What’s Happening with Pay Ratio Disclosures?

Well, we’re more than half-way through the year, Independence Day has come and gone, the 2018 proxy season is closer than it used to be, and we still don’t know whether pay ratio disclosures will go away. A brief background. Dodd-Frank Act Section 953(b) requires that the SEC amend Item 402 of Regulation S-K to mandate pay ratio disclosures. In 2015, the SEC dutifully adopted the mandated rules, which state that all companies required to provide executive compensation disclosure under Item 402(c) of Regulation S-K must provide new executive compensation disclosure regarding: the median of annual total compensation of all employees, the annual total compensation of the CEO, and the ratio of those two amounts. The new rules, which are complex and involve much time-consuming preparation, require companies to report the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017. This means that, for calendar-year companies, the new disclosures are required in 2018 proxy statements. Companies generally reacted with an initial howl of outrage over the perceived arbitrary uselessness of these disclosures, observed that the implementation date was nearly three years away, and then studiously ignored the issue, hoping that in the meantime Section 953(b) would be modified or repealed. Yet, as 2017 rounded into view, the Division of Corporation Finance issued guidance regarding some of the rule’s vaguer points, seemingly in part to remind companies that the rule was still out there and that much work was required to comply with its provisions. But just as companies reluctantly began to gear up (or to think about gearing up) to collect the necessary compensation...

Conflict Minerals–What Just Happened and What Didn’t

The conflict minerals saga continues. Background In April 2014, the Court of Appeals for the D.C. Circuit in National Association of Manufacturers v. SEC held that the conflict minerals rule’s requirement that companies state that their products have not been found to be “DRC conflict free” violated the First Amendment. Subsequently, the SEC staff released guidance relieving issuers of the obligation to put those labels in their reports. The case was subsequently remanded to the district court for further consideration, and on August 18, 2015, the Court of Appeals reaffirmed its prior decision. In response to these developments, Acting SEC Chairman Michael S. Piwowar issued a statement in January 2017 declaring that he had “directed the staff to reconsider whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate.” (See this Doug’s Note.) Last week, the D.C. Circuit Court entered final judgment in the case, which upheld its prior rulings, and remanded it to the SEC for appropriate action. This past Friday, the SEC issued a statement noting that the D.C. Circuit’s remand to the SEC has “presented significant issues for the Commission to address” and that several comments were received in response to Acting Chairman Piwowar’s January request. Therefore, “in light of the uncertainty regarding how the Commission will resolve those issues,” the Division of Corporation Finance will not recommend enforcement action if companies “only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD,” which conspicuously excludes the need to comply with paragraph (c). What does this mean? Companies that use conflict minerals...

Pay Ratio Disclosure: Lemonade from Lemons

Well, the SEC’s new pay ratio rules are finally out. We’ve all known they were coming for quite some time, dating all the way back to their origin in 2010—Dodd-Frank’s Section 953(b) mandate—followed by the SEC’s proposed rule back in September 2013. And while certain shareholder activists and corporate governance advocacy groups are no doubt pleased, it is hard to find much positive to say from the company perspective. Nevertheless, I’ll try: It could have been worse, Don’t miss an employee-relations opportunity, and “Hope springs eternal”. A short summary of the new rules… The new rules state that all companies required to provide executive compensation disclosure under Item 402(c) of Regulation S-K (which excludes smaller reporting companies, foreign private issuers, emerging growth companies, MJDS filers and registered investment companies) must provide new executive compensation disclosure regarding: the median of annual total compensation of all employees, the annual total compensation of the CEO, and the ratio of those two amounts. Companies may identify the median employee using their own methodology, which may include the total employee population, statistical sampling or another reasonable methodology. For example, a company may use annual total compensation under the current executive compensation rules or some other consistently-applied compensation measure reported in its payroll or tax records. A company may apply cost-of-living adjustments based on the locations of its employees, though it must also disclose the median employee’s non-adjusted annual total compensation and pay ratio in order to provide context for that adjustment. In contrast to the SEC’s proposal and perhaps the most significant practical concession by the SEC, the final rule allows a company to...

