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    Thursday, July 14, 2016

    Governmental Buildings and MoneyAfter more than nine years of deliberations, the IRS has finally released proposed regulations governing all types of deferred compensation plans maintained by non-profit organizations and governmental entities.

    In issuing these regulations, the IRS reiterates its long-standing theme that these regulations are intended to work in harmony with, and be supplemental to, the 409A regulations. However, the IRS provides little guidance on how these regulations interact with each other.  The following discussion focuses on 3 key aspects of the new guidance: the severance exemption, the substantial risk of forfeiture requirement, and leave programs.

    As with the 409A regulations, the 457 regulations exempt severance pay plans from the rules and taxes applicable to deferred compensation. The 457 regulations apply similar criteria with one notable exception: they do not apply the 401(a)(17) compensation limit in determining the “two times” dollar cap on amounts that can be paid pursuant to an exempt severance pay plan.  Practitioners in the for-profit arena currently believe they enjoy wide latitude in restructuring severance arrangements that are exempt from 409A.  It would not appear that practitioners will have that same latitude for severance arrangements that are exempt from 457, unless the arrangements also satisfy the severance pay exemption under 409A, particularly with regard to the dollar cap limit.

    Historically, the proposed 457 rules afforded greater flexibility with respect to what is considered a substantial risk of forfeiture, particularly in the context of non-competes and rolling risks of forfeiture. The regulations restrict, but do not eliminate this flexibility by establishing requirements that must be satisfied for non-competes and rolling risks of forfeitures to create a substantial risk of forfeiture.  Despite the fact that there is wide latitude in restructuring short-term deferral arrangements in the for-profit arena, these restrictions will limit the ability to  restructure short-term deferral arrangements when using non-competes or rolling risks of forfeiture without taking into consideration whether any restructuring would constitute a separate transgression of the 409A rules.

    Finally, the proposed 457 regulations raise the possibility that many leave programs, especially those maintained by governmental entities, could be suspect as deferred compensation arrangements. A paid leave program may be considered suspect if it allows large amounts of leave to be accumulated over the course of many years.  In our experience, this is not an uncommon design for many governmental and educational leave programs.  If the IRS does not retreat from this position, many such employers may need to reassess the structure of their leave programs.  The position taken in the proposed 457 rules might also give for-profit employers some pause as to whether the IRS might take a view that overly liberal leave programs may be subject to 409A requirements as deferred compensation.

    Notwithstanding the long-awaited guidance afforded by these regulations, practitioners and plan sponsors would have welcomed greater guidance with respect to the interaction of the 409A and 457 rules. For instance, the rules could have better addressed where and how the 409A rules claw back some of the greater flexibility historically provided by the proposed 457 rules.  In the absence of guidance, some of that greater flexibility may turn out to be illusory – and the IRS will have failed to adequately highlight the pitfalls that await those that rely upon the greater flexibility afforded 457 arrangements.  Such failure to adequately address the interaction of the regulations raises some troubling questions and possible traps for the unwary.

    Wednesday, July 13, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.  Additionally, taxpayers can rely on the proposed regulations.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This second post relates to changes in stock awards and stock sales.  See our first post, “Firing Squad.”  Check back for future posts on these regulations.

    Discounted Stock Buybacks Are Now Okay, Sort of. The existing regulations had a trap for the unwary.  If the stock subject to an option or stock appreciation right (SAR) was subject to a buyback at other than fair market value, then the option or SAR may not be exempt from 409A.  This makes sense when the price is more than fair market value since that could be disguised deferred compensation.  However, often times, companies will have shareholder agreements with discounted buybacks on termination for cause or if an employee violates a non-compete or similar covenant.  Unless an exception applied, this would mean that the option or SAR would have to comply with 409A’s timing rules, which are often contrary to what both the company and the recipient desire.

    Under the new proposed rules, mandatory buybacks at less than fair market value are okay as long as they only apply if either (A) the recipient is terminated for cause or (B) the occurrence of a condition within the recipient’s control (such as the violation of a non-compete).  Though these buybacks are also permitted under existing rules as long as they are so-called “lapse restrictions” (which means they have a limited duration), the additional flexibility provided by the proposed regulations is welcome in this area.

