- Review SEC Guidelines for Form 10-K Disclosures. At the end of 2011 and beginning of 2012, the SEC issued two disclosure guidelines affecting companies’ Form 10-K disclosures: guidance on cybersecurity risks3 and exposures to European sovereign debt.4 Each public company should evaluate whether its business is materially affected by cybersecurity risks or exposure to European debt. These issues can affect a company’s disclosures in its Form 10-K “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections, as well as its notes to fi nancial statements and disclosure controls and procedures.
- Use Correct Headings in Form 10-K and Comply with Mine Safety Disclosure Rules. Effective January 27, 2012,5 Form 10-K includes a new Item 4 in Part I:
“Item 4. Mine Safety Disclosures
If applicable, provide a statement that the information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in exhibit 95 to the annual report.”
Although the new mine safety disclosure applies only to a “registrant that is the operator, or that has a subsidiary that is an operator, of a coal or other mine” and may not apply to your company, check the table of contents of Form 10-K to make sure that Item 4 states “Mine Safety Disclosures,” not “(Removed and Reserved).”
- Stay Up to Date on Shareholder Proposal Developments. Although the “proxy access” rule,6 which required a public company to include nominees for director proposed by a shareholder in its proxy materials, is not in force, the private ordering rule (i.e., amendments to Rule 14a-8(i)(8)) became effective in September 2011. The private ordering rule gave shareholders an opportunity to propose amendments to a company’s governing documents that would establish procedures for the inclusion of one or more shareholder nominees for director in company proxy materials. In addition, the SEC issued Staff Legal Bulletin No. 14F on Shareholder Proposals7 in October 2011. The Staff Legal Bulletin addressed, among other things, (i) brokers and banks that constitute “record” holders under Rule 14a-8(b)(2)(i) for purposes of verifying whether a benefi cial owner is eligible to submit a proposal under Rule 14a-8; (ii) common errors shareholders can avoid when submitting proof of ownership; and (iii) the SEC’s new process for transmitting Rule 14a-8 no-action responses by email.
- Prepare “Bullet-Proof” Compensation Disclosure. Shareholder advisory votes to approve company executive compensation (the say-on-pay vote) have prompted public companies8 to enhance their executive compensation disclosures, especially in the Compensation Discussion and Analysis (CD&A) section of the proxy statement in order to obtain shareholder approval of say-on-pay proposals. If the say-on-pay proposal is on the ballot for a company’s coming annual meeting, and especially if shareholders did not approve the executive compensation last year, the company should carefully prepare compensation disclosures in its proxy statement to withstand the increased public scrutiny of the executive compensation information and to avoid public relations issues if its compensation practices are not approved by shareholders.9 Additionally, one of the mandatory principlesbased topics to be discussed in the CD&A focuses on whether, and if so, how the public company has considered the results of the most recent say-on-pay vote in determining compensation policies and decisions, and how that consideration has affected the company’s executive compensation policies and decisions. Such disclosure becomes especially important in the case of a company that did not get its executive compensation approved by shareholders during the 2011 proxy season.
- Become Familiar with Proxy Advisor Positions. Companies need to closely monitor recommendations and general policy statements of proxy advisors, including Institutional Shareholder Services Inc. (ISS), to avoid possible negative recommendations on company proposals at the annual meeting of shareholders. The say-on-pay proposal may have increased the infl uence of vote recommendations given by proxy advisors due to the special attention paid to various compensation issues faced by pubic companies. For example, ISS issued its 2012 updates to proxy voting guidelines12 and white paper13 highlighting ISS’ new methodology of evaluating pay for performance alignment.
Monitor SEC Rulemaking Timeline. The SEC’s current estimated timeline for January – June 2012 includes the adoption of exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence, as well as the adoption of disclosure rules regarding compensation consultant confl icts under Section 952 of the Dodd-Frank Act. (The SEC proposed such rules in March 2011). Although these new rules may not affect companies’ 2012 proxy statements, companies should review the composition of the compensation committee and evaluate the independence of committee members to identify potential issues. In addition, companies should review their relationships with compensation consultants and identify any existing or potential confl icts of interest in such relationships. In January – June 2012, the SEC also expects to propose rules regarding:
- disclosure of pay-for-performance, pay ratios, and hedging by employees and directors (under Sections 953 and 955 of the Dodd-Frank Act); and
- recovery of executive compensation (under Section 954 of the Dodd-Frank Act). The SEC plans to adopt fi nal rules regarding these matters in July – December 2012.