The newest edition of Peter Romeo and Alan Dye’s Section 16 Forms & Filing Handbook arrived in my mailbox last week. I thought the last edition contained a model form for every possible Section 16 reporting scenario, but no–there are 15 new forms in this version. It’s so big, I practically needed some assistance toting it upstairs to my office. Here are four things I learned from perusing the new forms.
1. Reporting Performance Awards with a Service Tail
New Model Form 135 clears up some of the confusion with respect to a performance award that is still subject to service-based vesting conditions after the performance goal has been achieved. As my readers know, performance awards in which vesting is conditioned on goals other than stock price targets aren’t reportable until the performance goes are achieved. Once the compensation committee has certified achievement of the goals, however, the award is reportable, even where it isn’t paid out immediately or is still subject to time-based vesting requirements. The award essentially becomes a standard RSU once the performance goals have been achieved. Assuming the award can only be paid out in stock, it can then be reported as the acquisition of either a derivative security or common stock, just like any other time-based RSU.
2. Voluntary Reporting of ESPP Purchases
Alan Dye doesn’t always report purchases under Section 423 ESPPs, but when he does, he uses transaction code A of J. (I couldn’t resist–it’s not often that I can invoke beer commercials in my blogs). Because purchases under an ESPP aren’t reportable, there’s no transaction code assigned to them. If you are going to voluntarily report these transactions, New Model Form 145 suggests using code A or J and including a footnote to explain the transaction. Personally, I like code A because it specifically applies to exempt acquisitions, whereas code J can apply to either exempt or nonexempt transactions.
3. Voluntary Exit Forms
I did already know that it isn’t necessary to file an exit form unless the former insider has reportable transactions that occur after his/her termination. Despite this, some companies voluntarily file exit forms for departing insiders anyway. I’d never really thought about some of the specifics related to filing a voluntary exit form when there aren’t any transactions to report on the form. New Model Form 214 provides some guidance. In addition to the obvious (check the “Exit” box and include a note in the remarks field explaining the reason for the filing), if using a Form 4, the date of the “earliest transaction” in box 3 should be the insider’s termination date (if using a Form 5, the date of the fiscal year end is reported in box 3), and the insider’s title in box 5 can either be his/her former title or you can select the “other” checkbox and specify his/her status (e.g., “former insider”).
4. Grants to Spouses of Insiders
Given how common dating is in the workplace, I bet that this situation comes up more frequently than you’d think: an insider meets someone at work, they fall in love and get married and then, unconnected to the marriage, the insider’s spouse is granted an option or an award. Because they are married, the grant has to be reported as an acquisition of an indirectly held security on a Form 4 for the insider. But because the spouse isn’t an insider, the award might not be submitted to the compensation committee/board for approval, making it a non-exempt grant unless the shares underlying the grant are held for at least six months. The 2014 Handbook includes new Model Form 91 explaining how to report the grant.
It’s probably unlikely that the shares underlying the grant would be sold within six months, but even so, my takeaway here is to consider submitting grants to spouses of insiders to the comp committee for approval. I imagine that it wouldn’t be that much extra work for the committee, it seems like it might be a good idea from a shareholder optics perspective anyway, and then the exempt status of the grant is one less thing to worry about.
Luckily, grants to any person(s) the insider is having an affair with probably aren’t considered to be indirectly owned by the insider (unless it’s some sort of weird Woody Allen-type situation) and, thus, aren’t reportable. Moreover, when the insider divorces, Model Form 74 (which is not new) explains that any transfers of securities pursuant to the divorce settlement generally aren’t reportable.
We’ve covered the range of insider trading cases in past editions of the NASPP Blog – ranging from employees gone rogue with inside information, to the accidental tipping off of friends during a Sunday brunch, to the SEC’s recent vigor in pursuing these cases. Just when I thought there were no more angles to cover with the SEC’s recent and ongoing crackdown on insider trading, I find myself surprised. It turns out the latest pair to settle SEC charges of insider trading are two husbands, both who gleaned inside information from their wives about their employers and used that knowledge to trade profitably.
Are Spouses Precluded from Trading?
