Yesterday evening, Senate Finance Committee Chairman Hatch released details of the Senate’s version of the Tax Cuts and Jobs Act. The most notable development for executive compensation is that the Senate bill generally contains the same executive compensation related provisions that were included in the first, and now outdated, release of the House bill (H.R. 1).
As previously reported, H.R. 1 was amended yesterday to remove Section 3801 of the bill, which provided for sweeping changes to the tax treatment of non-qualified deferred compensation, including stock options, under a new “Section 409B.”
For the moment, the new deferred compensation rules may be back on the table. The Senate Finance Committee meets for the first time on Monday, November 13 to begin consideration of the bill. Both the House and Senate versions are subject to further change, votes, and eventually reconciliation before final passage.
One of the giants from Corp Fin passed away earlier this week – Bill Morley. One of those rare gems that spent their entire career in the government, Bill served in various roles in Corp Fin over his 30 years – but he’s mostly remembered for being the Chief Counsel. One of his many roles was serving as the final arbiter of the shareholder proposal no-action letter process. Bill was considered “fair” by both sides. Not an easy feat to accomplish.
Here’s a remembrance from John Huber, who was Corp Fin Director in the ’80s: “He was my Chief Counsel after Peter Romeo went into private practice. As Chief Counsel, he was on top of no-action letters (reviewing each one before it went out), monitoring telephone calls/interps and keeping up-to-date with operations & rulemaking. At meetings when I asked what he thought, he would sometimes tell the group what the “least worst alternative” was. All that with the kindness & friendliness of a person who was indefatigable, never lost his temper and always cared about protecting investors. One of the best examples of the Corp Fin family.”
Bill retired in 1999. One of those guys that got pushed out by the Internet. Bill never wrote a single email – he didn’t want to learn new technologies. And when he was cleaning out his office, I walked by and realized there were boxes & boxes of historical documents sitting in his trash (we saved that stuff). Bill wasn’t sentimental about leaving at all. He was truly ready to enjoy life. To attend as many U. of Maryland lacrosse games as he could.
A year after retirement, Bill agreed to edit my new shareholder proposal treatise. Fifteen years of informal positions taken by Corp Fin where all up there, in his head. We met once a week for six months – I simply downloaded knowledge that no one else could match. The man sure knew his stuff. I’ve always treasured that time we spent together – such wonderful stories. There are no memorial plans yet – I will blog when we know more about that.
Here’s a 16-minute podcast that I taped with Bill in 2011, as he discussed his life in retirement – including:
– How did you wind up at the SEC?
– How do you recall the shareholder proposal process?
– Did you enjoy recruiting & hiring?
– What are among your fondest memories?
– What are you doing now?
It’s quite rare that I blog other than early in the morning. It’s too tempting to chase news across the day. But I thought I would throw up some big news regarding the earth-shattering House tax bill – even though it could be more complete if I waited til morning (including where we stand with the Senate version). Here’s the skinny about how the House made changes to its tax bill today (see this official summary):
1. The House has deleted the offending provisions about equity compensation from the bill (Section 3801 of the bill) – but it left in the provision allowing deferral of tax of stock options for private companies. And it sounds like the provision is modified that so it no longer applies to RSUs (it originally applied to both RSUs & options).
2. The changes to Section 162(m) still stand (Section 3802 of the bill). I think that’s a done deal, assuming they can get the rest of the bill passed. It’s clearly a revenue raiser and if the corporate tax rate is only 20%, companies probably don’t care about the deduction as much anyway. I’m sure it’s a trade-off many companies are willing to make.
So the upshot is that all of Section 3801 is struck – so no changes to the taxation of NQDC – and 409A still stands, so no big changes to the taxation of options & RSUs. And this is a week of my life I can never get back. We’ll be posting the new horde of memos that are sure to come in our “Regulatory Reform” Practice Area on CompensationStandards.com…
Yesterday, SEC Chair Clayton gave a speech about transparency – here’s an excerpt about the lack of retail voters:
I have become increasingly concerned that the voices of long-term retail investors may be underrepresented or selectively represented in corporate governance. For instance, the SEC staff estimates that over 66% of the Russell 1000 companies are owned by Main Street investors, either directly or indirectly through mutual funds, pension or other employer-sponsored funds, or accounts with investment advisers. And, if foreign ownership is excluded, that percentage approaches approximately 79%. Yet it is not clear whether in our rulemaking processes the views and fundamental interests of long-term retail investors are being advocated fully and clearly, either by individual investors or groups that represent them.
