The SEC has issued a staff report on the accredited investor definition. The Dodd-Frank Act directed the SEC to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted. Staff from the Divisions of Corporation Finance and Economic and Risk Analysis prepared the report in connection with the first review of the definition. The report examines the history of the accredited investor definition and considers comments on the definition received from a variety of sources. The report considers alternative approaches to defining "accredited investor," provides staff recommendations for potential updates and modifications to the existing definition and analyzes the impact potential approaches may have on the pool of accredited investors. The SEC is inviting members of the public to provide comments on the accredited investor definition, after which it is possible that changes could be more formally proposed.
The SEC has adopted a final rule under the Dodd-Frank Act requiring that public companies present the ratio of their chief executive officer’s total annual compensation to their median worker’s compensation. This rule comes nearly two years after being proposed, in a divided vote on an issue that has also divided public opinion.
Click below to read the complete Client Advisory, co-authored by S&W attorneys Howard Berkenblit and Natalie Lederman.
As mandated by the Dodd-Frank Act, the SEC today adopted a rule that requires public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The new rule will require disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure. Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after January 1, 2017.
The SEC purports to address concerns about the costs of compliance by providing companies with flexibility in meeting the rule’s requirements. For example, a company will be permitted to select its methodology for identifying its median employee and that employee’s compensation, including through statistical sampling of its employee population or other reasonable methods. The rule also permits companies to make the median employee determination only once every three years and to choose a determination date within the last three months of a company’s fiscal year. In addition, the rule allows companies to exclude non-U.S. employees from countries in which data privacy laws or regulations make companies unable to comply with the rule and provides a de minimis exemption for non-U.S. employees. Companies would be required to briefly describe the methodology used to identify the median employee, and any material assumptions, adjustments (including cost-of-living adjustments), or estimates used to identify the median employee or to determine annual total compensation. If a company identifies a median employee based on a consistently applied compensation measure, it would be required to disclose the measure it used. Also, companies would be required to clearly identify any estimates used.
The rule does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, MJDS filers, or registered investment companies. The rule does provide transition periods for new companies, companies engaging in business combinations or acquisitions, and companies that cease to be smaller reporting companies or emerging growth companies.
The adopting release for the rules appears here. The rules will be effective 60 days after publication in the Federal Register.
Today, the SEC (by a 3-2 vote among commissioners) proposed rules, as required under the Dodd-Frank Act, that would direct the stock exchanges to adopt clawback listing standards. Under the proposed new Rule 10D-1, listed companies would be required to develop and enforce recovery policies that in the event of an accounting restatement, “claw back” from current and former executive officers incentive-based compensation they would not have received based on the restatement. Recovery would be required without regard to fault. The proposed rules would also require disclosure of listed companies’ recovery policies, and their actions under those policies.
Under the proposed rules, the listing standards would apply to incentive-based compensation that is tied to accounting-related metrics, stock price or total shareholder return. Recovery would apply to excess incentive-based compensation received by executive officers in the three fiscal years preceding the date a listed company is required to prepare an accounting restatement. Companies would have discretion not to recover the excess incentive-based compensation received by executive officers if the direct expense of enforcing recovery would exceed the amount to be recovered or, for foreign private issuers, in specified circumstances where recovery would violate home country law.
Each listed company would be required to file its recovery policy as an exhibit to its annual report under the Securities Exchange Act of 1934. In addition, a listed company would be required to disclose its actions to recover in its annual reports and any proxy statement that requires executive compensation disclosure if, during its last fiscal year, a restatement requiring recovery of excess incentive-based compensation was completed, or there was an outstanding balance of excess incentive-based compensation from a prior restatement. Under the proposed rules, a company would be subject to delisting if it does not adopt a compensation recovery policy that complies with the applicable listing standard, disclose the policy in accordance with SEC rules or comply with the policy’s recovery provisions.
Comments on the proposal are due 60 days from publication in the Federal Register (presumably that means early September). Once adopted, the stock exchanges would then have 90 days to propose their listing rules under Rule 10D-1, which would be effective sometime in the ensuing year. Once the listing rules are effective, companies would have 60 days to adopt a clawback policy. Recoveries would be required after the effective date of the new rule for excess incentive-based compensation received by current and former executive officers that results from attaining a financial reporting measure based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1. Listed companies would be required to comply with the new disclosures in proxy or information statements and Exchange Act annual reports filed on or after the effective date of the listing exchange’s rule.
Next Wednesday, April 27, the SEC will consider whether to propose amendments to the Securities Exchange Act, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring public companies to disclose in a clear manner the relationship between executive compensation actually paid and the financial performance of the company. Any rules proposed will be subject to a comment period, following which further action will be required by the SEC to finalize the rules.
Here’s the SEC’s press release about today’s rule proposals.
This rule is required under the Dodd-Frank Act. Here is the proposing release.
The proposals will be open for comments for 60 days.