I’ve read many an insider trading policy, and they often attempt to extend the boundary of insider trading parameters to spouses and other family members living in the same home. Even if a policy doesn’t address it, it pretty much goes without saying that a spouse shouldn’t be trading on any information received from their partner about the partner’s employer.
Sneaky Husbands
This week the SEC reiterated their no-nonsense approach to pursuing insider trading charges when they settled charges against two husbands. What strikes me is that, based on the facts available, the “tipping” in this case was so benign – virtually through the normal co-existence that occurs in a same-household relationship. In one case, a husband put two and two together as his wife talked about an upcoming acquisition. In the other case, a wife talked on the phone to her employer about the fact that the company would be missing their earnings target for the first time in 31 quarters, all while on a leisurely vacation drive to Reno with her husband. When they returned from vacation, the husband structured a series of trades to profit off the earnings miss. In both cases, the wives reportedly instructed their husbands to never, ever trade on any information shared or overheard.
Neither of the wives were charged in the SEC’s investigation. However, the penalties to their spouses weren’t cheap – both husbands settled with the SEC for double the amount of their profits in the case (a $300,000 settlement for one husband based on $150,000 in profits, and a $280,000 settlement in the other case, based on $140,000 in profits).
Tipping from Merely Existing?
Many of us in stock compensation can probably relate to the manner in which the inside information in these cases were obtained. How many times are we on a conference call at home, or explain to a spouse that we have to work late because of the “deal” that’s in the works? It probably is somewhat routine for our issuers, and not a far fetch for our service providers and consultants either. While both wives in these two cases seemed to do everything right by instructing their spouses not to trade, insider trading still happened. I’m not suggesting that all of our co-habitants out there are likely to trade on overheard information, but I’m guessing these wives didn’t think their husbands would do it either. Perhaps this is the right time to clip the articles on the matter and remind our spouses, significant others, roommates, and anyone else who is in a position to overhear or learn from our work habits, that the SEC is on a roll and the penalties can be significant. Not to mention the public embarrassment that occurs from having your name liked to insider trading in the public eye. Yes, it can happen to you. Just ask two wives in Silicon Valley.
PricewaterhouseCoopers has published a summary of SEC comments on stock compensation (“2013 SEC Comment Letter Trends: Employee Stock Compensation,” available in the NASPP’s Surveys & Studies Portal). The comments were made in the course of the SEC’s review of various types of public filings (mostly Forms S-1, but also some Forms 10-K and other filings). I thought it would be interesting to take a look at what PwC found for today’s blog.
Companies Targeted
The majority (79%) of the companies to receive comments were technology, pharmaceutical, and life science companies. But don’t read anything into this–as noted above, the majority of the SEC’s comments were on S-1 filings, and these industries represented the majority of IPOs last year (particularly IPOs where employees held substantial amounts of stock compensation).
Areas Commented On
81% of the SEC’s comments related to information on stock compensation included in the MD&A. Of the comments related to the MD&A, 90% related to the discussion of critical accounting policies, et. al., for stock compensation. Based on the sample comments excerpted by PwC, it seems that many of these comments requested more information on the valuation of the company’s stock on grant dates.
Types of Comments
PwC found that, overall, 50% of the comments related to disclosure, 41% related to valuation, and 9% related to other accounting issues. Of the 41% of comments related to valuation, many of these seem to relate to the valuation of the company’s underlying stock on grant dates, rather than the valuation of stock options. Also, a little over one-third of the comments that PwC classified as disclosure-related were on the disclosures related specifically to valuation. Another 29% were on disclosures related to IPOs; many of these comments focused on valuation of the company’s stock (specifically on the differences between the most recent valuation and the IPO price).
Accounting Recognition Comments
Not much here. PwC notes that:
“Interestingly, we did not come across many comments related to some of the more complex areas of stock compensation accounting. For example, we saw only one comment on classification of awards as equity verses liability, no comments on expense attribution methodology, one comment on award modifications, and no comments on determination of the grant date.”
Key Takeaways
Overall, it seems that the SEC either (1) focused primarily on stock valuation-related issues in their review of stock compensation info in public filings, or (2) focused on everything but simply didn’t find much to comment on beyond the stock valuation issues.
If you are a public company, this is probably good news. Because your stock is publicly traded, so long as your grant dates are accurate, there’s not a lot for the SEC to question with regards to your stock value. But if you are a private company, you’ll want to make sure your house is in order when it comes to grant date stock valuations.
