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  • BC Network
    Wednesday, May 30, 2018

    The SEC staff regularly publishes “Compliance and Disclosure Interpretations” (C&DIs) on various securities matters. Recently, the staff issued new C&DIs related to the SEC’s proxy rules. Previously, the interpretations relating to proxy rules were contained in a “Manual of Publicly Available Telephone Interpretations” which had not been updated since 1999. Included in the new C&DIs are interpretations that affect compensation and benefit plan disclosure in proxy statements filed on Schedule 14A. Most of the new compensation and benefit plan related C&DIs continue the prior Telephone Interpretations, but the following C&DI includes a new substantive interpretation:

    • C&DI Question 161.03: If a registrant is required to disclose the New Plan Benefits Table called for under Item 10(a)(2) of Schedule 14A, the table should list all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”. Alternatively, the registrant may choose to use a narrative disclosure accompanying the New Plan Benefits Table to identify any individual or group for which the award and benefit information to be reported is “0”. [This continues the prior Telephone Interpretations as to the requirement to list in the New Plan Benefits Table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”. The option to use a narrative disclosure is a new interpretation.]

    The following compensation and benefit plan C&DIs continue the staff’s prior interpretations that were included in the Telephone Interpretations: Questions 126.01, 161.01, 161.02, and 161.04 to 161.12.

    Tuesday, September 19, 2017

    Securities and executive benefits attorneys and public companies that maintain equity incentive plans should be aware of a new theory of recovery under the “short-swing profit rule.” Plaintiffs’ attorneys have recently asserted a new form of claim alleging liability under the short-swing profit rule when shares are withheld to satisfy applicable taxes upon the vesting of awards.

    Overview of the Short-Swing Profit Rule

    The short-swing profit rule generally provides for strict liability of Section 16 insiders (i.e. an executive officer, director or 10% or more shareholder) if they engage in purchases and sales, or sales and purchases, of issuer equity securities within a six-month period that are not exempt under Section 16. Pursuant to Section 16 of the Exchange Act, a suit to recover short-swing profits may be instituted by the issuer or a shareholder in the name and on behalf of the issuer if the issuer fails or refuses to bring suit within 60 days after request. In practice, a plaintiff’s attorney will frequently make a demand on an issuer to seek recovery of short-swing profits after the attorney identifies non-exempt insider purchases and sales of issuer equity securities within a six-month period and, if the issuer does not resolve the issue to the attorney’s satisfaction, the attorney may then bring suit against the insider.  The potential liability to a Section 16 insider is the disgorgement of any profits earned between the purchase and the sale of the subject securities.  While there is no direct liability on the issuer under the short-swing profit rule, plaintiffs’ attorneys frequently seek a fee from the issuer for identifying the transaction creating Section 16 liability.

    New Plaintiffs’ Claims when Shares are withheld to pay Taxes

    The withholding of shares to satisfy the applicable taxes upon vesting of an award under an equity incentive plan is considered a disposition of shares to an issuer and has traditionally been considered exempt from the short-swing profit rule under Exchange Act Rule 16b-3(e) if the plan or award agreement permits such withholding and such plan or agreement has been approved in advance of the transaction by the issuer’s board of directors, a committee of two or more “non-employee directors” (as defined in Rule 16b-3), or an issuer’s shareholders. However, in several recent cases, plaintiffs’ attorneys have claimed that insider or issuer discretion to elect to have shares withheld at the time of vesting of awards (as opposed to the automatic withholding of shares upon vesting of the award) is not exempt under Rule 16b-3(e), and as a result, the executive is subject to liability under the short-swing profit rule.  In one such case, the court summarily rejected the plaintiff’s claims.  Other cases remain pending.  Commentators have suggested that plaintiffs’ new theories are very weak.

    Considerations in response to Plaintiffs’ Claims

    Notwithstanding the lack of success of these new theories to date, issuers should consider taking steps to minimize the risk of these types of claims either by providing for automatic withholding of shares to satisfy applicable taxes in equity plans and award agreements (which issuers may find undesirable or impracticable), or alternatively, having their board of directors or a committee of non-employee directors approve each withholding transaction in advance (which many issuers will also find impractical).  Also, issuers may want to confirm that their forms of award agreements clearly provide for withholding of shares, and that the board or committee clearly approve the use of such forms when making equity grant awards, to ensure that Section 16 prior approval requirements are met.  In any event, issuers may wish to warn their insiders of potential claims resulting from engaging in a withholding transaction and a non-exempt purchase of securities within any six-month period.

