SEC gets tougher on financial reporting
As you are probably aware, the SEC hit a milestone on July 1, completing its proposed rule-making on all executive compensation-related matters mandated under the Dodd-Frank Act.
Rule 10D-1, proposed two weeks ago, would require companies listed on US securities exchanges to develop and enforce recovery policies that, in the event of an accounting restatement, ‘claw back’ from current and former executive officers incentive-based compensation they wouldn’t have received based on the restatement. Recovery would be required without having to prove misconduct by any officer. Disclosure of listed companies’ recovery policies and the resulting actions under those policies would also be required.
According to the proposed rules, a company will risk de-listing if it fails to adopt a compensation recovery policy that meets the applicable listing standard, disclose the policy in accordance with SEC rules, or comply with the policy’s recovery provisions. The intent of the new rules is to improve the quality of financial reporting and accountability within companies for the benefit of investors, the regulator says.
Also on July 1, the SEC issued a concept release addressing the possibility of stricter disclosures by audit committees regarding matters related to their oversight of independent auditors and asking for comments from the public. One thing the commission is seeking public comment on is whether a company should be required to disclose information about any discussions between the audit committee and the auditor regarding the report that audit committees are obliged to obtain from the independent auditor under NYSE rules. In that report, the auditor describes the firm's internal quality control procedures and any material issues raised by the firm's most recent internal quality control review or peer review.
The concept release also asks for comments regarding whether additional disclosure about meetings between the audit committee and the independent auditor would be appropriate, including the frequency of private sessions with the auditor and the topics addressed during such sessions.
‘The reporting of additional information by the audit committee with respect to its oversight of the auditor may provide useful information to investors as they evaluate the audit committee’s performance in connection with, among other things, their vote for or against directors who are members of the audit committee, the ratification of the auditor, or their investment decisions,’ the SEC says in the concept release.
Both the proposed claw back rules and the discussion of possible enhanced audit committee disclosures have triggered concerns from consultants and outside counsel serving public companies. Yesterday, Hugessen Consulting published a client alert raising questions about Canadian firms listed on US stock exchanges being subject to the same clawback rules, which ‘would apply to a greater number of executives’ and ‘would remove much of the board discretion [that is] currently part of most Canadian company policies.’
A client alert from Gibson Dunn yesterday cited the law firm’s reservations that ‘future rule changes could significantly expand the length of audit committee reports and other proxy disclosures about audit committees, require disclosure about matters that arguably are not material to investors, and lead to increased risk of exposure for companies and their audit committee members.’
Whatever the response, it’s clear from these developments that the SEC is determined to strengthen corporate accountability for financial reporting – and that’s something companies shouldn’t resist.