Fiduciary and Investment Issues Archives | Page 3 of 24

New SEC Rules Heighten Scrutiny Over Executive Pay

by Andrew Liazos | Aug 29, 2022 | Executive Compensation, Fiduciary and Investment Issues

On August 25, 2022, the US Securities and Exchange Commission (SEC) adopted final rules imposing new mandatory “pay for performance” disclosures for most public companies (foreign private issuers, emerging growth companies and registered investment companies are excluded). These rules implement Section 953(a) of the Dodd-Frank Act, which provided for the SEC to adopt pay for performance rules requiring disclosure in a “clear manner” of the relationship between executive compensation “actually paid” and the company’s “financial performance” taking into account changes in stock value, dividends and distributions.

The final rules, which are primarily set forth in Item 402(v) of Regulation S-K, impose the following new tabular disclosure for any proxy statement or information statement for which executive compensation under Item 402 is required:

Important aspects of this table include the following:

Compensation “actually paid” to both the principal executive officer (PEO) (a/k/a CEO) and, as a group, the other named executive officers in the annual proxy statement, which is a measure that will require calculations different than amounts reported in the Summary Compensation Table, particularly for equity awards and pension benefits.
Financial performance is to be disclosed with respect to total stockholder return (TSR) for the company, its peer group and net income.
A public company covered by these rules can choose to use either the peer group used for its 10-K disclosures (under Item 201(d)) or the custom peer group in its CD&A for this table.
Issuers will be required to identify a “company selected measure” specific to their businesses (other than TSR and net income) that represents the “most important” financial performance measure used to link compensation actually paid to company financial performance.
The information required by the table is required to cover the five most recently completed fiscal years subject to a transition phase-in rule for 2023 and 2024.

Public companies will also need to provide a clear description of the relationship between each of the financial performance measures in the table and the executive compensation actually paid to its CEO and, on average, its other named executive officers during the lookback period, as well as the relationship between its TSR and the TSR of its peer group.

In addition, public companies will also need to identify the three to seven financial performance measures (or, in some cases, certain non-financial measures) that it determines are its most important measures.

Smaller reporting companies may avail themselves of scaled-back disclosure under Item 402(v), including a shorter lookback period (three years instead of five years) and no requirement to include a custom peer group, a tabular list or a company-selected measure.

Complying with these rules will require changes to existing forms of proxy disclosure. The extent to which these disclosures impact the amount or structure [...]

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ESOP Litigation: Latest Trends and Questions

by J. Christian Nemeth | Jul 6, 2022 | Employee Benefits, Employee Stock Ownership Plans (ESOPs), Fiduciary and Investment Issues, Retirement Plans

On May 6, 2022, McDermott Partner Chris Nemeth delivered a presentation during the 2022 TEA National Conference titled “ESOP Litigation: Latest Trends and Open Questions.” His presentation focused on recent significant employee stock ownership plan (ESOP) court decisions and emerging litigation trends in the ESOP industry. Chris and his co-presenter touched on the enforceability of arbitration clauses in the Employee Retirement Income Security Act of 1974 (ERISA) litigation, post-transaction debt forgiveness, and pleading and standing requirements.

For questions about employee benefits matters, please contact Chris or McDermott’s employee benefits practice team.

Mature ESOPs: Remodeling the House You Own

by Allison Wilkerson | Jun 23, 2022 | Employee Benefits, Employee Stock Ownership Plans (ESOPs), Fiduciary and Investment Issues, Retirement Plans

On May 5, 2022, McDermott Partner Allison Wilkerson delivered a presentation during the 2022 TEA National Conference titled “Mature ESOPs: Remodeling the House You Own.” Her presentation focused on the traits of a sustainable employee stock ownership plan (ESOP), common concerns of a mature ESOP and other ESOP-specific investment issues. Allison and her co-presenters also discussed redemption, re-leveraging and the hot acquisition market.