    Awards Prior to Date of Hire can Still Be Exempt. Under the existing rules, an option or SAR had to be for stock of the company for which the individual was working (or certain affiliated entities) for it to be exempt from 409A.  But what if you wanted to grant an option to someone prior to date of hire?  That option would technically need to comply with 409A and its onerous timing requirements.

    The proposed rules add additional flexibility in this regard. You can grant an option or SAR and have it be exempt as long as the service provider is expected to start work within 12 months (and actually does so).  If the service provider doesn’t start work within that 12 month period, then the award has to be forfeited (but honestly, you probably wanted it that way anyway).

    Change in Control Rule Applies to Exempt Stock Rights. Sometimes in a transaction, employees with stock awards are given rights to get paid on the same terms as shareholders.  For awards subject to 409A, the rules generally permit this as long as the payments do not go beyond five years from the date of the change in control.  However, since options and SARs with fair market value strike prices are exempt from 409A, there was some question as to whether this rule could be used with those awards.  These proposed regulations confirm that it can.

    A Stock Sale Means a Stock Sale. Generally, if a company’s stock is sold, the employees are not treated as having terminated employment/separated from service for 409A purposes.  On the other hand, in an asset sale, the buyer and seller can agree whether the sale constitutes a separation from service/termination of employment for 409A purposes.

    But under Section 338 of the Code, parties can elect to treat a stock sale as a deemed asset sale for tax purposes. Does this include 409A, which would then allow them to choose whether a separation from service has occurred?  The proposed regulations say it does not.  Therefore, employees will not have a separation from service, even if a 338 election is made.

    Thursday, July 7, 2016

    Good NewsOn the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!”  Of course, his news was rarely good.  More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect.  So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.

    The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations.  And the news is mostly good.

    The changes are legion, so we are breaking up our coverage into a series of blog posts. This first post is all about the changes related to the end of the service relationship.  Check back for future posts discussing other aspects of these proposed regulations.

    Severance Safe Harbor Available for Bad Hires. Severance is, surprisingly to some, generally considered deferred compensation subject to 409A.  However, severance can be exempt from 409A if the severance is due to a truly involuntary separation under 409A and does not exceed two times the lesser of (1) the employee’s prior annual compensation or (2) the limit on compensation for qualified plans under Code Section 401(a)(17) (currently $265,000, for a limit of $530,000).  To qualify for the exemption, the severance must also be paid by the end of the second tax year following the year of separation.  This is sometimes referred to as the “two years, two times” rule.

    But what if you make a bad hire or otherwise decide you want to fire someone in the same year you hired them? Is the severance safe harbor still available?  Treasury confirmed that, indeed, it is.  In that case, the limit is two times the lesser of (1) the employee’s annualized compensation for the year of termination or (2) the 401(a)(17) limit.

    Reimbursement of Legal Fees for Bona Fide Employment Claims is Exempt. Trial lawyers (or more likely their clients), rejoice!  Some employment agreements contain provisions where the employee can be reimbursed for legal fees if they succeed in a claim they bring against the company following termination.  These legal fee reimbursement provisions always had an uncertain status under 409A, until now.  The IRS has said that if they are a result of a bona fide dispute, they are exempt from 409A.

    Employees Becoming Contractors Can Have a Separation from Service. An employee who transitions to an independent contractor status can have a separation from service as an employee in connection with that transition if his/her level of services as an independent contractor are low enough to constitute a separation. Usually, this means that the former employee could provide no more than 20% of the level of services s/he was providing as an employee over the prior 36-months.  We always believed this was the rule, but there was some language in the regulations that caused others to question it. The IRS has clarified the rule, stating that such a reduction in services rendered constitutes a separation from service.

    Wednesday, April 27, 2016

    Top Hat“Top hat” plans are plans employers maintain for a “select group of management or highly compensated employees.” These plans are exempt from many of ERISA’s protections, including eligibility, vesting, fiduciary responsibility and funding. Thus, they are often used to provide benefits to management employees over and above those provided under the company’s broad-based retirement plans.

