Barring some sort of unforeseen obstacle, T+2 settlement is scheduled to go into effect on September 5 of this year. (That’s the Tuesday after Labor Day—what better way to cap a holiday weekend than with a major change in the US securities markets? I guess they didn’t want to wait until December 26).
On Tuesday, I blogged about why the securities industry is moving to T+2 (“Progress Towards T+2“). For today’s blog entry, I have a list of six things you need to think about with respect to T+2.
1. Be prepared to shorten processing time for any stock plan transactions that involve open market sales. This includes same-day-sale and sell-to-cover transactions. The broker will need to receive the shares and know the funds to be transferred to the company to cover the cost of the transaction and tax withholding in time to settle by T+2. That means you’ll have one less day to process the transaction.
2. Other types of transactions may be affected as well. Cash and net exercises and share withholding don’t involve open market transactions and, thus, theoretically aren’t subject to the mandated settlement period. But, in recent years, many companies have begun allowing employees to conduct these transactions using the automated, self-service tools provided by their brokers. Some (many? all?) brokers may subject these transactions to the same two-day settlement period simply because that is how their systems will be designed to work.
3. Watch out for complicated transactions. It may be no sweat to calculate the tax withholding for US employees and get that information over to your brokers in 24 hours. But for non-US employees, where you may have to contact local payroll (possibly in a time zone that is half a day off from yours) for the appropriate tax rate, this might not be so easy. And then there are your mobile employees. Withholding at the maximum tax rate and refunding the excess through local payroll might be the only way to manage this process.
4. Beware the IRS deposit deadline for same-day sales. Where the company’s cumulative deposit liability to the IRS exceeds $100,000, the deposit needs to be made within one business day. But for same-day sale exercises, an IRS field directive considers the deposit timely if made within one day of the settlement date. If settlement occurs on T+2, that means the deposit now needs to be made by T+3.
5. Talk to your brokers. Contact your brokers to find out what they are doing to prepare for T+2 and what testing opportunities will be available to you. Think about what you’ll need from your brokers and communicate this to them. Don’t wait for your brokers to contact you; get out in front of this.
6. Don’t forget about employee communications. Your brokers are going to be communicating this change to your participants. Make sure you know what they will be communicating and when, so you aren’t caught off guard. And review your own educational materials for any mention of the settlement period.
Some of the panelists in the NASPP Conference session on this encouraged the use of the term “settlement period” without explaining how long this period is, so that if/when the period is reduced to T+1, you don’t have to change it again. I hate that idea. It makes a confusing concept even more confusing for employees. And it could be decades before we move to T+1 (moving from T+3 to T+2 took 20 years). By then, you’ll probably have been promoted (or retired) and updating the educational materials will be someone else’s problem.
In early February, the SEC approved of rule changes by the NYSE and Nasdaq that are necessary to shorten the settlement cycle to T+2. The approved rule changes relate to the calculation of ex-dividend dates and several other administrative procedures that I don’t understand. The exact rules that were changed aren’t particularly important; what is important however is that yet another task on the T+2 to-do list has been checked off.
I recently listened to the recording of the session “Be Prepared For T+2” from last year’s NASPP Conference. (This was a great panel, by the way. So great that we’ve asked the panelists to give a repeat performance for our April webcast. Be sure to check it out.) Here are a few things I learned from the panel.
Why T+2? It’s All About Risk
The move to T+2 is industry driven, rather than a push from regulators, with the goal being to reduce risk in the settlement process. Currently trades are settled through a central counter-party, which you know as the DTCC (Depository Trust & Clearing Corporation). One of the DTCC’s roles is to guarantee delivery of shares to the buyer and cash to the seller. If, over the three-day settlement period, either one of these parties flakes out, the DTCC steps in to make the non-flaking party whole.
This requires cash. With securities worth $8.72 billion changing hands every day on the US markets, it requires a lot of cash. The panelists described it as a big suitcase of cash held by the DTCC that can’t be used for anything else. But the DTCC isn’t your rich uncle; this cash is provided by various market participants (such as brokerage firms).