The presentation concluded with the following suggestions:

There are options available no matter where you are in the ESOP life cycle.
Gauge your employee-owners.
Respond with changes that make the ESOP more relevant.
Reach out for help—the ESOP community is vested in your company’s success.

For questions about employee benefits matters, please contact Allison or McDermott’s employee benefits practice team.

Proposed Minimum Distribution Regulations Prompt Concerns

by Todd Solomon | Jun 22, 2022 | Employee Benefits, Fiduciary and Investment Issues, Retirement Plans

Employee benefits professionals are inquiring about relief options for proposed regulations for required minimum distributions (RMDs). According to this Tax Notes article, the proposed regulations would make determining the RMDs during the plan participant’s lifetime and the designated beneficiary more challenging for plan sponsors, IRA trustees and custodians, and third-party administrators. One of the major concerns is the implementation of the 10-year distribution period for most beneficiaries of individuals who die in 2020 or later. McDermott Partner Todd Solomon said the 10-year distribution period is a “somewhat surprising development [that] is likely to leave some beneficiaries and their advisers confused and frustrated because of the added layer of complexity and the inability to stretch distributions as under prior law.”

Homework and Deadlines Matter: New IRS Pre-Audit Compliance Program for Retirement Plans

by Marchan Clark, Jeffrey Holdvogt and Diane Morgenthaler | Jun 16, 2022 | Employee Benefits, Fiduciary and Investment Issues, Retirement Plans

Retirement plan sponsors should be aware of a new Internal Revenue Service (IRS) pilot program, which permits plan sponsors to conduct a pre-examination “check-up” of retirement plan administration before the IRS begins a plan examination. As part of the program, the IRS will send a letter notifying a plan sponsor that its retirement plan has been selected for an upcoming examination and give the plan sponsor 90 days to identify and voluntarily correct any compliance issues that may be self-corrected. Failure to respond by the 90-day deadline will result in an examination. Retirement plan sponsors who receive a pre-examination notice should immediately begin working with their lawyers and other advisors to determine the best way to respond to the IRS notice.

PRE-EXAMINATION PILOT PROGRAM

The IRS pre-examination compliance pilot program gives plan sponsors a chance to correct certain errors before an examination begins. If a plan sponsor identifies errors, then the plan sponsor may be able to self-correct using the procedures set forth in the IRS Employee Plans Compliance Resolution System (EPCRS) program, and the plan sponsor may notify the IRS of its corrective actions. If mistakes are not eligible for self-correction, the plan sponsor may request a closing agreement. With a closing agreement under the pilot program, the IRS will apply the Voluntary Correction Program (VCP) fee structure to determine the sanctions amount rather than the Audit CAP Program fees, which are unpredictable and typically higher. The IRS will review the plan sponsor’s corrective actions and determine whether it agrees that the plan sponsor appropriately corrected the mistakes. The IRS will then determine whether to issue a closing letter or to conduct a limited or full scope audit. The pilot program begins in June 2022.

It’s not clear what factors the IRS will consider when determining whether to conduct a limited or full scope audit following a plan sponsor’s response. However, it stands to reason that a plan sponsor’s efforts at good faith compliance with the correction requirements may serve to limit the scope because typically the IRS wishes to promote self-correction efforts. It’s also not clear whether the 90-day pre-examination period will apply to all retirement plan audits or only to those randomly selected to be part of the pilot program.

NEXT STEPS FOR PLAN SPONSORS

Plan sponsors who receive a pre-examination notice should immediately begin working with their lawyers and other advisors to determine the best ways to respond to the IRS notice. If you receive an initial letter or have questions about the IRS compliance and correction programs, please contact your McDermott lawyer or the authors listed below.

