During the Section 16 Q&A webcast in January, Alan Dye discussed the new procedures for resetting an EDGAR passphrase. The passphrase is used if you need to generate new EDGAR codes (CCC, password, and PMAC) for you or your insiders in the event that you’ve forgotten the password or it has expired.
Linda Epstein from Hewlett Packard Enterprise emailed to tell us that there is an easier way to update an insider’s expired password, assuming the following:
You know the insider’s EDGAR codes (CIK, CCC, expired password, and PMAC—you don’t need the passphrase for this), and
Have your own access to EDGAR.
The Easier Way
Rather than logging into the insider’s account, you can simply log into the main EDGAR website (or the EDGAR Online Forms Management website) under your account and select the Retrieve/Edit Data function. EDGAR will ask you to enter the CIK and CCC for the account you want to edit. Turns out, you can enter any account here (so long as you have the access codes for that account)—it doesn’t have to be your own account.
Once you enter the CIK and CCC code, you then have the ability to change the password for the account, provided you know the old password and the Password Modification Authorization Code (PMAC). This is easier than generating all new EDGAR codes, especially if the individual is an insider at more than one company (which would require you to notify all the other companies of his/her new CCC).
Update Contact Info Too
You can also use the Retrieve/Edit Data function to update an insider’s contact info, including email address, and you don’t need the insider’s password or PMAC to do this.
Given the ability to do this, I’m not sure you’d even need to update the insider’s password (you can still submit filings for an insider whose password has expired). But if you did need to do so, without the insider’s password or PMAC, you’d be stuck generating new EDGAR codes. Here again, this feature could be handy. Because, let’s face it, if you don’t know those two things, you also probably don’t know the insider’s passphrase and you’re going to have to generate a new passphrase. This feature would at least allow you to ensure that the insider’s email is correct (or change it to an email address that you can access), since, under the new passphrase procedures, you have to provide the “electronic security token” that is emailed to the insider when the new passphrase is requested.
It also means that instead of the nightmare I went through to update my passphrase, I could have had one of my friends who does Section 16 filings update my expired password for me (ironically, I knew my old password and PMAC, I just didn’t know my passphrase). I’m sure one of you would have come through for me. Good to know for the future (not that I am ever going to forget my passphrase or let my password expire again).
This Explains a Lot
Well, maybe not a lot, but it does at least explain why you have to enter your CIK and CCC to change your password after logging into EDGAR, something that, until now, seemed like a useless extra step to me. I’m not sure it explains the need for the PMAC, however (if you already know the insider’s old password, how much more authorization do you need).
If anyone else has any handy EDGAR tips, I’m all ears.
As I mentioned in my blog on Tuesday, we are starting to see some movement towards repeal or revision of at least parts of the Dodd-Frank Act. The Administration’s executive order isn’t the only action that has been taken; here are a couple of other developments:
CEO Pay Ratio—The SEC Weighs In
On Monday, February 6, Acting SEC Chair Michael Piwowar issued a statement on the CEO pay ratio disclosure. Piwowar requests comments on “unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed,” and encourages detailed comments to be submitted within 45 days. Piwowar also notes that he has directed the SEC staff to “reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.”
While that’s pretty vague, is does indicate that, in addition to the Secretary of the Treasury and the Financial Stability Oversight Council, the SEC is also looking at the CEO pay ratio rule. Even so, it’s hard to say what this means. As we all know, and as an article in the Wall Street Journal notes (“GOP-Led SEC Considers Easing Pay-Gap Disclosure Rule of Dodd-Frank“), it is difficult for the SEC to move quickly on matters like this:
Republicans on the SEC could be stymied by the commission’s own procedures on the pay-ratio rule because undoing a regulation is handled by an often lengthy process that is similar to creating one. It also is difficult for the SEC to delay it outright, because of the commission’s depleted ranks. There are just two sitting commissioners—Mr. Piwowar and Kara Stein, a Democrat—meaning the SEC is politically deadlocked on most matters. Ms. Stein on Monday signaled opposition to efforts to ease the pay rule. “It’s problematic for a chair to create uncertainty about which laws will be enforced,” she said.
