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!
Now that the proxy season is winding down and I’ve had the chance to attend a couple of presentations on the new ISS Equity Plan Scorecard, I thought it would be a good time to provide an update on how the scorecard has worked out so far.
Most Plans Passed
Very few plans failed to obtain a favorable rating under the new EPSC. But I’m not sure this should come as a surprise. Of course, most plans passed; that’s why companies pay for the ISS Compass model and hire consultants certified in the use of this model—to ensure that they don’t undertake the expense of submitting a plan to a shareholder vote and not get the votes they need to pass. If a favorable ISS recommendation is key to ensuring the plan is approved, companies are going to do what it takes to get a favorable recommendation. But, how much did companies have to reduce their share requests (and how many of the scorecard factors did companies have to incorporate into their plans) to get favorable recommendations?
It’s Only Going to Get Harder
One thing that’s been clear from the beginning is that ISS is likely to tweak both the pass threshold and the points allotted to each test in the EPSC from year-to-year (this is how they operate scorecards they have created for other purposes). Ken Lockett of AST, Laura Wanlass of AON Hewitt, Scott McCloskey of Lincoln Financial, and Melinda Hanzel of D.F. King presented on the EPSC at the Philadephia/DC/VA/MD joint half-day meeting in June. Given that so few companies failed this year, they noted that they expect the EPSC to be harder to pass next year.
Negative Points Are Possible
Laura noted that on some of the tests, including the SVT, a company can score so poorly that the plan is awarded negative points. The Corporate Executive noted, in its January-February 2015 issue, that with the SVT worth 45% of the score for most companies, it is virtually impossible to achieve a favorable recommendation without earning at least some points for this test. Now it turns out that the plan could score so poorly on the SVT that it is actually impossible to make up enough points the elsewhere in the scorecard to pass.
Where companies need to make up points under the scorecard, there are several provisions they can remove from (e.g., liberal share recycling, discretion to accelerate vesting) or add to (e.g., post-vesting holding periods, minimum vesting requirement) their plan to earn additional points.
I’ve heard from several practitioners that post-vest holding periods are worth more than expected under the scorecard. This is a nice break, since post-vest holding requirements aren’t necessarily a takeaway for execs when the company already has stock ownership guidelines in place (and what public company doesn’t have these already). To learn more about post-vesting holding periods, check out our podcast with Terry Adamson or our March webcast.
Peter Kimball of ISS Corporate Services presented on the scorecard at the Phoenix NASPP chapter meeting in May and noted that many companies were reluctant to remove discretion to accelerate vesting or to stipulate a minimum vesting period under the plan. I can understand this—there are perfectly legitimate reasons to accelerate vesting. And minimum vesting periods are a disaster waiting to happen. I’ve already encountered one company that had a minimum vesting requirement, and then granted RSUs that vested in under that time frame and did not discover the error until after the RSUs had vested and been paid out. I’m not sure how you fix that mistake; the lawyers I asked about it did not want to touch that question with a ten-foot pole (or without an attorney-client relationship to protect everyone involved).
Learn More at the NASPP Conference
The session “Demystifying the ISS Equity Plan Scorecard” at the 23rd Annual NASPP Conference will provide a full analysis of how companies fared under the scorecard this year and includes a case study from one company that has already navigated it. The Conference will be held in San Diego from October 27 to 30; register by August 7 to save!
Here’s what’s happening at your local NASPP chapter this week:
Austin: Emily Cervino of Fidelity Stock Plan Services presents “Data Analytics for Stock Plan Decision Makers.” (Wednesday, July 22, 11:30 AM)
Phoenix and Sacramento: The chapters co-host a webinar on top mid-year administrative items to consider and processes to review now to make your year-end go smoother. (Wednesday, July 22, 11:00 AM)
If you’re a public company with stock plans, it’s highly likely that you have a relationship with a broker to execute stock plan transactions. It may be a captive relationship (the broker services all of your employees), or perhaps you have relationships with multiple brokers to satisfy the needs of a varied employee population. Whether you have one or several brokers engaged in your stock plans, in today’s blog I offer up some tips on transforming your broker partnership(s) into an “epic” one(s).
