The SEC just announced that it plans to review rules requiring public companies to report the earnings of CEOs and other high-level executives, possibly highlighting an area of regulatory focus for the now Republican dominated and Paul Atkins-chaired commission.

A public roundtable will be held on June 26 to discuss possible changes to executive compensation disclosure requirements.

While a speaker list and agenda has not been released yet, Chair Atkins published a list of questions he wanted participants and the public to answer first about the current set of rules governing executive compensation disclosures.

Disclosure should be material

In his statement accompanying the roundtable announcement, Atkins pointed out that disclosure requirements have been expanded to focus more and more on variations of components of compensation, rather than on total compensation. 

“While it is undisputed that these requirements, and the resulting disclosure, have become increasingly complex and lengthy, it is less clear if the increased complexity and length have provided investors with additional information that is material to their investment and voting decisions. It is important for the Commission to engage in retrospective reviews of its rules to ensure that they continue to be cost-effective and result in disclosure of material information without an overload of immaterial information,” he stated.

The questions posed to commenters begin with asking them about their process for developing comp packages and the roles of the board and external advisors in the process.

Plus it asks them to weigh in more specifically on what they disclose in response to Item 402 of Regulation S-K that, they believe, might not actually be material to investors, or could be streamlined to improve investor disclosure.

Another area of potential reform that Chair Atkins is asking staff and stakeholders to consider is possible changes to a 2006 compensation rule that he voted in favor of when he was last at the agency as a commissioner between 2002 and 2008 .

The 2006 rules were amendments to the initial 1992 compensation disclosure rules; they require the reporting of the dollar value of an executive’s stocks and options and the value of accumulated pension benefits.

Atkins wondered whether the “complexity and length” of the disclosures as required by the 2006 amendments were helpful to investors and if they were too expensive for companies.

Pay-versus-performance and clawbacks

Atkins also had questions about the more recently adopted rules implementing the requirements of the Dodd-Frank Act related to pay-versus-performance and clawbacks.

The pay-versus-performance rule requires many publicly traded companies to compare executive pay to certain financial metrics — including cumulative total shareholder return, net income and another measure of the company’s choosing — with the goal of giving investors greater insight into how executive compensation at the company is calculated.

Atkins said: “I have continued to hear concerns regarding the rule’s definition of “compensation actually paid” (CAP). He is interested in finding out what companies’ experience has been in calculating CAP as well as the investor experience in using this information to make investment and voting decisions.

The clawback rule requires executives to return any bonuses that were awarded based on the company hitting certain financial targets if it’s later discovered those financials were inaccurately reported.

Comments

The announcement has already yielded a few comments; as they continue to trickle in, it’s interesting to note a couple of these early responses.

One commenter noted that the pay versus performance disclosures have been very costly for smaller reporting issuers to comply with in terms of time and money, especially given that there have been very little feedback from investors on the disclosures, which seems to suggest few read them or use them for benchmarking.

A group of individuals submitting one comment letter from their company referred to that rule as well saying they don’t support a full recission, but they would like several modifications made, such as eliminating the disclosure obligation of the compensation for those who are not principal executive officers.

Meticulous economic analysis

Separately, Atkins spoke last week at the 12th Annual Conference on Financial Market Regulation; those remarks further highlighted his emphasis on streamlining rulemaking and considering any unintended consequences that could stem from them.

This speech particularly highlighted his agency’s current focus on rigorous economic analysis when it comes to rulemaking.

In his prepared remarks, he lamented that the SEC has in recent years “demonstrated a tendency to prioritize regulatory expansion over meticulous economic analysis, potentially jeopardizing this delicate balance.”

He said that under his leadership, he wants the agency to not only attempt to quantify these economic effects, but also glean the potential benefits and costs of the final rule. He said that going forward the agency must show its work “so that the public understands what we are proposing and why.” And he added that this means demonstrating that the agency has also considered the potential negative impact of its rule-making.

“In choosing when and how to regulate our markets we should be cognizant to measure twice and cut once. Otherwise, we risk damaging our markets and unnecessarily adding costs to issuers and investors.”

And he also reminded his listeners that investors can also choose to invest in other markets, suggesting that it can sometimes be easy to overlook that investment is global in nature. He pointed out that in this global and highly competitive environment one of the SEC’s key objectives is to ensure that America’s market is the “best in the world for investors and issuers”.