Last week, the SEC adopted the final CEO pay ratio disclosure rules. I’ve been on vacation, so I don’t have a lot to say about them, but Broc Romanek’s blog on ten things to know about the rules is better than anything I could have written anyway, so I’m just going to repeat that here:
1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new “Top 10″ Lists in a couple years. Highest and lowest pay ratios. Although the rules aren’t effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules do not require companies to report pay ratio disclosures until fiscal years beginning after January 1, 2017.
2. You Don’t Need to Identify a New Median Employee Every Year! This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there’s a change in employee population or employee compensation arrangements). Your still need to disclose a pay ratio every year—but you don’t have to go through the hassle of conducting a median employee cost analysis every year. During those two years when you rely on a prior-calculated median employee, your CEO pay is the variable.
3. Pick Your Employee Base Within Three Months of FYE: The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don’t count folks not yet employed by that date—but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).
4. Independent Contractors Aren’t Employees: Duh.
5. Part-Time Employees Can’t Be Equivalized: The rules prohibit companies from full-time equivalent adjustments for part-time workers—or annualizing adjustments for temporary and seasonal workers—when calculating pay ratios.
6. Non-US Employees & the Whole 5% Thing: For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:
– Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules require a company to obtain a legal opinion on this issue—can you say “cottage industry”!
– Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.
7. Don’t Count New Employees From Deals (This Year): The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)
8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay: The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).
9. Alternative Ratios & Supplemental Disclosure Permitted: Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they’re clearly identified, not misleading nor presented with greater prominence than the required ratio).
10. Register NOW for the Proxy Disclosure Preconference and August 25 Pay Ratio Workshop:Register now before the discount ends next Friday, August 21. The Proxy Disclosure Preconference will be held on October 27, in advance of the NASPP Conference in San Diego. Registration for the Proxy Disclosure Preconference also includes access to a special online Pay Ratio Workshop that will be offered on August 25. The Course Materials will include model disclosures and more. Act by Friday, August 21 to save!
Here’s what’s happening at your local NASPP chapter this week.
DC/VA/MD: Greg Kopp and Marty Somelofske of Hay Group present results from the Hay Group/ The Wall Street Journal 2014 CEO Compensation study. The meeting will be followed by a cocktail reception. (Tuesday, August 11, at 3:30 PM)
Philadelphia: Robert Purser of E*TRADE and Gina Klein and Kerri McKenna of PwC present “FASB Proposed Changes and the Impact to Stock Plan Administration.” (Tuesday, August 11, 2:30 PM)
Dallas: Andy Ryser of Ernst & Young presents “ESPP: Design & Technical Aspects.” (Thursday, August 13, 7:30 AM)
Earlier this year I blogged about the fact that insider trading isn’t technically illegal. It sounds far fetched, but it’s true. There isn’t a law on the books that specifically defines insider trading. For the back story, see the NASPP blog entry “Insider Trading Isn’t Illegal?” from April 2, 2015. In the the latest twist in a story recited in that earlier blog, the Department of Justice is now petitioning the Supreme Court to review a key insider trading ruling. Could this mean the high court ends up defining insider trading once and for all? I’ll explore that in today’s blog.
The Back Story
The story begins with a ruling in December 2014 by the Second U.S. Circuit Court of Appeals (U.S. v. Newman) that overturned two “key” insider trading convictions, dealing a blow to the Justice Department and the SEC. At the time, the Wall Street Journal summarized the situation as follows: “…a federal appeals court overturned two insider-trading convictions and ruled it isn’t always illegal to buy or sell stocks using inside information.
The ruling raised the bar for prosecutors on a crime that is already hard to prove, and it will likely limit the types of cases the government can pursue.
Specifically, the three-judge panel of the Second U.S. Circuit Court of Appeals said prosecutors must prove traders knew that the person who provided an inside tip gained some sort of tangible reward for doing so. The judges also said it may be legal to trade on inside information, even if it gives an investor an unfair advantage in the markets, as long as the tipper didn’t commit an illegal breach of his or her duty.”
Key aspects of the appellate ruling were that in order for insider trading to have occurred,
“the tippee know both that the tipper breached a duty of confidentiality and
the tipper received a personal benefit of “some consequence.”
How is the Supreme Court Now Involved?
