The Advisors' Blog

– Brink Dickerson,Troutman Sanders

Several companies recently have received a comment from the SEC’s Corp Fin Staff asking them, under Item 402(s) of Regulation S-K, to describe the “process” undertaken to conclude that the “risks arising from the registrant’s compensation policies and practices . . . are reasonably likely to have a material adverse effect on the registrant . . . .” It is a good reminder that no disclosure is required unless the “reasonably likely” threshold is exceeded. See the SEC’s adopting release No. 33-9089 at 12.

Moreover, “the final rule does not require a company to make an affirmative statement that it has determined that the risks from its compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.” Id. at 17. Voluntarily including a compensation committee’s conclusions on the risk-compensation relationship does not trigger disclosure of the underlying process, unless under a Rule 10b-5 theory that disclosure is necessary in order for a reader to understand the conclusions (which given the straight-forward nature of the conclusions is difficult to imagine).

Also, since there is no widely accepted analytical approach correlating compensation and risk, the considerations of a board are by necessity going to be subjective, which does not make informative disclosure.