And Then There’s Congress
An article in Bloomberg/BNA reports that the Financial Choice Act is likely to be reintroduced into Congress this year (“Dodd-Frank Rollback Bill Expected in February, Duffy Says“). Originally introduced last year, this bill would repeal or restrict major parts of the Dodd-Frank Act, including reducing the frequency of Say-on-Pay votes, limiting application of the clawback provisions, and repealing the CEO pay ratio and hedging disclosures. Jenn Namazi blogged on the Act last year (see “Post Election: Things to Watch – Part I” and “Part 2“).
The Financial Choice Act is bigger than Dodd-Frank. The bill would also require a joint resolution of Congress before any “major” rulemaking by the SEC and a number of other agencies could go into effect. Mark Borges notes in his blog on CompensationStandards.com (“Acting SEC Chair Weighs in on CEO Pay Ratio Rule“) that the bill is expected to require the major proxy advisory firms to register with the SEC and, among other things, disclose potential conflicts of interest.
Poll: What Are You Doing?
It’s hard to know what to do in response to all this. Preparing for the CEO pay ratio disclosure requires a lot of time and resources, which most on the corporate side would view as wasted if the disclosure is eliminated. But if the disclosure isn’t eliminated, stalling preparations now could result in an implementation time crunch.
In his blog on CompensationStandards.com (“As Predicted—Hitting the Pause Button on the CEO Pay Ratio Rule“), Mike Melbinger says: “Postponement and revision of the rule seems likely. Now might be a good time to stop spending time and money on this calculation.” Take our poll to tell us what your company is doing (click here if the poll doesn’t display below).
Last week I blogged about yet another SEC enforcement action in the area of insider trading. For those looking for ways to further prevent insider trading by company employees, Rule 10b5-1 trading plans continue to be an attractive avenue toward this ambition.
A few months ago, in the November 11, 2016 edition of its newsletter Compensation & Benefits Digest, the Ayco Company examined and reported on Rule 10b5-1 best practices (“Update on Insider Trading and the Use of 10b5-1 Plans”). The firm is “seeing more companies tighten corporate compliance programs” in response to the SEC’s “significantly greater interest” in insider-trading enforcement (In my blog “White Collar (Stock) Crimes” of January 26, 2017, I suggested that insider trading is a low hanging enforcement fruit for the SEC, with advances in technology making it easier than ever before to identify suspect insider trades.) As part of this, Ayco has seen more companies develop policies on the use and design of 10b5-1 plans. Ayco also reported that of the 2,000 Section 16 insiders, including nearly 350 CEOs, for whom it provides financial-planning services, about 24% of the CEOs and 21% of other insiders (including directors) have had 10b5-1 plans in the past two years. The article also explains common and best practices for these plans in areas where there are no formal SEC rules, including:
Waiting period before first trade: Most model plans suggest a 60-90 period.
Time limits: Plans typically cover a period of three to six months and rarely longer than a year.
Number of plans: Companies often require or request that executives have only one plan at a time.
Transactions in and outside window period: Most companies permit trades under a plan even outside of a window period, although some companies may request the plans only be adopted during an open window.
Trades outside of plan: During the plan term, other company stock transactions are restricted.
Modification, termination, or suspension of plan: most companies take no position on whether a plan can be modified or cancelled, although some companies only allow this when the individual does not know material nonpublic information.
If your company policies and insiders haven’t fully embraced the concept of implementing Rule 10b5-1 plans, now may be a good time to reconsider.
It is common for boards and compensation committees to have discretion over clawback provisions, either over determining whether the clawback provision has been triggered or, once triggered, whether it should be enforced. While this discretionary authority is useful from a design and implementation standpoint, it can sometimes be problematic from an accounting perspective.
Background
Under ASC 718, expense associated with an equity award is determined on the grant date, which cannot occur before an employee and employer reach a mutual understanding of the key terms and conditions of the award. Where a key term is subject to discretion, a mutual understanding of the key terms and conditions of the award may not exist until the point at which this discretion can no longer be exercised.
