Edited by Robert Kohl and Hays Ellisen
SEC/CORPORATE SEC Division Deputy Director Discusses Expectations for 2010 Executive Compensation Disclosure In a November 9 speech at the Fourth Annual Proxy Disclosure Conference: Tackling Your 2010 Compensation Disclosure, Shelley Parratt, Deputy Director of the Securities and Exchange Commission's Division of Corporation Finance, outlined the SEC staff's expectations for companies' executive compensation disclosure for the 2010 proxy season.
Against the backdrop of intense public scrutiny of executive compensation, Deputy Director Parratt urged public companies to enhance their executive compensation disclosure, particularly with respect to their compensation disclosure and analysis (CD&A). She noted that, too often, companies fail to include sufficient analysis of their compensation decisions in their CD&A disclosure. According to Ms. Parratt, a detailed discussion of the process used to determine executive compensation is inadequate to satisfy the requirements of CD&A absent a meaningful analysis of why named executive officers were compensated in a particular manner or amount. Although Ms. Parratt believes process-oriented disclosure of the framework in which compensation decisions are made may provide investors with important context for CD&A, disclosure should focus on how the company applied such framework, including any qualitative factors considered by the company, to determine the amount and structure of executive compensation. However, she added, "If a committee's pay determinations were simply subjective decisions, the company should say that."
She also stressed the need to enhance disclosure with respect to performance targets (benchmarks) used to make compensation decisions (i.e., "pay for performance"). According to Ms. Parratt, the staff issues "more comments on performance targets than any other executive compensation disclosure item."
Applicable rules require companies to disclose performance targets that are material to compensation policies and decisions, unless such information is confidential and disclosure would result in competitive harm to the registrant. As a threshold matter, Ms. Parratt suggested that a company should consider whether performance targets are in fact a material element of compensation policies and decisions, especially where such targets may be disregarded at the company's discretion or performance-based compensation may otherwise be awarded even if performance targets are not achieved. She said that "when a company states that it determined a material element of compensation [is] based on the achievement of performance targets, [the staff] will ask for specific disclosure of the targets and the actual achievement level against the targets, or for the company to provide [the staff] with an explanation of how such disclosure would cause it competitive harm." A company claiming that such disclosure would result in competitive harm should nonetheless provide meaningful and specific disclosure regarding how difficult or likely it would be for the undisclosed performance target to be achieved, she said
Ms. Parratt stressed the need for issuers to be more proactive in updating their CD&A disclosure to reflect staff interpretations expressed in publicly available comment letters and other guidance regarding CD&A. According to Ms. Parratt, "after three years of [staff comments that are applicable only to companies' future filings, the staff] expects companies and their advisors to understand [the SEC's] rules and apply them thoroughly. So, 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."
Click here to view the complete text of Deputy Director Parratt's speech.
LITIGATION Ninth Circuit Overrides Lower Court Lead Counsel Appointment The Ninth Circuit ruled that the district court erred in refusing to appoint lead plaintiffs' chosen counsel in a consolidated securities class action.
Plaintiffs, investors in a technology corporation, alleged that the defendant had fraudulently concealed issues which led to a substantial decline in share price. The district court appointed co-lead plaintiffs to prosecute the action. However, the court did not appoint counsel chosen by one of the lead plaintiffs, instead choosing the attorneys that represented a third plaintiff group which were not chosen as a co-lead plaintiff. Co-lead plaintiff petitioned for a writ of mandamus, arguing that the district court's appointment was beyond its statutory authority. Non-lead plaintiff argued that the district court acted within its discretion in appointing their counsel because under the Private Securities Litigation Reform Act, the authority to select counsel by lead plaintiff is subject to court approval. The Ninth Circuit held that the discretion to approve lead counsel did not include the authority to appoint a different lead counsel; instead, the power to select counsel remains with lead plaintiff. (In re Roberto Cohen, No. 09-70378, 2009 WL 3681701 (9th Cir. Nov. 5, 2009))
Amended Complaint Cures Defective Scienter Allegations The U.S. District Court for the Northern District of California denied a motion to dismiss after plaintiffs in a securities fraud action amended their complaint to add statements based on confidential witness information and other allegations.