    If you or your organization would like more information, please contact your trusted Bryan Cave LLP lawyer or one of Bryan Cave LLP’s corporate finance or executive compensation lawyers.

    The employee benefits and executive compensation team would like to thank Andrew Rodman and Rocio A. Chavez for preparing this blog post.

    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
    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)
    § 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)
    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

    Friday, August 22, 2014

    Floating DollarAccording to the Investment Company Institute, approximately 18%% of all mutual fund assets are invested in money market mutual funds.  An even higher percentage reflects the investment in money market mutual funds held by participant-directed defined contribution plans.  Many of these plan participants believe that their retirement money is “safe” in a money market mutual fund since these funds are thought to be “guaranteed” to maintain a fixed target value of $1.00 per share.  Plan participants do not, as a rule, appreciate the risks inherent in money market mutual funds that in certain market conditions might “break the buck.”

    On July 23, 2014, the SEC promulgated a rule (the “MMF Rule”) addressing what it believes could be heavy redemptions of money market mutual funds in the event of economic stress.  The MMF Rule intends to make information about money market mutual funds, particularly inherent risk factors, more transparent.

    Money market mutual funds offer a return of principal, liquidity and a rate of return based on the market.  The net asset value (NAV) per share of a money market mutual fund changes daily in response to market factors, but the funds are designed to retain a stable share price that is typically $1.00 per share.

    Federal rules require money market mutual funds to invest in short-term investments with minimal credit risk and high quality.  But even investments that carry these characteristics are subject to the vagaries of the market place, and significant changes in market factors can cause money market mutual funds to deviate from their target value.

    The MMF rule requires institutional prime money market mutual funds to use a floating NAV, to impose default liquidity fees on non-governmental money market mutual funds when certain conditions of economic stress exist, and to give money market mutual funds the flexibility to institute liquidity fees and/or “redemption gates” under certain conditions of economic stress.

    The floating NAV applies to non-government, non-retail money market mutual funds.  It prevents institutional funds such as those held by large 401(k) plans from maintaining a stable $1.00 share price.

    Government money market mutual funds are invested in cash, government securities and/or repurchase agreements collateralized with cash or government securities.  Retail money market mutual funds are those that are reasonably designed to limit all beneficial owners of the fund to natural persons.  Both government and retail money market mutual funds are exempt from the liquidity fee and redemption gates provisions, but they can apply them if they disclose that they do so in their prospectus.

    It will take up to 18 months for these rules to become fully implemented.  During that time, it would behoove plan administrators and their investment advisors to reassess the type of money market mutual fund held by the retirement plan and determine if it continues to be a proper investment for the plan.  Additional information regarding the fund and how it works might be required to be distributed to participants.  And, it may be that institutional funds, irrespective of their lower cost structures, should be replaced by government money market mutual funds in order to meet the participants’ expectation of safety.  The plan fiduciaries will have to review new prospectuses to determine if their plan’s government or retail fund might impose liquidity fees or redemption gates.  Of course, procedural prudence will, as always, be required in evaluating the propriety of the money market mutual fund available in a participant-directed defined contribution plan.

    Thursday, August 21, 2014

    Institutional Shareholder Services, or ISS, invites U.S. companies to verify the data it uses to evaluate proxy statement equity plan proposals.  ISS previously announced a move to a “balanced scorecard” approach for its evaluation of equity plan proposals.  Data verification is included as a key feature of this approach.

    Data verification allows companies to preview, and if necessary update, the data used by ISS in its vote recommendation.  Some companies have been frustrated when reviewing ISS vote recommendations that include inaccurate or misconstrued data.  This program is designed to improve the quality of information used by ISS.  See “FAQs:  Equity Plan Data Verification” for details about the program.  Below is a summary of some key features:

    How to Participate

    • The data verification program is optional.
    • It is open to U.S. companies who have filed definitive proxy materials after September 8th, 2014 with an equity plan proposal (new or amendment) on the ballot.
    • The data verification program does not apply to other compensation plan proposals such as cash and bonus plan proposals.
    • To participate in the program, the company’s proxy materials must be filed at least 30 days in advance of the meeting date.
    • Data verification is only available to company contacts who register in advance to participate in the data verification program with ISS.


    • Companies will have only a short period to verify their equity plan data – approximately two business days to review and respond.
    • The window period is expected to open within 12 business days following the filing of the company’s definitive proxy materials.

