SEC Issues Proposed Hedging Disclosure Rule

On Monday, the SEC issued a proposed rule on hedging disclosure as required by Section 955 of the Dodd-Frank Act. The proposal - which will be open for comment for 60 days after publication in the Federal Register - would require disclosure in the proxy statement (pursuant to Reg. S-K Item 407(i)) about whether directors, officers and other employees of companies registered under Section 12 of the Exchange Act are permitted to hedge or offset any decrease in the market value of their company stock. SEC Chair White made these remarks:  

The proposed rules would provide investors with additional information about the governance practices of the companies in which they invest. Increasing transparency into hedging policies will help investors better understand the alignment of the interests of employees and directors with their own.  

Commissioners Gallagher and Piwowar, in a joint statement on the proposed rule, expressed these and other concerns:

• Based on a cost-benefit analysis, the proposal should have exempted emerging growth companies and smaller reporting companies.
• SEC should have exempted disclosures for employees who can't affect the company's share price.  This information won't be useful to investors.
• Proposed rule's extension of coverage to the issuer's affiliates - including subsidiaries, parents, and brother-sister companies - is overbroad and will increase compliance costs.

Commissioner Aguilar's supporting statement noted that while the proposed rule doesn't prohibit hedging, companies may change their practices to be better aligned with shareholder interests as a result of the disclosure requirements. He also expressed a desire for the SEC to proceed promptly on the other Dodd-Frank-required executive compensation-disclosure rules.

Cydney Posner's blog discusses the proposed rule in detail. See also these Davis Polk and Weil memos.

SEC's Director of Corp Fin Keith Higgins Discusses Rule 14a-8(i)(9)

Earlier this week at the PLI Program on Corporate Governance, SEC Director of Division of Corporation Finance Keith Higgins discussed his own views about the role of SEC staff in the shareholder proposal process generally - and Rule 14a-8(i)(9) developments and considerations specifically. He noted that the federal proxy regulatory scheme merely effects - rather than supersedes - voting rights granted to shareholders under state law. He also acknowledged, however, that the Division has become, in effect, "an informal arbitrator in the shareholder proposal process, assisting both companies and shareholder proponents, who might otherwise have to resort to litigation to resolve their disagreements."

With regard to Rule 14a-8(i)(9) specifically, Higgins made these key points, among others:

• The Division's long-standing interpretation permitting exclusion of same subject matter counter proposals has been deliberate, and soundly based on concerns that including both a management proposal and same subject matter shareholder proposal in the proxy could "present alternative and conflicting decisions for shareholders and that submitting both proposals to a vote could provide inconsistent and ambiguous results."
• The Commission has said proposals don't need to be identical in scope or focus for the exclusion to be available.
• The rule, as historically amended, was intended to reflect the Division's longstanding interpretation.
• The fact that a shareholder proposal is precactory has not been viewed by the Division as consequential to the analysis. Virtually all shareholder proposals are precatory, and that fact doesn't negate the concerns posed by including both proposals - i.e., alternative and conflicting voting decisions for shareholders and inconsistent and ambiguous vote results that would be difficult for management and the board to interpret.
• Disallowing the availability of the exclusion for responsive management proposals (i.e., management proposals made only in response to a shareholder proposal), as some investors argue should be the case, may - in effect - penalize board responsiveness and serve as a disincentive for boards to present their own proposals.

PCAOB Vows to Review Standard-Setting Process in Connection With Budget Approval

The PCAOB's 2015 budget and related accounting support fee - approved by the SEC last week - represent a decrease of 3% and 10%, respectively, from 2014. Responding to the SEC's reiteration of its earlier criticisms about the PCAOB's priorities (which we reported on previously) at the budget meeting, Reuters reports that PCAOB Chair James Doty pledged to review its internal standard-setting process, but believed its agenda reflected a "proper balance" of disclosure and audit performance rule-making:

SEC Republican Commissioner Dan Gallagher on Wednesday was critical of the amount of time the PCAOB spent on disclosure projects, saying its time would be better spent on core audit rules such as standards on fair values. The board's priorities, he said, need to be "re-examined." Doty told Gallagher he believes the PCAOB is striking the proper balance between disclosure and performance audit rule-writing. 

