grown” and “[i]t is important for investor protection that the lead auditor adequately plan and supervise the work of other auditors so that the audit is performed in accordance with PCAOB standards and provides sufficient appropriate evidence to support the lead auditor’s opinion in the audit report.”
In general, 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.
Adoption of the revised standards, which were first proposed in 2016, represents the reconstituted Board’s first action to implement its standard-setting agendas. (See this item on the standard-setting agendas.) The revised standards will apply to all audits conducted under PCAOB standards, including audits of emerging growth companies. The standards will be subject to the approval of the Securities and Exchange Commission. If approved, they will take effect for audits for fiscal years ending on or after December 15, 2024.