No More Lenience on Pay Disclosure: SEC

The regulator pledges to finally get tough on the enforcement of its three-year-old compensation-disclosure rules.

After three years of reviewing companies’ pay disclosures, the Securities and Exchange Commission appears to be running out of patience.

Since late 2006, when the SEC revamped its guidelines for disclosing information on the compensation of top executives, the regulator has been sending out comment letters to companies whose disclosures they consider insufficient. These companies have been asked to do a better job next time or to provide additional information in a response letter.

But now the SEC has higher expectations, warns Shelley Parratt, deputy director of the commission’s Division of Corporation Finance. “Any company that waits until it receives staff comments to comply with the disclosure requirements should be prepared to amend its filings if it does not materially comply with the rules,” she said during a two-day conference this week held by and

Under the sweeping changes to the Compensation Discussion and Analysis sections of proxy statements, companies are required to tabulate and describe their reasoning for bonuses, incentive awards, stock options, and severance packages for top executives. But so far, the SEC has lightly enforced the more stringent requirements, giving both itself and companies time to get used to them.

For example, in late 2007, the first year the changes were effective, the commission noted faults in the CD&As of 350 companies. In comment letters sent to those firms, the regulator niggled for minor changes — such as larger text in footnotes — and requested more discussion surrounding the rationale for executives’ pay structure.

Last year and this year, the SEC has not disclosed how many companies received comments on their CD&As. Parratt indicated, though, that by this time next year most companies will have been reviewed at least once. “If we have not reviewed your filings [yet], the chances are very good that we’re planning to do so this year,” she said.

Meanwhile, in addition to tighter reviews of CD&As, the SEC will be rethinking other kinds of disclosure requirements in the coming year. “Our goal is to determine if some information we require should be omitted, or if some information we don’t require should be added,” said SEC chairman Mary Schapiro at a securities regulation conference last week.

For example, the commission is considering whether to boost disclosure of companies’ risks tied to climate change. Environmental groups have criticized the SEC for not enforcing its rules requiring companies to report when they are involved in certain legal proceedings regarding their treatment of the environment. Studies have shown that nearly three-fourths of businesses don’t disclose their environmental liabilities in SEC filings, as required. “We are taking a very serious look at our disclosure system in this area,” SEC commissioner Elisse Walter said last month.

In addition, the SEC may revisit guidelines for the management discussion and analysis section of companies’ annual reports, which hasn’t been updated in more than five years. Walter has said management could do a better job at tipping off investors to the trends and uncertainties they are experiencing. “In my view, corporate MD&As are still not where they should be,” she said.


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