The SEC’s newly adopted “pay vs. performance” disclosure rules are one of the most significant changes to executive compensation disclosure in the past decade. The new disclosures will require multiple years of information and new calculations for equity awards – and they’re required in 2023 proxy statements!
On Thursday, November 10th from 1-4pm ET, join us for a special session on “Tackling Your Pay Vs. Performance Disclosures” – featuring Compensia’s Mark Borges, Morrison Foerster’s Dave Lynn, WilmerHale’s Meredith Cross, Sidley’s Sonia Barros, SGP’s Rob Main, Fenwick’s Liz Gartland, Gibson Dunn’s Ron Mueller, and more.
This is a 3-part, 3-hour special session that will cover:
1. Navigating Interpretive Issues – we are already getting lots of questions in our Q&A forum about how to apply the new rules, and we know that new issues are arising daily. We’ll be sharing practical guidance and any SEC updates that you need to know – including what you’ll need to tell your board and executives.
2. Big Picture Impact – how will the disclosure mandate affect say-on-pay models and shareholder engagements? This session will provide context and pointers for bolstering executive compensation & compensation committee support during proxy season.
3. Key Learnings From Our Sample – attendees of this event will get first access to our sample disclosures, prepared by Mark Borges and Dave Lynn. Hear “lessons learned” from their drafting effort that will guide you through your own process and jumpstart your disclosures.
This event is available at a reduced rate of only $295 for anyone who is already a CompensationStandards.com member or who is signed up to attend our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” on October 12th – 14th – where we’ll be setting the stage with key takeaways from the pay vs. performance rule and the steps that you need to take now to be ready to comply. Register for the “special session” here for the CompensationStandards.com member rate (or, if you are not a CompensationStandards.com member but you are signed up for our “Proxy Disclosure & 19th Annual Executive Compensation Conferences,” contact sales@ccrcorp.com for the special rate).
For non-members, the cost to attend is $595. If you’re not yet a member of CompensationStandards.com, try a no-risk trial now. We’ll be continuing to add practical guidance on this topic to CompensationStandards.com as disclosure hurdles & consequences come to light – such as this great podcast that Dave already taped with Gibson Dunn’s Ron Mueller about “first impressions” of the rule, emerging interpretive issues, possible pitfalls, and more.
All that to say, a CompensationStandards.com membership be an essential ongoing resource if you are involved with pay vs. performance. Plus, our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. Register for the “special session” here if you are a non-member and are not attending our Conference.
The SEC announced on Friday that the EDGAR system is now ready to accept electronic Form 144 filings. Under rules that were adopted this past June, most Form 144 filings will be required to be made electronically beginning as early as March 2023 (the SEC will announce the exact compliance date when the final rule is published in the Federal Register, which is expected to happen within the next few weeks and will begin the 6-month countdown).
The SEC has launched a page with resources for filing Form 144 electronically. Here’s what you need to do now:
1. Make sure all of your company’s insiders have an EDGAR account and that their codes are up & running. The page explains how to search for lost codes.
2. If any reporting person doesn’t already have an EDGAR account, apply for one now. Applications require individual review by the Staff, and they expect a rush of submissions as the compliance date nears, so don’t be caught at the back of the line. The page explains the steps to apply.
3. Brush up on Form 144 CDIs for questions about when you need to file an amended Form, etc. Remember that we also have a “Rule 144 Q&A Forum” for questions about the Rule itself.
4. Check out the SEC’s page for step-by-step guidance for using the online fillable Form 144 and Frequently Asked Questions.
We’ll be discussing the implications of electronic Form 144 filings – along with many other practical topics – at our virtual “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – coming up in only two weeks, October 12th – 14th. There is still time to register! Here’s the agenda – 18 essential sessions over the course of three days. Sign up online (with the “Conference” drop-down, and the “PDEC” options), email sales@ccrcorp.com, or call 1-800-737-1271. Bundle your registration with our “1st Annual Practical ESG Conference” and get a discounted rate!
As John blogged in June, one of the questions surrounding the move to paperless Form 144 filings is whether brokers will continue to handle this step in the trading process – or if, because EDGAR codes are now involved and it can be a real mess if those get bungled, the Form 144 filings will now fall to company counsel.
In addition to discussing this with plan sponsors and other brokers, it’s helpful to get a sense of what other companies are planning to do. Please participate in this anonymous poll to share your thoughts:
Yesterday, the SEC announced settled enforcement proceedings against Boeing & former CEO Dennis Muilenburg arising out of alleged misstatements surrounding the catastrophic crashes of two of its 737 MAX aircraft. This excerpt from the SEC’s press release summarizes the alleged misstatements:
According to the SEC’s order, one month after Lion Air Flight 610, a 737 MAX airplane, crashed in Indonesia in October 2018, Boeing issued a press release, edited and approved by Muilenburg, that selectively highlighted certain facts from an official report of the Indonesian government suggesting that pilot error and poor aircraft maintenance contributed to the crash. The press release also gave assurances of the airplane’s safety, failing to disclose that an internal safety review had determined that MCAS posed an ongoing “airplane safety issue” and that Boeing had already begun redesigning MCAS to address that issue, according to the SEC’s orders.