    What Data

    • ISS reviews definitive proxy filings, 10-Ks, 10-Qs, and 8-Ks, “among other documents” to gather data for its vote recommendation.
    • Data submitted for the program must be consistent with relevant publicly-disclosed filings.
    • ISS includes a list of data verification questions for companies to use in advance.  The questions are helpful insight into the ISS “balanced scorecard” approach.  The questions cover four areas:

    1.      Equity Plan Provisions – includes definitions and provisions covering stock option repricing, cash buyouts of underwater stock options, share recycling, limits on full value awards, fungible share counting provisions, evergreen share reserves, dividend/dividend equivalent rights, change in control definitions, triggers and effect on time-based and performance-based awards, and tax gross-ups.

    2.      Outstanding Stock and Convertibles – includes data covering the number of common shares outstanding, shares issuable upon exercise of outstanding warrants, conversion of debt, and outstanding weighted average common shares in the past 3 fiscal years in the computation of basic EPS.

    3.      Equity Grant Activity – includes data regarding time-vesting options, stock appreciation rights, full value and performance-based awards granted or earned in the past 3 fiscal years.

    4.      Shares Reserved and Outstanding Under Equity Compensation Program – includes number of shares reserved under the proposal, shares remaining available under all equity compensation plans, and shares subject to outstanding awards.


    460326385If your company is a publicly-traded U.S. company, or a company covered under ISS’ U.S. policy, with an upcoming equity plan proposal, consider participating in the ISS equity plan data verification program.  Remember that contacts at your company will need to register in advance (multiple contacts are permitted) and be prepared to act quickly to verify, and make any necessary corrections, to your company data.

    In advance of filing your definitive proxy statement, consider reviewing the ISS verification questions and include the data, where appropriate, in clear and concise proxy statement disclosures.

    Thursday, July 17, 2014

    On June 25, 2014, a unanimous United States Supreme Court weighed in on the legal standards applicable in stock drop cases in Fifth Third Bancorp v. Dudenhoeffer.

    Facts. Beginning in 2007, Fifth Third Bank began experiencing a large number of mishaps, most of them associated with borrowers not repaying their loans when due. As a result, Fifth Third’s stock price suffered the same phenomenon as that of virtually every other publicly traded financial institution in the world during the great recession: it dropped precipitously, falling 74% from July 2007 to September 2009. With the benefit of hindsight, plaintiffs brought a class action lawsuit against the fiduciaries of the Fifth Third 401(k) Plan, alleging that all of this should have been patently obvious based on public and nonpublic information allegedly possessed by the fiduciaries. The plaintiffs asserted that the fiduciaries should have taken one or more of the following actions with respect to the company stock fund in the 401(k) Plan: (1) sell the stock before it declined; (2) refrain from purchasing any more Fifth Third stock; (3) cancel the Plan’s company stock option; and (4) disclose the inside information allegedly in their possession so that the market would appropriately adjust its valuation of Fifth Third stock downward and the Plan would as a result no longer be overpaying for it.

    The Supreme Court’s Ruling. Much of the decision focuses on whether the so-called “Moench” presumption of prudence attaches to a fiduciary’s decision to allow or continue the investment of plan assets in company stock when the governing plan documents direct that such investment shall be made. This presumption was originally articulated by the Third Circuit in the case of Moench v. Robertson, and was subsequently adopted by every circuit which had considered the matter, although there was some disagreement regarding whether the presumption applied at the pleading or evidentiary phase. The Supreme Court Justices read and reread ERISA’s statutory language, looked in every nook and cranny, and directed their law clerks to do the same, but ultimately they were unable to find even a single word in the statute which accorded such a presumption of prudence. The Court then concluded that the Circuit Courts had made it all up, and that no such presumption existed.

    Rather than stopping at the point of simply deciding the issue presented, the Court elected to offer some advice to the lower courts regarding how meritless stock drop cases might be weeded out, perhaps because the lower courts, at least in the eyes of the Supreme Court, had gotten the law in this area so wrong for so long. The Court stated that, in the case of a publicly traded security, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valued are “implausible”, at least in the absence of special circumstances. The Court noted that ERISA fiduciaries have little hope of outperforming the market, and so may, as a general matter, prudently rely on market price.