Here are a few items that recently showed up in my Google Alert/email that I found interesting.
Return on Executives Exequity is promoting a new way to measure alignment of pay with performance: return on executives (ROX). This measure compares the change in compensation paid to executives with the aggregate change in shareholder wealth. According to Exequity’s alert, ROX results in greater correlation between pay and performance and fewer disconnects in pay for performance alignment than other models (e.g., relative degree of alignment) typically used by ISS, Glass Lewis, and institutional investors.
The alert doesn’t go into a lot of detail on the calculation, but if you are having trouble with your Say-on-Pay story, maybe you should give Exequity a call.
Canada’s Loophole Activists in Canada are jumping on the stock options loophole bandwagon. Their objection isn’t related to corporate tax deductions, however (companies already don’t typically get a deduction for stock compensation in Canada). Stock options that meet certain requirements are taxed as capital gains in Canada, which generally results in a 50% income deduction. The requirements seem to be somewhat straightforward (you can read about them on pg 28 the NASPP’s Canada Guide) and there isn’t a limit on the number of shares that can qualify for this benefit, like there is with ISOs in the US. Canadian tax activists think option gains should be taxed as compensation. But I wonder, if the options are taxed as compensation, shouldn’t companies then be entitled to a corporate tax deduction for them?
Less Disclosure It’s not often that you hear about the SEC reducing the disclosures companies are required to make. Recently, however, the Corporation Finance staff updated the SEC’s Financial Reporting Manual to reduce the amount of disclosure companies have to make about their pre-IPO stock price valuations. The SEC doesn’t note what is new in the Manual, but a blog by Polk Davis describes what has changed with respect to the disclosures. This seems to be an outcome of the SEC’s Reg S-K study that I blogged about last week.
Just when you thought you were finally getting a handle on the executive compensation disclosures, the SEC is considering changing them. According to an alert by McGuireWoods, the SEC staff has reviewed the disclosure requirements of Reg S-K (all of them, not just the disclosures relating to executive compensation) and issued a report that includes recommendations for further review. The JOBS Act of 2012 (not to be confused with the Jobs Creation Act of 2004) required the study with respect to disclosures by emerging growth companies, but the SEC expanded it to cover all companies.
The staff’s recommendations with respect to the executive compensation disclosures are fairly vague; they point out that these disclosures can be quite lengthy and technical and further review might be warranted on this basis, as well as to confirm that the information disclosed is useful to investors. The staff also suggests that the disclosures be reviewed to determine if they need to be made simpler for smaller companies.
So maybe the disclosures will change and maybe they won’t. According to the report, there weren’t any comments submitted to the SEC’s JOBS Act website on the executive compensation disclosures. Interestingly, there were two comments suggesting that the table disclosing the number of shares outstanding and available for grant under stock plans approved by shareholders and not approved by shareholders could be eliminated (and one comment that this table shouldn’t be eliminated, proving once again that you can’t please all the people, all the time).
According to McGuireWoods, at this time, the SEC is still formulating an action plan with respect to the study; a time frame hasn’t been specified for completing any further reviews called for under the study, much less promulgating and transitioning to any new rules.
Did You Know?
I did learn a couple of interesting tidbits when reading the section of the SEC’s report that covered the executive compensation disclosures. I thought you might be interested to know that:
The executive compensation disclosure rules have been amended more often than any other rules for disclosures required under Reg S-K.
The executive compensation disclosures, albeit in a very different format, have been around since the very first registration statement (Form A-1) implemented in 1933.
Back in 1933, the disclosure was required for any directors, officers, or other persons earning in excess of $25,000. This seems like a pretty low threshold, but then I ran the amount through the Bureau of Labor Statistic’s inflation calculator. In today’s dollars, that’s around $450,000.
In 1972, the threshold for disclosure was increased to compensation in excess of $40,000. According to the inflation calculator, that’s around $223,000 in today’s dollars.
It wasn’t until 1992 that the threshold was increased to $100,000. In today’s dollars, that’s about $166,000. $40,000 in 1972 was the equivalent of about $134,000 in 1992, so my guess is that we have a ways to go until the SEC decides to increase the threshold again.