Approximately six weeks after the March 2019 crash of Ethiopian Airlines Flight 302, another 737 MAX, and the grounding by international regulators of the entire 737 MAX fleet, Muilenburg, though aware of information calling into question certain aspects of the certification process relating to MCAS, told analysts and reporters that “there was no surprise or gap . . . that somehow slipped through [the] certification process” for the 737 MAX and that Boeing had “gone back and confirmed again . . . that we followed exactly the steps in our design and certification processes that consistently produce safe airplanes.”
Without admitting or denying the SEC’s allegations, Boeing & its former CEO consented to separate orders (here’s Boeing’s order and here’s the CEO’s order) to cease and desist from future violations of Section 17(a)(2) and 17(a)(3) of the Securities Act. Boeing agreed to pay a $200 million civil penalty and its CEO agreed to a $1 million penalty.
I told everyone to prepare for a torrent of high-profile enforcement proceedings as the SEC’s fiscal year winds down. It will be interesting to see what next week brings. Stay tuned.
Following my recent blog on Jim McRitchie’s commentary about how little time many companies were giving shareholders to vote, Carl Hagberg reached out and pointed me toward his Shareholder Service Optimizer article on “How and When to Properly Open and Close the Polls. This kind of topic is right in Carl’s wheelhouse & he’s got some suggestions on best practices for voting procedures. Here’s an excerpt with some of his thoughts:
– Declare that “the polls are now open for voting” when the Meeting is called to order – or, at the very latest, when it is time to begin the introduction of all proposals on the ballot, i.e., “the official business of the meeting.”
– Our own view is that the “best practice” is to introduce proposals one-by-one – and to ask if there is any discussion, which most of the time these days is no – but if so, to hear it then and there. If there is any discussion, allow a brief pause (a few seconds should be fine here) for voters to amend their votes if they wish to, before moving to the next item.
– When all the proposals have been introduced, move to the General Discussion Period – and announce that the polls will be open for 10 more minutes “to allow voters who have not yet voted or who wish to change their votes online to do so.” Yes, a few holders may have to ‘multi-task’ but so be it, we say.
Carl also recommends providing a “fair warning” & another “last and final warning” during the few minutes prior to the time that the polls will close.
As a parent of three kids who straddle the Millennial – Gen Z divide, I know that one of the (many) ways that Boomers like me really make members of younger generations roll their eyes is by being clueless about the latest pop culture jargon. I admit that I’m not real up to speed on that stuff. I mean, I know a little about hip-hop and have picked up some of the jargon over the years, but as I’ve said before, my kids think I’m dorkier than Ari Melber when I attempt to use it.
I’m not much of a crypto or Web 3.0 guy either, and I bet the same is true for many of you as well. But maybe Latham & Watkins’ latest “Book of Jargon” can help us out. It’s a glossary of jargon relating to blockchain technology, cryptocurrency, Web3, NFTs, and the metaverse & is likely indispensable if you find yourself having to fake your way through a meeting with folks in this, uh, “space.”
On the other hand, your facility with this jargon probably won’t impress your kids, unless of course they work in crypto – in which case why should you care if they’re impressed, since they’ve probably moved back into your house by now?
Yesterday, the SEC announced settled enforcement proceedings involving alleged insider trading by Cheetah Mobile’s CEO and its former president. Insider trading cases are a dime a dozen, but this one has given the Division of Enforcement something it has coveted for quite some time – an insider trading case involving senior executives allegedly misusing a Rule 10b5-1 plan. Here’s an excerpt from the SEC’s press release:
The Securities and Exchange Commission today charged the CEO of Cheetah Mobile Inc. and the company’s former President with insider trading for selling Cheetah Mobile’s securities, pursuant to a purported 10b5-1 trading plan, while in possession of material nonpublic information. The SEC’s order finds that Sheng Fu, the company’s CEO, and Ming Xu, its then-President and Chief Technology Officer, jointly established a purported 10b5-1 trading plan after becoming aware of a significant drop-off in advertising revenues from the company’s largest advertising partner.
According to the SEC’s order, in 2016, Sheng Fu and Ming Xu sold 96,000 Cheetah Mobile American Depository Shares under the trading plan and avoided losses of approximately $203,290 and $100,127, respectively. Cheetah Mobile is based in China and offers various technology products, including mobile games and other applications.
“This case serves as yet another example of the SEC’s resolve to hold executives accountable when they try to skirt federal securities laws to illegally trade on nonpublic information,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. “While trading pursuant to 10b5-1 plans can shield employees from insider trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it.”
