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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.

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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.

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Clawbacks, Compliance and Incentive Compensation: A Supplemental Approach

The following post comes to us from Michael W. Peregrine, Partner at McDermott Will & Emery, Andrew C. Liazos, head of McDermott’s executive compensation practice, and Timothy J. Cotter, Managing Director at Sullivan, Cotter, and Associates, Inc. 

Governing boards should consider compliance-based incentive compensation as a supplement to statutorily mandated “clawback” provisions, and as an alternative to more aggressive proposals to recoup past compensation from “culpable” executives.  The general counsel is well situated to support the board in any evaluation of compensation-based executive accountability policies.

There is much public discourse concerning the function of clawback clauses, their structure, and their limitations.  Much of this discourse is prompted by recent corporate scandals and associated calls for executive accountability.[1]  But there are other reasons.  There is extensive discussion in anticipation of rulemaking from the Securities and Exchange Commission that is required under Dodd Frank Section 954.[2]  Notable governance commentators and shareholder advocates are encouraging boards to adopt clawback policies that go beyond the statutory requirements.[3]  Major public companies are adopting their own versions of clawback policies,[4] including some who are doing so at the behest of investors.[5]  In addition, the boards of large, financially sophisticated nonprofit corporations are considering clawback policies as a demonstration of corporate responsibility.[6]  Indeed, how best to establish a “clawback” policy continues to be a hot topic!

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SEC Finalizes Dodd-Frank Independence Rules Under Section 952

by Andrew C. Liazos

On June 20, 2012, the Securities and Exchange Commission (SEC) adopted final rules to implement the compensation committee independence requirements under Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).  The final rules require the national securities exchanges (such as the New York Stock Exchange and NASDAQ) to establish certain minimum listing standards with respect to:

  • the independence of compensation committee members
  • the authority and responsibilities of the compensation committee
  • the process to be followed when selecting compensation consultants and other advisors

While the final rules allow the exchanges until June 27, 2013 to implement new listing standards after receiving approval from the SEC, new requirements could be very well be in place before the 2013 proxy season.  Overall, the SEC made relatively few changes to the proposed rules that were issued in March 2011.  A public company must meet an exchange’s listing standards in order to have its equity securities traded on that exchange.  In addition, the SEC also amended its proxy rules to require additional disclosure if the work of a compensation consultant has raised a conflict of interest.  This new requirement will be in effect for the 2013 proxy season—even if the exchanges have not finalized new listing standards—and complying with it will require action before next year’s election of directors.  Please click here for a discussion of the final rules.

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The Dodd-Frank Act’s Impact on Pension Plan Investment Options

by Maureen O’Brien, Karen A. Simonsen and Adrienne Walker Porter

Pension plans use swaps to manage interest rate risks and other risks and to reduce volatility with respect to funding obligations.  The Dodd-Frank Act established a comprehensive regulatory framework for swaps.  The legislation was enacted to reduce risk, increase transparency and promote market integrity within the financial system, including the comprehensive regulation and required registration of swap dealers and major swap participants.

The Dodd-Frank Act has introduced new challenges in managing risks and liabilities of pension plans by subjecting ERISA plans to new requirements under the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).  If pension plans are unable to use swaps, plan costs and funding volatility could rise sharply.  This would undermine participants’ retirement security and would force employers to reserve, in the aggregate, billions of additional dollars to address increased funding volatility.  In order to meet the rulemaking objectives specified under the Dodd-Frank Act, regulators and Congress have introduced significant changes that may impact how pension plans manage their funded status.

  • In December of 2010, the CFTC released proposed regulations outlining business conduct standards for swap dealers and major swap participants.  The regulations highlighted the issue that swap dealers engaging in typical business activities with respect to “special entities” could be treated as ERISA fiduciaries.  (The Dodd-Frank Act provides that a special entity includes an employee benefit plan.)  ERISA provides that, generally, any transaction between a fiduciary and the ERISA plan with respect to which it owes fiduciary duties is prohibited.  Therefore, in effect, the proposed regulations may preclude swap dealers from entering into swap transactions with employee benefit plans subject to ERISA. Additionally, the Department of Labor’s proposed rule relating to the definition of the term “fiduciary” under ERISA may include advisors that perform plan asset valuations, which is an activity conducted by swap dealers under the CFTC proposed regulations.
  • On April 12, 2011, the CFTC issued proposed regulations establishing minimum initial and variation margin requirements for non-cleared swaps entered into by CFTC-regulated swap dealers and major swap participants. Under the proposed rules, pension plans would be included in the category of high-risk financial entities, subject to the most stringent requirements.  Such high-risk financial entities are required to post collateral and are limited to the type of assets that may be used to post margin.  This change could significantly increase the cost of managing pension plans.
  • On May 4, 2011, the U.S. House of Representatives Agriculture Committee approved H.R. 1573, legislation providing the CFTC and SEC with 18 additional months to finalize many of the rules relating to swaps.  The rules defining swaps-related products and participants and the rules relating to reporting recordkeeping, however, are to be finalized by July 15, 2011.  The CFTC also recently released a notice reopening the comment period for many of the proposed regulations related to the Dodd-Frank Act. 

Plan sponsors should continue to monitor the regulatory and legislative activity surrounding pension plans’ ability to use [...]

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SEC Schedules Meeting to Adopt Final “Say on Pay” Rules

by Andrew C. Liazos, Joseph S. Adams and Crescent A. Moran

On January 18, 2011, the SEC announced that it will be holding an open meeting to consider adopting final rules under Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  It is expected that final rules will be issued at that time regarding the procedures to be followed when soliciting shareholder advisory votes to approve the compensation of executives and the frequency of shareholder say-on-pay votes.  For further details regarding the requirements under Section 951, click here.  The final rules will be important for public companies to evaluate prior to filing proxies on and after January 25, 2011.  We will post a copy of the final rules on this blog when they become available and thereafter will publish an On the Subject summarizing the key aspects of the final rules.

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SEC Proposes Rules on Executive Compensation Shareholder Votes Under Dodd-Frank

by Joseph S. Adams, Andrew C. Liazos, Thomas J. Murphy and Anne G. Plimpton

On October 18, 2010, the U.S. Securities and Exchange Commission (SEC) issued proposed rules regarding shareholder advisory votes on executive compensation and golden parachute arrangements under Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).  There are three separate shareholder advisory votes under Section 951 that are covered by the proposed rules:   

  • “Say-on-Pay Vote” – voting on whether to approve the compensation of named executive officers as disclosed under federal securities law.
  • “Say-on-Frequency Vote” – voting at least once every six years on whether the say-on-pay vote should occur every one, two or three years.
  • “Say-on-Parachutes Vote” – voting on whether to approve so-called golden parachute compensation in connection with a business combination.

For more information and analysis regarding how the rules could affect the 2011 proxy season, click here

The proposed rules are available at

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