It’s been a while since we’ve had major regulatory updates that impact stock compensation. Knowing that, I sometimes find myself scanning the horizon, looking for the next “thing” that’s going to have us examining our practices, changing procedures or implementing something new. This week my radar went into action when I heard that SEC Chair Mary Jo White had laid out quite a list of upcoming initiatives in a recent address.
Technology on the Brain
In spite of some significant cutbacks in technology dollars available to the SEC for long term initiatives, the SEC seems to still have advancement in this area on the brain. Chair White announced that the SEC has deployed a new analytical tool called “NEAT” (National Exam Analytics Tool) to help identify possible insider trading or other misconduct. This tool can identify red flags in a fraction of the time it took to do so in the past. I’m guessing this means that the wave of insider trading investigations and scrutiny is not over.
In the spring of 2013, the SEC issued guidance permitting issuers to use social media sites to communicate company announcements (see the NASPP Blog, May 16, 2013). White has now indicated that the SEC is broadly rethinking disclosure requirements for public companies and the role of technology in sharing information with investors. Last month the SEC recommended to Congress in a report (which was mandated by the JOBS Act) that the disclosure rules undergo comprehensive reexamination and reform. White shared some insight into the SEC’s thinking: “I believe we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.” Saying it and issuing a report doesn’t mean new rules are imminent, but it is perhaps a hint of things to come. It seems within the realm of possibility that this type of reform may be fairly significant if and when it happens.
New Investigation Focus
White says that as the SEC wraps up investigations stemming from the financial crisis, attention is now shifting to other areas of enforcement – namely financial reporting fraud and accounting irregularities amongst others. This is a good time to make sure our controls, checks and balances are operating full force. While we can’t control other areas of financial reporting beyond stock administration, we can ensure that the areas under our realm can stand up to the possibility of an intense audit or investigation. This seems particularly wise, since Chair White also said that “The coming year promises to be an incredibly active year in enforcement, as we continue to vigorously pursue wrongdoers and bring enforcement actions across the entire industry spectrum.”
It looks like the SEC continues on their roll of assertive enforcement actions and attempt to progress into more modern times. Let’s see what the horizon holds in that regard.
On September 18, the SEC proposed highly anticipated rules governing the ratio of CEO to median employee pay that public companies will be required to disclose in their proxy statements. In today’s blog, I provide a summary of the proposed rules.
Background
We’ve known this was coming since the Dodd-Frank Act was signed into law. The Act requires the SEC to adopt rules mandating that public companies disclose the ratio of CEO pay to that of the median pay of all other employees (see my blog entry “Beyond Say-on-Pay,” August 5, 2010). It’s taken a while for the SEC to propose the rules because, well, it’s a complicated topic and the SEC has a lot on its plate these days, including a host of other rulemaking projects under Dodd-Frank and the Jobs Act, not to mention investigating Rule 10b5-1 plans.
You Win Some
The Act requires that the ratio of CEO pay to median employee pay be based on “compensation” as defined for purposes of the Summary Compensation Table. So, in a worst case scenario, you could have had to prepare an SCT for all employees just to figure out the median employee compensation.
And, if you want, you can certainly still do that. But, for most companies, it’s about all they can do to put together the SCT for the 5+ execs for whom disclosure is required. So, instead, the proposed rules allow companies to figure out which employee represents the median based on any consistent, systematic method (e.g., based on W-2 income), then determine only that employee’s compensation as per the SCT. The pay ratio disclosure would then simply be the CEO’s pay as compared to the pay of the one employee that represents the median.
You Lose Some
That was the good news. The bad news is that the SEC has interpreted “all employees” to be literally all employees. That includes part-timers, seasonal, and temporary employees, and both US and non-US employees employed as of the last day of the company’s fiscal year. Pay for employees that were hired during the year can be annualized, but annualization is not permitted for seasonal or temporary employees. Likewise, location-based cost-of-living adjustments or full-time adjustments for part-time employees are not permitted.
