Cam C. Hoang

The 10-K and proxy season begins in a little over a month for companies with calendar fiscal year-ends.  The following governance and disclosure developments should be considered in the course of preparing these filings. For additional background, see our presentation and supplemental materials for Preparing for the 2019 SEC Reporting Season. Proxy Statement Impact of the government shutdown: During the government shut down, the SEC is operating with a skeleton staff, with no capacity for reviewing preliminary proxy statements or no-action requests. Companies that need to file preliminary proxy materials should continue to file them in accordance with Rule 14a-6(a) of the Exchange Act, at least ten calendar days prior to the date the definitive materials are first sent or given to shareholders.  If companies are not advised by SEC staff within that period that there will be a review, they should proceed with the definitive filing and distribution of proxy materials. While the Division of Corporation Finance has not discussed how no-action requests for shareholder proposals will be handled during the government shutdown, companies should continue to make the submission required by Rule 14a-8(j) via email if they intend to exclude a shareholder proposal.  Given that companies must submit no-action requests no later than 80 calendar days before filing definitive proxy statements, it is likely that the SEC staff will have a chance to review and respond to submissions under Rule 14a-8 once the shutdown ends.  If the current shutdown is still in effect at the time that the proxy statement is filed, a company would have to decide whether it has a basis to exclude the proposal without the benefit of a no-action letter. See this update and this update on the shutdown’s impact on capital markets regulation and this 19-firm memo prepared during the last shutdown. Gender diversity voting policies:  For meetings held after January 1, 2019, Glass Lewis will generally recommend votes against nominating committee chairs (and potentially other nominating committee members) on boards with no female directors.  ISS will do so for meetings held on or after February 1, 2020.  Mitigating circumstances disclosed in the proxy statement may influence their recommendations. Rapidly evolving disclosure of environmental and social programs:  More companies are dedicating sections of their proxy statements to describing these initiatives, or referring to applicable disclosure on their websites or in their responsibility reports, while being careful not to incorporate by reference these materials into their filings. Expanding duties for compensation committees: These committees are overseeing broader issues of human capital management beyond director and executive officer compensation, sometimes in response to allegations of sexual harassment and other misconduct, followed by investor questions.  Semler Brossy reports that one-third of DJIA (Dow Jones Industrial Average) 30 companies have a board compensation committee with broader responsibilities, e.g., leadership development and/or other HR areas - many of which signal their breadth in their name, such as Talent & Development Committee or Human Resources Committee. Updated tax policy discussions in the CD&A: Companies historically may have disclosed that they use best efforts to obtain tax deductions for executive compensation above the $1 million cap under Section 162(m) of the Internal Revenue Code.  Since the exemption for performance-based compensation has been eliminated under the Tax Cuts and Jobs Act, with limited grandfathering for compensation payable pursuant to a written binding contract in effect on November 2, 2017, this disclosure now should be updated. CEO pay ratio in year two: Companies may keep the median employee from last year, unless there were significant changes to (i) the employee population, (ii) employee compensation arrangements or (iii) the original median employee’s circumstances, so that the company reasonably believes its pay ratio disclosure would significantly change.  In cases (i) and (ii), the median employee should be re-identified.  In case (iii), the company may use another employee whose compensation is substantially similar to the original median employee based on the compensation measure used to select the original employee.  If the same median employee is used, briefly disclose the basis for the reasonable belief. Say-on-frequency for smaller reporting companies: A non-binding say-on-frequency vote is due for those companies that had their last vote in 2013, including most smaller reporting companies.  Shareholders may cast an advisory vote on whether to hold the advisory vote on executive compensation ("say-on-pay") every year, every two years or every three years.  