SEC Proposal: The End of Equity Compensation Plan Disclosure?

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The Securities and Exchange Commission’s recent flurry of regulatory activities shows progress with the agency’s evaluation of disclosure requirements. As part of a larger regulatory revamp of Regulation S-K and related filings, the SEC proposes to eliminate the now obsolete disclosure requirements regarding equity compensation plans.

Regulation S-K governs the disclosure requirements for various SEC filings by public companies. The SEC issued proposed rules to amend Regulation S-K on July 13, including a demonstration version of the proposed amendments, which provides nearly 200-pages of proposed additions and deletions to the Regulations. A concept release soliciting comments from the public was previously issued on April 13. 

SEC’s Disclosure Effectiveness Initiative

The SEC’s comprehensive review of Regulation S-K is part of the Disclosure Effectiveness Initiative, which was mandated by Section 108 of the Jumpstart Our Business Startups Act.

The goal of the SEC’s initiative is to improve the disclosure regime for the benefit of both companies and investors by adding, removing or eliminating disclosure requirements.  This requires a careful balance between the potential impact the proposed amendments may have on the information conveyed to investors and the compliance measures companies must implement to comply with the disclosure requirements.

Equity Compensation Plans (Item 201(d)) 

Equity compensation plans are often offered as part of an executive's compensation package to attract, motivate and retain executive talent.  The use of equity compensation has become increasing popular over the years as a means to provide executives with non-cash incentives and a form of ownership in companies.

Disclosure regarding equity compensation plans currently is required under Item 201(d) of Regulation S-K. Item 201(d) requires disclosure of the following information for shareholder approved and unapproved equity plans in tabular and narrative format:

  • number of securities to be issued upon exercise of outstanding options, warrants and rights;
  • weighted-average exercise price of outstanding options, warrants and rights;
  • number of securities remaining available for future issuance under equity compensation plans; and
  • material features of plans that have not yet been approved by shareholders.

The SEC proposes to eliminate Item 201(d) of Regulation S-K and the corresponding references related filings, including: Part III of form 10-K and Item 10(c) of Schedule 14A.  The SEC determined that Item 201(d) is now obsolete because the presentation of the information by approved and unapproved plans is no longer necessary.  The SEC explained that the information required under Item 201(d) can be found in other financial statements and that the listing standards by the national exchanges now require that almost all equity plans be approved by shareholders. 

Amy Knieriem of Mercer LLC told Bloomberg BNA, “Much of the information provided in the Item 201(d) table can be found elsewhere, including financial statements, since changes to the accounting rules for stock compensation require extensive disclosures of equity compensation awards and plan provisions. Eliminating Item 201(d) would not likely be a big takeaway: When companies ask shareholders to approve equity plans, they generally provide the information shareholders find most valuable in the request for approval. However, investors may still want companies to provide data on any active unapproved plans.” 

Let SEC Know What You Think

Comments on the proposed rules regarding amendments to Regulation S-K and other SEC filings are due 60 days following publication in the Federal Register.  Specifically, the SEC requests additional feedback on the following questions: 

  • Would the deletion of Item 201(d) affect the usefulness of information received by investors? 
  • Should Item 201(d) be retained for issuers that are not required to have shareholder approved plans?

The SEC is also expected to finalize highly-anticipated executive compensation disclosure rules regarding pay versus performance, incentive-based pay clawbacks and hedging, in 2016.

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