In the case of clawback provisions, if the circumstances under which the board/compensation committee might exercise their discretion are not clear, this could lead to the conclusion that the service or performance necessary to earn the award is not fully defined. This, in turn, prohibits a mutual understanding of the terms and conditions of the award and delays the grant date. This delay would most likely result in liability treatment of the award.
Recent Comments from SEC Accounting Fellow
Sean May, a professional accounting fellow in the SEC’s Office of the Chief Accountant, discussed this concern in a speech at the 2016 AICPA Conference on Current SEC and PCAOB Developments, held in Washington, DC. May distinguished objectively applied clawback policies from policies that “may allow those with the authority over compensation arrangements to apply discretion.” In addition, he made the following comments:
If an award includes a key term or condition that is subject to discretion, which may include some types of clawback provisions, then a registrant should carefully consider whether a mutual understanding has been reached and a grant date has been established. When making that determination, a registrant should also assess the past practices exercised by those with authority over compensation arrangements and how those practices may have evolved over time. To that end, registrants should consider whether they have the appropriate internal control over financial reporting to monitor those practices in order to support the judgment needed to determine whether a grant date has been established.
Clawbacks and Discretion are Common
68% of respondents to the NASPP’s 2016 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting) indicate that their equity awards are subject to clawback provisions. 83% of those respondents, indicate that the board or compensation committee has some level of discretion over enforcement of the provisions.
If you are among those 83%, it might be a good idea to review the comments May made at the AICPA conference with your accounting advisers to make sure your equity awards receive the accounting treatment you expect.
Over the years I’ve covered many forms of insider trading scenarios and associated consequences. Of particular fascination to me have been cases involving employees trading in their own company’s stock. Maybe it’s because there are obvious policies in place to prevent this that it seems more egregious, or maybe it’s the level of betrayal (an inside job). I often think I’ve seen it all, and then some new twist surfaces. In today’s blog I’ll cover a recent SEC enforcement action against a former Expedia employee.
You Will Get Caught
In the Expedia case, a former computer support technician secretly accessed senior executives’ emails for confidential information. Reuters reports that he pleaded guilty to one criminal count of securities fraud, agreed to pay back his former company the nearly $82,000 that it spent to investigate the computer intrusions, and settled with the SEC for close to $376,000 (“Ex-Expedia IT Employee Pleads Guilty to Insider Trading,” Nate Raymond, Dec. 5). According to the complaint filed by the SEC, the technician used the stolen information to trade Expedia securities in advance of seven Expedia earnings announcements and two Expedia agreement-related announcements, resulting in unlawful profits of nearly $350,000.
Insider trading enforcement actions provide important learning opportunities for companies who are engaged in an ongoing quest to educate employees and prevent these types of crimes. It seems to me that many of these acts of insider trading are ones born of circumstance opportunity (overhearing a conversation involving material, non-public information, for example, or, having access to certain information or functions through the nature of one’s job). It’s impossible to eliminate every single potential opportunity to cross paths with inside information – and many companies work to educate employees about not giving in to the temptation to share the information or use it for financial gain. I know I’ve touted the message “Don’t try it. You will get caught.” Yet, some employees still try it, and they do get caught.
The former Expedia employee’s case raises the question – what can companies learn about further protecting access to vulnerable information from all angles? Or, is it not about better protecting the information, but further educating the employees about the realities of the consequences for insider trading? In recent years I’ve been impressed with the SEC’s advancements in technology, particularly in identifying trades that warrant further investigation. With all the progress in technology, insider trading is a low hanging fruit for the SEC. If you’re not talking to employees about some of the recent enforcement actions for insider trading and the mechanisms the SEC is using to track down these trades, now’s a good time to start. Case studies can be excellent teaching tools.
Why Do People Commit White Collar Crimes?