Per Rule 14a-21 of the Exchange Act, include (i) a statement that the vote concerning the frequency of the say-on-pay vote is being provided as required pursuant to Section 14A of the Securities Exchange Act of 1934, as amended; (ii) a description of the general effect of the say-on-frequency vote, such as whether it is non-binding; and (iii) the current frequency of the say-on-pay vote and when the next say-on-pay vote will occur.  Emerging growth companies ("EGCs") are exempted from say-on-pay and say-on-frequency votes.  The SEC also expanded the definition of "smaller reporting company" this year.  See discussion below. Guidance for equity compensation plan proposals: The SEC updated its guidance related to equity compensation plan proposals, see Section 161 of the Proxy Rules and Schedules 14A/14C C&DIs.  Among the clarifications provided: Companies should be prepared to disclose all material terms of a plan, even when the proposal is for an amendment of an existing plan.  Furthermore, a New Plan Benefits Table (listing benefits or amounts that will be received by each of the named executive officers and certain groups under the proposed plan) will only be called for if the plan is: (i) a plan with set benefits or amounts (e.g., director option plans); or (ii) one under which some grants or awards have already been made subject to shareholder approval. Annual Report on Form 10-K Disclosure simplification:  As a result of the SEC’s Disclosure Update and Simplification rulemaking, certain 10-K disclosure can be eliminated, because the information is  outdated or duplicative of information already included in the financial statements in accordance with GAAP or in the MD&A when material to the business. Part I, Item 1, Business: Companies are no longer required to disclose: three years of segment level financial information, amounts spent on R&D financial information by geographic area risks associated with foreign operations and a segment’s dependence on foreign operations facts indicating why performance in certain geographic areas may not be indicative of current or future operations (but consider for the MD&A) reference to the SEC’s Public Reference Room, physical address and phone number (but disclose the SEC website, a statement that SEC filings are available there, and the company’s website) Part II, Item 5, Market for Registrant’s Common Equity: Companies are no longer required to disclose: high and low sales prices for common equity traded over the last two fiscal years (but disclose trading symbols for each class of common equity traded) frequency and amount of cash dividends declared restrictions that currently or are likely to materially limit a company’s ability to pay dividends on its common equity (including restrictions on subsidiaries to transfer funds) Part II, Item 7, MD&A: Companies should discuss changes in financial condition and results of operations based on geographic area, if they are material to an understanding of the business. Part IV, Item 15, Exhibits: Companies are no longer required to provide a ratio of earnings to fixed charges as an exhibit. Update those risk factors:  Not only should companies consider new and emerging risks, they should review the status of existing risks.  An abstract discussion may not be sufficient if an existing risk has materialized.  Earlier this year, as reported here, Altaba (formerly Yahoo! Inc.) agreed to pay a $35 million penalty to settle charges that it misled investors by failing to disclose one of the world’s largest data breaches thus far.  Among its violations, Yahoo's post-breach disclosure in quarterly and annual reports was too general, stating that the company faced only the risk of, and negative effects that might flow from, data breaches.  The company failed to disclose the actual breach or its potential business impact and legal implications. Continue to mind the GAAP: In a recent SEC cease-and-decease order discussed here, ADT was fined $100,000 for failing to give “equal or greater prominence” to the most directly comparable GAAP measures in accordance with Item 10 of Regulation S-K.  The company highlighted non-GAAP measures in the headlines and bullets summaries of two earnings releases, without disclosing the GAAP measures until later in the earnings releases. Leasing and revenue recognition accounting standards: Public entities besides EGCs must adopt the leasing accounting standard (FASB ASC Topic 842) for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period.  For calendar year-end companies, they will adopt the standard on a modified retrospective basis on January 1, 2019, with an initial application date of January 1, 2017.   