The Awesomeness of Epic
Okay, so I borrowed the term “epic” from our recent NASPP webcast, “Making Your Broker Relationship into an Epic Partnership.” You have to admit, though, it sounds pretty cool to use the word “epic.” Coming from an era where “rad” was the go-to phrase, I’m still getting used to epic. Ah, I’ve digressed. Back to the topic at hand. If you’ve been in the stock plan world for a while, chances are you’ve been around many, many broker relationships. I think brokers as a whole do a great job executing stock plan transactions. Most of the brokers who service stock plans that have got the associated transactions down to a science. What I want to focus on today are the other things that can take your relationship with your broker to a whole another level.
Remember the Importance of a One-on-One Interaction
In the recent webcast, the panel shared UBS participant survey results that pointed to a higher level of participant satisfaction with the education provided by their company when that education included one-on-one conversations. That concept, while not new, really struck me. I think it’s because we live in a world dominated by so many forms of electronic communication options – mobile, video, email, text, and so on. It can be easy to forget the value of a one-on-one conversation with someone. As a stock plan administrator, it would be a huge challenge to find time to have these types of conversations with all stock plan participants. This is where the broker relationship can take center stage. Most, if not all, of the brokers in this industry are skilled in participant education and communication. Knowing that participants value conversation, elevate your plan to the next level by leveraging your broker to help with those educational moments.
Other Areas to Consider
Busy stock plan administrators need all the help they can get. There are several areas where brokers are typically willing and able to help their issuer clients, some of them not as well known. These areas include taking some of the responsibility for communicating with the transfer agent, analyzing the impact (or potential impact) of the company’s stock plan on the market, and completing 144 paperwork. The list goes on.
A good manager has learned the art of leverage – tapping into other resources beyond themselves in order to do the best job possible. The broker relationship is the ultimate example of a leveraged one – the stock plan administrator leans on the broker to do what they do best – execute stock plan transactions and help educate employees. Isn’t it great to learn there are even more ways to leverage the broker partnership? Why not sit down with your broker today to learn more about how they can further help you elevate your plan? By the way, “elevate” is a catch word I got from the webcast and it’s stuck with me. It’s time to take things to the next level.
Nominate a Keynote Speaker!
Always dreamed of being a keynote speaker? Have a particular speaker you’d like to see be part of a keynote panel? Nominate yourself our someone else to participate in our keynote panel at the 23rd NASPP Annual Conference. Read more about it and submit your nomination.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Nominate yourself or someone else to participate in the keynote at the 23rd Annual NASPP Conference.
On June 26, 2015, the Supreme Court ruled in Obergefell v. Hodgesthat all states must permit marriage between same sex couples and all states must recognize marriages performed in other states, including those of same sex couples. In essence, marriage is now simply marriage for all. What impact does this ruling have on your stock plans? I’ll cover that in today’s NASPP Blog.
Back in Time
While the Obergefell decision has been described a landmark one, the real mechanical impact to stock plans arrived two years earlier – in June 2013. In deciding the case of U.S. v. Windsor, the Supreme Court ruled that Section 3 of the Defense of Marriage Act was unconstitutional. The result of that decision was that same-sex couples recognized as married under the laws were they live were considered married for federal purposes. See the NASPP Blog “The Supreme Court and Stock Compensation” (July 18, 2013) for more information on that case.
