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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.

Read the full article.




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.

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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.




SEC No-Action Letter Permits Non-ERISA Retirement Plans to Issue Participant Fee Disclosures Without Violating Securities Laws

The U.S. Securities and Exchange Commission (SEC) issued a no-action letter on February 18, 2015, that extends relief from SEC Rule 482 to sponsors of certain retirement plans exempt from ERISA. The relief permits sponsors of non-ERISA plans to follow final U.S. Department of Labor regulations for participant-level fee disclosures, provided the sponsor complies with several conditions set forth by the SEC.

Read the full article.




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.

Read the full article.




New Money Market Fund Rules Require Review by Retirement Plan Sponsors

The U.S. Securities and Exchange Commission recently amended the rules governing money market funds in an effort to increase the stability and liquidity of these funds in times of economic stress. Sponsors of retirement plans should consider how their use of money market funds should be changed in light of these revised rules.

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Recent Corporate Aircraft Litigation Raises SEC Perquisite Disclosure Issues

by Andrew C. Liazos, Ira B. Mirsky, Anne G. Plimpton and Ruth Wimer

A recent shareholder derivative action alleges that the directors of Chesapeake Energy breached their fiduciary duties to shareholders by, among other things, misleading shareholders about the true extent and true cost of personal use of the company’s aircraft.  The complaint raises questions about disclosure practices that could affect how public companies determine the aggregate cost of perquisites on proxy statements.  It appears that the plaintiffs’ bar is already targeting potential plaintiffs for similar cases using the lure of whistleblower recoveries.

To read the full article, click here.




Executive Travel on Corporate Aircraft–Strategies for Regulatory Compliance and Tax Efficiency

by Ruth Wimer

Recent press coverage of Internal Revenue Service and U.S. Securities and Exchange Commission problems with executive travel on company aircraft makes continued use challenging.  The known benefits of business-owned aircraft include security, privacy and efficiency, particularly in light of delays inherent in commercial travel.  This newsletter describes in plain English the basic requirements and strategies for dealing with the myriad rules presented with respect to executive and guest travel on company aircraft, and recommends as a solution the adoption of a carefully drafted executive aircraft use policy.

To read the full article, please click here.




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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