Section 11200 of the SEC Financial Reporting Manual clarifies that filing a registration statement with an earlier comparative period (eg, January 1, 2016) does not change the date of initial application. Last year, public entities adopted the revenue recognition accounting standard (FASB ASC Topic 606) for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period.  SEC Chief Accountant Wes Bricker has indicated that revenue recognition disclosure will be a top issue for comment this season, and the SEC staff has encouraged companies to refine and supplement their annual disclosures included in subsequent quarterly filings. Areas of judgment, such as identification of performance obligations and the application of principal vs. agent guidance have been the most frequently discussed topics in consultations with the Office of the Chief Accountant.   Section 11100 of the SEC Financial Reporting Manual addresses certain disclosure issues related to the adoption of ASC 606.  For instance, for companies that adopted ASC 606 using the full retrospective approach, they do not need to apply the standard when reporting selected financial data in the 10-K for periods prior to those periods that are retroactively adjusted, but they must provide information regarding comparability of data presented pursuant to Instruction 2 to the Item 301. Updates to the 10-K cover page were made in connection with rulemaking for smaller reporting companies and inline XBRL reporting (see our Preparing for the Proxy Season presentation for a markup). No delivery of hard copies of proxy materials to the NYSE, if the hard copies have been filed in EDGAR.  Nasdaq had abolished this requirement earlier. More companies qualify as “Smaller Reporting Companies:” During 2018, as discussed here, the SEC expanded the definition of “smaller reporting company” to include (i) those companies with public float of less than $250 million as of the last business day of their second fiscal quarter, and (ii) those companies with less than $100 million of annual revenues and either no public float or public float of less than $700 million.  As a result, additional companies now qualify to provide scaled disclosure in this year’s Form 10-K and proxy statement.  If and until the SEC makes corresponding amendments to the definitions of “accelerated and “non-accelerated” filers, smaller reporting companies with public float of $75 million or more will continue to be accelerated filers that must comply with shorter filing deadlines and provide an auditor’s attestation of management’s assessment of internal control over financial reporting required under Sarbanes-Oxley Act Section 404(b). And coming up for future 10-Qs and 10-Ks: Effective for quarters beginning after November 5, 2018 (which means Q1 2019 for calendar companies), amended Rules 8-03(a)(5) and 10-01(a)(7) under Regulation S-X require quarterly (vs annual) analysis of changes in stockholders’ equity and the amount of dividends per share for each class of shares for “the current and comparative year-to-date [interim] periods, with subtotals for each interim period.”   These changes were adopted as part of the Disclosure Update and Simplification rulemaking discussed above. A discussion of critical audit matters, which are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment, will be included in audit reports for fiscal years ending on or after June 30, 2019 for large accelerated filers and in audit reports for fiscal years ending on or after December 15, 2020 for all other companies to which these requirements apply.  The new requirement does not apply to emerging growth companies. Inline XBRL, which allows filers to embed financial data into the body of an SEC filing, rather than attaching the data as an exhibit, must be implemented as early as fiscal periods ending on or after June 15, 2019 for large accelerated filers; fiscal periods ending on or after June 15, 2020 for accelerated filers and fiscal periods ending on or after June 15, 2021 for all other filers. And coming up for future proxy statements: Effective for proxy statements filed during fiscal years beginning on or after July 1, 2019 (July 1, 2020 for smaller reporting companies and emerging growth companies), companies must describe any practices or policies that they have adopted regarding the ability of employees, officers or directors to engage in hedging transactions.  Companies may either disclose the full policy, or a "fair and accurate" summary of the policy.  Summaries must include the categories of persons and the categories of transactions specifically permitted or disallowed.  Companies that have not adopted hedging policies must disclose that fact or state that hedging transactions are permitted.

