Waller
July 29, 2015 - United States of America
SEC Releases Proposed Rules in Connection with Dodd-Frank
Last week marked the fifth anniversary of the enactment of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”),
and a number of proposed rules have been released recently by the U.S.
Securities and Exchange Commission to implement corporate governance and
disclosure requirements required by Dodd-Frank applicable to reporting
companies under the Securities Exchange Act of 1934 (as amended, the “Exchange
Act”).Pay for Performance: Disclosure Requirements The SEC released proposed
rules regarding disclosure of pay-for-performance on April 29, 2015. The
proposed rules would require companies to disclose the following information
for the immediately preceding five fiscal years in a new table:
Executive compensation actually paid for the principal executive officer, which
would be the total compensation as disclosed in the summary compensation table
already required in Schedule 14A proxy statements with adjustments to the
amounts included for pensions and equity awards;
Total executive compensation reported in the summary compensation table for the
principal executive officer and an average of reported amounts for the remaining
named executive officers;
The company’s total shareholder return (“TSR”) on an annual basis; and
The TSR on an annual basis of the companies in a peer group.
Comments were due for these proposed rules on July 6, 2015. Executive Pay Clawbacks: Corporate
Governance and Disclosure Requirements The SEC released proposed rules on
July 1, 2015 regarding recovery, or “clawback,” of executive compensation
pursuant to Section 10D of the Exchange Act. The proposed rules require
national stock exchanges to adopt listing rules that will require issuers to
adopt and comply with a written policy (a “Compensation Recovery Policy” or
“CRP”) for the recovery of “excess” incentive-based compensation received by
current and former executive officers during the three completed fiscal years
preceding the date on which the issuer concludes that an accounting restatement
is required because of a material error. “Excess” compensation subject to
clawback is any amount of incentive-based compensation received by the
executive officers which would not have been received had the financial
statements upon which the incentive-based compensation been reported as
restated.Who is Covered by the CRP? The CRP covers all “executive officers” who
held such offices at any time during the relevant performance periods. The
proposed rule defines “executive officer” as the issuer’s president, principal
financial officer, principal accounting officer (or if there is no such
accounting officer, the controller), any vice-president of the issuer in charge
of a principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-making
function or any other person who performs similar policy-making functions for
the issuer.What are the Types of Accounting Restatements that Trigger a
Clawback? A clawback is triggered when an issuer is required to restate
previously issued financial statements to reflect the correction of one or more
errors that are material to those financial statements. A series of corrections
of immaterial errors may be material for purposes of triggering a clawback.Can
Issuers Indemnify Executive Officers? Issuers cannot indemnify executive
officers against their loss of incentive-based compensation, subject to
clawback. However, if the cost of recovering excess compensation would be in
excess of the excess compensation subject to clawback, an issuer may decline to
pursue recovery from the affected executive officer(s). Required Disclosures
Under the proposed rules, each U.S.-listed issuer would have to file a copy of
its CRP as an exhibit to its Form 10-K for the first fiscal year following
adoption. Issuers would also have to provide disclosures if, during the prior
fiscal year, either a restatement triggering the CRP was made or there was an
outstanding balance of excess incentive-based compensation from application of
the CRP to a prior restatement. These disclosures would include the date on
which an issuer is required to prepare an accounting restatement, the aggregate
dollar amount of excess incentive-based compensation attributable to the
restatement, and the aggregate dollar value of excess incentive-based
compensation remaining outstanding at the end of the prior fiscal year.
Comments are due for these proposed rules on September 14, 2015. Other Dodd-Frank Updates
Comments for the proposed rules regarding hedging by employees and directors
were due on April 20, 2015. These proposed rules required disclosure about
whether directors, officers, and other employees are permitted to hedge or
offset any decrease in the market value of equity securities of the issuer
owned by them. They also applied to disclosure included in proxy and information
statements for the election of directors by issuers subject to the federal
proxy rules. It is uncertain when final rules will be issued.
The SEC has still not issued final rules with respect to disclosure of the
median of the annual total compensation of all employees of each issuer and the
ratio of that median to the annual total compensation of the issuer’s chief
executive officer as required by Section 953(b) of Dodd-Frank. The SEC had
released its proposal on September 18, 2013, and comments were due December 2,
2013; however, the SEC staff released additional analysis regarding the
proposed rules on June 4, 2015, with comments due July 6, 2015.
For additional information on proposed rules and final rulemaking actions by
the SEC under Dodd-Frank, please contact Chase Cole, Brent Bowman, James
Bowden, or any member of Waller’s Capital Markets and Securities practice.
Footnotes:
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.