Tag: Financial reporting


SEC Proposes Rules on Mandatory Clawback Policies

Renata J. Ferrari is partner tax & benefits department at Ropes & Gray LLP. This post is based on a Ropes & Gray Alert.

On July 1, 2015, the Securities and Exchange Commission proposed rules to require issuers of securities listed on U.S. stock exchanges to adopt and enforce clawback policies applicable to incentive-based compensation received by current and former executives in the three-year period preceding the date the issuer is required to prepare an accounting restatement due to material noncompliance with financial reporting requirements. The proposed rules would implement the “no fault” clawback rule requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Section 10D of the Securities Exchange Act of 1934, as amended).

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Clawbacks of Erroneously Awarded Compensation

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at a recent open meeting of the SEC; the full text is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

A few months ago, the baseball world celebrated the 90th birthday of Yogi Berra, the legendary former catcher and manager for the New York Yankees. Yogi Berra is well-known for his witty comments, often referred to as “Yogi-isms.” [1] Several come to mind today, as we consider another rulemaking related to executive compensation.

“Pair up in threes.”

Following our earlier efforts on hedging and pay versus performance, today’s proposal is the third relating to executive compensation that we have considered in 2015. The Commission has yet again spent significant time and resources on a provision inserted into the Dodd-Frank Act that has nothing to do with the origins of the financial crisis and affects Main Street businesses that are not even part of the financial services sector. Why does the Commission continue to prioritize our agenda with these types of issues, when rulemakings that are directly related to the financial crisis remain unaddressed?

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Making Executive Compensation More Accountable

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

When it comes to compensation, Americans believe you should earn your money. They also believe, just as strongly, that you should not keep what you did not earn. It’s fundamental to our values. However, when companies have to restate their financial statements because they violated applicable reporting requirements, their executives may not be required to reimburse any incentive-based compensation that was erroneously paid. In other words, they get to keep what they never should have received in the first place.

And, quite often, we are talking about very large amounts. In today’s corporate world, many executives are earning eye-catching sums. Much of the increase in executive compensation is commonly attributed to the impact of incentive-based compensation, including equity and other performance-based compensation plans.

Incentive-based compensation plans are intended to align the interests of company managers and shareholders. However, when a company is required to issue a restatement, and when its executives have been paid compensation based on inflated financial results, this alignment disappears. In such cases, it is only fair that these erroneously awarded payments be recovered.

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SEC Proposes More Frequent and Detailed Fund Holdings Disclosure

John M. Loder is partner and co-head of the Investment Management practice group at Ropes & Gray LLP. This post is based on a Ropes & Gray Alert.

On May 20, 2015, the SEC proposed new and amended rules and forms (the “Proposals”) that, if adopted, will significantly broaden the type and scope of information reported by registered investment companies. The Proposals, which are summarized below, fall into five categories:

  • New Form N-PORT, which would require registered investment companies to report detailed information about their monthly portfolio holdings and risk metrics to the SEC using a prescribed XML data format.
  • New Rule 30e-3, which would permit registered investment companies to transmit periodic reports to their shareholders by making the reports and quarterly portfolio information accessible online.
  • New Form N-CEN, which would require registered investment companies to report census-type information to the SEC annually, using a prescribed XML data format.
  • Elimination of Forms N-Q and N-SAR, as well as amendments of certain other rules and forms.
  • Amendments to Regulation S-X, which would require standardized, enhanced disclosure about derivatives in investment company financial statements consistent with Form N-PORT.

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Audit Committees: 2015 Mid-Year Issues Update

Rick E. Hansen is Assistant Corporate Secretary and Managing Counsel, Corporate Governance, at Chevron Corporation.

Board audit committee agendas continue to evolve as companies are faced with a rapidly-changing global business landscape, the proliferation of standards and regulations, increased stakeholder scrutiny, and a heightened enforcement environment. In this post, I summarize current issues of interest for audit committees.

The Audit Committee And Oversight

During her remarks at the Stanford Directors’ College in June 2014, SEC Chair Mary Jo White observed that “audit committees, in particular, have an extraordinarily important role in creating a culture of compliance through their oversight of financial reporting.” [1] Since then, various Commissioners of the SEC and its Staff have reinforced this message by reminding companies of the audit committee’s duties under federal securities laws to:

  • oversee the quality and integrity of the company’s financial reporting process, including the company’s relationship with the outside auditor;
  • oversee the company’s confidential and anonymous whistleblower complaint policies and procedures relating to accounting and auditing matters; and
  • report annually to stockholders on the performance of these duties.

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CFO Narcissism and Financial Reporting Quality

Sean Wang is Assistant Professor of Accounting at the University of North Carolina at Chapel Hill. This post is based on an article by Professor Wang, Mark Lang, Professor of Accounting at the University of North Carolina at Chapel Hill, and Chad Ham and Nicholas Seybert, both of the Department of Accounting & Information Assurance at the University of Maryland.