ISS released its annual update of frequently asked questions on its US Compensation Policies on December 20, 2018 (preliminary updates had been released in November). The updates are effective for shareholder meetings occurring on or after February 1, 2019. There are nine new or materially updated questions, which are summarized below: #19 Will any of the quantitative pay-for-performance screens change in 2019?  No.  The screens will continue to use GAAP/accounting performance measures, but ISS will display Economic Value Added (EVA) measures on a phased-in basis over the 2019 proxy season and will continue to explore their future use to add insight to financial performance.  (EVA can measure a company's residual wealth by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.) #21 Given the use of TSR in ISS' quantitative screen, does ISS prefer companies use TSR as an incentive program metric?  While it recognizes investors' preference for objective and transparent metrics, ISS does not endorse or prefer the use of total shareholder return (TSR) or any specific metric in executive incentive programs. #42 How does ISS analyze "front-loaded" awards intended to cover future years?  ISS is unlikely to support grants that cover more than four years (ie, the grant date plus three future years), and for these types of grants, commitments not to grant additional awards over the covered period should be firm.  Usual pay-for-performance considerations will be more closely scrutinized. #47 Which problematic practices are mostly likely to result in an adverse recommendation?  Additional problematic pay practices that are likely to result in adverse vote recommendations on compensation committee members and/or say on pay proposals now include: (1) excessive termination payments (not just change in control payments) exceeding three times base pay and annual bonus, and (2) a "good reason" termination definition that presents windfall risks. #48 How does ISS evaluate "Good Reason" termination definitions?  ISS will scrutinize "Good Reason" definitions to ensure that the circumstances are reasonably viewed as an adverse constructive termination, and to determine whether there is a potential windfall risk.  Circumstances reflecting potential performance failures, such as bankruptcy or delisting, will be considered problematic. #50 If a company becomes a "smaller reporting company" under the SEC's revised definition, how will ISS assess reduction in compensation disclosure?  ISS notes that smaller reporting companies (SRCs) are still required to hold say on pay votes, and so while they may use scaled compensation disclosure requirements, SRCs should continue to provide sufficient disclosure to enable investors to make an informed say on pay vote.  This means that SRCs should think carefully before eliminating CD&As, and at minimum, ensure that there is sufficient narrative for shareholders to meaningfully assess compensation philosophy and practices. #59 How would ISS view any compensation program changes made in light of the removal of 162(m) deductions?  While shifts away from performance-based compensation to discretionary or fixed pay elements did not make the list of problematic pay practices most likely to result in an adverse recommendation, ISS will still consider these shifts to be problematic pay practices and will view them negatively. #67 How does ISS apply its policy around "excessive" levels of non-employee director pay?   If ISS determines that a NED’s pay is a quantitative pay outlier (see FAQ below), it will perform a qualitative evaluation of the company’s disclosed rationale to determine if concerns are adequately mitigated.  The updated FAQs list a number of circumstances that will typically mitigate concern around high non-employee director (NED) pay, including onboarding grants, special payments related to corporate transactions or special circumstances, and payments for specialized scientific expertise as may be necessary in certain industries.  As a reminder, last year, ISS had announced a policy to recommend against board members responsible for approving NED pay when there is a recurring pattern of excessive pay magnitude without a compelling rationale in two or more consecutive years.  ISS subsequently updated its methodology to identify pay outliers, and in consideration of the updates, ISS had postponed issuing adverse recommendations until meetings occurring on or after February 1, 2020. #68 What is ISS' methodology to identify non-employee director pay outliers?  The updated FAQs clarify that the methodology identifies pay outliers above the top 2-3% (vs the top 5%) of all comparable directors within the same two-digit GICS group and index grouping (eg, S&P 500).  The revised methodology acknowledges that there are pay premiums for non-executive chairs and lead independent directors, and in limited instances, the methodology also makes allowances for narrow distributions of NED pay, where there is not a pronounced difference in pay between the top 2-3% of directors and the median director.