Since I arrived at the agency, I have made concerted efforts to reach Main Street investors across the country, and this has resulted in productive conversations with individuals, as well as those who advocate for them. Many others at the SEC, including Rick Fleming, our Investor Advocate, and the Office of Investor Education and Advocacy, concentrate on retail investors generally and have outreach efforts focused on investors who are teachers, students, serve in the military, or live in retirement communities.
A majority of Main Street America’s dollars are invested in vehicles where the investor – the person with their money at risk – is not the voting shareholder. Often voting power rests in the hands of investment advisers who owe a duty to vote proxies in a manner consistent with the best interests of the fund and its shareholders. A question I have is: are voting decisions maximizing the funds’ value for those shareholders?
In situations where the voting power is held by or passed through to Main Street investors, it is noteworthy that non-participation rates in the proxy process are high. In the 2017 proxy season, retail shareholders beneficially-owned 30% of the shares in U.S. public companies; however, only 29% of those shares voted. This may be a signal that our proxy process is too cumbersome and needs updating.
Meanwhile, NY Times’ Gretchen Morgenson wrote this column recently entitled “Small Investors Support the Boards. But Few of Them Vote”…
Has “Notice & Access” Caused Retail Holders to Stop Voting?
Here’s a note from Lynn Turner: “The proxy retail investor participation rate use to be much higher but dropped dramatically when the SEC took action to eliminate distribution to investors of paper proxies and ballots a decade ago with ‘e-proxy.’ If the SEC wants to increase retail investor interest and voting, the could likely get a good start by undoing their previous mistake! Many people told the SEC at the time that they were making a mistake. History has now proven those people right.
Interesting that the retail investors in this country holding equities are typically older people who have lived long enough to build up larger investment balances. Those are the people who you have to reach to get to vote. In our general elections, many of those use paper mail in ballots which has increased participation in voting. Unfortunately, the SEC took an opposite tack several years ago and chose to reduce participation by retail investors. Their objective was achieved as Chair Clayton notes his speech.”
Novel Ways to Boost Retail Voting: The BofA Story
Some companies with sizable retail bases have found novel ways to boost retail voting. Remember this podcast with Peggy Foran & Ed Ballo about Pru’s “Trees (& Totes) for Votes” program.
More recently, Bank of America’s Ross Jeffries & Gale Chang talked to Carl Hagberg – as reflected in this article in Carl’s “Shareholder Service Optimizer” – about how BofA’s campaign to donate $1 if a shareholder voted produced real results. The number of BofA accounts voting went up 8% with this unique campaign (nearly 50k more voters). Nice!
Here’s the results from our recent survey on Regulation FD policies & practices (here’s other Reg FD surveys conducted over the years):
1. Our company has a written policy addressing Regulation FD practices:
– Yes, and it is publicly available on our website – 5%
– Yes, but it is not publicly available on our website – 64%
– No, but we are in the process of drafting such a policy – 7%
– No, and we do not intend to adopt such a policy in the near future – 24%
2. For Regulation FD purposes, our company believes:
– Our website is a “recognized channel of distribution” – 29%
– We are still studying whether our website is a “recognized channel of distribution” – 17%
– Our website is not a “recognized channel of distribution” – 52%
– I don’t even know what this question means – 2%
3. Compared to our insider trading policy, our Regulation FD policy:
– Has the exact same parameters – 34%
– Our Regulation FD policy imposes a quiet period that starts earlier than our insider trading policy – 6%
– Our Regulation FD policy imposes a quiet period that starts later than our insider trading policy – 25%
– Our Regulation FD policy imposes a quiet period that lasts longer than our insider trading policy – 6%
– Our Regulation FD policy imposes a quiet period that lasts shorter than our insider trading policy – 28%
– We don’t have a Regulation FD policy – 26%
I found it interesting that Japan just introduced its own version of Reg FD. Better late than never…
Equifax: Special Committee Finds Insiders Properly Pre-Cleared Trades
Back when I blogged about the Equifax cybersecurity breach – and the question arose whether senior executives had pre-cleared trades in the company’s stock – I wrote: “At this point – as the LA Times article notes – we don’t know if these officers were aware of the breach before they made the sales and/or whether the company’s pre-clearance procedures were adequately followed.”
Equifax now has released this special committee report dealing specifically with this pre-clearance of insider trades. And after reviewing 55,000 documents & 62 interviews with the parties involved, it found that the insiders involved did indeed properly pre-clear the trades according to the company’s policy. That certainly is good news.