In the latest edition of The NASPP Advisor (“Insider Trading and Rule 10b5-1 Plans,” January/February 2017), we suggest that companies who are looking to refresh or redesign their programs for preventing insider trading read an interview of Harvard Business School professor Eugene Soltes in the December issue of Human Resource Executive (“Good Intentions, Bad Decisions,” pages 18–19). The professor recently wrote a book entitled Why They Do It—Inside the Mind of the White-Collar Criminal. In the interview, he shares some of his insights into how intelligent and ambitious executives can sometimes fall into traps that lead to criminal acts with “terrible consequences for their company, those around them, and themselves.” For example, executives are used to decisions and activities in business that can be gray or murky, so they need to know when their actions cross lines that lead to “serious consequences.” These insights may be useful for HR professionals who are working to discourage such mistakes among employees and executives.
ISS 2017 Equity Compensation Plan FAQ notes that where companies want ISS to include performance awards in their burn rate when the awards are earned, ISS now requires specific disclosures with respect to the performance awards.
A Quick Primer on ISS, Burn Rates, and Performance Awards
ISS includes performance awards in a company’s burn rate when the awards are earned, if the company includes this information in the disclosures related to its stock plan. If this information isn’t disclosed, ISS includes the performance awards in the burn rate calculation when they are granted.
The problem with including the performance awards when they are granted is that ISS doesn’t reduce the burn rate for subsequent forfeitures (due to either termination of employment or failure to meet the performance goals). Consequently, it is generally preferable to have performance awards included in the burn rate when they are earned. This will result in a more accurate (and possibly lower) burn rate, because only the shares that are actually earned and paid out will be included in the calculation.
What’s Changed?
In the past, ISS simply required companies to clearly and consistently disclose how many shares were granted and earned under performance awards, without defining what the disclosure should have looked like. In its 2017 Equity Compensation Plans FAQ, however, ISS has stipulated the following requirements for the disclosure:
Table format
Separate from the disclosure for time-based awards
Aggregate of all performance awards granted to all employees (providing the disclosure only for awards held by NEOs is insufficient)
Covering three years
Included every year going forward, even if the plan will not be acted on in a particular year
Included even if no performance awards were granted or earned in a particular year
ISS has also said that they generally won’t calculate the number of shares earned under performance awards, even if it would be possible for them to do this from information presented in narrative format.
The FAQs include a sample disclosure that looks remarkably like the old roll-forward tables companies used to include for all of their stock compensation under the original FAS 123.
Is This Legally Required?
The disclosure isn’t legally required or required under ASC 718. But if you want ISS to include your performance awards in your burn rate when they are earned, rather than when they are granted, the disclosure is necessary.
As most of my readers know, the FASB has amended ASC 718 to expand the exception to liability treatment that applies to shares withheld to cover taxes to include withholding up to the maximum individual tax rate. This has led many companies to consider changing their tax withholding practices for stock compensation.
Plan Amendment Likely Necessary
As noted in my blog entry “Getting Ready for the New Share Withholding” (May 5, 2016), companies that are interested in taking advantage of the expanded exception face an obstacle in that virtually all stock plans include a prohibition on using shares to cover taxes in excess of the minimally required statutory withholding. Where companies want to allow shares to be withheld for tax payments in excess of this amount, the plan must first be amended to allow this.
Shareholder Approval Not Necessary
In the aforementioned blog entry, I had noted that it wasn’t clear if shareholder approval would be required for the plan amendment, particularly if the shares withheld will be recycled back into the plan. I have good news on this question: both the NYSE and Nasdaq have amended their shareholder approval FAQs to clarify that this amendment does not require shareholder approval, even if the shares will be recycled.
Nasdaq (ID number 1269, it should be the last question on the second page. Or do a keyword search for the word “withholding” and the relevant FAQ should come right up.)
For a while, there was still a question as to whether the NYSE required shareholder approval when shares withheld from restricted stock awards would be recycled. In late December, John Roe of ISS arranged for the two of us to meet with John Carey, the Senior Director at NYSE Regulation, to get clarification on this. Just prior to our meeting, the NYSE updated their FAQs to clarify that shareholder approval is not required even in the case of share withholding for restricted stock awards, even when the shares will be recycled.