    Choosing which employees may participate in a “top hat” plan is an important decision, as selecting employees who are ineligible for this type of arrangement may lead to violations of ERISA, penalties, increased taxes, and other liabilities. For years companies, courts, and even the Department of Labor (DOL) have struggled with defining the group of employees who can participate in a “top hat” plan. Two recent federal court cases provide insight into the current state of the law and the factors courts consider when assessing “top hat” status.

    In Bond v. Marriott International, Inc., Nos. 15-1160, 15-1199 (4th Cir. 2016) (Unpublished Opinion), the Fourth Circuit held that the plaintiff’s claims were time barred, thus avoiding a decision on whether Marriott’s deferred stock bonus awards program was a “top hat” plan. The Maryland district court, however, had determined that the plan was indeed a “top hat” plan (Bond v. Marriott Int’l, Inc., 296 F.R.D. 403 (D. Md. 2014). Former employees of Marriott asserted that a retirement awards program was not a “top hat” plan and thus subject to the ERISA vesting requirements. The plan used a prorated vesting formula based on each participant’s service until he or she reached age 65. The plaintiffs in the case, who did not fully vest in their benefits as they terminated employment before reaching age 65, argued that this reduction in benefits violated ERISA. The district court accepted Marriott’s reliance on the plan prospectus which stated the plan was “exempt from the participation and vesting, funding and fiduciary responsibility provisions” of ERISA, and Marriott’s granting of retirement awards to less than 2 percent of their total workforce each year.

    The plan sponsor also prevailed in another recent case, Sikora v. UPMC (12/22/15 W.D. PA), in which the court was called upon to review the criteria for “top hat” status. In Sikora, the district court made clear to be considered a “top hat”, a plan must plainly “cover relatively few employees…and…cover only high level employees.” A former vice president at UPMC sought benefits from his former employer’s non-qualified supplemental benefit plan. Upon his voluntary termination, the plaintiff sought a lump sum payout, but instead received a written decision from the plan administrator informing him that he forfeited his fully vested account balance. Plaintiff filed suit alleging various causes of action while the defendant’s contention was that the plan was a “top hat” plan and exempt from ERISA’s vesting and non-forfeiture provisions. The court granted summary judgment for UPMC based on a plan participation rate of 0.2% and the titles and high compensation of the eligible participants.

    Courts have received a variety of arguments discussing factors to be considered for when a plan should meet the “top hat” definition. For instance, in an amicus brief filed in Bond, the DOL asserted the Court should rely on its “bargaining power” interpretation. In 1990, the DOL released an Opinion Letter on this subject which set forth the last official statement of its view, which is that only those employees who “by reason of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan” are eligible to participate in a “top hat” plan. Remember, an Opinion Letter is not legal precedence, but merely expresses the DOL’s view of how the law should be interpreted.

    Bond does not accept the DOL’s views nor expressly reject them. Instead, for a more thorough examination of the factors courts should entertain (and a vigorous repudiation of the DOL’s “bargaining power” view), look no further than the decision in Sikora. There, the court relied on both quantitative and qualitative factors. First, in determining what is a “select group” hinges primarily on the percentage of the workforce participating in the plan. The court noted that several courts have found plans with less than 15% participation to be “select.” Next, the court determined whether the “select group” consists exclusively of high-level employees by considering the following factors: (1) purpose of the setting up the plan, (2) plan eligibility criteria, (3) job titles of participants, (4) average compensation of participants, and (5) whether participants are eligible to participate in other key management or incentive plans.

    More than 40 years after ERISA was enacted there is still no bright-line standard for determining “top hat” status. The area remains ripe for litigation as these recent cases demonstrate and a fertile field for employee counsel. Accordingly, we recommend regular review of top-hat plans to ensure they meet regulatory requirements and these outlined factors.

    Tuesday, November 17, 2015

    CFOAfter the change in securities disclosure laws back in 2006, it was a common statement that the CFO of a public company was no longer covered by the $1 million deduction limit on non-performance based compensation under 162(m) of the tax code. This was (and is) because of a disconnect between the securities laws and the tax code.