The SEC issued a request for comment on the nature and timing of disclosures that reporting companies must provide in quarterly reports on Form 10-Q, including when the requirements overlap with earnings releases furnished on Form 8-K.  Comments will be due within 90 days of publication of this request in the Federal register.  Comments may be submitted through the SEC's Internet comment form on its website or to rule-comments@sec.gov, referencing File Number S7-26-18. The Commission's request frames four broad issues for consideration (paraphrased below), with more specific questions listed under each issue: whether there are benefits to investors of having a separate quarterly report and earnings release, and reasons for variations and overlapping content between the two documents, the impact on investors when the earnings release is published before, after or concurrently with the quarterly report, whether earnings releases can be used to satisfy the core financial disclosure requirements of Form 10-Q, with the Form 10-Q supplementing or incorporating by reference the earnings release, and the merits of semi-annual vs quarterly interim reporting. The SEC's request follows an August tweet by President Trump, announcing that he had asked the Commission to study the termination of quarterly reporting in favor of semi-annual reporting, and SEC Chair Jay Clayton's remarks in November that the matter was under consideration. Observers are generally skeptical that the SEC will transition to less frequent reporting, given expectations of underwriters and investors and the current incorporation of periodic reports into registration statements.  However, the Commission has expressed its interest in exploring ways to promote efficiency in periodic reporting by reducing unnecessary duplication in the information that public companies disclose.  Furthermore, the SEC is seeking comment on how the existing system, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants. In particular, the SEC is considering streamlining the Form 10-Q and providing issuers with the option to provide quarterly reporting information in earnings releases to satisfy the core disclosure requirements of Form 10-Q.  In streamlining the Form 10-Q, the SEC has indicated that it may consider rescinding the Regulation S-X requirement that interim financial statements be reviewed by an auditor, US GAAP prescriptions on the form and content of interim financial statements, and Form 10-Q certifications by the CEO and CFO.  This approach would be similar to streamlined reporting requirements for foreign private issuers, which file annual reports, but not quarterly reports, and then furnish current reports on Form 6-K to the extent that the issuer must disclose material information about changes in the business. Would the Commission concurrently implement more stringent disclosure standards for earnings releases?  These releases  are currently "furnished" rather than "filed," meaning that they are not automatically incorporated by reference into registration statements or subject to liability under Sections 18 of the Securities Act of 1933, though they are still subject to anti-fraud provisions under Section 10(b) of the Securities Exchange Act of 1934. A decision to streamline quarterly reports and emphasize earnings releases, if is part of a broader emphasis on more current reporting, would be on-trend with investors' general appetite for information on a closer to real-time basis, similar to their experience with news and other types of information communicated through social media and Internet channels.  However, the importance and necessity of proper internal controls and disclosure controls, and the time required to perform those controls, will prevent real-time reporting without further technological advances.    

In August, the SEC adopted amendments updating and simplifying disclosure rules. See our prior summary here. Notable amendments included: the extension of a previously annual requirement to interim periods, to present a statement of changes in shareholders' equity and to disclose the amount of dividends per share for each class of shares (vs common shares only) (either in a separate statement or a footnote)(revised Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X); the elimination of requirements to disclose pro forma information on business combinations in quarterly reports on Form 10-Q, because similar disclosure may be found in Form 8-K filings; the elimination of requirements in business descriptions to disclose financial information broken out by segment (Item 101(b) of Regulation S-K) and geography (Item 101(d)(2)), risks associated with, and dependence of a segment on, foreign operations (Item 101(d)(3)), and amounts spent on R&D (Item 101(c)(1)), because similar discussions may be found in the financial statement footnotes and/or the MD&A, when material; and the elimination of exhibits setting forth the computation of any ratio of earnings to fixed charges disclosed in an SEC report (Items 503(d) and 601(b)(12) of Regulation S-K), because US GAAP already requires the disclosure of components of the ratio. On www.thecorporatecounsel.net, Broc Romanek had blogged that it was unclear when the new rules become effective. The SEC staff has released C&DI 105.09 confirming that the amendments are effective for all filings made 30 days after publication of the final rule in the Federal Register, which for calendar year-end reporting companies, may include their Form 10-Qs for the third quarter of 2018, if the final rule is published soon. However, in light of the proximity of the anticipated effective date to the filing deadline, the staff will not object if companies first present the statement of changes in shareholders' equity (first bullet above) in the Form 10-Q for the quarter that begins after the effective date, ie, for the first quarter of 2019 for calendar year-end reporting companies.

