Nasdaq and New York Stock Exchange propose clawback rules
As previously published in this client alert on the final clawback rule and this PubCo post on compensation clawbacks, the Securities and Exchange Commission (SEC) adopted Rule 10D-1 in October 2022 to require securities exchanges to establish listing standards to obligate public companies to develop and implement a "clawback" policy providing for the recovery of incentive-based compensation received by current or former executive officers in the event a company is required to prepare an accounting restatement. In response, the NYSE and Nasdaq have released proposed listing standards.
The NYSE proposal would add new section 303A.14 to the Listed Company Manual, which sets forth requirements for the recovery policy, including the triggering restatements, executive officers covered, incentive-based compensation covered and other pertinent provisions, all designed to closely conform to the applicable language of Rule 10D-1. Section 303A.14 also specifies the following implementation timeline:
- The recovery policy prescribed by the section must be adopted no later than 60 days from the effective date of the listing standard.
- Companies must comply with the recovery policy for all incentive-based compensation received on or after the effective date resulting from financial reporting measures based on financial information from a fiscal period ending on or after the effective date.
- Companies must provide the required disclosures in the applicable SEC filings on or after the effective date.
The NYSE proposal also would add Section 802.01F, which specifies that if the NYSE determines that a listed issuer is noncompliant with any of the provisions of Section 303A.14, trading in all listed securities of the company would immediately be suspended and delisting procedures would immediately commence. The NYSE will determine whether the steps a company is taking constitute compliance with its policy, and a separate process would apply for companies that fail to timely adopt the required recovery policy.
Similarly, the Nasdaq proposal would add new Listing Rule 5608, which also sets forth the requirements for a recovery policy and is designed to conform closely to the applicable language of Rule 10D-1. In addition, Listing Rule 5608 provides for the same implementation timeline as the NYSE proposal, except that companies would be required to apply the recovery policy to incentive-based compensation received on or after the effective date, regardless of the financial reporting measure it is based on.
A company would be subject to delisting under Nasdaq's proposal if it does not adopt a compliant compensation recovery policy, disclose said policy in accordance with SEC rules or comply with its recovery provisions as contemplated by Rule 10D-1.
Nasdaq will determine whether the steps a company is taking constitute compliance. Companies that fail to comply must submit a plan to regain compliance, with the administrative process resembling other corporate governance deficiencies under the Nasdaq listing standards.
As a reminder, these listing standards must be effective no later than November 28, 2023. Comments on each notice of proposed rule change will be due 21 days from publication of the applicable notice in the Federal Register. For more information, refer to this March 2023 PubCo post on the Nasdaq and NYSE proposals.
Corp Fin issues C&DIs on pay-versus-performance rules
On February 10, 2023, the SEC's Division of Corporation Finance posted 15 new Compliance and Disclosure Interpretations (C&DIs) addressing issues arising under the final pay-versus-performance rules, which require most public companies to provide a table and accompanying disclosure comparing executive "compensation actually paid" against specified measures of company financial performance. The new C&DIs can be found under the caption for Reg S-K, Item 402(v). Among other topics, the C&DIs address questions regarding:
- The calculations for equity award and pension value adjustments to get to compensation actually paid.
- The fiscal years to be covered by the footnote disclosure.
- The calculation of peer group total shareholder return.
- Whether the company-selected measure can be derived from net income or total shareholder return.
- The use of stock price as a company-selected measure.
- How to determine whether a company uses a financial performance measure for compensation decisions when it utilizes a "bonus pool."
Notably, in one C&DI the staff confirmed that Item 402(v) disclosure does not need to be included in Form 10-K, despite Item 11 of Form 10-K indicating that the information is required under Item 402. Companies should check their Item 11 statement in their Form 10-K to ensure it does not expressly incorporate by reference the pay-versus-performance disclosure. For a summary of all the C&DIs, refer to this February 2023 PubCo post on the new C&DIs. For more information on the pay-versus-performance rules, see this September 2022 client alert and this September 2022 PubCo post.