If we can shorten the settlement cycle, the inherent risk is reduced, and less cash is needed to guarantee settlement. This frees up cash that market participants can use for other, presumably better and more profitable, purposes.
Remember Y2K?
The process of changing to T+2 is not dissimilar to what we all went through back when we were preparing for the new millennium. It’s not terribly complex, but there are a lot of rules and processes that have to be reviewed, updated, and tested.
The Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) have formed an Industry Steering Committee to define the path to T+2. (They even have their own website and a nifty logo, because any self-respecting industry-wide initiative needs a logo.) The steering committee commissioned Deloitte & Touche to prepare a T+2 Playbook detailing all of the changes that have to take place to shorten the settlement period by a day. Europe moved to T+2 in 2014 and apparently there were some lessons learned during that process.
What About T+1? Or T+0?
The consensus of the panel is that T+1 is a long ways off. Moving to T+2 merely requires that the current processes speed up. Moving to T+1 would require real-time clearance; that’s a fundamental change to the entire settlement process. You can rest assured that you’ll have plenty of time to get use to T+2 before having to worry about T+1.
Wait, There’s More!
Stay tuned! On Thursday I’ll discuss the steps you should be taking to prepare for T+2. Also, don’t miss our April webcast, “Be Prepared for T+2.”
I have another grab bag of topics for you this week.
2013 Say-on-Pay Results Just in time for the 2014 proxy season, Steven Hall & Partners has published a quick summary of the Say-on-Pay vote results for last year’s proxy season. Here are a few facts of interest.
73 companies failed (out of a total of 3,363 companies that held votes. This seems to be up from 2012. Oddly, even with a Google search, I could not find an apples-to-apples comparison, but it seems like just over 60 companies had failing votes in 2012. It’s possible the increase is partly due to more companies having held Say-on-Pay votes.
In the category of “Not Getting the Message,” 15 of the companies with failing votes had failures in prior years.
At one company, Looksmart, 100% of the votes on their Say-on-Pay proposal were against it (which makes them look not so smart). That’s right, even the board voted against their own Say-on-Pay proposal. Apparently there was a complete board turnover, all the executives were fired, and the new execs didn’t own any stock.
New HSR Act Filing Thresholds New HSR Act filing thresholds have been announced for 2014. Under the new thresholds, executives can own up to $75.9 million of stock before potentially having to make the HSR filings. See this memo from Morrison & Foerster for more information. If you have no idea what the HSR Act is, see the NASPP’s excellent HSR Act Portal.
NASDAQ Amends Rules on Compensation Committee Independence NASDAQ has amended its rules on compensation committee independence to provide that compensatory fees (consulting, advisory, et. al.) paid by the company to board members should be considered when evaluating eligibility to serve on this committee, rather than prohibiting these fees outright. The NYSE has always imposed the more lenient standard and apparently NASDAQ received feedback that their more stringent standard might make them less popular. This alert from Cooley has more information.
When public companies are contemplating changes to their stock compensation programs, it is not uncommon to ask the NYSE (or Nasdaq, depending on where their stock is trading) for an informal opinion as to whether the changes require shareholder approval. Today I blog about a recent Delaware court ruling that calls the authority of these informal opinions into question.
Here is the sequence of events:
A company wants to grant a large ($120 million) “performance award” to its CEO that will vest only upon continued service; the stated purpose of the award is retention. The company’s stock plan doesn’t allow grants of performance awards that vest merely on continued service, so this requires a plan amendment.
The company asks the NYSE if the plan amendment requires shareholder approval and an NYSE staffer tells the company that the amendment doesn’t require shareholder approval.
The company proceeds with the amendment and issues the grant.
The grant quickly garners a lot of negative attention from the media.
A shareholder (a large pension fund) sues the company’s board and CEO, alleging that the plan amendment was illegal. The gist of the argument is that shareholder approval of the amendment is required under the NYSE listing standards and that, because the plan has a provision in it requiring shareholder approval of amendments when such approval is required by the exchange on which the company’s stock is traded, the amendment isn’t legal under the terms of the plan.