In order to facilitate discussion on the role of proxy advisory firms at the upcoming Roundtable on the Proxy Process, which is scheduled for November 2018, the SEC staff has determined to withdraw two no action letters that provided comfort to investment advisers in relying on proxy advisory firm recommendations: In Egan-Jones Proxy Services (May 27, 2004), the staff had confirmed that by voting based on the recommendations of an independent proxy advisory firm, an investment adviser could demonstrate the absence of a conflict of interest, and the fulfillment of fiduciary duties, provided that the investment adviser should first ascertain, among other things, whether the proxy advisory firm "(a) has the capacity and competency to adequately analyze proxy issues and (b) can make such recommendations in an impartial manner and in the best interests of the adviser's clients." In Institutional Shareholder Services, Inc. (September 15, 2004), the staff had confirmed that investment advisers should evaluate the independence of proxy advisory firms based on the facts and circumstances, and that a number of ways include a thorough review of the firm's conflict procedures and the effectiveness of their implementation; case-by-case evaluation of the proxy advisory firm's relationship with issuers; or other means to ensure the integrity of the firm. The withdrawal of these no action letters opens up for discussion, and creates uncertainty around, the circumstances in which investors may rely on proxy advisory firm recommendations and when a firm may be considered independent.  The withdrawal is the latest development in the call for additional rulemaking around proxy advisory firms.  Last December, the House passed the Corporate Governance Reform and Transparency Act of 2017, which would require proxy advisory firms to register with the SEC, disclose potential conflicts of interest and codes of ethics and publicize methodologies for formulating proxy recommendations.  Then earlier this year, six members of the Senate Banking, Housing and Urban Affairs Committee sent letters to ISS and Glass Lewis requesting information regarding their eligibility for exemption from proxy rules, accuracy of reporting and potential conflicts of interest. The SEC staff has not to date signaled any changes to its guidance in Staff Legal Bulletin No.20, which among other topics, addresses considerations that an investment adviser may wish to take when it retains a proxy advisory firm, an investment adviser's ongoing duty to oversee a proxy advisory firm that it retains, and an investment adviser's duties to ascertain the material accuracy of the facts upon which a firm's recommendations are based. The impact of proxy advisory firms' recommendations on institutional investor voting is debated.  A study by Choi, Fisch and Kahan (2010) found that proxy advisory firms have modest influence on voting outcomes, with an estimate that ISS recommendations shift 6%-10% of investor voting.  Similarly, a survey by Rivel (2016) found that only 7% of institutional investors say that proxy advisory firms are the "most influential" contributors to their policies, and that generally established best practices are the primary source of their voting policies and decisions.  A study by McCahery, Sautner, and Starks (2016) of 143 institutional investors concluded that they rely on the advice of proxy advisory firms to complement their decision making, rather than relying on them exclusively. However, investor voting decisions often are highly correlated with proxy advisory firm recommendations.  According to a report published by the Manhattan Institute in May 2018, a sample of voting records for 713 institutional investors in 2017 showed that they are significantly likely to vote in accordance with proxy advisory firm recommendations across a broad spectrum of governance issues.  For example, 95% of institutional investors vote in favor of a say on pay proposal when ISS recommends for it, while only 68% vote in favor when ISS is opposed. This correlation may suggest that proxy advisory firms have more influence than institutional investors appreciate or acknowledge.  It may also indicate that governance practitioners form a community, whether they work for investors or proxy advisory firms, and that they develop and are influenced by a common set of trends and "best practices," resulting in investor voting policies that synch with ISS or Glass Lewis voting policies.