SEC adopts final rules to move standard settlement cycle from T+2 to T+1
On February 15, 2023, the SEC announced it had adopted final rules to shorten the standard settlement cycle for most securities transactions from two business days (T+2) to one business day (T+1) after the trade date. The SEC also shortened the standard settlement cycle for firm commitment public offerings priced after 4:30 pm from four business days (T+4) to two (T+2). These final rules also include requirements relating to the processing of institutional trades. SEC Chair Gary Gensler stated that the adoption of these amendments "addresses one of the four areas the staff recommended the Commission address in response to the meme stock events of 2021." Notably, the SEC indicated it continues to consider the feasibility of moving to a T+0 settlement (i.e., settlement by the end of the trade day). The rules will become effective 60 days after being published in the Federal Register, with a compliance date of May 28, 2024. For more information, refer to this SEC Fact Sheet on Reducing Risk in Clearance and Settlement and this February 2023 PubCo post on settlement cycle changes.
Climate disclosure starter guide
Persefoni and the Society for Corporate Governance recently published a practical resource titled Climate Disclosure Starter Guide: Measuring, Managing, and Reporting Scope 1,2, and 3 Emissions, aiming to help companies understand the complicated and complex workstreams of climate management. While it doesn't provide an in-depth solution for all companies, the guide provides a general understanding of the steps companies should take when calculating and reporting a carbon footprint and building a climate strategy.
The five primary steps explored are:
- Establishing organizational boundaries and a governance strategy.
- Identifying emissions sources and collecting data.
- Aligning with the relevant standards.
- Creating a climate strategy.
- Reporting a company's carbon footprint.
The guide may be of particular use to companies beginning their climate reporting and strategy journey, as it also includes definitions and explanations for key climate terms and concepts and summarizes the different standards to be aware of.
SEC continues focus on non-GAAP measures
On February 28, 2023, The Wall Street Journal reported on a series of recent comments letters from the SEC focused on the presentation of non-generally accepted accounting principles (non-GAAP) metrics. Per the WSJ, 20 companies were questioned in January and February 2023 about their compliance with Question 100.04, one of the C&DIs updated in December 2022, when it was expanded to more generally state that a non-GAAP measure can violate Regulation G and be misleading if the recognition and measurement principles used to calculate the measure are inconsistent with GAAP. The updates also included the addition of illustrative examples of adjustments the staff may consider to be misleading. The WSJ expects the number of companies to be questioned about their use of non-GAAP measures to increase in the coming months, given the SEC's apparent focus. See this December 2022 PubCo post on the new non-GAAP C&DIs for more information on the C&DI updates.
SEC climate-related comments
In February 2023, MyLogIQ published its findings from an analysis of 620 climate change-related comments in SEC comment letters to Forms 10-K and 20-F from July 2021 to January 2023 (covering 76 public companies). The report found 11 climate-related reporting themes that the SEC is focused on:
- Consistency between environmental, social and governance/corporate social responsibility reports and SEC filings.
- Material effects on transition risks.
- Material litigation risks.
- Capital expenditures on climate-related initiatives.
- Indirect consequences on business trends.
- Physical impacts on operations and cost of insurance.
- Compliance costs.
- Pending legislation and regulation.
- Purchase of carbon credits.
- The board and its role in climate disclosures.
- Reputational risk.
The report includes examples of comments for each theme and shows the frequency with which they are mentioned, with comments most commonly addressing the physical effects/cost of insurance (18%), transition risks (16%) and compliance costs (15%). Finally, the report includes three takeaways for companies from the analysis:
- Be prepared to discuss the physical effects of climate change on the company's operations and cost of insurance.
- Synchronize the content of publicly posted reports with SEC filings.
- Management discussion and analysis and risk factor disclosure received the most comments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
