On January 16, the SEC approved the new NYSE and NASDAQ listing standards relating to compensation committee independence. As noted in the NASPP’s alert on the original proposals (“Exchanges Issue New Standards for Compensation Committee Independence“), the new standards include three primary requirements:
The compensation committee must be comprised of independent directors, based on a number of “bright line” tests (many of which were already applicable to independent directors under each exchange’s prior listing standards) as well as additional factors that the SEC suggested should be considered in determining a director’s independence. Also, NASDAQ will now require a separate compensation committee (the NYSE already required this).
The compensation committee must have authority and funding to retain compensation advisors and must be directly responsible for appointment, compensation, and oversight of any advisors to the committee.
The committee must evaluate the independence of any advisors (compensation consultants, legal advisors, etc.).
The final rules make only a few minor changes to the original proposals, including clarifying that the compensation committee will not be required to conduct the required independence assessment as to a compensation adviser that acts in a role limited to:
consulting on a broad-based plan that does not discriminate in favor of executive officers or directors of the company, and that is available generally to all salaried employees; or
providing information (such as survey data) that is not customized for a particular company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.
Public companies now need to assess whether the compensation consultants and other advisors engaged by their compensation committee raise any conflicts of interest and disclose any identified conflicts in their proxy statement (for annual meetings after January 1, 2013 at which directors will be elected). Although not required, where no conflict of interest is found, we expect that many companies will include a disclosure to indicate this.
In his Proxy Disclosure Blog on CompensationStandards.com, Mark Borges of Compensia highlights a recent disclosure on this topic in Viacom’s proxy statement, which might be useful to review as you draft your own disclosure (if this isn’t your gig, perhaps you can score some points by forwarding it on to the person that will be drafting this disclosure).
And now for something a little lighter: a video by the blog Cady Bar the Door on the whistleblower provisions of the Dodd-Frank Act. I know you don’t care about the whistleblower provisions, but you should watch the video anyway. It might make you feel better about your own company’s general counsel.
BTW–if you think this would be a cool format to use for educating employees, you can make your own Xtranormal video. Just pick your characters, type in your dialogue, and Xtranormal does the rest. You can make at least one movie, probably more, for free.
Here’s your NASPP To Do List for the week:
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Submit a question for the Question of the Week Challenge to be entered in a raffle for a free registration to the CEP Symposium (see last week’s NASPP To Do List for more information).
Register for our spring 2013 online Stock Plan Fundamentals program. Don’t wait–the early-bird rate is only available until February 15.
Order the audio from the 20th Annual NASPP Conference! Just $65 per session for NASPP members–less per session if you purchase a multi-session package.
The 20th Annual Conference in New Orleans was packed with fantastic and useful information throughout. In particular, I want to draw attention to a special moment that actually occurred in one of the pre-conference sessions. Attendees of the pre-conference session on Proxy Disclosure were treated to an address by Meredith Cross, Director of the SEC’s Corporation Finance Division. Director Cross shared insight into SEC priorities and roadmap, as well as iterated some specific reminders for public companies. In today’s blog I’ll summarize some of Director Cross’ key points.
Housekeeping
First, I want to mention that Director Cross began her address with a disclaimer, stating that what she said reflects her own opinions and not formally those of the SEC. I feel compelled to reiterate that here. Still, her insights are undoubtedly valuable insight into the workings and thought process of the SEC.
Disclosures, Disclosures
Director Cross began by sharing her opinion on the state of company disclosures post adoption of Say-on-Pay. She stated that overall, the SEC has observed compliance with the requirements and resultant higher quality disclosures. One thing the SEC is considering is a retrospective review of Say-on-Pay related disclosures to see if they are actually achieving what the SEC hoped they would. What is the SEC hoping for in terms of quality Say-on-Pay disclosures? One example would be individualized reporting for each company director; that level of granularity is what the SEC is looking for in the context of quality disclosures. Data gathered during the review of disclosures will likely be used to determine if any disclosure requirements need tweaking.
Dodd-Frank: What’s Next?
The Dodd-Frank Act came with a myriad of rules to implement, which has kept the SEC rather busy. Some of the rules adopted by the SEC direct the national securities exchanges to develop their own listing standards to implement certain requirements of the Dodd-Frank Act that relate to compensation committees and director independence. The stock exchanges had until 9/25/2012 to submit their proposals to the SEC. Both NYSE and NASDAQ have posted their proposals on their respective web sites. Director Cross encourages companies to review the proposals and comment as they feel appropriate. The SEC has until 6/27/2013 to adopt the new standards.