In the wake of Corp Fin’s new Staff Legal Bulletin No. 14I, we have scheduled a webcast for next Tuesday, November 14th – “Shareholder Proposals: Corp Fin Speaks” – during which Davis Polk’s Ning Chiu will ask Corp Fin’s Matt McNair about how the new SLB should be applied in practice.
As reflected in the memos posted in our “Shareholder Proposals” Practice Area, there are a number of open issues to consider after the SLB – particularly logistical issues about how boards can timely act to qualify for the Staff’s new “ordinary business” position…
Rule 701 & E-Delivery: Corp Fin’s New CDI
Yesterday, Corp Fin issued this new CDI 271.25 under the ’33 Act rules:
Question: To protect against the unauthorized disclosure of Rule 701(e) information, may companies that are using electronic delivery to satisfy Rule 701(e) disclosure requirements implement safeguards with respect to electronic access to Rule 701(e) information?
Answer: We understand that some companies satisfying their Rule 701(e) delivery obligations electronically have concerns about the potential disclosure of sensitive company information. Standard electronic safeguards, such as user-specific login requirements and related measures, are permissible. The use of a particular electronic disclosure medium either alone or in combination with other safeguards, such as the use of dedicated physical disclosure rooms that house the medium used to convey the information required to be disclosed, should not be so burdensome that intended recipients cannot effectively access the required disclosures.
For example, we would expect that physical disclosure rooms would be accessible during ordinary business hours upon reasonable notice. Once access to the required information has been granted, however, the medium used to communicate the required disclosure should provide the opportunity to retain the information or have ongoing access substantially equivalent to personal retention. [November 6, 2017]
We just wrapped up Lynn, Borges & Romanek’s “2018 Executive Compensation Disclosure Treatise” — and it’s been printed. This edition has a major update to the key chapter on the new SEC’s pay ratio rules (now 120 pages long!) & more – this includes the latest pay ratio guidance from the SEC in September. All of the chapters have been posted in our “Treatise Portal” on CompensationStandards.com.
How to Order a Hard-Copy: Remember that a hard copy of the 2018 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1650-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.
Last week’s tax bill from House Republicans would have a tremendous impact on executive pay if enacted into law. We’re posting memos in the “Regulatory Reform” Practice Area on CompensationStandards.com – but here’s a teaser from Skadden that will blow you away:
If enacted, the newly proposed “Tax Cuts and Jobs Act” would effectively put an end to many of the most widely used forms of executive compensation:
– Deferred compensation and stock options would disappear
– Use of performance-based compensation would be severely limited
– Compensation over $1 million to senior executive officers would be nondeductible for public companies and subject to an excise tax for tax-exempt organizations.
Of course, the tax reform bill released by the House Republicans today (November 2) is likely to change, perhaps drastically, in the coming days.
House Passes Two Bipartisan Bills to Facilitate Offerings
On November 1, the House passed two bills designed to encourage capital formation by extending JOBS Act testing-the-waters provisions to all companies, codifying the SEC’s earlier expansion of confidential submission of draft registration statements by a non-emerging growth company for its IPO and during the one-year period after going public, and modifying the definition of an accredited investor to make more individuals eligible to participate in private placements.
The bills were passed on a bipartisan basis and echo proposals that were part of the Financial Choice Act passed by the House in June 2017 and the Treasury Department’s recent regulatory reform report on capital markets. We expect the bills would likely be passed and signed into law if they reach the Senate floor for a vote.
Farewell to Walter Schuetze
I note the sad news of the passing of Walter Schuetze. Walter served both the profession & public admirably. He was a courageous & staunch advocate for improving financial reporting through the use of fair value accounting.
As noted in this bio, Walter had an amazing career – one of the original founding members of the FASB. A leader of the KPMG’s National Accounting Technical Office, and the Chair of the AICPA’s Accounting Standards Committee. Served as both the SEC Chief Accountant and SEC Enforcement’s Chief Accountant. He will be missed by many.
Farewell to Dean Hunt
Sadly, former SEC Commissioner Dean Hunt passed away too. Here’s what the SEC’s statement says:
Appointed to the Commission in 1996 at the dawn of the digital age and a truly transformative era of our capital markets, Ike was a powerful voice for making sure our mission of protecting investors, fostering fair and efficient markets, and facilitating capital formation remained timeless in the face of dramatic change.