ISS Still Not a Fan of Share Recycling
It should come as no surprise that, where the withheld shares will be recycled, ISS isn’t a fan of amendments to allow shares to be withheld for excess tax payments. Now that it’s clear shareholder approval isn’t required for the amendment, this likely isn’t a significant concern for most companies, unless they are submitting their plan for shareholder approval for some other reason. It isn’t a deal-breaker, but it could enter into ISS’s qualitative assessment of the plan. This would particularly be an issue if ISS’s recommendation is tied to more than the plan’s EPSC score.
Not a Modification for Accounting Purposes
There also has been some question as to whether the amendment would be considered a modification for accounting purposes if applied to outstanding awards. Based on the FASB’s recent exposure draft to amend the definition of a modification under ASC 718 (see “ASC 718 Gets Even Simpler,” November 22, 2016), the FASB doesn’t seem to think modification accounting is necessary. The comment period on the exposure draft ended on January 6. There was little opposition to the FASB’s position: only 14 comment letters were received, one letter clearly opposed the change, 12 supported the change, and one was “not opposed” but not enthusiastic. Given that response, hopefully the FASB will finalize the proposed update quickly so that this question is settled.
Here we are again at the start of another season of Section 6039 filings. Nothing much has changed with respect to Section 6039 filings in recent years, so imagine my surprise when I learned that the IRS had updated Form 3922.
Form 3922 Grows Up
As it turns out, the only update to the form is that it has been turned into a fill-in form. If you are planning on submitting paper filings, this allows the form to be filled in using Adobe Acrobat, so you don’t have to scare up a typewriter or practice your handwriting. I haven’t owned a typewriter since college and even I can’t read my handwriting, so I am a big fan of fill-in forms.
Unfortunately, this is just about the least helpful improvement to the forms that the IRS could make. Form 3922 is for ESPP transactions. ESPPs tend to be offered by publicly held companies with well over 250 employees. Chance are, if a company has to file Form 3922, the company has more than 250 returns to file (less than 250 ESPP participants is probably a pretty dismal participation rate for most ESPP sponsors) and the returns have to be filed electronically. The fill-in feature doesn’t impact the electronic filing procedures; it is only helpful for paper filings.
It would have been more helpful if the IRS had made Form 3921 a fill-in form. Given the declining interest in ISOs (only around 10% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey grant ISOs), companies are more likely to be filing this form on paper. The IRS notes, however, that it selected Form 3922 to be made into a fill-in form because they receive so few filings of it on paper. I guess the IRS’s goal was to appear helpful but not actually be helpful. Your tax dollars at work.
A Fill-In Form Isn’t As Helpful As You Think, Anyway
As it turns out, having a fill-in form may not be that helpful, anyway. I was thinking you could fill in the form, save it, and then email it to the IRS but it doesn’t seem like this is the case. No, even if you fill it in using Adobe Acrobat, you still have to print it out and mail it to the IRS. And the requirements for printing the form out still include phrases like “optical character recognition A font,” “non-reflective carbon-based ink,” and “principally bleached chemical wood pulp.” I think this means that you have to print the form on white paper, using black ink that isn’t too shiny, and using the standard fonts in the fill-in form. But I’m not entirely sure.
What About Form 3921?
When I first saw that Form 3922 is now fill-in-able, I assumed, perhaps naively, that a fill-in Form 3921, which would truly be useful, would be available any day. But that was back in September and still no update to Form 3921. Upon reflection, especially given the IRS’s statement about why this honor was bestowed upon Form 3922, I think I may have been overly optimistic.
Happy New Year! It’s that time of the (new) year again where we offer up congrats for our annual Question of the Week contest.
Question of the Week Winner!
The winner is of our 2016 Question of the Week contest is (drum roll!): DMekwunye (who, by the way, placed 2nd in our 2015 contest and has landed in the top 3 scorers for at least three years in a row now). For those of you who are asking “What’s the Question of the Week Contest?“, it’s a weekly quiz challenge designed for stock plan professionals to test their know-how in a variety of areas, while competing against their peers. Hone your equity compensation knowledge while having fun at the same time! There’s a new question each week, and a correct answer earns points.
