By Bill Flook
On the 10-year anniversary of the signing of the Dodd-Frank Act, SEC nominee Caroline Crenshaw told the Senate Banking Committee she would do all she could, if confirmed, to ensure the commission finishes its lingering executive compensation rulemaking mandates under the 2010 Wall Street reform law.
Crenshaw made the remarks during a July 21, 2020, nomination hearing that also saw testimony from Commissioner Hester Peirce, who has been renominated to the role.
The SEC, even before Trump-appointee Jay Clayton took over as chairman, had been slow to implement the series of disclosures and other reforms on how public companies compensate their top executives. Crenshaw, during the nomination hearing, singled out the unfinished “clawbacks” rule as particularly important.
The SEC in 2015 proposed Release No. 33-9861, Listing Standards for Recovery of Erroneously Awarded Compensation. The proposed clawbacks requirements would be triggered in the wake of a company’s financial restatement. Current and former executives would be forced to return excess performance-based incentives they received based on the flawed numbers, spanning a period of three years before the restatement.
Under the proposal, those executives would not need to be accused of misconduct in order to be subject to clawbacks. Nor would an executive need to be directly involved in preparing the financial statements. Companies that do not adopt and disclose clawbacks policies could face delisting.
The executive compensation rules, Crenshaw said, are required by law, “but it’s not just that these rules are mandated.”
“We want to make sure that we’re holding executives to account, and we want to make sure these executives don’t get to keep money that they didn’t earn,” Crenshaw said, responding to a question from Sen. Sherrod Brown of Ohio, the Senate Banking Committee’s ranking Democrat.
The hearing, held remotely, was a largely low-key affair, aside from a prickly exchange between Peirce and Sen. Elizabeth Warren over whether the Republican commissioner supported enhanced private equity disclosures.
While Crenshaw responded favorably to the idea of expanding private equity fund disclosure requirements about risks, fees, and investment performance, Peirce said that private equity investors “have a fair amount of leverage in terms of trying to get the disclosure they want.”
“And so given the way the market is structured, I think it’s less important for us to focus on private equity disclosures and more important to focus on the disclosures that are reaching typical retail investors,” Peirce said.
Warren, a Massachusetts Democrat, bristled at Peirce’s response.
“I am not surprised to hear that you are not interested in requiring more disclosure from the private equity industry,” Warren said. “Nothing in your record suggests that you’re willing to take on powerful interests to protect either investors or workers.”
Added Warren: “That’s why I think it would be a mistake to confirm you for another term.”
The questioning from senators spanned a broad range of topics, which also included environmental, social, and governance (ESG) disclosures, cryptocurrency regulation, and the ongoing inability for the PCAOB to inspect the audits of Chinese companies traded on U.S. exchanges.
Sen. John Kennedy, a Louisiana Republican, pressed Peirce on why the SEC has not done more under its own power to remedy the situation. Peirce, who said foreign companies listed in the U.S. should be subject to the same requirements as U.S. companies, cited “a couple of things” that the market regulator could do, including making sure “that the disclosure is there about the risks of investing abroad in foreign companies.” The SEC’s emerging market roundtable, held earlier this month, generated some “productive suggestions,” she said.
The Senate in May passed S. 945, the Holding Foreign Companies Accountable Act by unanimous consent, a bill that would delist foreign companies traded on U.S. exchanges if the PCAOB is unable to inspect their auditor for three straight years, part of a broader campaign to pressure China to open its doors to U.S. audit regulators. Kennedy sponsored the bill alongside Sen. Chris Van Hollen, a Maryland Democrat.
The bill is one of several measures seeking to force an end to the long-standing deadlock with Chinese authorities, in which the latter refuses to give PCAOB inspectors access to the audits of U.S.-traded issuers, leaving the companies in violation of the Sarbanes-Oxley Act of 2002.
Rep. Brad Sherman is sponsoring the House version of the Holding Foreign Companies Accountable Act (H.R. 7000), which a House Financial Services subcommittee debated in late June.
This article originally appeared in the July 22, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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