In Kurt Eichenwald’s Conspiracy of Fools, the author details the collapse of the Enron empire and places the majority of the blame on their CFO, Andrew Fastow. Fastow is credited with being responsible for engineering the special purpose entities, which hid the majority of Enron’s debt from their balance sheets. The excess leverage created risks that were opaque to Enron’s shareholders, and were largely responsible for Enron’s bankruptcy. Eichenwald’s interviews with Fastow’s colleagues portrayed him as a narcissist who would do anything for his own self-interest at the expense of the welfare of those around him.

In our paper, CFO Narcissism and Financial Reporting Quality, which was recently made publicly available on SSRN, we examine whether CFO narcissism can impact financial reporting outcomes. We focus on CFOs because of their primary role in financial reporting decisions. We conjecture that the traits of narcissism, which include exploitativeness, the domination of group decisions, a sense of self-entitlement, inflated self-perceptions, and a constant need for recognition, will result in narcissistic CFOs being more willing to exploit power and information asymmetry to engage in misreporting.

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Foreign Institutional Ownership and the Global Convergence of Financial Reporting

Vivian Fang is an Assistant Professor of Accounting at the University of Minnesota. This post based on an article by Professor Fang, Mark Maffett, Assistant Professor of Accounting at the University of Chicago, and Bohui Zhang, Associate Professor at the School of Banking and Finance, University of New South Wales.

In our recent paper, Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices, forthcoming in the Journal of Accounting Research, we examine the role of foreign institutional investors in the global convergence of financial reporting practices. Regulators frequently espouse comparability as a desirable characteristic of financial reporting to facilitate investment decision-making and allocation of capital. Over the past 15 years, significant regulatory effort has gone into promoting comparability, the most prominent example of which is the International Accounting Standards Board’s (IASB) push for global adoption of International Financial Reporting Standards (IFRS). However, recent research (e.g., Daske, Hail, Leuz, and Verdi [2008], Christensen, Hail, and Leuz [2013]) shows that mandating the use of a common set of accounting standards alone is unlikely to achieve financial reporting convergence.

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Fixing Public Sector Finances: The Accounting and Reporting Lever

Holger Spamann is an assistant professor at Harvard Law School. This post is based on the article Fixing Public Sector Finances: The Accounting and Reporting Lever recently published in the UCLA Law Review and co-authored by Professor Spamann and James Naughton of Kellogg School of Management.

Detroit’s bankruptcy highlighted the precarious financial situation of many states, cities, and other localities (collectively referred to as municipalities). In an article just published in the UCLA Law Review, we argue that part of the blame for this situation lies with the outdated and ineffective financial reporting regime for public entities and that fixing this regime is a necessary first step toward fiscal recovery. We provide concrete examples of advisable changes in accounting rules and advocate for institutional changes, particularly involvement of the Securities and Exchange Commission (SEC).

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Resolution Preparedness: Do You Know Where Your QFCs Are?

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Frank Serravalli, Dan Weiss, John Simonson, and Daniel Sullivan. The complete publication, including appendix, is available here.

In January, the US Secretary of Treasury issued a notice of proposed rulemaking (“NPR”) that would establish new recordkeeping requirements for Qualified Financial Contracts (“QFCs”). [1] US systemically important financial institutions (“SIFIs”) and certain of their affiliates [2] will be required under the NPR to maintain specific information electronically on end-of-day QFC positions, and to be able to provide this information to regulators within 24 hours if requested. This is a significant expansion in both scope and detail from current QFC recordkeeping requirements, which now apply only to certain insured depository institutions (“IDIs”) designated by the FDIC. [3]

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SEC Enforcement Developments in 2014, and a Look Forward

The following post comes to us from Bill McLucas, partner and chair of the securities department at Wilmer Cutler Pickering Hale and Dorr LLP, and is based on a WilmerHale publication by Mr. McLucas; the complete publication, including footnotes, is available here.

As we noted last year in our memorandum focused on 2013 developments, Securities and Exchange Commission Chair Mary Jo White has called for the SEC to be more aggressive in its enforcement program. By all accounts, the Enforcement Division has responded to that call. The past year saw the SEC continue the trend, started under Enforcement Director Robert Khuzami in 2009, of transforming the SEC’s civil enforcement arm into an aggressive law enforcement agency modeled on a federal prosecutor’s office. This should not come as a surprise since both Andrew Ceresney, the current Director, and George Cannellos, Ceresney’s Co-Director for a brief period of time, like Khuzami, spent many years as federal prosecutors in the Southern District of New York. And the Commission itself is now led for the first time by a former federal prosecutor, Mary Jo White, the US Attorney for the Southern District of New York from 1993 to 2002. Given the events of the past decade involving the Madoff fraud and the fallout from the 2008 financial crisis, we believe both the aggressive tone and positions the SEC has taken in recent years will continue.

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