And the Winners Are…
A big congrats to screen name alias DMekwunyefor coming out on top of our 2016 contest. Since she uses her real name as her screen name and she’s been one of our most dedicated Question of the Week competitors for years, I’m going to reveal her full name – De Anna Mekwunye of Wind River Systems. Congrats De Anna!
The screen names of the top 5 scorers for the 2016 contest are:
1st – DMekwunye (420 points)
2nd – mamaandmore (410 points – tie with Sunny Days)
2nd – Sunny Days (410 points – tie with mamaandmore)
4th – All About Equity (390 points)
5th – SMKS (380 points)
What’s in a Name?
Your play is tracked by your screen name – so you can be as anonymous or transparent in your game playing as you like. It’s become an annual tradition for me to highlight some of the fun, intriguing and perplexing screen names each year. In 2016, once again it seems nothing was off limits, from the range of “equity” and “stock” possibilities (Equity for Dummies, Stock Plan Warrior, Equity Gamer, StockFiddler, CEP III 2003 & 2011) to the mythical (unicorn6872) to the humble (Will Give It A Go, Guessing) to those who tell it like it is (Ace1, Sure, winningduck, TestMe, Lucky13). Finally there were a few that would probably require a happy hour and some time to explain (Jane Jetson, bagelbert, Amateur Lurker, woohoo, and PeabodyMarble).
Work Hard, Play Hard
We’ve just reset scores and this week’s challenge starts a whole new contest, so this is the perfect time for NASPP members to sign up, create your screen alias and jump into the Question of the Week Contest. We leave all of January’s questions active for the entire month, so you have plenty of time to complete the first quizzes of the new game.
The SEC has announced an update to the process used to generate a new EDGAR passphrase. In anticipation of this, now would be a good time to make sure your email address is correct (and the email addresses for all of your Section 16 insiders) in the EDGAR system.
What Is a Passphrase and How Is It Different from a Password or a Password Modification Authorization Code (PMAC)?
The EDGAR system has a ridiculous number of password-type codes assigned to each individual user. You probably only need one password to access your bank account, but EDGAR assigns four password-type codes to each user. And, even with that shockingly complex security protocol, it’s still possible to submit fake EDGAR filings.
Your passphrase is used to generate a completely new set of EDGAR codes (CCC, password, and PMAC). You do this when you are first assigned a CIK (because you won’t have any of the other codes yet). It’s also the only way to generate a new password if you’ve forgotten yours.
What Is the New Process?
The problem with having to use your passphrase to generate a new password (and CCC) is that if you’ve forgotten your password, you’ve probably also forgotten your passphrase. In which case, you have to request a new passphrase before you can generate a new password.
Previously, to generate a new passphrase, you completed the online request form and submitted a new notarized Form ID to the SEC (for a more detailed, somewhat humorous explanation of this, see “My EDGAR Nightmare“). Now, you’ll also have to provide an “electronic security token” with your request. The electronic security token will be emailed to you by EDGAR at the time you make the request to change your passphrase. This is why it is important to make sure your email address is correct; if the EDGAR system doesn’t have your correct email address, you won’t get the email with your electronic security token and you’ll have to go through some sort of manual review to get your passphrase updated, which could take more than two days (and I’m sure you all understand the significance of process that takes longer than two days in the EDGAR context).
What Exactly Is an Electronic Security Token?
Got me. Since EDGAR is emailing it to you, my guess is that it is some sort of code that you enter into the EDGAR website, but it could also be a link in the email that you have to click.
Will Form ID Still Be Required to Change a Passphrase?
No idea on this either. The announcement from the SEC did not include a lot of information.
When Is the New Process Going Into Effect?
The SEC announcement, which was issued on December 12, says “soon.” When dealing with the government, “soon” often is later than you might expect but I still wouldn’t wait to make sure your and your insiders’ email addresses are correct.
Thanks to Tami Bohm of Radian Group for reminding me to blog about this.