Compromise Proposal on Audit Engagement Partner Disclosure Forthcoming

In related news, PCAOB Chair Doty reportedly affirmed at last week's budget meeting that the PCAOB would be seeking comments on a "compromise" position for audit engagement partner disclosure that would allow companies to include the information in their Form 10-K or a new form filed with the PCAOB. In its updated Standard-Setting Agenda (reported on here), the PCAOB indicated that a supplemental request for comment would take into account comments related to liability and an alternative location for the disclosure.

This Wall Street Journal article had previously noted the so-called "compromise position" that would entail audit firms making the required disclosure in a new form that would be filed with the PCAOB within 60 days of the company's Form 10-K filing that contains the auditor's opinion. Investors generally wanted the disclosure in the Form 10-K or proxy statement, whereas the majority of auditors and issuers sought disclosure elsewhere - if at all.   

OSC Proposes Whistleblower Program With $1.5 Million Award Cap 

Last week, the Ontario Securities Committee released a consultation paper proposing a framework for a new whistleblower program to encourage reporting to the OSC of possible breaches of Ontario securities law. The program would be applicable to whistleblowers who report serious misconduct that results in administrative proceedings or a settlement heard by the Commission under the Ontario Securities Act. 

The proposed program addresses whistleblower eligibility requirements; monetary incentives; whistleblower confidentiality; anti-retaliation measures; and program administration. Monetary incentives would consist of up to 15% of the total monetary sanctions awarded in a hearing or settlement in which total sanctions or settlement payments exceed $1 million - subject to a $1.5 million cap on the award. Payment would not be contingent on collection of the sanction amount, but would only be paid upon final resolution of the matter - including any appeals. 

See also this Bennett Jones memo.  

ISS Posts 2015 Compensation FAQs 

Earlier this week, ISS posted its 2015 Compensation FAQs. 

Proxy Research Providers Announce Feedback & Monitoring Mechanisms
 

Hat tip to Broc Romanek for his blog today informing us that the charter signatories to the Best Practice Principles for Shareholder Voting Research & Analysis ("BPP Group") announced the launch of these formal mechanisms for collecting feedback and monitoring the implementation of the Principles:

• Ongoing comments and feedback via its website that will facilitate real-time delivery of input directly to all members of the BPP Group.
• BPP Group will consider comments and feedback provided on an ad hoc basis, and will consider all reasonable and appropriate measures to address the good governance and integrity of the industry as a whole.
• BPP Group will develop a comparative framework - expected to be completed this summer - to facilitate assessment for how each signatory has complied with the Principles and related guidance.
• BPP Group will undertake a formal biennial review of the Principles and related guidance, which will include review of the results of ESMA's independent review of the Principles and other market developments. Any potential updates to the Principles and related Guidance will be subject to a stakeholder consultation.

The Principles were launched by the BPP Group in 2014 in response to ESMA's suggestion that the industry would benefit from an increased understanding of how it operates.

ISS Updates "Speciality" Proxy Voting Guidelines

ISS just posted these updated proxy voting speciality policies:

• Sustainability Proxy Voting Guidelines
• Socially Responsible Investment (SRI) Voting Guidelines
• Taft-Hartley Voting Guidelines
• Public Fund Proxy Voting Guidelines
• Catholic Faith-Based Voting Guidelines

Shareholders Challenge Bylaw Requiring 3% Shareholder Consents to Sue

An Imperial Holdings shareholder has filed a class action suit against the company and directors challenging a bylaw that requires a shareholder to obtain consents of shareholders beneficially owning at least 3% of the company's stock before filing suit against the company, its board or its officers. The bylaw was effective upon board adoption in October; however, Imperial announced its intent to submit it to shareholders for ratification at the next annual meeting.