    The tax code says that the chief executive officer and each of the next four most highly compensated officers whose compensation is required to be disclosed pursuant to the securities rules are “covered employees” for purposes of the $1 million limit. The 2006 changes in the securities rules changed the disclosure rules to require disclosure of compensation of the principal executive officer (usually the CEO), the principal financial officer (usually the CFO), and the three most highly compensated executive officers other than the principal executive officer and the principal financial officer and up to two additional individuals in certain circumstances). The IRS said that lack of a reference to the “principal financial officer” in the tax code meant that CFOs, by and large, were exempt from 162(m).

    However, when legal regimes cross, it’s not always as simple as it seems. For smaller reporting companies (generally those with less than a $75 million in public float), the securities rules only require disclosure of the compensation of the principal executive officer (usually the CEO) and the next two most highly compensated executive officers (other than the principal executive officer). There is no reference to the principal financial officer (by title) in these rules.

    In recent guidance (a Chief Counsel memo, to be specific), the IRS stated that, for a smaller reporting company, a CFO can be subject to 162(m) if he or she is among the two most highly compensated executive officers (other than the principal executive officer). Given the interaction of the tax code and the securities rules, this makes sense, and smaller reporting companies were likely already observing this rule. However, it serves as an important reminder to confirm any conclusion that involves the interaction of two different legal regimes.

    Monday, November 2, 2015

    With all the rulemaking required under the Dodd-Frank Act, it can sometimes be hard to keep up with the status of the various rules.  Below is a handy chart that details the current status of the various executive compensation rulemakings.  We plan to update this periodically for additional rulemakings, so be sure to come back and visit from time to time.

    Last Updated: November 2, 2015

    Provision Summary Status of SEC Rulemaking
    Say on Pay; Say on Golden Parachutes
    § 951
    Requires advisory vote of shareholders on executive compensation and golden parachutes; advisory vote on frequency of say on pay
    • Final rule: adopted January 25, 2011; SEC Rel. No. 33-9178
    Compensation Committee Independence
    § 952(includes comp consultant conflicts)
    Requires stock exchanges to adopt listing standards that require:

    • compensation committee members to be “independent;”
    • each committee must   have the authority to engage compensation advisers and before selecting any adviser, the committee must take into consideration specific independence factors; and
    • the committee must be directly responsible for the appointment, comp and oversight of the advisers and the company must provide funding.

    Requires disclosure of whether the committee obtained advice of a comp consultant, and whether the work raised a conflict of interest and how it was addressed

    • Final rule: adopted June 20, 2012 requiring exchanges to adopt listing standards; SEC Rel. No. 33-9330
    • SEC approved listing standards in January 2013 exchanges subsequently adopted the required listing standards
    Clawback Policy
    § 954
    Requires the company to develop, implement and disclose its policy for recovery of excess incentive-based compensation
    • Proposed rule: released July 1, 2015; SEC Rel. No. 33-9861
    Disclosure
    Pay versus Performance
    § 953(a)
    Requires disclosure of the relationship between executive compensation “actually paid” and the company’s financial performance
    • Proposed rule: released April 29, 2015; SEC Rel. No. 34-74835
    Pay Ratio – Internal Pay Equity
    § 953(b)
    Requires disclosure of: (1) the median of the annual total compensation of all employees (except the CEO); (2) the annual total compensation of the CEO; and (3) the ratio of the amount in (1) to the amount in (2).For purposes of the ratio, the amount in (1) equals one (1:450), or, the ratio may be expressed as a narrative (the CEO’s annual total compensation is 450 times that of the median annual total compensation of all employees)
    • Final rule: released August 5, 2015; SEC Rel. No. 33-9877 (first reporting period for fiscal year beginning January 1, 2017 – typically disclosed in the 2018 proxy statement); new Reg. S-K Item 402(u)
    Hedging
    § 955
    Requires disclosure of whether any employee or director may hedge or offset any decrease in the fair market value of company stock
    • Proposed rule: released February 9, 2015; SEC Rel. No. 33-9723
    Chair and CEO positions
    § 972
    Requires disclosure of chairman and CEO structure
    • No planned guidance for this provision; see Reg. S-K Item 407(h)
    Monday, October 12, 2015

    A recent case from a federal court in the Northern District of Georgia provides an interesting perspective on the termination of a nonqualified retirement plan with a traditional defined benefit formula offering lifetime annuity payments. In Taylor v. NCR Corporation et. al., NCR elected to terminate such a nonqualified retirement plan. The termination decision not only precluded new entrants to the plan and the cessation of benefit accruals for active employees, but it also affected retirees in payout status receiving lifetime payments. Those retirees received lump sum payments discounted to present value in lieu of the lifetime payments then being paid to them.