The lawsuit has along ways to go before we get an actual decision, but the Delaware Chancery Court has allowed the lawsuit to proceed, despite the fact that the company has an informal opinion in writing (an email) from an NYSE staffer stating that the amendment did not require shareholder approval.
My synopsis here is based on the very excellent Sullivan & Cromwell memo summarizing the case that is posted on Naspp.com. In addition to the highlights I’ve covered here, the memo includes a great discussion of some of the key factors the judge considered in issuing the ruling. If you are going to be seeking informal guidance from the NYSE or Nasdaq, you should definitely check it out–you might pick up a couple of pointers to make the opinion you receive a little more reliable.
I Have a Couple Questions
This saga raises a couple of questions for me (and since the company involved does not appear to have any NASPP members, I feel unfettered in my contemplation of them).
First, why didn’t the company just amend the plan to allow for the grant of RSUs, rather than the seemingly much more convoluted and backwards amendment to allow the grant of performance awards that don’t vest based on performance. Honestly, in today’s “pay-for-performance” world, that just seems like asking for trouble. The plan already allows the grant of restricted stock that vests based purely on service and question C-3 of the NYSE’s FAQs on the shareholder approval requirements specifically states that where a plan already allows the grant of restricted stock, an amendment to allow the grant of RSUs is not material. Seems like not only might this have avoided the lawsuit (or at least the ruling allowing the lawsuit to proceed) but the company also wouldn’t have had to bother with the informal opinion from the NYSE. I’m sure there must be good reason, but I’m completely baffled as to why the company didn’t approach the amendment this way.
Second, how much do you have to pay your CEO to get him to stay? $120 million seems like a lot, just to get the guy to stick around. And, in this case, the CEO’s last name happens to also be the name of the company, which isn’t a coincidence–he’s the son and nephew of the co-founders of the company. And it takes $120 million to get him to stick around? That just seems wrong.
Some Barbara Trivia
One interesting piece of trivia is that the company involved is a large real estate investment trust that happens to own the shopping mall that was my sister’s and my favorite when we were growing up. We spent a lot of time at that mall. (What? We lived in the suburbs and that’s what suburban kids did back then–they went to the mall).
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).
As required by Exchange Act Rule 10C-1, which was recently adopted by the SEC pursuant to the Dodd-Frank Act (see my June 26 entry, “Comp Committees and Their Advisors“), the NYSE and NASDAQ have proposed changes to their listing standards with respect to compensation committee independence.
The More Things Change, the More They Stay the Same
I almost titled this blog that way, because, frankly, I thought we already had rules in place on compensation committee independence. And, it turns out, I was at least partly correct. We definitely already have them under Section 16 and Secton 162(m), but the exchanges already had their own standards in this area as well. The proposed rules continue to require companies to have compensation committees comprised of independent directors and largely just reaffirm the requirements that already exist in each exchange’s current listing standards with respect to director independence.
So What’s New?
The SEC’s rule calls for a couple additional factors that should be taken into consideration in assessing director independence: (1) the source of the director’s compensation, including consulting, et. al. fees, and (2) any affiliations the director has with the company. Both exchanges propose to incorporate these additional assessments into their standards.
Under both proposals, #2 is not a dealbreaker, however; the proposals concede that there could be some situations where affiliation does not impair a director’s independence (e.g., in the case of a director that is an affiliate by virtue of stock ownership). The NYSE and NASDAQ proposals depart with respect to #1 however. Under NASDAQ’s proposal, any fees paid to the director (other than for service as a director) preclude independence; the NYSE proposal just includes this as a factor to consider–the fees aren’t necessarily a dealbreaker.
NASDAQ also proposes to require that companies have a formal compensation committee (the NYSE already requires this).
What Else is New?
Probably the most significant new requirement is that the compensation committee must evaluate the independence of any advisors (compensation consultants, legal advisors, etc.) that it relies on. Given that I think this is significant, you’d think I’d have more say about it, but that’s all I’ve got. I’m sure you don’t need me to blather on about why this is significant.
In addition, 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 that it uses.