More Information
For more information, see the NASPP Alert “SEC Proposes CEO Pay Ratio Disclosure Rules.” The proposed rules were issued just days before the NASPP Conference, so speakers at the Conference were able to address them during their presentations. In particular, Keith Higgins, the Director of Corporation Finance at the SEC, discussed the proposed rules in his keynote during the Proxy Disclosure Conference, and Mike Kesner of Deloitte provided a tutorial on the proposed rules in the session “Pay Disparity Workshop & How to Ensure Your Pay Practices Pass.” You can purchase the video of the Proxy Disclosure Conference or purchase the audio for Mike’s session.
Comments on the proposed rules can be submitted to the SEC until December 2, 2013.
Sometimes a blurb on an equity compensation “happening” crosses our desks, and it’s hard to know whether it’s the start of a new trend, or just an isolated occurrence. This was the case when I recently came across an SEC no-action letter on Sarbanes-Oxley 402 (the provision of the Act that covers loans to officers and directors). I hesitated to blog about it, but then decided that it could be a useful and interesting clarification in an area where the SEC has long remained silent. I realized I wasn’t alone, because Broc Romanek expressed the same sentiments in a recent CorporateCounsel.net blog.
Innovation Breeds a No-Action Letter
As far as I can tell, the circumstances leading to the no-action letter represent a one-off scenario. However, the interesting part to me was the creative approach to equity compensation that was the intent behind the request to the SEC. The company involved, RingsEnd Partners LLC, created a program for restricted stock award shares that they believed would encourage executives to hold on to award shares that they might otherwise consider selling upon vest (when taxes are typically due). As more fully described in the detailed version of the incoming letter to the SEC, participation would be voluntary, and those electing participation in the program would allow their shares to be initially taxed at grant (I’m guessing via agreement from the participant to make an 83(b) election). Underlying shares from new awards would be transferred to a trust at the time of grant. The trust would then go to a bank to obtain a loan to pay the taxes on the shares (based on the spread at the award date). The shares would be held by the trust as collateral for the loan. Once vested, no additional taxes would be due (any appreciation would later be taxed at sale), and a portion of the shares would be sold to cover the loan amount from the bank. The remaining shares (and any residual cash proceeds) would then be released to the participant. With shares free and clear, and no further amounts due until sale, RingsEnd Partners believes that participating executives will be encouraged to hold the shares, further aligning with shareholder interests. The company would have no participation in the program, other than “ministerial” tasks. Believing their arrangement would not violate SOX 402’s provisions regarding making loans to officers and directors, they sought a no-action letter from the SEC.
The Legal Details
The firm leading the charge to the SEC on behalf of the company was BakerHostetler, and they released their own summary of the events that led to the no-action letter. This is one of those times when they can articulate it much better than I can, so I will extract some of the pertinent sections:
In BakerHostetler’s Feb. 28 letter to the SEC staff, Messrs. Oxley, Gallagher and Reich sought guidance on Section 402 with regard to an innovative equity-based incentive compensation (EBIC) program that their client, financial services firm RingsEnd Partners LLC, developed with global financial institution BNP Paribas. The EBIC program contemplates that participating employees will receive company stock as incentive compensation and thereafter transfer those shares to an independently managed Delaware statutory trust. The trust could then obtain term loans from an independent banking institution, using some or all of the shares transferred to the trust as collateral. The letter notes that, in the absence of interpretive guidance on SOX 402, public companies have been reluctant to permit directors and officers to participate in the proposed program.
BakerHostetler contended that an issuer allowing its employees to participate in the EBIC program would not be extending or maintaining credit, or arranging for the extension of credit, in the form of a personal loan to employees subject to SOX 402. The lawyers noted that although a company would “need to perform certain ministerial tasks in order to allow its employees to participate in the EBIC program,” the company would “neither encourage nor discourage employee participation,” nor would the company “directly or indirectly make or guarantee the loans, or provide any extension of credit or other financial support” to the trust, its trustee, or trust beneficiaries (the employees). BakerHostetler argued that the legislative history suggests that under the final version of SOX 402, the phrase prohibiting a company from “arrang{ing} for the extension of credit” should be read no more broadly than prohibiting the company from providing a “loan guarantee or similar arrangement,” language found in earlier versions of SOX 402.