    At the time NCR terminated the plan, its provisions apparently provided that the plan could be terminated at any time provided that “no such action shall adversely affect any Participant’s, former Participant’s or Spouse’s accrued benefits prior to such action under the Plan. . . ” The plaintiff was a retiree receiving a lifetime joint and survivor annuity of approximately $29,000 annually. As a result of the plan’s termination, NCR calculated a lump sum benefit for the plaintiff of approximately $441,000, with the plaintiff ultimately receiving a net payment of approximately $254,000 after federal and state income tax withholdings.

    The key allegations made by the plaintiff, as recited by the court, were (1) that the lump sum payment caused the plaintiff to incur a significant taxable event and (2) that the plaintiff objected to the use of a discount factor to reduce the value of the lump sum payment being made to him.

    The court rejected the first claim by citing widely established precedent that tax losses do not fall within the relief available under ERISA. The court also rejected the plaintiff’s complaint about the actuarial reduction, citing an Eleventh Circuit decision, Holloman v. Mail-Well Corp., in which the Eleventh Circuit seemed to conclude that the power to accelerate a stream of benefit payments necessarily included the ability to discount the value of those future payments to a present value lump sum.

    The court faulted the plaintiff’s allegations for simply complaining about the use of an actuarial reduction.  The court stated that the allegation “that the present value reduction factor decreased his further monthly payments as correct, but irrelevant” as a present value decrease of future payments was “precisely the purpose of applying a present value reduction factor.” Furthermore, the court said that the allegation that “the use of the present value reduction factor was, in itself, improper because it amounted to a reduction of his future monthly payments under the plan” was “incorrect as a matter of law.”

    The most interesting aspect of this case is how willing the court was to read a broad grant of authority into a very simple and concise reservation of an employer’s right to terminate a nonqualified retirement plan. The court was willing to infer that the power to terminate necessarily includes the power to commute annuity payments to lump sums and to discount the value of those annuity payments using appropriate actuarial assumptions, including discount rates. This case did not survive NCR’s motion to dismiss. The court indicated that it may have at least survived that stage of the litigation had the plaintiff alleged that the actuarial assumptions used by NCR were improper, rather than simply complaining about the mere use of such factors.

     

    Thursday, July 9, 2015

    Guy GrabbingLast week the Securities and Exchange Commission (SEC) proposed a new Rule 10D-1 that would direct national securities exchanges and associations to establish listing standards requiring companies to adopt, enforce and disclose policies to clawback excess incentive-based compensation from executive officers.