Understanding a Trustee’s Role in Management Incentive Plans

by McDermott Will & Schulte | Jun 9, 2022 | Benefit Controversies, Employee Benefits, Employee Stock Ownership Plans (ESOPs), Executive Compensation, Fiduciary and Investment Issues, Retirement Plans

On May 5, 2022, McDermott Partner Erin Turley delivered a presentation during the 2022 TEA National Conference titled “Understanding a Trustee’s Role in Management Incentive Plans.” Her presentation focused on the trustee’s role in Management Incentive Plans (MIPs), how retention and performance stock appreciation rights (SARs) impact an employee stock ownership plan (ESOP) and ways to avoid trustee pitfalls with a MIP. Erin also discussed types of synthetic equity design decisions, incentive stock options, non-statutory stock options and phantom stock/SARs.

The presentation concluded with the following fiduciary considerations:

Since the issuance of any equity or synthetic equity can have a potentially dilutive impact on the ESOP, it is important for any plan to be in the best interest of the ESOP plan participants.
As a result, one of the primary objectives of the plan should be to identify and select a group of people to be incentivized and rewarded to drive value for everybody.
For example, in the case of a SAR, you are rewarding a group of individuals based only on appreciation in the value of the company stock. If the value goes up, that’s good for everybody.
The overall compensation program should be in line with compensation practices for comparable-type positions in the industry, perhaps taking geography into account.

For questions about employee benefits matters, please contact Erin or McDermott’s employee benefits practice team.

When Are Cryptocurrencies Appropriate Investments for Retirement Plans and IRAs?

by Brian Tiemann and McDermott Will & Schulte | Jun 7, 2022 | Employee Benefits, Fiduciary and Investment Issues, Privacy and Data Security, Retirement Plans

The US Department of Labor (DOL) recently issued guidance for the first time on the investment of retirement plan assets in cryptocurrencies. Compliance Assistance Release No. 2022-01 cautions 401(k) plan fiduciaries to “exercise extreme care” before allowing participants to invest plan assets in cryptocurrencies because cryptocurrencies “present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss.” In this Intellectual Property & Technology Law Journal article, McDermott Partners Andrea S. Kramer and Brian J. Tiemann outline what retirement plan fiduciaries need to know about cryptocurrency investments in the current market.

Access the article.

ERISA Litigation: What Have We Learned?

by McDermott Will & Schulte | May 24, 2022 | Employee Benefits, Employee Stock Ownership Plans (ESOPs), Executive Compensation, Fiduciary and Investment Issues, Retirement Plans

Earlier this spring, McDermott Partner Erin Turley delivered a presentation about the impacts of recent Employee Retirement Income Security Act of 1974 (ERISA) litigation. Lawsuits now target both large and small employee benefit plans; plan sponsors are being sued and dragged into complex and lengthy litigation, thus changing the basic economics of the provision of fiduciary liability insurance. In response to these lawsuits, plan sponsors are looking to outsource as much of this fiduciary responsibility and potential liability and exposure as possible.

Access the presentation slides.

The Fiduciary Duties of 457(b) Plans and How to Mitigate Potential Risks

by Todd Solomon | May 19, 2022 | Employee Benefits, Executive Compensation, Fiduciary and Investment Issues, Retirement Plans

Fiduciaries of 403(b), 401(a) and 457(b) retirement plans have come under increased scrutiny in recent years, in part due to participant lawsuits filed against plan sponsors and the resulting media attention. In this presentation with the 457 Consulting Group, McDermott Partner Todd Solomon discusses the fiduciary duties of plan sponsors and how to mitigate potential risks. The content in these slides applies to governmental 457(b) plans.

Access the slides.

Cryptocurrency for Employee Benefits Lawyers: What You Need to Know

by Andrew Liazos and Brian Tiemann | Apr 14, 2022 | Employee Benefits, Fiduciary and Investment Issues, Retirement Plans

As the popularity of cryptocurrency continues to grow, what do employee benefits lawyers need to know about this emerging investment option? McDermott Partners Andrew Liazos, Andrea Kramer and Brian Tiemann recently offered their perspectives about cryptocurrencies and how they relate to Employee Retirement Income Security Act of 1974 (ERISA) plans, individual retirement accounts (IRAs) and incentive awards in an American Bar Association virtual event.

Access the slides.

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