If you read to the very end of Item 402(v) of Regulation 402(v), you’ll see that Instruction 3 says that “[t]he information required by paragraph (v) of this section will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.” Based on this Instruction (as well as the statement at the very beginning of the Adopting Release that “[t]he disclosure is required in proxy or information statements in which executive compensation disclosure is required”), I just assumed that the question of where the disclosure should be located was fairly straightforward.
However, one question kept popping up — did the “pay-versus-performance” disclosure also need to be included in the Annual Report on Form 10-K, particularly where a company wasn’t taking advantage of the “forward incorporation by reference” technique permitted by General Instruction G(3) of Form 10-K. After checking with a colleague, who pointed me to the following statement in the Adopting Release (at Section 2.A.1.iii) that:
We are not requiring the pay-versus-performance disclosure in other filings where disclosure under Item 402 of Regulation S-K is required, as we believe that, taken in context, the language of Section 14(i) calling for registrants to provide the disclosure “in any proxy or consent solicitation material for an annual meeting of the shareholders” suggests that the information was intended to be presented in conjunction with a shareholder vote.
I took comfort in that language, as well as Instruction 3, that it wasn’t necessary to include the disclosure in a Form 10-K. Of course, that view was subsequently confirmed by the SEC Staff in its recent interpretive guidance on Item 402(v) in Question No. 128D.01:
Question: Is the information required pursuant to Item 402(v) of Regulation S-K required to be included in Form 10-K, given that Item 11 of Form 10-K indicates that the registrant is required to furnish the information required under Item 402 of Regulation S-K?
Answer: No. Item 402(v) of Regulation S-K provides that the information required thereunder must be provided in connection with any proxy or information statement for which the rules of the Commission require executive compensation disclosure pursuant to Item 402 of Regulation S-K, and Instruction 3 to Item 402(v) specifies that the information provided under Item 402(v) of Regulation S-K will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. [February 10, 2023]
Nonetheless, in several Form 10-K filings in late January and early February, I noted that some companies had inadvertently included the disclosure in their Form 10-K in the language they used in Item 11 of Part III of the form. Typically, the Item 11 statement would read something like the following:
The information in the sections of our 2023 Proxy Statement captioned “Compensation Discussion and Analysis,” “Compensation Tables,” “Director Compensation,” “Corporate Governance – Compensation Committee Interlocks and Insider Participation,” “Other Information – CEO Pay Ratio Disclosure” and “Other Information – Pay Versus Performance” is incorporated in this Item 11 by reference.
However, since the issuance of the SEC Staff guidance, I’m beginning to see fewer of these statements. Instead, the following language is becoming more common in Item 11:
Information appearing in our Proxy Statement under the captions “2022 Director Compensation Table,” “Compensation Discussion and Analysis,” “Information Regarding Executive Compensation” (excluding the information under the subheading “Pay Versus Performance”) and “Compensation Committee Report” is incorporated by reference herein.
It’s just a small thing, but it’s probably worth checking your customary Item 11 statement to make sure you’ve carved out the “pay-versus-performance” disclosure.
– Mark Borges, CompensationStandards.com, February 22, 2023