    • Covered Securities Issuers. With limited exceptions for issuers of certain securities and unit investment trusts (UITs), the Proposed Rule 10D-1 would apply to all listed companies, including emerging growth companies, smaller reporting companies, foreign private issuers and controlled companies. Registered management investment companies would be subject to the requirements of the Proposed Rule only to the extent they had awarded incentive-based compensation to executive officers in any of the last three fiscal years.
    • Covered Officers.   The Proposed Rule would apply to current and former Section 16 officers, which includes a company’s president, principal financial officer, principal accounting officer (or if none, the controller), any vice-president in charge of a principal business unit, division or function, and any other officer or person who performs policy-making functions for the company. Executive officers of a company’s parent or subsidiary would be covered officers to the extent they perform policy making functions for the company.
    • Triggering Event. Under the Proposed Rule, the clawback policies would be triggered each time the company is required to prepare a restatement to correct one or more errors that are material to previously issued financial statements and would be applied to covered officers even in the absence of any misconduct. Changes to a company’s financial statements that arise for reasons other than to correct an error (g., change in accounting principles, revision for stock splits and adjustments to provisional amounts related to a prior business combination) would not trigger any required recovery action.
    • Three-Year Lookback. A company would be required to recover excess incentive-based compensation received by covered officers within the three completed fiscal years prior to the date the company is required to prepare the accounting restatement. Under the Proposed Rule 10D-1, an accounting restatement would be treated as required on the earlier of: (1) the date the company concludes or reasonably should have concluded that its previously issued financial statements contain a material error; or (2) the date a court, regulator or other authorized body directs the company to restate a previously issued financial statement to correct a material error. For example, if a company that operates on a calendar year determines in November 2018 that a previously issued financial statement contains a material error and files the restated financial statements in January 2019, the recovery policy would apply to all excess incentive-based compensation received by covered officers in 2015, 2016 and 2017.
    • Incentive-Based Compensation. Under the Proposed Rule, incentive-based compensation is any compensation that is granted, earned or becomes vested (in whole or in part) due to the achievement of any financial reporting measure (g., revenue, operating income and EBITDA) or performance measures based on stock price and total shareholder return. Incentive-based compensation generally would not include salary, discretionary bonus payments, time-based equity awards, non-equity awards based on achievement of a strategic measure (e.g., consummation of a merger) or operational measures (e.g., completion of a project) or bonus pool awards where the size of the pool is not based on satisfaction of a financial reporting measure performance goal. However, if a covered officer earns a salary increase based (in whole or in part) on the attainment of a financial reporting measure, the increase could be considered a non-equity incentive plan award and subject to recovery under the Proposed Rule 10D-1.

    For purposes of applying the three-year lookback period, incentive-based compensation would be deemed received in the fiscal period during which the financial reporting measure specified in the incentive-based compensation award is attained, even if the payment or grant occurs after the end of that period. Consequently, the date of receipt would depend upon the terms of the award. For example, if an award is granted based on satisfaction of a financial reporting measure, the award would be deemed received in the fiscal period when that measure was satisfied. However, if an equity award vests upon satisfaction of a financial reporting measure, the award would be deemed received in the fiscal period when it vests. Any ministerial acts or other conditions necessary to effect issuance or payment (e.g., calculating earned amounts or obtaining board of approval) would not be determinative of the date the incentive-based compensation is received by the covered officer.

    • Determining Recoverable Amount.    The amount subject to recovery would be the amount of incentive-based compensation received by a covered officer that exceeds the amount the officer would have received had the incentive-based compensation been determined based on the accounting restatement. Although the Proposed Rule does not specify a means of recovery, it does offer guidelines for determining the recoverable amount under different types of incentive-based compensation arrangements.
      •  Cash Bonus Pool Awards. The company would reduce the size of the aggregate bonus pool based on the restated financial reporting measure and if the reduced bonus pool is less than the aggregate amount of individual bonuses received from it, the excess amount of an individual bonus would be the pro rata portion of the deficiency. If the aggregate reduced bonus pool would have been sufficient to cover the individual bonuses received from it, then no recovery would be required.
      • Equity Awards. The method of recovering equity awards would depend on the status of the award. With respect to shares, options or SARs still held by the covered officer at the time of recovery, the recoverable amount would be the number received in excess of the number that should have been received applying the restated financial reporting measure.   If the options or SARs have been exercised but the covered officer still holds the underlying shares, the recoverable amount would be the number of shares underlying the excess options or SARs applying the restated financial measure. However, if the shares have been sold, the recoverable amount would be the sale proceeds received by the covered officer on the excess number of shares. In all situations, the covered officer’s payment of any applicable exercise price would be taken into account.
      • Nonqualified Deferred Compensation. The covered officer’s account balance or distributions would be reduced by the excess incentive-based compensation contributed to the nonqualified deferred compensation plan and any interest or earnings accrued thereon. In addition, for retirement benefits under pension plans, the excess incentive-based compensation would be deducted from the benefit formula, and any related distributions would be recoverable.
    • Exceptions to Recovery. Proposed Rule 10D-1 provides for two limited exceptions to recovery.
      • Impracticable Recovery. Recovery would not be required if determined by the company’s committee of independent directors (or in the absence of such a committee by a majority of the independent board members) to be impracticable because the direct costs of recovery would exceed the amount subject to recovery. However, before concluding that recovery would be impracticable, the company must make a reasonable attempt at recovery and furnish the exchange with documentation of its efforts. This and all other determinations made by a company under Proposed Rule would be subject to review by the listing exchange.
      • Violation of Home Country Law. Recovery also would not be required if it would violate the company’s home country law; however, the company would be required to obtain an opinion of home country counsel (acceptable to the applicable national securities exchange or association) that recovery would result in such a violation. In an effort to deter countries from changing their laws in response to this exception, the Proposed Rule would limit application of this exception only to laws adopted prior to the date of publication of the Proposed Rule in the Federal Register.

