SEC Proposals Would Shake Up Executive Comp Reporting

The U.S. Securities and Exchange Commission (SEC) on May 19 published proposed rule changes that aim to:

• Simplify public company financial disclosures;
• Significantly reduce executive compensation reporting obligations;
• Lower corporate compliance costs; and,
• Encourage businesses to go public and remain listed.

The proposed reforms, which were included in the May 21 Federal Register, represent the most significant overhaul of the public company reporting and capital-raising framework in two decades. The public may comment on the proposals through July 20.

Two SEC documents cover the proposed changes to 17 CFR Parts 210, 229, 230, 232, 239, 240 and 249:

• “Registered Offering Reform,” Release Nos. 33-11418; 34-105513; IC-36160; File No. S7-2026-17
• “Enhancement of Emerging Growth Company Accommodations and Simplification of Filer Status for Reporting Companies,” Release Nos. 33-11419; 34-105515; File No. S7-2026-18

Simplifying the Filing System

The proposals seek to consolidate the current multi-tiered filer system into two primary categories (see below) that are dictated by a company’s two-year average public float (the total number of corporate shares available to be actively bought and sold by the general public).

Given the defined threshold, the SEC estimates approximately 80% of all public companies will be eligible for simplified disclosure. However, major market entities — including nearly all companies in the S&P 500 and S&P 400 — will remain classified as LAFs and continue to follow full disclosure requirements.

In a move to entice shifts from private status, newly public companies would be subject to the reduced disclosure rules for a full 60 months, even if their public float exceeds $2 billion. The current “seasoning” period is 12 months.

Reducing Compensation Disclosure for NAFs

For those that qualify as NAFs, the proposed rules (in Release No. 33-11419) introduce extensive cuts to executive compensation obligations. If adopted, NAFs will no longer need to hold recurring shareholder advisory votes on executive pay (e.g., “say on pay,” “say on pay frequency,” “say on golden parachute”), and will face the following reduced disclosure obligations (see below).

Exploring the Past and Future

SEC Chairman Paul S. Atkins commented on the proposals’ noteworthiness in a published statement.

“These proposals build upon the legislative and regulatory concepts that have proven successful in the past and aim to extend that success to more companies — particularly small and mid-sized companies — and incentivize them to go and stay public,” he said. “The current public company regulatory framework is in dire need of a comprehensive overhaul. Over the past 25 years, layers upon layers of legislative changes and SEC rules have created many different categories of public companies with complex, overlapping requirements and benefits. … Similarly, many of the current SEC rules governing public offerings have not been updated in over 20 years, unnecessarily constraining public companies’ ability to raise crucial capital in the public markets quickly. … Today’s proposed rulemakings … are among the first important steps toward transforming the SEC’s regulatory framework for public companies.”

As a reminder, the changes are currently just proposals, and verbiage edits could occur following the comment period. However, it is likely prudent for companies and HR professionals to begin evaluating how the amendments would affect their future proxy disclosure and compensation governance practices.

If and when finalized, the changes would be significant for many HR, finance and legal teams at public companies, since the amount of time that executive compensation-focused professionals currently devote to CD&A development, CEO pay ratio and pay vs. performance calculations, and related disclosure controls likely would be cut.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Executive Compensation
• Finance and Budgeting
• Organizational Performance