Last week, the Department of Justice petitioned the Supreme Court to review the appeals court ruling in Newman.
As described in the Wall Street Journal, “The government argues that the appeals court’s definition of what constitutes ‘personal benefit’ goes against a prior Supreme Court Decision, as well as conflicts with decisions made by two other courts of appeals. In its petition, the DOJ says the Second Circuit ruling ‘frustrates key purposes of the securities laws,’ and “blurs the lines between legitimate and prohibited activity.”
Further, the DOJ argues that any delay by the Supreme Court ‘will result in continuing and serious harm’ to securities markets.”
What’s Next?
The parties in the original case, Mr. Newman and Mr. Chiasson, may file an opposition to the DOJ’s request, according to a memo written by the law firm Davis Polk. If they do, the government has the opportunity to reply and then the court will decide, after a conference, whether or not to hear the case.
According to the Davis Polk memo, while the Supreme Court reviews only very small percentage of cases, this case may have the factors to warrant a review. There is a division in the lower courts over how to define “personal benefit” in the context of insider trading, and that inconsistency may make Supreme Court review more likely. Stay tuned.
Last Chance to Save on the NASPP Conference
The discounted rate for the 23rd Annual NASPP Conference is only available through next Friday, August 7. Don’t miss out—register today!
Just Added: Pay Ratio Workshop
As announced earlier today, SEC has adopted the final CEO pay ratio disclosure rules. To help attendees prepare for these game-changing new rules, the Proxy Disclosure Preconference on October 27 now includes a special Pay Ratio Workshop that will be held online via audio webcast on Tuesday, August 25. Only attendees of the Proxy Disclosure Preconference are eligible to attend the Pay Ratio Workshop. Register for this preconference program by this Friday, August 7 to take advantage of the discounted price and gain access to the Aug 25 Pay Ratio Workshop.
The Proxy Disclosure Preconference will be held on October 27 in San Diego, in advance of the 23rd Annual NASPP Conference.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Complete our quick survey on the proposed amendments to ASC 718.
Register for the 23rd Annual NASPP Conference. Register today—the current price is only available through this Friday, August 7!
With the FASB and the SEC issuing significant announcements impacting stock and executive compensation, it only seems right that we should also be dealing with changes to the tax regs impacting stock compensation. Luckily the IRS has obliged with a proposed amendment to the procedures for filing Section 83(b) elections.
Background
I’m going to assume that you all know what a Section 83(b) election is and when it would be filed. If not, read the discussion of “Early Exercise” in the NQSO Portal and the discussion of “Section 83(b) Elections for Restricted Stock Awards” in the article “Taxation of Restricted Stock Awards,” available in the Restricted Stock Portal.
Previously, award and option holders wishing to file a Section 83(b) election had to mail the election to their IRS service center within thirty days of the triggering transfer (a grant of restricted stock or exercise of an unvested option) and also include a copy of their election with their tax return for that year. With the IRS now encouraging taxpayers to file their returns electronically, the requirement to include a copy with your tax return has turned out to be problematic. Many (dare I say all?) of the systems used to electronically file returns with the IRS simply don’t have the capability of including a copy of a Section 83(b) election, forcing taxpayers to file on paper—a situation in which everyone, both the IRS and the taxpayer, loses.
Recent Developments
Last year, in PLR 201438006, the IRS ruled that a Section 83(b) election is valid even if the taxpayer fails to include a copy of the election with his/her tax return for the year (see my February 3, 2015 blog entry, “Grab Bag“). This ruling was to avoid giving taxpayers an opportunity to rescind their election by simply failing to include the copy with their tax return but it also steered us on a course for the recently proposed amendment (if the election is valid without including a copy with your return, why is the copy necessary).
Proposed Amendments
The proposed amendment would simply eliminate this requirement altogether. There’s really no need for it; as the IRS notes in the preamble to the proposed regs, they already have the original and they scan that for their records upon receipt of it. The requirement to file the copy with your tax return is an anachronism, harkening back to a day before electronic forms and scanners were commonplace.
The IRS does note that taxpayers should keep a copy of the election in their records until the statute of limitations expires for the return on which the sale of the shares subject to the election is reported.
The proposed regulations would apply to all stock transferred (grants of restricted stock and exercises of unvested stock options) on or after January 1, 2016 but taxpayers can rely on them for stock transferred in 2015.