    Under either exception, a company would be required to disclose why it decided not to pursue recovery of the excess incentive-based compensation.

    • Prohibited Indemnification or Reimbursement. A company would be prohibited from mitigating or otherwise entering into an arrangement designed to avoid or nullify the effect of any required recovery, including indemnifying a covered officer against the loss of excess incentive-based compensation or paying or reimbursing the officer for the purchase of an individual third-party insurance policy to fund potential recovery obligations.
    • Disclosure Obligations. The recovery policies would be a required exhibit to the company’s annual report on Form 10-K. Additional disclosures would be required in the company’s annual report and any proxy and consent solicitation materials requiring executive compensation disclosure if at any time during its last completed fiscal year the company either prepared an accounting restatement that required recovery action or had an outstanding balance of excess incentive-based compensation. The SEC also proposes requiring a company to make the appropriate amendment to the Summary Compensation Table for the fiscal year in which the amount recovered was initially reported and be identified by footnote.
    • What’s Next. The Proposed Rule is subject to a 60-day comment period following its publication in the Federal Register. The SEC is soliciting comments on virtually every aspect of the Proposed Rule so the final version of the rule could possibly reflect significant changes. Exchanges will have 90 days after the adopted version of Rule 10D-1 is published in the Federal Register to file its proposed listing rules, which must be effective no later than one year following that publication date.

    Listed companies must adopt recovery policies within 60 days after the exchanges’ rules become effective and begin enforcing such policies on all incentive-based compensation received by covered officers (current and former) as a result of satisfaction of a financial reporting measure based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1.   Failure to adopt and enforce the required recovery policies would subject a company to delisting.

     

    See also this client alert Securities group posted on bryancave.com.

    Thursday, April 9, 2015

    ChartCompanies should be aware that at least some major accounting firms are questioning whether discretionary aspects of clawback policies trigger variable accounting for compensatory equity awards granted by those companies. Existing accounting guidance (ASC 718-10-30-24) would seem to suggest that clawback features should not disrupt fixed accounting treatment because of their contingent nature.

    Now, however, PricewaterhouseCoopers and KPGM, at least, are publicly expressing concerns about clawback policies focusing on their discretionary, rather than contingent, nature. A 2013 PricewaterhouseCoopers survey of 100 companies indicated that nearly 80% of those companies had clawback policies that had problematic discretionary provisions. A clawback policy could involve discretion as to what circumstances it may apply; whether it should be applied; and, if applied, how severely it should be applied. It seems that all aspects of discretion may be problematic. Companies adopting or modifying existing clawback policies should evaluate the potential risks of discretionary provisions and consider consulting with their independent accountants before adopting or revising those policies. This will be particularly true for public companies when it comes time to evaluate compliance with the much-anticipated SEC guidance on clawbacks that will finally implement the Dodd-Frank legislation of 2010.

    Friday, September 5, 2014

    Our sister blog, Start-Up Bryan Cave, recently posted about when and why to use the an 83(b) election.  The post has a good discussion of the advantages and disadvantages.

    One item it does not mention is the company’s deduction, which is taken if and when the 83(b) election is made.  In the absence of an election, the deduction occurs when the property vests.

    Of course, for the company to take the deduction, it has to know that the election has been made.  Even though the IRS rules require the recipient to give a copy to the company, another valuable planning point is to make sure that the agreement itself also requires the recipient to provide a copy of the election to the company.