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
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SEC Release No. 34-94074: Reopening of Comment Period for Pay versus Performance
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SEC Commissioner Caroline A. Crenshaw’s Statement of Support
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:
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failures to get informed consent from Limited Partner Advisory Committees, Advisory Boards or Advisory Committees required pursuant to fund disclosure rules;
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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;
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fund investments that diverged materially from fund-disclosed investment strategies; and
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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:
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the use of cherry-picked and inaccurate data, resulting in misleading track records and erroneous performance metrics;
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failures to maintain books and records about predecessor performance at other advisers, as well as material omissions and deceptive claims about such performance; and
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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:
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advisers that did not reasonably research investments and/or critical service providers in accordance with fund due diligence policies and procedures; and
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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
SEC Extends Decisions on Crypto ETF Listings
The SEC extended its consideration of a proposed rule change to list and trade shares of ARK 21Shares Bitcoin Exchange-Traded Fund (“ETF”) on the Cboe Exchange, Inc. The date to approve or disapprove the proposed rule was extended to April 3, 2022.
The SEC also extended its consideration of a proposed rule change to list and trade shares of Teucrium Bitcoin Futures Fund on the NYSE Arca Exchange. The date to approve or disapprove the proposed rule was extended to April 8, 2022.
The SEC is assessing whether the exchanges (i) have a comprehensive surveillance-sharing agreement with a significant, regulated market and (ii) can effectively prevent fraudulent and manipulative activity. In similar proposals, the SEC previously expressed concern over the ability of exchanges to adequately meet the requirements under Exchange Act Section 6(b)(5) (“National Securities Exchange Registration Determination”) in protecting investors and the public interest by preventing fraudulent and manipulative practices.
Primary Sources
SEC Extends Period for a Decision on Proposal Enhancing Capital Requirements for Clearing Organizations
The SEC extended the period for action on a proposed rule change enhancing capital requirements for clearing organizations. The SEC designated March 29, 2022 as the new date by which it will “either approve, disapprove, or institute proceedings to determine whether to disapprove” the proposed rule change.
As previously covered, in separate filings, the Fixed Income Clearing Corporation, the Depository Trust Company and the National Securities Clearing Corporation proposed changes to their respective rules, bylaws and procedures to raise the capital requirements of their members. Clearing organizations are permitted to condition member participation on meeting the net capital requirements under Exchange Act Section 17A(b)(4)(B).
The SEC said that extending the 45-day period for action was appropriate, since that would give the SEC “sufficient time to consider and take action on the Proposed Rule Change.”
Primary Sources
House Bill to “Modernize” FinCEN’s Special Measure Authorities
The America COMPETES Act of 2022 (Full name: “The America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength”) was introduced in the U.S. House of Representatives. The bill would, among other things, modernize FinCEN’s special-measures authority to “empower FinCEN to adapt its existing tools, monitor and obstruct global financial threats, and meet the challenges of combating 21st century crime.”
The bill states that innovations in financial services – such as digital assets and informal value transfer systems – have “transformed and expanded” international business since FinCEN was given its special-measures authority 20 years ago. Further, the bill asserts that while innovations are “useful to legitimate consumers,” they are a “boon for bad actors,” enabling perpetrators to attack U.S. companies with ransomware and using the financial system to “move and obscure the proceeds of their crimes.”
The bill would allow the Secretary of the Treasury to “prohibit, or impose conditions upon certain transmittals of funds” to or from any domestic financial institution or domestic financial agency if the Secretary finds that the transmittal involves:
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a foreign jurisdiction of primary money laundering concern;
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one or more types of accounts within, or involving, a foreign jurisdiction of primary money laundering concern; or
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one or more classes of transactions within, or involving, a foreign jurisdiction of primary money laundering concern.
Primary Sources
CFTC Chair Behnam Talks Tech, Climate, Enforcement and Diversity
CFTC Chair Rostin Behnam described the challenges associated with developing rules to govern trading on electronic platforms, given technological innovations that have created a “growing divergence” between CFTC rules and the marketplace.
In…
Read More:SEC Updates on Opened Comment Period
2022-01-29 00:30:00
