Beware boilerplate market risk disclosures
Registrants provide quantitative and qualitative disclosures in their annual reports about market-rate exposure risks (the ‘S-K Item 305 disclosures’). While Corp Fin staff discussed these disclosure requirements with particular focus on the financial services industry, many of the points apply more broadly to other registrants.
Corp Fin is concerned that the S-K Item 305 disclosures are often boilerplate. The staff emphasized the importance of adequately describing the interest-rate and liquidity risks that financial institutions are facing in the current economic environment. To make disclosures more meaningful to investors, the staff recommended including information such as key assumptions related to interest-rate risk and information about available sources of liquidity and potential costs and issues of accessing those sources.
Pay vs performace (PvP) rules
PvP had been discussed in the Corp Fin panel earlier in the day. In this session, Woody discussed how the division is approaching its reviews related to this rule. Specifically, Woody discussed that the reviews for 2023 proxy disclosures have been focused on understanding how registrants are responding to the new rule and identifying potential challenges with compliance.
Woody noted that generally registrants have made a good faith effort to comply but highlighted a few areas in which registrants may have fallen short, including:
lack of clarity regarding disclosing changes in assumptions used in the calculation of compensation actually paid;
unclear disclosure of the calculation of non-GAAP measures as the company selected measure; this information may be cross-referenced within the same proxy filing but not to other filings such as the Form 10-K; and
omission of the disclosures of the relationship between executive compensation and company performance in whole or in part.
The staff also noted that graphical presentation of the relationship disclosures is more effective and informative than narrative presentation. Woody noted that comment letters associated with PvP rules are aimed prospectively at future proxy filings.
Best practices for responding to comment letters
To make the comment letter process run smoothly, panelists suggested coordinating with your service professionals early in the process. Your audit team is an important resource, as are the national experts within many of the accounting firms. Securities counsel also plays an important role in crafting the response; many law firms have expertise in the topical issues seen in comment letters.