Always a thoughtful advocate for the rule of law and its fair and consistent application, Ike started his legal career as an SEC staff attorney in 1962. From then, whether in private practice, academia, or serving at the Commission, Ike set a shining example for generations of SEC staff to follow. We thank Ike for his passion and distinguished public service, and offer his family and friends our deepest condolences.
A few days ago, Corp Fin issued Staff Legal Bulletin No. 14I – it’s first SLB on shareholder proposals in two years. And it’s a big one. As CII notes, the SLB creates a path for companies to omit proposals by presenting a “well-developed” description to the Corp Fin Staff of the board’s analysis of the issue raised by the proposal & the issue’s significance to the company – and the SLB places a greater expectation on proponents to tie social or ethical issues to a significant effect on the company’s business.
– Deference to company analyses of significant policy issues under the Rule 14a-8(i)(7)’s “ordinary business” exclusion basis
– Expansion of the “economic relevance” exception under Rule 14a-8(i)(5)
– Additional eligibility requirements for proposals “by proxy” under Rule 14a-8(b)
– Application of Rule 14a-8(d) to the use of images in shareholder proposals & supporting statements and encouraged reliance on Rule 14a-8(i)(3)’s “false and misleading” standard for exclusion
In her Davis Polk blog, Ning Chiu does a good job of identifying the open issues relating to how companies might be able to create the board’s analysis over significant policy issues under (i)(7). More on this SLB soon…
“NASDAQ” v. “Nasdaq”? Branding 101
As Steve Quinlivan noted in this blog, Nasdaq has filed an immediately effective rule change with the SEC to reflect a corporate branding change to Nasdaq’s name. If you read through our stuff – including our fabulous “Nasdaq Listing Standards Handbook” – you’ll see that we have never used “all caps” for Nasdaq. It ain’t Plain English. I’ll use all caps for acronyms – like the “SEC” – but I won’t use all caps otherwise. It’s bad branding…
The irony is that Nasdaq didn’t use all caps long ago – but then changed it to “NASDAQ.” I think it was originally all caps, as it was an acronym for National Association of Securities Dealers Automated Quotations. So it went from upper case to lower case to upper case and now again lower case…
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If you weren’t paid to read a proxy statement, would you ever think about looking at anything other than the summary comp table? I know I wouldn’t – it’s just human nature to have a prurient interest in this kind of stuff. Maybe the Wu-Tang Clan put it best:
Cash Rules Everything Around Me
C.R.E.A.M. get the money
dolla dolla bill y’all. . .
Anyway, because they know that we’re dying to know, Equilar just issued a new study on General Counsel pay at 1,100 public companies. As with previous Equilar GC pay studies, this one isn’t publicly available, but here’s Equilar’s press release summarizing it. Here are the key findings:
– How Much – The median total compensation for General Counsels, broken out by revenue range was:
o Under $1 Billion: $918k
o $1 Billion to $5 Billion: $1.5 million
o $5 Billion to $15 Billion: $2.4 million
o Over $15 Billion: $3.8 million
– Equity Awards are a Big Part of Comp – Equity awards represented about 1/2 of total compensation at the smallest companies in the study, and nearly 2/3rds at the largest. However, it’s good to be at the top of the pyramid – GCs at the largest companies were awarded more than 7x the amount in stock value as those who worked for companies with less than $1 billion in revenue.
– Pay Increases – Overall, GC pay rose 4% last year. The big winners were GCs of companies in the $1-5 billion range – they saw their comp increase by an average of 8.1%. Their counterparts at companies in the $5-15 billion range saw pay climb 3.3%, while those at the smallest companies surveyed received a 6.6% bump. GCs at the largest companies fared the worst – experiencing a decrease of 0.6% in compensation.
For data on broader in-house comp trends, check out this BarkerGilmore study. It covers both private & public companies and addresses comp trends for the GC, managing counsel and senior counsel.
Securities Fraud: Do Not Disrespect the Wu-Tang Clan
So, “Harper’s” magazine published the transcripts of the jury selection in Martin Shkreli’s securities fraud case. Among his other antics, Shkreli purchased the only copy of Wu-Tang Clan’s “Once Upon a Time in Shaolin” album for $2 million – and then contrived to manufacture a bizarre & convoluted beef with the Clan.
The transcripts reveal that these shenanigans didn’t sit too well with Juror #59:
Juror #59: Your Honor, totally he is guilty and in no way can I let him slide out of anything because…
The Court: Okay. Is that your attitude toward anyone charged with a crime who has not been proven guilty?
Juror #59: It’s my attitude toward his entire demeanor, what he has done to people.