On other Dodd-Frank notes, the SEC still has remaining rules to implement. Self admittedly, the SEC was challenged in accurately predicting the timing for implementation. Director Cross noted that the SEC has made good progress on all Dodd-Frank requirements that had deadlines, which took priority. Attention will now turn to implementation of the remaining rules (after turning some attention to focus on deadlines imposed by the JOBS Act first).
Tips
What I really appreciated about Director Cross’ address is that she had real tips to provide to issuer companies. I think anytime there’s an opportunity to hear from someone at one of the regulators, visibility into their thinking is more transparent. For example, the Director Cross says the SEC is aware of some specific concerns raised by companies relative to their disclosures. Namely, questions around putting supplemental income in context (e.g. if you pay a bonus in January that was earned prior to December 31, when do you disclose it?). According to Director Cross, the SEC needs to make sure these scenarios are interpreted consistently (my interpretation: don’t be surprised if down the road some interpretive guidance is issued.) Another area of concern for companies is the reporting of realized vs. realizable income. There’s no industry definition for this, so Director Cross’ advice is to approach it consistently year-over-year.
Reminders
On a final note, Director Cross had a few reminders for companies:
402(s) disclosures (how compensation practices relate to risk management) – companies need to remember that even if compensation practices haven’t changed, the company’s approach to risk management may have changed. For this reason, companies need to assess both practices annually.
Performance Targets – remember that if a performance target isn’t met, this could be material, and the SEC expects companies to have related discussion in the CD&A disclosure in the proxy.
Say-on-Pay – companies should view their proxy statement as an advocate for their pay practices, and a means to communicate with their shareholders.
It certainly was a treat to have Director Cross’ participation in the Proxy Disclosure pre-conference session, and hopefully this summary has provided an inside view into some of the SEC’s agenda, concerns, and radar.
Last week, the SEC issued final rules requiring US exchanges to adopt listing standards on the independence of compensation committee members and the use of compensation advisors by said committees.
I don’t have a lot to say about these rules because they don’t directly relate to stock compensation. Sure, the compensation committee typically has authority over the company’s stock plans and changing who sits on the committee and which advisors the committee relies on could have implications for the company’s stock plan, but there’s nothing specific to stock compensation in the rules. And, let’s face it, for purposes of this blog, there are only two categories of stuff: 1) Stock compensation and things that explicity impact it and 2) Things I don’t care about. But, despite that fact that the new rules seem to fall into category #2, it is a current development that, at least peripherally impacts our world, so I figured a blog entry might be in order.
Rules to Create Rules
The final rules issued by the SEC are 124 pages (and no, I haven’t read them all–see #2 above–but I did read a nifty summary by Morrison & Foerster). What strikes me is that here we have 124 pages of rules, but these aren’t actually the real rules yet. These rules just direct the exchanges (Nasdaq, NYSE) to adopt the rules. They don’t even tell Nasdaq and the NYSE what the rules should be, they just suggest things that should be considered in creating the rules. The exchanges now have around 90 days to propose the actual rules, which presumably will be subject to comment (although the SEC rules were already subject to comment) and then eventually the actual, final rules will be adopted. Just an observation, not a criticism of the SEC–they are just doing what they were instructed to do under Dodd-Frank.
Three Independence Standards
The rules require the exchanges to adopt rules requiring compensation committee members to be independent, taking into consideration sources of compensation paid to directors and any relationships directors have with the company or its officers. If you’re thinking that this sounds familiar, you’re right. For purposes of Section 16, most companies maintain a committee of two or more “nonemployee” directors and for purposes of Section 162(m), companies also ensure that the members of that committee are “outside” directors. Now the committee members will also have to be “independent” under the listing standards the exchanges adopt. My guess is that they aren’t going to just adopt the Section 16 or 162(m) definition (which are similar to each other but just different enough to be confusing) and that we’ll have a third standard to comply with.
Compensation Advisors
The rules also stipulate that the exchange listing standards require that compensation committees have sole authority to engage advisors (compensation consultants and/or attorneys) and that company provide funding to the committee to pay the advisors. The rules specify a number of independence factors that the exchanges are to direct compensation committees to consider when engaging advisors. The rules don’t preclude the committee from receiving advise from non-independent counsel or consultants (e.g., the company’s in-house or outside legal counsel).
Compensation committee reliance on independent advisors has been a best practice for many years now; I suspect that many companies already have practices that partially or fully comply with this requirement. Even so, given that the advisors your compensation committee hires are likely to be making recommendations on stock compensation issued to executives, it’s something to be aware of. See topics #1 and #2 in our recent webcast “Ten Equity Compensation Issues That Affect All Stock Plan Professionals (That No One Told You About).”
