DISCLOSURE DRAFTING TIPS

Welcome to my disclosure drafting tips! I hope to use this page to highlight some common errors that I find as I read annual reports, proxy statements, Forms ADV (or is that Form ADVs?), and other disclosure documents. The names have been changed to protect the innocent, but I promise: every “before” that you see here is real.

If your company has any particularly gnarly disclosure paragraphs that you want me to tackle, please send them along!

Someone needs the time and authority to edit

Disclosure documents have a way of getting unwieldy. People add things each year without thinking about whether the new content repeats or conflicts with old content. Rarely does anyone proactively look for content to delete. And the person who "owns" the document is so caught up in incorporating feedback from all the contributors (and those pesky outside lawyers!) that it may seem impossible to take the time to read the almost-finished product from start to finish. I say take the time. It will be well worth it. Here are three sections from the same proxy statement to illustrate the point.

Before

Board Independence

In determining independence, each year the Board determines whether directors have a “material relationship” with the Company. When assessing the “materiality” of a director’s relationship with the Company, the Board considers all relevant facts and circumstances, including a consideration of the persons or organizations with which the director has an affiliation. Where an affiliation involves the delivery of services to or by the Company, the Board considers the frequency or regularity of the provision of services, whether the services are being carried out at arm’s length in the ordinary course of business and whether the services are being provided substantially on the same terms to the Company as those prevailing at the time from unrelated parties for comparable transactions. For Audit Committee members, the Board must also determine that these directors, in addition to the general independence requirements described above, satisfy certain financial education requirements and do not accept any consulting, advisory, or other compensatory fee from the Company. Each member of the Audit Committee is financially literate as required by NYSE standards, and each of [director names removed] qualifies as an “audit committee financial expert” under applicable SEC standards.

The Board has determined that the following directors are independent directors: [list of eleven names—entire board except for CEO/Chair].

Mr. Smith was appointed the Company’s President and CEO and a member of the Company’s Board of Directors, effective [date]. With the exception of Mr. Smith, all other members of the Board of Directors qualify as independent directors under the applicable requirements of the SEC and NYSE. Board committees also reflect applicable requirements for certain of their members to qualify as independent directors.

*****

Pre-Approval Policies and Procedures for Audit and Non-Audit Services

The Audit Committee is required to pre-approve the audit and non-audit services performed by the Company’s independent auditor to assure that such services do not impair the auditor’s independence. Specific pre-approval by the Audit Committee is required before the service is provided. The Company’s Chief Financial Officer submits all requests or applications to provide services that require approval to the Audit Committee.

*****

Perquisites

Perquisites are not a significant part of our executive compensation program. We provide a limited number of perquisites and other personal benefits to NEOs, which we believe are reasonable and consistent with market practices. The Company believes each perquisite offered also provides a benefit to the Company as noted: annual tax preparation fees up to $X and annual financial planning and tax planning expenses up to $X to encourage keeping up to date and in compliance with complex regulations; annual medical examination up to $X to encourage proactive health management; and employment relocation expenses to reduce the administrative burden of relocation in order to encourage new executives to focus on their job with us as soon as possible.

The Company believes these items are advantageous to our Company and our stockholders, and they keep executives focused on the legitimate interests of the business.

Before, with commentary

Board Independence

In determining independence, each year the Board determines [it is awkward to say the Board determines one thing by determining another thing] whether directors have a “material relationship” with the Company. When assessing the “materiality” of a director’s relationship with the Company, the Board considers all relevant facts and circumstances, including a consideration [same problem] of the persons [ugh] or organizations with which the director has an affiliation. Where an affiliation involves the delivery of services to or by the Company, the Board considers the frequency or regularity of the provision of services [frequency, regularity, and provision are all nouns here; the sentence would work better if they were two adjectives and a verb], whether the services are being carried out at arm’s length in the ordinary course of business and [this is an instance where devout resistance to putting a comma before the last element in a series makes the sentence worse] whether the services are being provided substantially on the same terms to the Company as those prevailing at the time from unrelated parties for comparable transactions. For Audit Committee members, the Board must also determine that these directors, in addition to the general independence requirements described above, satisfy certain financial education requirements and do not accept any consulting, advisory, or other compensatory fee from the Company. Each member of the Audit Committee is financially literate as required by NYSE standards, and each of [director names removed] qualifies as an “audit committee financial expert” under applicable SEC standards [this is unrelated to “independence” and belongs with the committee descriptions].