In the new guidance issued by the SEC, the agency’s staff wrote that an issuer that permits its directors and officers to participate in the plan “would not be deemed thereby, directly or indirectly, to be extending or maintaining credit, in the form of a personal loan to or for such individuals for purposes of Section 13(k) of the Securities Exchange Act of 1934” {SOX Section 402}. The SEC also wrote that an issuer that undertakes certain ministerial or administrative activities to permit its directors and officers to participate in the EBIC Program would similarly not be deemed, directly or indirectly, to be extending … or arranging for the extension of credit in the form of a personal loan to or for such individuals within the meaning of SOX 402.
Is this just a one-off scenario? Or, will this no-action letter spark a trend of creative arrangements that allow for funding of equity compensation awards in a manner that won’t evoke action from the SEC for a SOX 402 violation? Only time will tell, but it was certainly interesting to intercept.
My Google alerts have exploded this week with reports of the latest insider trading indictments, leading to more cap feathers in the SEC’s extended effort to uncover insider trading. According to the Wall Street Journal, the crackdown has resulted in 72 convictions out of 80 people charged in the past three years – a pretty impressive result. Most of the charges and convictions did not involve stock plans. However, in the midst of all the attention on outright stock trades, another investigation has been building in the background – the SEC is now turning attention towards probing increasing claims that Rule 10b5-1 plans are fraught with abuse and, ultimately, insider trading. In today’s blog, I explore the issue.
First, A History of 10b5-1 Plans
Rule 10b5-1 was adopted by the SEC in 2000 as an attempt to provide executives and other company insiders with a way to trade shares of stock without risking the error of trading on “inside” information. The concept is that an insider creates a trading plan (which addresses shares to be sold and prices/timing) when he/she is not in possession of material, non public information. Then, the plan is executed over months/years, presumably resulting in trade orders being established long before the actual trade. According to the SEC, the idea behind the plans was to give executives a safe harbor to proceed with these prearranged trades and “give executives regular opportunities to liquidate their stock holdings–to pay their kids’ college tuition, for example–without risk of inadvertently facing an insider trading inquiry.” In the decade plus time since the adoption of Rule 10b5-1, the plans have become a commonplace, routinely implemented by insiders at companies across the nation. Some companies have even extended the use of these plans down within other ranks of the organizations, suggesting the belief that this is a great way to help other non executive insiders avoid trading on inside information.
What’s the Loophole?
In 2006, an accounting professor at Stanford University named Alan Jagolinzer began briefing the SEC on results of research he’d done on 10b5-1 plans. His findings suggested that executives who adopted such plans outperformed their peers that didn’t have a prearranged trading plan. He felt this may be the result of abuse within these programs. What kind of abuse, you ask? It seems that many trades in these plans appear to be “well timed” – perhaps a sale occurs just before bad news is announced. While insiders may have locked themselves into a prearranged trading plan, a loophole seems to have emerged. They may not want or be able to modify the trading plan, but these insiders may certainly have input into the timing of company announcements. So, in a reverse sort of fashion, it’s not the plans that may be causing problems, it’s the fact that insiders can get around their own plans by timing the announcement of good and bad news around their planned stock trades. Of relevance to us as stock professionals is that 10b5-1 plans can include a variety of shares – ranging from stock options, to shares owned outright, to shares previously purchased through the ESPP.
Trouble Ahead?
Since Mr. Jagolinzer first relayed, and subsequently published, his findings, other chatter has emerged from various sources – including a petition to the SEC from the Council of Institutional Investors. Recent press stories have again resurrected the issue, and the SEC seems to be taking note. A recent Harvard Business Review blog suggests that the SEC and other regulators have opened investigations. Could this be the next backdating scandal?
This heightened scrutiny highlights the importance of companies “adopting well-crafted 10b5-1 policies that are designed both to prevent trades based on inside information and to avoid the appearance of impropriety–even when applying 20/20 hindsight.” The Harvard Business Review blog had a few suggestions on how to accomplish this:
Have the first trade under a 10b5-1 plan take place after a reasonable “seasoning period” has passed from the time of adoption of the plan,
Have each executive use only one 10b5-1 plan at a time, and
Minimize terminations and amendments of 10b5-1 plans.
It will be interesting to see how these investigations transpire over the coming months. In the meantime, companies should revisit their 10b5-1 policies and make adjustments that will stand up to the potential microscope and hindsight.
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.