On August 25, 2022, the US Securities and Exchange Commission (SEC) adopted final rules to implement the pay versus performance disclosure requirement mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Dodd-Frank Act added Section 14(i) to the Securities Exchange Act of 1934, which directs the SEC to adopt rules that require registrants to clearly disclose the relationship between executive compensation actually paid and the registrant’s financial performance. More than 12 years after US Congress passed the Dodd-Frank Act, the SEC has adopted Item 402(v) of Regulation S-K to put these disclosure requirements into effect in time for the 2023 proxy season.
SEC Finalizes Rules Regarding Disclosure of CEO Pay Ratio—What They Require, What to Do and What’s Next
In yet another divisive 3-2 vote along party lines, on August 6, 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules requiring public companies (other than emerging-growth companies, smaller reporting companies and foreign private issuers) to disclose the ratio of the compensation of its chief executive officer to the median compensation of its employees (CEO Pay Ratio). The new rules were mandated under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
View From McDermott: SEC Proposes New Pay Versus Performance Disclosure Rules
On April 29, 2015, the Securities and Exchange Commission (SEC), by a three-to-two vote, proposed new rules that would prescribe new mandatory pay-versus-performance disclosure. The proposed rule would include specific information showing the relationship between executive compensation “actually paid” and financial performance of the registrant. The proposed rule, issue under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), would add a new Item 402(v) to Regulation S-K.
The key take-away is that covered insurers would not be allowed to use their existing pay for performance disclosure approaches to meet the requirements under the proposed rule. Instead, if the proposed rule is finalized in its current form, covered insurers would be required to include a new “Pay Versus Performance” table. Covered insurers would also be required to provide a “clear description” of the relationship between certain data elements included in the new table.
The proposed rule is “designed, in part, to enhance comparability across registrants. . .” perhaps in connection with shareholders’ “Say on Pay” votes. However, commissioners differed on the usefulness of the information that would be provided by the proposed rule, and the final vote was divided along political lines–similar to how the commissioners voted on the CEO Pay Ratio proposal.
SEC’s Large Payouts to Compliance-Officer Whistleblowers Highlight Need for Companies to Pay Prompt Attention
On April 22, 2015, the U.S. Securities and Exchange Commission (SEC) announced that it had awarded $1.4 million–$1.6 million to a compliance officer-turned-whistleblower who aided the SEC in an enforcement action against the officer’s employer. This marks the second time an employee with an internal audit or compliance function—who does not typically qualify under whistleblower rules—received an award under the SEC’s whistleblower program dictated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
SEC Proposed Hedging Transaction Disclosure Rules
Much attention has been given to recent U.S. Securities and Exchange Commission (SEC) proposed rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) that would require disclosure of chief executive officer pay ratios and a new pay-for-performance table. But there’s another proposed rule that could cause significant headaches for public companies during the 2016 proxy season. As we previously reported, the SEC has proposed rules that would require disclosure of what categories of transactions are – and are not – allowed under issuer hedging policies. These rules would implement Section 955 of the Dodd-Frank Act. We believe that this issue has not received significant attention because most public companies already have hedging policies. What’s not appreciated is that the scope of the proposed rules is quite broad and could cover many common investment transactions that would not be a hedge under many public company hedging policies. For example, purchasing the stock of other issuers could be a hedge under the proposed rules. If the proposed rules are implemented in their current form, public companies could be forced to choose between (i) disclosing that some forms of hedging are allowed under their hedging policies, thereby risking adverse voting recommendations from proxy advisory services (such as ISS and Glass-Lewis, at least under current voting guidelines) or (ii) modifying existing hedging polices to limit investment approaches used to diversify concentrated stock positions, which would complicate compliance oversight of hedging policies and lead to changes by executives in their investment strategies, including potentially more sales of issuer stock under 10b5-1 programs. McDermott Will & Emery has submitted comments urging the SEC to clarify and narrow the scope of hedging transactions that would be covered as part of the final rules – click here for a copy of the comment letter. We recommend that public companies keep in mind the need to review existing hedging polices in light of what the SEC adopts as final rules on hedging policy disclosures, which could be finalized by early this fall.
SEC Proposes Disclosure Rule for Hedging Transactions by Directors, Officers and Employees
The U.S. Securities and Exchange Commission recently issued a proposed rule that would require public companies to disclose in annual proxy statements whether their employees and board members may hedge or otherwise offset any decrease in the market value of such companies’ equity securities. The proposed rule implements Section 955 of the Dodd-Frank Act and covers a broader range of transactions than typical hedging policies.