As 2012 draws to a close, I can’t help but reflect on the fact that it’s been another relatively quiet year in terms of regulatory developments. This has hopefully meant more time focused on projects and refining administration practices, and less time spent trying to figure out how to implement new legislation. With year-end around the corner and no burning developments (we’ll see what happens with the fiscal cliff issue), now is the perfect time to perform a “health check” on compliance procedures.

A sanity check on compliance procedures is something every company should be doing with regularity. In some cases we have legislation that mandates this type of check (Sarbanes-Oxley 404, for one), but even then the areas of focus are not all-encompassing. Ideally it would be great to identify the key areas of administration for your equity programs and develop a corresponding checklist that can be utilized on a periodic basis as a reminder for areas that need monitoring. Think of it like preventative care for your stock plans. Why not do this now, before the next era of regulatory changes places further demand on our time?

I advocate the idea of a checklist because not all compliance shortcomings are alike. Many failures come not from lax day to day procedures, but from oversights and things long forgotten. For example, there is much fanfare around the adoption of a new equity plan, and the corresponding registration of the shares allocated to the plan on a Form S-8 is something that is usually not forgotten. However, what happens years down the road when the plan is no longer in use? For shares remaining in a defunct plan, the company needs to remember to un-register those shares with the SEC. This is certainly not a day-to-day or even annual occurrence for most companies, but is something that could easily be added to a checklist to ensure no oversight occurs.

Another reason to have a defined checklist? Increased global audit and enforcement. It just seems plainly better for a company to proactively identify and rectify any potential errors or missteps rather than leaving it up to being caught by an external party. Interestingly, when it comes to global tax compliance, the 2012 NASPP/PwC Global Equity Incentives Survey observed a downward trend in the frequency of annual compliance reviews conducted by companies. 57% of companies reported conducting annual compliance reviews in 2011 (and that number was even higher in prior years). In 2012, only 34% of respondents reported performing annual compliance reviews. What’s alarming about a trend like this is that on the flip side, the level of audit activity by regulators is is increasingly strong, and in some cases, continuing to rise. France, for example, is considered one of the most challenging jurisdictions from a tax perspective, and in the 2012 survey it ranked second highest in terms of the percentage of companies audited (17%). Now is not the time to let go of compliance monitoring.

Checklist Tips

The concept of a checklist is likely an all-familiar one in our stock compensation world. I’m not proposing something that’s necessarily novel. However, I notice that most often the “checklists” are oriented towards a specific set of procedures or tasks, like processing an ESPP purchase or RSU release. I don’t often see a full checklist oriented towards across-the-board compliance, and this is an area where I think plan administration could be made much easier. So what would I include in my checklist? Some things you won’t want to miss:

– Plan Management (Plan Reserves, Registration, Fungible Shares and Reconciliation): Ensure reconciliation occurs in all aspects of maintaining shares under the equity plans. This includes registering initial shares, validating plan balances on an ongoing basis, tracking plan reserve increases, and taking action when the plan is no longer in use. This could serve as a stand-alone category on a checklist, with many areas to monitor.

– Handling Exceptions: I could write a whole another blog on tracking exceptions. You know the situation: some anomaly occurs mid-quarter (unexpected acceleration of a grant? unusual termination conditions or modifications?) and then, with no formal process to keep track of the change, it’s forgotten. Adding a few steps around tracking these exceptions to your checklist would save volumes of work down the road trying to recall what occurred and alleviate fears about forgetting something.

There’s only so much I can include in today’s blog. I hope you will consider the notion of adopting a checklist that you can use to broadly monitor compliance on a regular basis. There are a number of focused checklists in our Administrative Tools and Year-End portals that may give you an idea on the types of things to track.

-Jennifer