SEC Updates on Opened Comment Period

SEC Reopens Comment Period on Executive Compensation Proposal

The SEC reopened the comment period on a proposal to amend the current executive compensation disclosure rule, Item 402 of Regulation S-K, to require that companies disclose the relationship between their executive compensation and financial performance.

The proposal was originally published in April of 2015 (see prior coverage). The proposed revisions to Item 402 implement Exchange Act Section 14(i) (“Proxies – disclosure of pay versus performance”), which was created by Dodd-Frank Section 953.

Commissioner Statements

SEC Chair Gary Gensler expressed support for the proposed rulemaking, saying it would “strengthen the transparency and quality of executive compensation disclosure.” Mr. Gensler also noted that, if adopted, the proposal would “fulfill a mandate from Congress under the Dodd-Frank Act of 2010.”

Commissioner Caroline A. Crenshaw also supported the reopening of the comment period, observing how executive pay practices have changed since 2015. Ms. Crenshaw stated that it was important to re-solicit public feedback, noting that companies are now “increasingly linking executive pay to environmental, social, and governance (“ESG”) measures.”

Commissioner Allison Herren Lee expressed support for the action and focused on changes involving smaller reporting companies, stating that “smaller reporting companies today would account for 45 percent of all companies that would be subject to the rule’s requirements.” She added: “[i]t would be helpful to hear from commenters as to whether we should include exemptions for smaller reporting companies in the final rule and, if so, how best to calibrate them.”

Commissioner Hester M. Peirce dissented, stating she would have favored a release that asked the public “whether [the SEC] should permit companies greater flexibility to determine which financial performance measure is appropriate in this context and to determine how to calculate executive compensation actually paid.”

Primary Sources

  1. SEC Release No. 34-94074: Reopening of Comment Period for Pay versus Performance

  2. SEC Chair Gary Gensler’s Statement of Support

  3. SEC Commissioner Caroline A. Crenshaw’s Statement of Support

  4. SEC Commissioner Allison Herren Lee’s Statement of Support

  5. SEC Commissioner Hester M. Peirce’s Statement of Dissent

SEC Division Warns Private Fund Advisers on Compliance Deficiencies

In a risk alert for private fund advisers, the SEC Division of Examinations highlighted compliance issues found during the 2020 exam period. The Division stated that the alert was meant to help SEC-registered investment advisers review and enhance their compliance programs.

Conduct Inconsistent with Disclosures

The Division said that its examiners observed issues with regard to material investor disclosures, including:

  • failures to get informed consent from Limited Partner Advisory Committees, Advisory Boards or Advisory Committees required pursuant to fund disclosure rules;

  • management fee calculations that did not adhere to fund disclosures, as well as failures to comply with liquidation, fund extension terms, and recycling practices described in fund organizational documents, resulting in erroneous management fees;

  • fund investments that diverged materially from fund-disclosed investment strategies; and

  • failures to announce “key person” departures in accordance with fund disclosures.

Performance and Marketing Disclosures

The Division said that its examiners observed violations of IAA Rule 206(4)-8 (“Pooled Investment Vehicles”) and Rule 204-2(a)(16) (“Books and Records to Be Maintained by Investment Advisers”), including:

  • the use of cherry-picked and inaccurate data, resulting in misleading track records and erroneous performance metrics;

  • failures to maintain books and records about predecessor performance at other advisers, as well as material omissions and deceptive claims about such performance; and

  • misleading advisor statements with regard to performance awards and unsupported claims of government supervision.

Due Diligence

The Division said that its examiners observed fiduciary failures, including:

  • advisers that did not reasonably research investments and/or critical service providers in accordance with fund due diligence policies and procedures; and

  • investment due diligence policies and procedures that were inadequately designed for a fund’s investment strategy.

Hedge Clauses

The Division said that its examiners observed fund documents that misleadingly attempted to waive or limit fiduciary duties established by Advisers Act Sections 206(1) and (2) (“Prohibited Transactions by Investment Advisers”).

The Division stated that its findings resulted in deficiency letters and referrals to the Division of Enforcement.

Primary Sources

  1. SEC Division of Examinations Risk Alert: Observations from Examinations of Private Fund Advisers

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