SEC gets a lesson on late Friday disclosure

By Dominic Jones

EVERYONE knows that if you have bad news to deliver then the best time to do so is late on a Friday afternoon. That’s when reporters are distracted and editors are heading home for the weekend.

And probably the most-prized Friday or all is the one just before a Christmas long-weekend. You can be almost certain that no one is going to be paying attention then.

Right?

As silly as it may seem, some companies and their advisers still think this holds true.

And so journalists and investors make a special point of paying attention to filings and releases issued late on Friday afternoons. In fact, late on a Friday is positively the worst time for anyone to issue bad news because it’s precisely when suspicious journalists are actively looking out for it.

One journalist, Michelle Leder of Footnoted.org, has almost made a career out of wading through late Friday SEC filings looking for juicy bits of corporate disclosure gossip. She has authored a book about the hidden gems of insight that lay buried in Edgar filings footnotes.

You would hope that the SEC itself would know about the tendency for companies to issue bad news late on Fridays because those filings represent low-hanging fruit for the watchdog. But apparently not.

Late last Friday, the Commission announced a rule change on its website that will allow companies to report lower pay amounts for corporate executives in their upcoming shareholder reports.

Only third time in recent years

Unusually, this was only the third time in recent years that the SEC has issued a final rule without a prior comment period. Furthermore, the change reverses the SEC’s prior shareholder-focused position to a more company-friendly stance.

Unfortunately for the SEC, the fact that the announcement came late on the Friday before Christmas raises questions about why the change wasn’t done more openly.

So it’s really not that surprising to see headlines like the one below from Dow Jones today:

SEC Slammed After Executive Pay U-Turn

In it the SEC’s “last-minute decision to reverse course” and “loosen” the rules is heavily criticized by Rep. Barney Frank, incoming chairman of the House Financial Services Committee, who labels the regulatory u-turn “regrettable” and says it underscores the need for congress to act against the “problem of executive compensation.”

The New York Times draws attention to the timing of the SEC announcement. In the story’s first paragraph, the paper describes it as “a move announced late on the last business day before Christmas” as if that is a highly relevant fact.

Of course, there was lots of space in today’s paper after the long weekend so the article itself provides a thorough review of the rule change and its implications. (Another reason not to issue bad news on Friday.) Both SEC chairman Christopher Cox and division of corporation finance director John White were interviewed for the Times article.

Others, such as Footnoted.org’s Leder and NakedShorts author Greg Newton have also picked up on the SEC’s surprising timing. Securities law blogger Broc Romanek, who appears to have been one of the first to cover the story, suggests the timing may have been the consequence of internal wrangling over the change and that the late announcement was a subtle way for the objectors to “air a grievance.”

A defensible decision

Without taking sides, the merits of the change itself seem defensible to me. Rather than value and disclose options all at once, the rule change spreads out the cost over the vesting term in line with accounting treatment.

Of course, even though it may mean additional work for companies that have been busily preparing their new executive compensation disclosures under the “old” rules, the SEC’s change of heart is still a gift to corporate America.

New compensation disclosures are expected to reveal some startling figures to shareholders for the first time. Some in the corporate community have expressed concern about the new disclosures provoking a shareholder backlash, potentially souring investor sentiment and undermining already shaky confidence caused by a continuing wave of fraud and options backdating scandals.

The SEC’s about-turn on how companies must value options grants will mitigate the coming damage from executive pay disclosure by lowering the final tallies investors see in the Total Compensation column. The original rule could well have unnecessarily contributed to undermining public confidence.

Unfortunately, the way it was done creates a bad impression. Companies would do well to remember the importance of appearances when publishing their new executive compensation disclosures.

Just as important as what you will be disclosing is how you do it.

Update: Patrick Hosking of the Times in London has a particularly lucid commentary on the SEC’s about face. Under the headline One burden regulator should not have lifted, he writes:

The SEC and its chairman Christopher Cox are under considerable pressure to lift the regulatory burden on US companies amid evidence that business is being lost to other financial centres, notably London. Sarbanes-Oxley and other post-Enron rules have unquestionably added to the regulatory burden and put Mr Cox under pressure.

Mr Cox has apparently chosen to throw his critics a bone. Unfortunately, he has chosen the wrong bone.

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