    Stock MarketUnder this standard, is it even possible to plead a breach of fiduciary prudence as it relates to investment decisions involving a publicly-traded company stock fund? The Court left this question open with the following observation: “We do not here consider whether a plaintiff could nonetheless plausibly allege imprudence on the basis of publicly available information by pointing to a special circumstance affecting the reliability of the market price as ‘an unbiased assessment of the security’s value in light of all public information.’” To even have a chance of succeeding in stock drop litigation based solely on publicly available information, therefore, plaintiffs would have to prove that the plan fiduciaries were aware or should have been aware of a special circumstance which would lead to the conclusion that the most efficient market in the history of mankind was not operating efficiently with respect to the value of the company’s stock. The Moench presumption of prudence has been replaced with the Dudenhoeffer presumption of an efficient public market. Unlike the Moench presumption, which was rebuttable, the Dudenhoeffer presumption appears to be virtually irrebuttable. To our brethren in the plaintiffs’ bar who make their living handling stock drop cases, we offer the following words of encouragement: Good luck with that.

    The Court next moved to a discussion of the plaintiffs’ allegations that the plan fiduciaries failed to act on the basis of nonpublic information. The Court noted that the duty of prudence does not require a fiduciary to break the law. Presumably, therefore, litigation premised on the theory that fiduciaries should have taken action which would have violated the securities laws should be dismissed. The Court also instructed the lower courts faced with stock drop claims to consider whether the suggested fiduciary action (e.g., deciding to liquidate a company stock fund or disclose material nonpublic information) might do more harm than good by causing a drop in the value of the stock already held by the plan.

    Reaction from the Department of Labor. The Department of Labor, which had filed an amicus brief in support of the plaintiffs’ position, immediately declared victory, once again proving the ability of Washington bureaucrats to put a positive spin on any defeat. The DOL blog post may be found here.

    Lessons from Dudenhoeffer. The Dudenhoeffer decision suggests that fiduciaries in charge of monitoring a company stock fund should not only review and analyze press releases, SEC filings, and other publicly available information, but should also build the following considerations into their fiduciary process:

    1. In considering publicly available information with respect to company stock, fiduciaries should determine whether any special circumstance exists affecting the reliability of the stock’s market price as an unbiased assessment of the stock’s value that would make reliance on the market’s valuation imprudent.

    2. It is still a bad idea to have insiders serve on the committee which oversees the company stock fund. Consider removing insiders from the investment committee, or at least consider vesting sole authority to oversee the company stock fund in a subcommittee consisting solely of non-insiders.

    3. In the event an insider does serve on the committee tasked with overseeing the company stock fund, and the insider comes into possession of material nonpublic information suggesting the company’s stock is overvalued, the insider should consider whether he or she could take action with respect to the company stock fund consistent with the securities laws that a prudent fiduciary in the same circumstances would not view as more likely to harm the fund than to help it.

    The decision also suggests a possible change to the historical approach to drafting plan language relating to plan investments in company stock. Many practitioners had hardwired language into the plan document mandating investments in company stock in order to place the fiduciaries in the best position to claim the Moench presumption of prudence. Given the demise of the Moench presumption, such language would no longer appear to be helpful, and may even prove detrimental in the situation in which the plan fiduciaries desire to discontinue the company stock fund. Assuming the portion of the plan which invests in company stock is an employee stock ownership plan (“ESOP”), consider language which simply recites that the ESOP portion of the plan has been designed to invest primarily in employer securities.

    Thursday, November 8, 2012

    It’s that time of year again!  Time to ensure year-end executive compensation deadlines are satisfied and time to plan ahead for 2013.  Below is a checklist of selected executive compensation topics designed to help employers with this process.

    I.       2012 Year-End Compliance and Deadlines

    □      Section 409A – Amendment Deadline for Payments Triggered by Date Employee Signs a Release

    It is fairly common for an employer to condition eligibility for severance pay on the release of all employment claims by the employee.  Many of these arrangements include impermissible employee discretion in violation of Section 409A of the Internal Revenue Code because the employee can accelerate or delay the receipt of severance pay by deciding when to sign and submit the release.  IRS Notice 2010-6 (as modified by IRS Notice 2010-80), includes transition relief until December 31, 2012 to make corrective amendments to plans and agreements.

    Generally, the arrangement may be amended to either (1) include a fixed payment date following termination, subject to an enforceable release (without regard to when the release is signed), or (2) provide for payment during a specified period and if the period spans two years, payment will always occur in the second year.  We recommend employers review existing employment, severance, change in control and similar arrangements to ensure compliance with this payment timing requirement.  The December 31, 2012 deadline for corrective amendments is fast approaching.