Disclosures
The final rules also update the disclosures companies are required to make with respect to compensation consultants, expanding the factors that must be considered in evaluating the independence of the consultants.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Since it is a holiday week, I have a couple of lighter topics for my blog entry.
Behind Every Half-Baked Law Is an Over-Sensationalized Cause In his May 21 Compensation Blog entry on CompensationStandards.com, Mike Melbinger of Winston & Strawn states “…nearly every bad law in the field is the result of Congressional or agency reaction (or overreaction) to some widely publicized occurrence.” To prove it, Mike created a game in which readers can match each half-baked law (Mike’s phrase) with its cause. So you can join in on the fun, I’ve reproduced it here. Match the law on the left with its cause on the right.
Law
Cause
1. 280G
A. Enron executives
2. 409A
B. Change in control payments made to Bill Agee of Bendix in 1982
3. AMT
C. 2007 World Financial Crisis (Wow, was it really that long ago? Shouldn’t my investments have recovered by now?)
4. Dodd-Frank Act
D. Enron, Worldcom, Anderson
5. SOX
E. Treasury Secretary Joseph Barr testifies that, in 1967, there were a total of 155 individuals with incomes over $200,000 who did not pay any federal income taxes; twenty of them were millionaires.
10 pts to anyone who gets all five right. Answers next week.
Deal Cube Wars I’m not quite sure what a deal cube is–I guess it is some sort of souped-up paperweight given to lawyers to commemorate a deal they worked on–but that hasn’t stopped me from enjoying the Deal Cube Tournament that Broc Romanek is running in his blog on TheCorporateCounsel.net. Check out the cubes (he’s gotten readers to send in pictures of over 130 of them) and vote for your favorites. Some of them are quite clever. Broc’s blog is available for both subscribers and nonsubscribers, so anyone can join in on the fun.
Don’t Miss Out: Conference Early-Bird Expires on Thursday The early-bird rate for the 20th Annual NASPP Conference expires this Thursday. You can see by the program that this is going our most informative Conferences ever. You’re going to want to be there, so make sure you register by Thursday to save on your registration.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Register for the 20th Annual NASPP Conference in New Orleans. Don’t wait, the early-bird rate is only available until this Thursday, May 31.
It’s been months since I last discussed anything related to the Dodd-Frank Act so in today’s blog, I provide an update on SEC rulemaking related to the Act.
More Delays
The SEC recently updated its calendar for rulemaking activities pertaining to Dodd-Frank to delay a number of projects, including:
Requirements for companies to adopt clawback policies for compensation paid to executives.
Disclosure of the ratio of CEO pay to the median pay of all employees.
Disclosure of the relationship of executive compensation to corporate financial performance.
Disclosure of hedging policies for employees and directors.
Final rules on these projects are now scheduled to be issued no earlier than July and possibly as late as December 2012. This means we won’t have final rules in time for this year’s proxy season (but you had probably already figured that out for yourself). The SEC expects to issue proposed rules during the first half of 2012.
Accredited Investors
The SEC has amended the definition of an “accredited investor” to exclude the value of primary residences from net worth. This is an important definition under Regulation D, which provides a number of exemptions from registration for offerings of stock, some of which limit the number of nonaccredited investors that can participate in the offering.
Next up, the SEC is set to finalize rules prohibiting “bad actors” from participating in Rule 506 offerings. At first I thought this meant that Pauly Shore and David Caruso wouldn’t be able to participate in unregistered offerings, but it actually relates to felons and others that have been convicted of or sanctioned for securities fraud and similar activities.
These changes probably don’t impact the operation of most companies’ stock plans. Public companies generally register all the shares issued under their stock plans and private companies are generally relying on Rule 701 for an exemption from registration. Either way, neither has to worry about accredited investors or complying any with of the Regulation D exemptions (including Rule 506). But where a private company has exceeded the limitations in Rule 701 (10 points if you know what they are off the top of your head–no Googling) or where either public or private companies are making private sales of stock to investors outside of their stock plans, the Regulation D exemptions can come into play.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
They grow up so fast! July 21 was the one-year anniversary of the Dodd-Frank Act (in case you are wondering, it’s been nine years since SOX was passed–time sure flies when you’re having fun). Today I take a look at Say-on-Pay results and highlight a recent announcement from the SEC about the timeline of further Dodd-Frank rulemaking projects.
To reminisce more on Dodd-Frank developments over the past year, check out the memo “Dodd-Frank One Year Later” by David Lynn of Morrison & Foerster (and editor of TheCorporateCounsel.net).