After noting ongoing SEC and IRS investigations of the company and other recently settled actions, the complaint states:

Notwithstanding this background and the ongoing investigations by the SEC and the IRS, and indeed, seemingly because of these investigations of potential illegal activity, on November 3, 2014, Imperial Holdings' directors adopted a draconian bylaw (the "Bylaw"), which, on information and belief, no other company in the country has done, to insulate themselves from shareholder redress for violations of state and federal law and breaches of fiduciary duties, both in the past and in the future. The Bylaw places all-but-insurmountable hurdles before the courthouse doors and is designed to, and effectively does, eliminate public shareholders' statutory rights to commence and prosecute shareholder class and derivative litigation against them, no matter how egregious the wrongs.

In the company's release about the new bylaw, Imperial's chair and a principal of its largest shareholder made these remarks:

The Board has noticed a disturbing trend of lawsuits brought by shareholders with very small stakes in publicly traded companies against the companies, their directors, and their officers, purportedly on behalf of a class of shareholders or on behalf of the company. These lawsuits often result in other shareholders receiving no meaningful benefit and indirectly incurring the cost of the plaintiff's lawyer and the company's lawyer. The Board believes it is in the best interest of the company to require a shareholder claiming to represent a class of shareholders or the company to demonstrate a minimum level of shareholder support.

Reminder: Society Participating in IAC Panel Discussion on Proxy Access

Just a reminder that, as previously reported, Society CEO & President Darla Stuckey - along with representatives of BlackRock, the NYC Office of the Comptroller, and the Division of Corporation Finance - will be participating this Thursday in a panel discussion on proxy access at the SEC Investor Advisory Committee at the SEC's headquarters in Washington, D.C. The panel discussion begins at 11:05 am.

Society to Participate in SEC Roundtable on Proxy Voting
 

We are pleased to report that the Society President and CEO Darla Stuckey will be participating in the SEC's February 19 roundtable on improving the proxy voting process. As previously reported, the roundtable will be divided into two panels. The first will focus on unviersal proxy ballots. Darla will participate in the second panel, which will focus on retail participation in the proxy process. Keith Higgins, Director of the Division of Corporation Finance, along with David Fredrickson, Chief Counsel for the Division, will moderate the panel and will guide the discussion. Stay tuned for more information.

CEO-Employee Pay Ratio Study Reveals Much Smaller Than Estimated Pay Gaps

A recent study of US commercial banks - described in this paper - revealed that the gap between CEO and employee pay is generally much smaller than the estimates that have been widely reported in the media. Based on over 10,000 observations between 1995 - 2012, authors Profs. Nelson and Rountree of Rice University and Prof. Crawford of University of Houston, found that the mean and median CEO-employee pay ratios were 16.58-to-1 and 8.38-to-1, respectively, as compared to Bloomberg's 2013 reported estimates of 204-to-1 and 500-to-1 for the S&P 500 and top 100 company average, respectively. The authors also found that although extremely high pay ratios are associated with higher risk and lower performance in the future - more generally (i.e., for most of the companies, given that relatively few companies exhibit extreme ratios), increases in the pay ratio are associated with lower risk and higher performance.

Prof. Nelson notes that although the study focused on the banking industry, thus potentially limiting generalization, "there is no reason to believe that the distribution of pay ratios in the banking sector is sytematically lower than in other sectors, particularly given the concerns raised about banks' compensation practices that partly motivated the Dodd-Frank Act and the SEC proposal."

This week's highlighted question from the Huddle is:

In December 2014 our Board of Directors met and approved the annual budget for 2015 with a condition that there needed to be a successful completion of a budget working session between executive officers and three members of the Board of Directors. The executive officers and three Board members met and discussed the budget and agreed that the budget was appropriate. I have drafted the minutes from December to state the following: 

"RESOLVED, that the 2015 Budget be, and hereby is, approved and adopted, such approval and adoption, in their entirety, being explicitly conditioned on the successful completion of a budget working session between executive officers and the members of the Board of Directors no later than January 31, 2015; and..." 

Any suggestions on best practices on how to capture, for the record, that a budget working session was held and all concerns were resolved? Should this be inserted in the December minutes or can the Board simply ratify the action at the next board meeting?

This question generated a lot of activity and many excellent answers (too many to note here) including:

My thought is to ratify at the next meeting. What also could be helpful is simply having a director that was part of the budget working session report at the next board meeting that the working session took place with board members and management agreeing on the final budget.