The Court: All right. We are going to excuse you, sir.
Juror #59: And he disrespected the Wu-Tang Clan.
Future defendants are on notice – do not disrespect the Wu-Tang Clan.
Our New Practice Area: “Wu-Tang Clan”
As we’ve shown with our recent blogs on ICOs, blockchain & cryptocurrencies, we strive to keep up with the latest developments on the securities law and capital markets front. Along those lines, there’s an emerging player on the scene that we think merits its own practice area.
If you’ve been playing along with the home version of our game today, then by now you know that I’m talking about the Wu-Tang Clan.
Scoff if you want, but shortly after the Clan’s pivotal role in Martin Shkreli’s fraud trial, a “Wu-Tang Coin” ICO was launched with the stated purpose of purchasing the band’s “Once Upon a Time in Shaolin” album from Shkreli & releasing it to the public.
As if that weren’t enough, now “Rolling Stone” reports that band member Ghostface Killah has himself jumped in to the world of crypto-finance:
Ghostface Killah has cofounded a cryptocurrency company called Cream Capital, CNBC reports. The company is looking to raise $30 million during its initial coin offering (ICO).
Cream Capital takes its name from Wu-Tang Clan’s 1993 classic song “C.R.E.A.M.,” which stands for “Cash rules everything around me.” In the case of the company, Cream Capital Chief Executive Brett Westbrook told CNBC it has been granted the trademark for Crypto Rules Everything Around Me.
The ICO “Cream Dividend” tokens will be sold in November, which can then be exchanged for Ether. Ether is the value token of the Ethereum blockchain.
When it comes to acknowledging the Wu-Tang Clan’s prominence in finance & the capital markets, we concede that we’re a distant second to Dave Chappelle, whose classic “Wu-Tang Financial” sketch saw it all coming several years ago. No, I’m not going to link to it – the language is NSFW – but do yourself a favor and check it out on your own time.
If you put up a statue called “Fearless Girl” that’s intended to point a finger at Wall Street’s lack of gender diversity, you shouldn’t be surprised if people ask whether you’re “walking the walk.” That’s the position State Street finds itself in – and according to this recent Guardian article, it hasn’t lived up to its rhetoric:
As selfies with Fearless Girl shot across social media, State Street, one of America’s leading money managers, was quietly and consistently voting down gender equality proposals at some of the country’s largest corporations.
On a shareholder proposal calling for Alphabet, Google’s parent company, to disclose any pay disparities between men and women, State Street voted no. On the same proposal before Wells Fargo, State Street voted no.
According to SEC records seen by the Guardian, in 2017 alone State Street rejected shareholder proposals to tackle gender inequality at least a dozen times – including at Aetna, American Express, Bank of America, Express Scripts, JP Morgan Chase and MasterCard.
In State Street’s defense, when it announced its gender diversity initiative, it focused on diversity at the board level & said that it would give portfolio companies a year to get their acts together. So, State Street’s efforts are still a work in process – but the media’s decision to scrutinize its voting record on gender diversity shouldn’t come as a shock.
SEC Staff Comments: 2017 Trends
This EY memo surveys trends in Corp Fin comment letters during the year ended June 30, 2017. As this excerpt suggests, there aren’t a lot surprises when it comes to areas of the Staff’s focus:
– Non-GAAP financial measures topped our list of the most frequent topics in SEC staff comment letters for the year ended 30 June 2017.
– Emerging topics of SEC staff focus include how companies are applying the new revenue recognition standard as well as what they are disclosing about cyber risks and cyber incidents.
– The SEC staff also frequently comments on management’s discussion and analysis, segment reporting and income taxes.
The memo also shares some thoughts on best practices in responding to Staff comments:
– Responses to each comment should focus on the specific question(s) asked by the SEC staff, and those responses should cite authoritative literature wherever possible.
– Responses should address the registrant’s unique facts and circumstances. While it may be helpful to consider response letters from other registrants as a resource, registrants should not just repeat responses made by other registrants to similar comments.
– If revisions are being made to a filing as a result of a comment from the SEC staff, responses should indicate specifically where these revisions are being made. If additional disclosure will be included in a future filing, the registrant should consider providing the proposed language in its response letter to avoid an additional comment once the disclosure is filed.
– Companies should seek the input of all appropriate internal personnel and professional advisers (such as legal counsel and independent auditors) to determine whether they have responded to the comment letter in a complete and accurate manner. Waiting until a later round of comments to involve the necessary resources may delay or hinder a successful resolution.
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