Say on Pay: The Results So Far
With proxy season winding down, here are the latest Say-on-Pay results (courtesy of Mark Borges, who has been providing weekly Say-on-Pay updates in his excellent blog on CompensationStandards.com):
2,596 companies have reported votes. Of those, only 37 reported failed votes, but there are three additional companies (Cooper Industries, Hemispherix Biopharma, and isoRay) where whether the Say-on-Pay vote passed depends on how you count. Of course, if your Say-on-Pay vote is that close, it probably doesn’t matter whether you count it as a pass or fail; either way, you are likely to be making some changes to your executive pay.
At least three companies (Lockheed Martin, General Motors, and Umpqua Holdings) modified prior grants to be subject to performance vesting in response to shareholder comments in connection with their Say-on-Pay votes.
At a majority (about 76%) of the companies reporting votes, shareholders expressed a preference for annual Say-on-Pay votes.
SEC Delays Further Rulemaking
In his also excellent blog on CompensationStandards.com, Mike Melbinger reported yesterday that the SEC has modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation. Here is the new schedule:
August – December 2011
§951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
§§953 and 955: Adopt rules regarding disclosure of pay-for-performance, CEO to median employee pay ratio, and hedging policies
§954: Adopt rules regarding recovery of executive compensation (i.e., clawbacks)
§956: Adopt rules (jointly with others) regarding executive compensation at covered financial institutions
July – December 2012
§952: Report to Congress on study and review of the use of compensation consultants and the effects of such use
Given the new schedule, Mike thinks it unlikely that most of these rules will be effective for next year’s proxy season, but there is a chance that one or two provisions will be effective for proxies filed after January (as with the Say-on-Pay rules, published in January 2011). Mike notes that the SEC will propose rules first (and already has for a couple of the provisions), so we should know well in advance which provisions will be final for the 2012 proxy season.
It’s Not Too Late to Enroll in the NASPP’s Financial Reporting Course The NASPP’s newest online program, “Financial Reporting for Equity Compensation” started on Thursday, July 14, but it’s not too late to get into the course. All webcasts have been archived for you to listen to at your convenience.
Designed for non-accounting professionals, this course will help you become literate in all aspects of stock plan accounting, from expense measurement and recognition, to EPS and tax accounting. Register today so you don’t miss any more webcasts.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Don’t miss your local NASPP chapter meetings in Kansas/Missouri, Philadelphia, and Phoenix. And, next week, on August 10, the San Francisco chapter will host their annual all-day event at Wente Vineyard in Livermore, CA. You really should come out for this exceptional event.
The SEC plans to address the clawbacks in Section 954 of the Dodd-Frank Act between August and December of this year. Many companies appear to be waiting to make final decisions on how to apply the clawback requirements until the SEC completes the proposed rules. (There is more information on creating a clawback policy in the NASPP blog entry, Clawbacks and Executive Compensation.)
Under the Dodd-Frank Act, companies risk delisting if they do not adopt a clawback policy that complies with Section 954 (which is now Section 10D of the Exchange Act). Some of the more difficult aspects of compliance may be in the clawback period (there is a three-year look-back), the potential for little or no company discretion in enforcing the policy, the fact that the executive does not need to be at fault or have contributed to a financial restatement and the actual calculation of compensation that must be recouped.
SEC Enforcement
In 2009, the SEC brought the first enforcement action based solely on SOX clawback provisions. There has been an increase since that case of suits involving clawbacks initiated by the SEC. Last month Beazer CEO, Ian McCarthy, agreed to pay back $6.5 million in compensation under the SEC action against him. (It may not be a coincidence, then, that Beazer’s shareholders voted against pay packages for company executives this year).
Enforcement Snags
The legal aspect of actually recouping compensation under a clawback provision or policy is complex. In the Unites States, enforcement is subject to state wage laws and may or may not be feasible. Presumably, the federal regulations from Dodd-Frank will trump state law, but that is yet another detail to be worked out. Another difficulty for companies to overcome is with respect to di minimis recoupment amounts or clawbacks that would require unreasonable efforts, such as situations where the individual does not have the finances available to repay the compensation.
International Considerations
International considerations for clawbacks are covered in this great matrix from Baker & McKenzie, which differentiates between Dodd-Frank, noncompete, and nonsolicitation clawback practices. In some countries like Canada, Germany, and Mexico, the provisions of Dodd-Frank are likely to be enforceable. However, in many countries like Australia, Japan, Spain, such policies most likely would not be enforceable, particularly if there isn’t an issue of misconduct or individual culpability. There are even situations like in Ireland or the UK where the provisions are likely to be enforceable as long as they were included in the original agreement, which could be a problem for existing equity compensation.