    □      Compensation Deferral Elections

    Compensation deferral elections for amounts otherwise payable in 2013 must generally be documented and irrevocable no later than December 31, 2012.  The remainder of 2012 is sure to pass quickly, especially with the added distractions of the elections and tax law uncertainty.  Employers should consider additional communications to ensure the deadline is not overlooked. (It’s also a good time to confirm 409A compliance generally, as we have discussed previously.)

    □      Payroll Deduction True-Up for Fringe Benefits and Other Compensation

    Some employers utilize a rule for administrative convenience that permits income and employment tax withholding on certain items of compensation to be made at the end of the year (i.e., imputed income on after-tax long-term disability premiums).  Employers should ensure that all payroll deductions for taxable compensation for the year are taken into consideration.

    □      Annual Compensation Risk Assessment for SEC Reporting Companies

    Beginning with the 2010 proxy season, companies have been required to perform a risk assessment of their compensation policies and practices.  The purpose of the assessment is to evaluate compensation-related risk-taking incentives.  Where a company determines that its employee compensation program includes  “risky” pay policies and practices, it must include disclosures (including mitigating practices).  In recent addresses, representatives of the SEC have included a “reminder” to public companies that the compensation risk assessment must be performed annually.

    □      Compensation Consultant Conflict of Interest Assessment for SEC Reporting Companies

    Beginning with the 2013 proxy season, the Dodd-Frank Act requires a company to disclose whether the work of its compensation consultant has raised any conflict of interest.  The assessment should consider six specified factors outlined in the rules.  The purpose of the assessment is to determine whether the work of the consultant raised a conflict of interest.  If the company determines a conflict of interest was raised, the company must disclose the nature of the conflict and how the conflict is being addressed.

    II.     2013 Planning

    □      Section 162(m) Employer Compensation Deduction Limit

    Section 162(m) of the Internal Revenue Code limits the deduction for a publicly-held corporation to $1 million for each covered employee (typically the chief executive officer and four most highly compensated officers, other than the CEO and CFO).  This deduction limit does not apply to “qualified performance-based compensation.”  To qualify for the exception, the compensation must be payable solely on account of the attainment of one or more pre-established performance goals and other technical requirements must be satisfied.  Employers should review their plan design and administrative practices to ensure compliance with the technical requirements.  For example:  (1) review the timing of prior shareholder approval to determine whether new shareholder approval must be obtained in 2013, (2) confirm that the compensation committee is comprised solely of two or more “outside directors,” and (3) ensure that the committee timely establishes the performance goals for the new performance period, and pre-certifies the level of achievement of the performance goals at the end of each performance period.  A few other technical requirements to note include:

    • If the company issues restricted stock and restricted stock units (RSUs) that are designed to qualify as performance-based compensation, any related dividends and dividend equivalents must separately satisfy the performance-based compensation requirements (i.e., must be contingent on achievement of the performance goals).
    • It is common for a shareholder-approved equity plan to include a per-employee share limit for a stated period for awards granted under the plan.  It is important for the company to keep track of this limit to ensure actual awards do not exceed this cap.

    New for 2013 – Deduction Limit for Health Insurance Providers and Related Entities

    A new provision enacted under the Health Care Reform law takes effect on January 1, 2013.  New Section 162(m)(6) of the Internal Revenue Code limits the deduction covered health insurance providers (and their related entities) may take for compensation paid to certain employees in excess of $500,000.   There is no performance-based compensation exception to this limit.

    □      Monitor Tax Law Changes

    There are a number of tax law changes scheduled to occur beginning in 2013 that will impact required income and employment tax withholding for many forms of executive and equity compensation.  Congress could act to extend some tax rate cuts beyond 2012.  We recommend employers monitor tax law developments and be prepared to make changes to current payroll reporting processes.  Below are some of these changes:

    Employment Taxes.  On October 16, 2012, the Social Security Administration announced employment tax rates for 2013.  The taxable wage base for earnings subject to the Social Security tax for 2013 is $113,700, up from $110,100 in 2012.  In addition to an increase in the Social Security taxable wage base, the tax withholding rate is scheduled to return to 6.2% (the temporary 4.2% reduced rate is scheduled to expire at the end of 2012).  The Medicare tax also applies and the required withholding rate is an additional 1.45% with no wage limit.  Starting in 2013, an additional Medicare tax of 0.9% applies to earnings from wages and other taxable compensation over a threshold amount (i.e., $200,000-$250,000 based on filing status).