The Obergefell decision has resulted in marriage equality in all states. However, the Windsor decision in 2013 sparked several changes to employee benefits in states where same sex marriages were recognized. According to a myStockOptions.com FAQ on the topic, “While the Obergefell decision was a more significant societal landmark, the Windsor decision had a bigger impact on stock plans. It led companies to look through benefit plans and policies, as well administrative procedures, for situations where marital status matters. As a result, companies had already made many changes even before the Obergefell ruling in June 2015. Among more than 1,000 federal laws and regulations touched by the rulings are those which affect the design and administration of employee benefit plans. In short, spousal provisions in employee benefit plans should treat same-sex spouses and opposite-sex spouses in the same way. While stock plans are not affected by federal laws in the same way as qualified retirement plans (e.g. a 401(k) plan) or health and welfare plans, the changes that will be required in these other benefit plans will probably lead to similar modifications in stock plan documents.”
What Now?
While much of the groundwork was already laid in the Windsor decision, there are still several things companies need to consider in ensuring their benefits and stock plans are consistent in application to an employee’s spouse:
Ensure benefit and stock plans are consistent in their definition of “spouse” and any other related terms.
The above is true for any practices, policies and procedures in place that refer to a spouse. Examples may include policies on divorce, policies on transferability of stock options, and beneficiary designations.
Companies may take the existence of “domestic partner or same sex partner” benefits under review since same sex couples are now permitted to marry in all states.
In addition, the SEC and IRS have already clarified that same sex couples who are legally married are considered to be a spouse, husband or wife regardless of where they live. That guidance stands after the Obergefell decision.
While there are some housekeeping items to be done to ensure companies are not consistent in their application the definition of “spouse”, “husband” and “wife”, I don’t expect it to be a significant time commitment or development in terms of far reaching implications to stock plans.
The Chicago NASPP chapter will host a meeting this week on Thursday, July 9 at 7:30 AM. Mike Melbinger of Winston & Strawn will present “The Explosion of Litigation Over Executive Compensation.”
What does the ISS equity plan scorecard have to do with life on easy street and baseball? All three of these things were part of the Philadelphia and DC/VA/MD chapters’ half day meeting on June 18. I attended the meeting, in my role as Executive Director and official NASPP photographer. Here are some pics from the day:
The half-day meeting was held at Urban Outfitter’s headquarters in the old naval yards in Philadelphia. This ship was outside the main entrance to the office. If you’ve never seen the Urban Outfitter’s office, it’s a pretty cool place (see my pics from the last time I attended a Philly chapter meeting there).
A big thank-you to Urban Outfitters for providing the space and another big thank-you to AST and Fidelity for sponsoring the meeting.
Here we have John Hammond of BendyStraw and Dan Kapinos of Radford. Dan is the current Philly chapter president and John is a former president. Kudos to the boards of both the Philly and DC/VA/MD meetings for organizing such a great event (even managing to get the rain to stop just before the baseball game started).
Lots of awesome prizes were raffled off to attendees, including themed gift baskets for all of the regions represented by the two chapters.
Emily Cervino of Fidelity and Laura Wanless of Aon Hewitt, two of the presenters for the day.
The day started off with a panel on “Everything You Need to Know About ISS’ Equity Plan Scorecard in 75 Minutes,” presented by Melinda Hanzel of DF King, Ken Lockett of AST, Scott McCloskey of Lincoln Financial and Laura Wanlass of Aon Hewitt.
Next up, Emily Cervino of Fidelity and I presented “Living on Easy Street: Innovative Ideas to Make Your Life Easier.”
After the presentations, everyone enjoyed a great lunch, courtesy of AST, Fidelity, and Urban Outfitters and then we adjourned to the afternoon Phillies game. The Phillies won, making a great ending to a great day!
While I was on the east coast, I also attended meetings of Boston and NY/NJ chapters. Check out pics from the Boston meeting and the NY/NJ meeting.
After the NY/NJ meeting, Maria Robins of Morgan Stanley and I had lunch at Grand Central Station. Recognize the clock in the background?
Lastly, Maria showed me a neat trick with my camera. Here is a video I took of Grand Central Station with it, that will only take two seconds of your day. Well maybe four seconds. You would think a two-sec video would have trouble buffering, but you’d be wrong. You might have to play it a second time for it to work right.