The Board has determined that the following directors are independent directors: [list of eleven names—entire board except for CEO/Chair] [why not just identify the one director who isn’t independent?].

Mr. Smith was appointed the Company’s President and CEO and a member of the Company’s Board of Directors, effective [date]. With the exception of Mr. Smith, all other members of the Board of Directors qualify as independent directors under the applicable requirements of the SEC and NYSE. [there is nothing in these two sentences that hasn’t been said already] Board committees also reflect applicable requirements for certain of their members to qualify as independent directors. [This sentence is unrelated to “independence.”]

*****

Pre-Approval Policies and Procedures for Audit and Non-Audit Services

The Audit Committee is required to pre-approve the audit and non-audit services performed by the Company’s independent auditor to assure that such services do not impair the auditor’s independence. Specific pre-approval by the Audit Committee is required before the service is provided. [this is covered by the first sentence (except perhaps the concept of “specific”), and by the definition of “pre-approve”] The Company’s Chief Financial Officer submits all requests or applications to provide services that require approval to the Audit Committee. [this is not useful information, and could it be a problem if one day someone other than the CFO submits a “request or application”?]

*****

Perquisites

Perquisites are not a significant part of our executive compensation program. We provide a limited number of perquisites and other personal benefits to NEOs, which we believe are reasonable and consistent with market practices. The Company believes each perquisite offered also provides a benefit to the Company as noted: annual tax preparation fees up to $X and annual financial planning and tax planning expenses up to $X to encourage keeping up to date and in compliance with complex regulations [this is awkward and it’s missing a subject—who is supposed to be keeping up to date and complying?]; annual medical examination up to $X to encourage proactive health management; and employment relocation expenses to reduce the administrative burden of relocation in order to encourage new executives to focus on their job with us as soon as possible.

The Company believes these items are advantageous to our Company and our stockholders, and they keep executives focused on the legitimate interests of the business. [this adds nothing new]

After

Board Independence

Each year, to determine independence, the Board evaluates whether directors have a “material relationship” with the Company. To assess whether a relationship is “material,” the Board considers all relevant facts and circumstances, including the individuals or organizations with which the director is affiliated. When a director is affiliated with one of the Company’s service providers or customers, the Board considers how often or regularly services are provided, whether services are carried out at arm’s length in the ordinary course of business, and whether services are provided substantially on the same terms as those prevailing at the time for unrelated parties in comparable transactions. Audit Committee members must satisfy these general independence requirements, and the Board also must determine that these directors meet certain financial education requirements and do not accept any consulting, advisory, or other compensatory fees from the Company.

The Board has determined that all of the directors except Mr. Smith, our Chair and CEO, are independent.

[reduced by over 100 words]

*****

Pre-Approval of Audit and Non-Audit Services

The Audit Committee is required to specifically pre-approve the audit and non-audit services performed by the independent auditor to ensure that such services do not impair the auditor’s independence.

[reduced by more than 50%]

*****

Perquisites

Perquisites are not a significant part of our executive compensation program. We provide the NEOs with the following limited perquisites and other personal benefits because we believe they are reasonable and consistent with market practices:

  • annual tax preparation fees up to $X and annual financial planning and tax planning expenses up to $X;
  • annual medical examination up to $X; and
  • relocation expenses.

The Company believes these items are advantageous to our Company and our stockholders because they keep executives focused on the legitimate interests of the business.

[reduced by about 40%]