The New Pay-for-Performance Proposal–A Misstep by the SEC

  The SEC last week finally proposed rules mandated by Dodd-Frank providing for disclosure of the relationship between compensation actually paid to executives and company financial performance. While it is important to remember that Congress, not the SEC, initiated this rulemaking (meaning that the staff probably wishes it didn’t have to be sidetracked by this issue), the SEC had considerable flexibility in crafting its proposal. In this case, it may have missed the mark. What was proposed? The proposed rule would amend Regulation S-K by adding a new Item 402(v) that requires additional disclosures in proxy statements in which Item 402 executive compensation disclosure is required (basically any time directors are being elected). The amendment would require: that the disclosed executive compensation be calculated by starting with total compensation from the Summary Compensation Table (SCT), then modifying it (a) to exclude the present value of benefits under defined benefit and actuarial pension plans that are not attributable to the applicable year of service and (b) to include the value of equity awards at vesting rather than when granted (which adjustments are designed to conform to the statute’s “executive compensation actually paid” phrasing); that company and peer financial performance be measured using total shareholder return (TSR), as defined in Item 201(e) of Regulation S-K; a prescribed table showing executive compensation actually paid, SCT total compensation, company TSR and peer TSR; the separate presentation of the principal executive officer and average compensation of the remaining named executive officers; disclosure of the relationship over the past five years between (a) executive compensation actually paid and company TSR and (b) company TSR and...

Another Whistleblower Award Wrinkle

There is no longer any doubt that the SEC is serious about implementing its whistleblower program. According its most recent award announcement, the program has now paid more than $50 million to whistleblowers since its 2011 inception. Another award last week is noteworthy not only for its eye-catching amount (between $1.4 million and $1.6 million), but also for a wrinkle that further indicates the SEC’s commitment to encouraging whistleblowers. What happened… The details are skimpy since the SEC is required by law to protect the confidentiality of the whistleblower and, therefore, cannot disclose anything that could, directly or indirectly, compromise the whistleblower’s identity. The SEC’s announcement does reveal, however, that the whistleblower claimant was a “compliance professional” employed by the company in question. The SEC noted the general rule that it will not consider information obtained by a whistleblower who is “[a]n employee whose principal duties involve compliance or internal audit responsibilities.” There are, however, exceptions to this rule. In this case, the applicable exception is for a compliance officer who has  “a reasonable basis to believe that disclosure of the information to the [SEC] is necessary to prevent the relevant entity from engaging in conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors.” (Exchange Act Rule 21F-4(b)(4)(v)(A)) Andrew Ceresney, Director of the SEC’s Division of Enforcement, stated that: “This compliance officer reported misconduct [to the SEC] after responsible management at the entity became aware of potentially impending harm to investors and failed to take steps to prevent it.” The wrinkle… This is the second time the SEC has...

The SEC Enforces Whistleblower Protection from Confidentiality Agreements

Earlier this week, the SEC announced in a first-of-its-kind enforcement action that certain KBR, Inc. confidentiality agreements violated the whistleblower protections of the Dodd-Frank Act. What happened… The SEC found that KBR, a global technology and engineering company, had required witnesses in certain internal investigations to sign confidentiality agreements containing language that threatened discipline or firing if they discussed the substance of the investigation with anyone outside the company without prior approval of KBR’s legal department. Because the internal investigations involved allegations of securities law violations, the SEC found that the agreements violated Rule 21F-17(a) under the Securities Exchange Act, which provides that: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement….” Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated, “By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us.” Mr. Ceresney noted the prohibitions of Rule 21F-17(a) and stated that “[w]e will vigorously enforce this provision.” KBR paid a $130,000 penalty to settle the matter and neither admitted to nor denied the SEC’s allegations. What’s interesting… Perhaps the most interesting thing about this enforcement action is that there were no identified instances of KBR having actually sought to prevent its current or former employees from communicating with the SEC. It was enough for SEC enforcement purposes that the existence of those provisions could chill a potential whistleblower’s willingness to report illegal conduct to the...