Last week marked the fifth anniversary of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and a number of proposed rules have been released recently by the U.S. Securities and Exchange Commission to implement corporate governance and disclosure requirements required by Dodd-Frank applicable to reporting companies under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”).

Pay for Performance: Disclosure Requirements

The SEC released proposed rules regarding disclosure of pay-for-performance on April 29, 2015.  The proposed rules would require companies to disclose the following information for the immediately preceding five fiscal years in a new table:

  • Executive compensation actually paid for the principal executive officer, which would be the total compensation as disclosed in the summary compensation table already required in Schedule 14A proxy statements with adjustments to the amounts included for pensions and equity awards;
  • Total executive compensation reported in the summary compensation table for the principal executive officer and an average of reported amounts for the remaining named executive officers;
  • The company’s total shareholder return (“TSR”) on an annual basis; and
  • The TSR on an annual basis of the companies in a peer group.

Comments were due for these proposed rules on July 6, 2015.

Executive Pay Clawbacks: Corporate Governance and Disclosure Requirements

The SEC released proposed rules on July 1, 2015 regarding recovery, or “clawback,” of executive compensation pursuant to Section 10D of the Exchange Act.  The proposed rules require national stock exchanges to adopt listing rules that will require issuers to adopt and comply with a written policy (a “Compensation Recovery Policy” or “CRP”) for the recovery of “excess” incentive-based compensation received by current and former executive officers during the three completed fiscal years preceding the date on which the issuer concludes that an accounting restatement is required because of a material error. “Excess” compensation subject to clawback is any amount of incentive-based compensation received by the executive officers which would not have been received had the financial statements upon which the incentive-based compensation been reported as restated.

Who is Covered by the CRP?

The CRP covers all “executive officers” who held such offices at any time during the relevant performance periods.  The proposed rule defines “executive officer” as the issuer’s president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function or any other person who performs similar policy-making functions for the issuer.

What are the Types of Accounting Restatements that Trigger a Clawback?

A clawback is triggered when an issuer is required to restate previously issued financial statements to reflect the correction of one or more errors that are material to those financial statements.  A series of corrections of immaterial errors may be material for purposes of triggering a clawback.

Can Issuers Indemnify Executive Officers?

Issuers cannot indemnify executive officers against their loss of incentive-based compensation, subject to clawback.  However, if the cost of recovering excess compensation would be in excess of the excess compensation subject to clawback, an issuer may decline to pursue recovery from the affected executive officer(s).

Required Disclosures

Under the proposed rules, each U.S.-listed issuer would have to file a copy of its CRP as an exhibit to its Form 10-K for the first fiscal year following adoption.  Issuers would also have to provide disclosures if, during the prior fiscal year, either a restatement triggering the CRP was made or there was an outstanding balance of excess incentive-based compensation from application of the CRP to a prior restatement.  These disclosures would include the date on which an issuer is required to prepare an accounting restatement, the aggregate dollar amount of excess incentive-based compensation attributable to the restatement, and the aggregate dollar value of excess incentive-based compensation remaining outstanding at the end of the prior fiscal year.

Comments are due for these proposed rules on September 14, 2015.

Other Dodd-Frank Updates

  • Comments for the proposed rules regarding hedging by employees and directors were due on April 20, 2015.  These proposed rules required disclosure about whether directors, officers, and other employees are permitted to hedge or offset any decrease in the market value of equity securities of the issuer owned by them.  They also applied to disclosure included in proxy and information statements for the election of directors by issuers subject to the federal proxy rules. It is uncertain when final rules will be issued.
  • The SEC has still not issued final rules with respect to disclosure of the median of the annual total compensation of all employees of each issuer and the ratio of that median to the annual total compensation of the issuer’s chief executive officer as required by Section 953(b) of Dodd-Frank.  The SEC had released its proposal on September 18, 2013, and comments were due December 2, 2013; however, the SEC staff released additional analysis regarding the proposed rules on June 4, 2015, with comments due July 6, 2015.