Under the terms of the SEC’s order, the defendants, without admitting or denying the agency’s allegations, agreed to cease and desist from future violations of the antifraud provisions of the federal securities laws & to provide advance notice of any transactions in Cheetah Mobile securities to the Director of the Market Abuse Unit in the Division of Enforcement. They also agreed to pay civil penalties.
As everyone reading this knows, the SEC has proposed changes to Rule 10b5-1 that will impose significant additional conditions and limitations on its use. One of the criticisms of that proposal has been the absence of any enforcement proceedings directed at 10b5-1 plans. Now the SEC has one.
Equilar & BarkerGilmore recently published their annual report on GC pay trends. As always, the report has a lot of detail on compensation components, demographic information and commentary on the state of the market for GC positions. But to me, the most interesting aspect of the report is its acknowledgement of the increasing number of GCs who are appearing as NEOs in public company comp tables:
One measure of the ascension of the role over the past half-decade is an increase in GC reported among the named executive officer (NEO) population. In 2021, 175 Equilar 500 companies included a General Counsel among their NEOs. This is up from a five-year low of 167 in 2018. The total of 175 is the same number as reported by the group in 2020, and at 4.8% growth in the last four years, the rate of increase is more modest than the 8.2% rise reported between 2016 and 2020 seen in the 2021 edition of General Counsel Pay Trends. Ongoing growth nevertheless serves to underline the continued evolution of the role.
The report says that GCs aren’t ascendant across all industries. The number of GCs identified as NEOs fell in prevalence among companies in both the consumer cyclical and consumer defensive sectors, and rose more modestly in some others, including healthcare and basic materials.
Woodruff Sawyer recently published their D&O Market Update, and like other commentators, Woodruff Sawyer expresses a pretty optimistic view on D&O insurance premium trends. This excerpt discusses the changes in the market that occurred during the first half of this year:
During 1H 2022, pricing trends flipped from where they were in 2H 2021. This shift is most dramatic for those business sectors where Woodruff Sawyer’s clients happen to be most heavily weighted: life science, technology, and IPOs. These industry segments were hit hardest by the hard market and consequently are gaining the most benefit from the current, more competitive market. More mature companies or those in less risky industries are also benefiting from the improving market, but the scale of the percentage decreases through the rest of this year and into 2023 will be somewhat more muted.
As always, clients beset by tricky litigation, or litigation precursors such as large stock drops after releasing bad news, may still see increases. Comparing data from 2H 2021 with 1H 2022 is telling. According to Woodruff Sawyer’s data, 70% of clients renewing between July and December of 2021 received an increase. Starting in January of 2022, the trend flipped: 16% of clients experienced an increase, 15% obtained a flat renewal, and 69% obtained a decrease.
The report says that another contributing factor to the improved premium environment is competition provided by new entrants to the public company D&O insurance market. These folks were enticed to jump into the market by the rising premium environment of 2020 & 2021. Now, they’re helping to hold the line on premium increases.
Last week, the SEC announced the settlement of an enforcement proceeding against VMWare in which it alleged that the company misled investors about its order backlog management practices, which allowed it to push revenue into future quarters by delaying customer deliveries to customers. Here’s an excerpt from the SEC’s press release announcing the settlement:
The SEC’s order finds that, beginning in fiscal year 2019, VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so that it could recognize revenue from the corresponding license sales in the following quarter. According to the SEC’s order, VMware shifted tens of millions of dollars in revenue into future quarters, building a buffer in those periods and obscuring the company’s financial performance as its business slowed relative to projections in fiscal year 2020. Although VMware publicly disclosed that its backlog was “managed based upon multiple considerations,” it did not reveal to investors that it used the backlog to manage the timing of the company’s revenue recognition.
Under the terms of the SEC’s order, the company agreed, without admitting or denying the agency’s allegations, to refrain from future violations of Section 17(a)(2) and 17(a)(3) of the Securities Act & the books and records provisions of the Exchange Act. Over on Radical Compliance, Matt Kelly blogged some thoughts on some of the proceeding’s implications for internal controls:
The company did have a written policy about how to use discretionary holds; but that policy was so broadly worded — “backlog is managed based upon multiple considerations, including product and geography” — that executives could twist the policy to fit whatever aims they wanted. Like, say, manipulating the sales backlog to meet earnings expectations and hide weakness in revenue growth.
In theory, one could say that management should have had more disciplined documentation requirements, forcing executives to justify their discretionary holds according to more objective criteria. I’ve mentioned that concept before, in other posts about poor management judgment that gets the company into trouble. Your internal controls should require enough documentation that poor decisions stick out like a sore thumb, so that auditors or the board’s audit committee can see those bad choices from a mile away.
Then again, there’s a broader lapse in management judgment here, too. The SEC rapped VMWare on the knuckles for failing to disclose that it used discretionary holds to manage earnings; but even if the company had disclosed that, does anyone believe that would be a good idea?
By the way, the SEC’s fiscal year ends next Friday, so brace yourself for the customary torrent of year-end announcements relating to settled enforcement actions.
