The Securities and Exchange Commission (SEC) recently issued the Agency Rule List – Spring 2021 outlining its priorities for the coming year. Highlighted below are items that have human resources and executive compensation implications.
Finalizing Dodd-Frank rules
The following items would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Division of Corporate Finance (Corp Fin) is considering items 1 – 3 as reproposed regulations, giving those a longer time frame until finalization.
- Clawbacks of erroneously awarded compensation: Regulations to implement section 954 of the Dodd-Frank Act would require listing exchanges to mandate that companies disclose and enforce a policy to claw back incentive-based compensation in certain circumstances, including upon a material restatement of company financials.
- Enhanced reporting by institutional investors of “say on pay” and other proxy votes: Regulations to implement section 951 of the Dodd-Frank Act would enhance the information reported on Form N-PX detailing how institutional investment managers voted on any shareholder vote on executive compensation or golden parachutes.
- Limits on financial institution incentive compensation that promotes inappropriate risk taking: Regulations and guidelines from the SEC together with the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency and the National Credit Union Administration (the agencies), to implement section 956 of the Dodd-Frank Act would apply only to covered financial institution ($1 billion or more in total assets). These reproposed regulations and guidelines would prohibit incentive-based payment arrangements, or any feature of any such arrangement, that the agencies determine encourage inappropriate risks by a covered financial institution by providing excessive compensation or that could lead to a material financial loss for the institution. Because this is a multi-agency effort, getting all parties to agree to uniform rules may take longer than if the SEC must act on its own.
- Pay versus performance disclosure: This would be a finalization of previously proposed regulations to implement section 953(a) of the Dodd-Frank Act, which would require proxy disclosure of the relationship between executive compensation actually paid and the financial performance of the registrant. It is likely that the SEC won’t make significant changes to the original proposed regulations before they are finalized, which could occur before the end of 2021, effective for 2022 calendar-year proxies.
Initiatives to undo Trump-era SEC actions
The following items would seek to change SEC actions adopted under the Trump administration:
- Human capital management disclosure: Corp Fin is considering recommending that the SEC propose rule amendments to enhance registrant disclosures regarding human capital management. Companies already were required to provide human capital disclosures when material to an understanding of the business for 10-Ks or 10-Qs filed on or after November 9, 2020, under a Trump-era rule. The SEC appears poised to adopt a more directive rule it believes would necessitate a new rule proposal rather than an amendment. In a recent speech, Commissioner Allison Herren Lee explains why she thinks the materiality standard needs to be revisited.
- Proxy advisor voting advice: Corp Fin is considering recommending that the SEC propose rule amendments governing proxy voting advice. The SEC recently announced it would not enforce the Trump-era proxy advisor rules as it explores alternative approaches.
New initiatives
Corp Fin is considering the following items as recommendations to the SEC, including additional disclosure requirements for registrants and guidance to investment companies and investment advisors on environmental, social and governance (ESG) factors.
- Climate change disclosure: Proposed rule amendments could enhance registrant disclosures about registrants’ climate-related risks and opportunities. The SEC has already begun sifting through public comments on the best approaches to provide climate change information that would adequately inform investors and other market participants. Commissioner Lee stated the SEC would issue its proposal before year-end.
- ESG requirements for investment companies and investment advisors: These proposed requirements for investment companies and investment advisors are related to ESG factors, including ESG claims and related disclosures. It appears the rules governing investment companies and advisors would tie to the disclosures the SEC may mandate for registrants on ESG topics. Presumably, those rules would then provide structure on how investment companies and advisors address these issues for clients and could also be required as issues to be considered when voting on proxies and for directors.
- Corporate board diversity: Proposed rule amendments could enhance registrant disclosures about the diversity of board members and nominees.
- Cybersecurity risk governance: Proposed rule amendments could enhance registrant disclosures regarding cybersecurity risk governance.
- Disclosure regarding beneficial ownership and swaps: Proposed amendments to current disclosure requirements (last updated in 2011) could enhance market transparency, including disclosure related to beneficial ownership or interests in security-based swaps.
- Share repurchase disclosure modernization: Proposed amendments could modernize disclosure of share repurchases, including Item 703 of Regulation S-K.
- Universal proxy access: Final regulations that adopt amendments to the proxy rules could allow a shareholder voting by proxy to choose among all duly nominated candidates in a contested election of directors. On April 16, 2021, the SEC reopened the comment period on the original proposal that was put forth back in 2016.
Going forward
Most of the items on the Agency Rule List require a formal SEC rulemaking process, meaning proposed regulations and a typical 60-day public comment period would be required before final regulations can be issued.
New stock exchange listing requirements take longer, as the listing exchanges must propose changes to their rules that are then subject to SEC approval before going into effect.
A few items on the list have been published as proposed regulations for which comments have been received, so it would only take the approval of final regulations for these rules to become effective.