    Supplemental Wage Withholding.  The supplemental wage withholding rate is used by  employers for income tax withholding on bonus, commissions, severance payments, equity awards and other special payments.  The supplemental wage withholding rate for 2012 is 25% or a mandatory 35% once aggregate supplemental wages exceed $1 million for the year.  Due to the scheduled expiration of the Bush-era tax cuts, the 2013 rates are scheduled to increase to 28% and 39.6% for aggregate amounts in excess of $1 million.

    □     Proxy Statement Preparation for SEC Reporting Companies

    With the implementation of Say on Pay, proxy statement disclosures serve as a key investor communication tool to help explain the company’s compensation program and how it ties to company performance.  Now is the time to improve disclosures and implement best practices for the upcoming proxy season.  Below are some areas for consideration:

    • Add an executive summary at the beginning of the proxy statement
    • Reorganize the proxy and improve the table of contents
    • Begin the CD&A with highlights including company financial performance and the absence of problematic pay practices
    • Add a comparison of realizable pay to Summary Compensation Table pay (consider using charts and graphs)
    • Explain how the performance pay measures and targets were selected and the outcome of actual results
    • Improve disclosure of peer group selection, benchmarking and company rank
    • Explain recent compensation design changes and rationale for the changes
    • Remove excess words and repetitive disclosures


     Disclaimer/IRS Circular 230 Notice

    Thursday, April 5, 2012

    Update (2:45 PM): As expected, President Obama has signed the JOBS Act into law.

    The JOBS Act is expected to be signed by President Obama today. According to the Act, it is intended:

    To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.

    The Act includes provisions relating to crowdfunding, access to capital markets, exemptions to encourage small company capital formation, increased private company shareholder threshold for registration, and reduced public company compliance and disclosure burdens for “emerging growth companies.”

    In addition, Title I of the Act “ Reopening American Capital Markets to Emerging Growth Companies,” includes changes to executive compensation disclosure requirements for emerging growth companies.

    Emerging Growth Company. An emerging growth company means a company with total annual gross revenues of less than $1 billion (indexed for inflation). Only companies with an IPO after December 8, 2011 can qualify as an emerging growth company. The company loses status as an emerging growth company upon the earliest of:

    • the last day of its fiscal year in which its annual gross revenues are $1 billion or more;
    • the last day of its fiscal year five years after its IPO;
    • the last day of its fiscal year in which it has, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or
    • the date it is deemed to be a “large accelerated filer.”

    Executive Compensation. An emerging growth company is exempt from the following requirements:

    • the say on pay advisory vote; and
    • the say on golden parachute advisory vote.

    Once the company no longer qualifies as an emerging growth company it must include a say on pay advisory vote not later than:

    • the date three years after its IPO (if the company was an emerging growth company for less than 2 years); and
    • the date one year after it is no longer an emerging growth company (if the company was an emerging growth company for 2 or more years).

    Emerging growth companies are also exempt from the following Dodd-Frank required disclosures (once the rules are adopted):

    •  “pay versus performance” – required disclosure of the relationship between compensation actually paid and company financial performance; and
    •  “pay ratios” – the ratio of the median annual total compensation of all employees (except the CEO) compared to the CEO’s annual total compensation.

    An emerging growth company may also qualify as a “smaller reporting company” for purposes of scaled executive compensation disclosures available to smaller reporting companies under current rules.

    Other Title I Provisions. Title I includes a number of other provisions for emerging growth companies including: reduced financial disclosures, delayed application of certain accounting pronouncements, the availability of confidential treatment for a period of a draft registration statement, relief from certain internal controls audits, and a transition period for certain auditing standards.

    Opt-In Right. An emerging growth company may choose to not take advantage of these new exemptions and instead comply with the requirements for a non-emerging growth company. However, the decision to opt-in must be made at the time of the IPO, is all or nothing (no cherry picking), and the company must continue to comply with the non-emerging growth company standards for as long as it remains an emerging growth company. In other words, if an emerging growth company opts-in, there is no opting-out.

    Regulation S-K. Title I also requires the SEC to review Regulation S-K and report to Congress within 180 days as to how to streamline the registration process.

    Takeaway. The Act eases the reporting and compliance burden for emerging growth companies giving them easier access to public capital markets. Unlike other portions of the Act, the emerging growth company provisions are effective upon enactment. As a result, pre-IPO companies will want to move quickly to work with counsel to determine whether and how to take advantage of this new relief and the requirements for maintaining emerging growth company status.

    Related Links

    Bryan Cave Corporate Finance and Securities Group Client Alert on the JOBS Act Post on the JOBS Act (Update June 8)

    SEC FAQs on the JOBS Act