Corp Fin issues new C&DIs on ‘clawback’ rules
On January 27, 2023, the Securities and Exchange Commission’s Division of Corporation Finance posted four new C&DIs (Compliance and Disclosure Interpretations) addressing issues arising under the final “clawback” rules adopted in October 2022. As a refresher, these rules require securities exchanges to establish listing standards obligating public companies to develop and implement policies to recover erroneously awarded incentive-based compensation received by current or former executive officers (see this November 2022 PubCo post on the updated clawback rules and this October 2022 client alert for more information).
In brief, the new C&DIs address the following:
- While check boxes and other disclosure requirements will be in the relevant forms in 2023, Question 121H.01 provides that the SEC does not expect companies to include the check boxes or provide the required disclosure until they are required to have a recovery policy under the applicable listing standard. The listing standards are not required to be effective until November 28, 2023, and issuers subject to such listing standards will not be required to adopt a recovery policy for 60 days following the date on which the applicable listing standards become effective.
- For foreign private issuers that use Form 20-F, Question 121H.02 provides that individualized disclosures under the final rules are required for members of their administrative, supervisory or management bodies for whom they otherwise provide individualized compensation disclosure in the filing.
- For companies filing Form 40-F, Question 121H.03 provides that individualized disclosure under the final rules is required for executive officers for whom there is otherwise individualized compensation disclosure in the filing.
- Question 121H.04 notes that the rule is intended to apply broadly to plans that consider incentive-based compensation, and that for plans that consider incentive-based compensation, an issuer would be expected to claw back the amount contributed to the notional account based on erroneously awarded incentive-based compensation and any earnings accrued to date on that notional amount.
For more information, refer to this January 2023 PubCo post on the new C&DIs.
SEC reportedly considering easing proposed climate disclosure rules
On February 3, 2023, the Wall Street Journal and Politico reported that SEC Chair Gary Gensler is considering softening the controversial proposed rules requiring public companies to provide extensive climate-related disclosures (see this April 2022 client alert, this March 2022 PubCo post on the proposed new rules and this March 2022 PubCo post on the proposed new rules related to greenhouse gas emissions for more information). As noted by Politico, a main reason for the possible relaxation is “the wave of lawsuits that are expected to challenge the rule once it’s finalized,” especially with the “Supreme Court moving to rein in the so-called administrative state.” According to the WSJ, the SEC is particularly focused on whether and how to revise the financial statement disclosure requirements that are included in the proposed rules, though the final version of the rules “will likely still mandate some climate disclosures in financial statements, according to the people close to the agency.” For more information, refer to this February 2023 PubCo post on dialing back the climate disclosure rules.
New Corp Fin director
On January 13, the SEC announced that Renee Jones, director of the Division of Corporation Finance, would depart the agency on February 3, 2023. She was replaced by Erik Gerding, Corp Fin’s former deputy director. Jones led Corp Fin through the cascade of proposed rulemaking in 2022, including proposals for climate disclosure, special purpose acquisition companies and cybersecurity risk disclosure, as well as nine rule adoptions – including rules for compensation clawbacks, pay-versus-performance and Rule 10b5-1 plans, and insider trading. Gerding joined the SEC in October 2021 and was head of legal and regulatory policy in Corp Fin. For more information, refer to this January 2023 PubCo post on the change in directorship.
Geopolitical impact on boardroom
In a new report titled “Geopolitical and economic risks: Board oversight in an evolving world,” Corporate Secretary published the findings of a survey of governance professionals exploring how boards are implementing oversight of geopolitical risk. Some key takeaways include:
- 54% of respondents indicated that the board of directors has “primary oversight of relevant geopolitical risk issues,” with 17% identifying the risk committee and 15% the audit committee.
- 67% of large-cap respondents and 65% of mega-cap respondents indicated that primary oversight of geopolitical risk was the responsibility of the whole board of directors, while only 47% of mid-caps and 46% of small caps indicated the same.
- 42% of respondents indicated that, within the past 12 months, the board of directors has discussed geopolitical risk issues at every board meeting, while 28% say those discussions occurred on an ad hoc basis (only 6% reported that the board hadn’t discussed these issues).
- The most frequently mentioned economic/geopolitical topics discussed at board meetings in the past year were economic growth/recession (95%), inflation (93%), the war in Ukraine (84%), racial equality (46%) and gender pay gaps (43%).
For more information, refer to this January 2023 PubCo post on boardroom geopolitics and this article on board oversight of geopolitical risks and opportunities.
FTC noncompete rule proposal
In a significant departure from current practice, the Federal Trade Commission published a proposed rule that would categorically ban noncompete agreements between employers and a broad class of “workers” (natural persons who work, whether paid or unpaid, for an employer, including employees, independent contractors, externs, interns, volunteers, apprentices or sole proprietors who provide a service to a client or customer). Currently, noncompete covenants are generally governed by state laws and are generally considered enforceable if “reasonable.” The proposed rule has no immediate impact and is likely to be challenged in court if made final, but companies should be aware of the proposal and consider alternative approaches to protect their confidential information. For more information, refer to this FTC fact sheet and this January 2023 client alert on the FTC’s proposed rule.
Insights from early filers
On January 5, 2023, Morrow Sodali published a helpful resource titled “2022 – 2023 Early Filers,” which organizes access to disclosures in proxy statements and Form 10-Ks that were filed by select non-calendar year, fiscal year-end companies. These disclosures can provide insights into how companies are handling new and trending disclosure topics and may be of use to companies looking for examples of such disclosures. For proxy statement filings contained in the resource, separate links are included for the proxy summary, compensation discussion and analysis, board matrix, leadership structure, committees, risk oversight, and environmental, social, and governance (ESG), in addition to other topics for a subset of companies. For Form 10-K filings, linked disclosure topics for all companies include business, risk factors, management discussion and analysis, ESG, cybersecurity, and human capital management.