The Securities and Exchange Commission (SEC) announced last Friday that it has adopted amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other Commission disclosure requirements, US Generally Accepted Accounting Principles (GAAP), or changes in the information environment.   These amendments were originally proposed in 2016, in order to implement provisions of the Fixing America's Surface Transportation (FAST) Act.   While a more complete summary of the changes is provided below, notable amendments include: the elimination of requirements for pro forma information on business combinations in interim filings, because similar disclosure may be found in Form 8-K filings; and the elimination of requirements for financial information broken out by segment and geography in a business description contained in SEC reports and registration statements, because similar discussions may be found in the financial statement footnotes and/or the MD&A, when these topics are material to an understanding of the business. Overall, the amendments are not intended to alter the mix of information available to investors in SEC reports and registration statements.  As a result, companies should take care to cross-reference applicable overlapping disclosure and to continue to disclose segment and geographically-specific information in other parts of their filings, including in the risk factors and the MD&A, to the extent that the discussion is material to an understanding of the business. Where there are redundant and overlapping disclosure requirements from SEC rules and GAAP standards established by the Financial Accounting Standards Board (FASB), the amendments attempt to reduce issuers' compliance burden.  The SEC has referred certain proposed amendments to FASB for their consideration in making consistent changes to future GAAP standards, and commentators have encouraged both agencies  to continue to coordinate on their reporting standards. Multiple categories of issuers will be impacted by the amendments.  Specifically: Regulation S-K amendments relate to domestic issuers and foreign private issuers that choose to file on domestic forms. Regulation S-X amendments relate to domestic issuers and foreign private issuers that report under US GAAP or reconcile to US GAAP. Certain amendments affect asset-backed issuers, Regulation A issuers and companies regulated under the Investment Company Act. The amendments will be effective 30 days from publication in the Federal Register.  Furthermore, the SEC staff has been directed to review the amendments' impact on disclosure and capital formation within five years and to report back to the Commission.       Here are highlights of the SEC rules that have been eliminated or streamlined: Overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements.  Disclosure requirements that convey similar information, or that are incremental but no longer useful, have been deleted, while incremental, overlapping requirements have been integrated with other SEC rules.  Notable disclosure requirements that have been deleted include: (1) derivative accounting policies under Rule 4-08(n) of Regulation S-X, which are already addressed in financial statement footnotes under US GAAP, except for the requirement to disclose where in the statement of cash flows the effect of derivative financial instruments is reported; (2) amounts spent on research and development activities in the business description, in accordance with Item 101(c) of Regulation S-K, since this information will remain in the financial statement footnotes and the MD&A, when material; (3) dilution from the amount of common equity subject to outstanding options, warrants, or convertible securities, when the class of common equity has no established US public trading market, which must be disclosed in Form S-1 or Form 10 under Item 201(a)(2)(i) of Regulation S-K; (4) historical and pro forma ratios of earnings to fixed charges for issuers that register debt securities or preference securities, and an exhibit setting forth the computation of any ratio of earnings to fixed charges disclosed in an SEC report, required by Regulation S-K; (5) pro forma financial information in interim filings for business combinations, in accordance with Rule 8-03 and Rule 10-01 of Regulation S-X, because US GAAP and Item 9.01 of Form 8-K result in similar disclosure; (6) financial information about segments in the business description, pursuant to Item 101(b) of Regulation S-K, which will continue to be available in the footnotes to the financial statements and the MD&A, when material; (7) financial information by geographic area, pursuant to Item 101(d) of Regulation S-K, which will continue to be available in the footnotes to the financial statements and the MD&A, when material; and (8) information on the seasonality of the business in interim reports, pursuant to Instruction 5 to Item 303(b) of Regulation S-K, which will continue to be available in the MD&A, when available. Outdated requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment.  In addition to eliminating outdated transition disclosure requirements, the Commission amended rules that have become outdated due to changes in the regulatory, business and technological environment.  These amendments are described in detail starting on page 101 of the adopting release.  (1) With regard to market price disclosure required under Item 201(a)(1) of Regulation S-K and Item 9.A.4 of Form 20-F, issuers whose common equity is traded in an established public trading market will only be required to disclose the trading symbol, instead of sale or bid prices, of their stock.  (2) Domestic and foreign private issuers may delete requirements to identify the Public Reference Room and its physical address and phone number in their reports and registration statements, since investors now use the Internet to access filings.  (3) Furthermore, all issuers will be required disclose their Internet address if they have one.  (4) Foreign private issuers will no longer be required to disclose exchange rate data when financial statements are prepared in a foreign currency in Form 20-F, since exchange rate information is readily available free on a number of websites. Redundant and duplicative requirements, which require substantially similar disclosures as GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements.  These amendments are summarized in a series of tables starting on page 29 of the adopting release.  While they will not substantially change disclosure, they are intended to alleviate confusion and inconsistency by  eliminating redundant and duplicative disclosure requirements, including Regulation S-X requirements on: the consolidation of financial statements, disclosure of significant changes in debt obligations, income tax rate reconciliation, title and amount of securities subject to warrants, rights and convertible instruments, identification of related party transactions, material contingencies in interim financial statements, presentation and computation of earnings per share, disclosure specific to insurance companies and bank holding companies, reasons for changes in accounting principles in an interim period, examples of interim period adjustments, common control transactions disclosed in interim financial statements, the disclosure of discontinued operations in interim financial statements, and incorporation by reference into Form 10-Q of reports furnished to security holders. Superseded requirements, which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.  The SEC adopted a series of amendments to reflect more recently updated US GAAP requirements or more recently updated Commission disclosure requirements.  These amendments are described starting on page 108 of the adopting release and include: (1) elimination of a requirement under Rule 3-15(a)(1) of Regulation S-X that REITs separately present all gains and losses on the sale of properties outside of continuing operations in the income statement, which was inconsistent with a US GAAP requirement that only applies to discontinued operations; (2) elimination of certain Regulation S-X requirements related to consolidation of financial statements that were inconsistent with US GAAP provisions related to difference in fiscal periods, the Bank Holding Company Act of 1956 and intercompany transactions; (3) elimination of certain Regulation S-X requirements for development stage companies; (4) removal of certain Regulation S-X requirements for insurance companies that conflicted with US GAAP; (5) elimination of references to "extraordinary items" in SEC rules and forms, consistent with US GAAP; and (6) replacement of references to "generally accepted auditing standards" (GAAS) with PCAOB standards.      

A recent SEC consent order against The Dow Chemical Company reminds companies that when evaluating whether or not to disclose a payment or benefit to an executive as a perk in a proxy statement, the fact that the item has a tangential business purpose, or is convenient for the company, is insufficient grounds to exclude the item as a perk.  In order to be excluded as a perk, the item must be "integrally and directly" related to the performance of the executive's duties.  Examples of items that typically should be classified as perks include country club memberships for mixed business and personal use, commuting expenses, and personal guests who join a business flight on the corporate jet. While companies may perceive individual perks as insignificant or as justifiable business expenses, these items can be significant in the aggregate, in hindsight and through a regulatory lens.  The consistent failure to disclose perks over a period of years may result in Commission sanctions and negative publicity, particularly for larger public companies and for companies who for a variety of reasons are the subject of closer Commission scrutiny. As background, on July 2, 2018, the SEC entered into a consent order against Dow, settling claims that from 2011 through 2015, the company did not adequately evaluate and disclose approximately $3 million in executive perks as "other compensation" in its proxy statements.  These authorized but undisclosed perks included personal use of the Dow aircraft and other expenses.  The consent order notes that though Dow applied procedures regarding the evaluation and disclosure of its executives' perks, it did not follow the Commission's standard regarding disclosure of perks, which provides that: • An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties. • Otherwise an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees. Instead, the consent order finds, Dow incorrectly applied a standard whereby a business purpose related to the executive’s job was sufficient to determine that a benefit would not be a perquisite that required disclosure. Notably, the consent order also sanctions Dow for its disclosure controls.  According to the order, Dow did not adequately train employees in key roles, including those tasked with drafting the CD&A section of the proxy statement and compiling the executive compensation tables, to ensure that the proper standard was applied for perks disclosure.  Dow also had inadequate processes and procedures to ensure proper reporting of perks.  In addition to a $1.75 million penalty, the consent order requires Dow to hire an independent consultant for one year to review and make recommendations on Dow's policies, procedures, controls and training related to the evaluation of whether payments and other expense reimbursements should be disclosed as perks under securities laws.  

The SEC held a very busy open meeting yesterday, voting on the following final and proposed rules: Adoption of amendments to modernize the definition of “smaller reporting company,” which was established in 2008.  See our previous discussion of the amendments.   Adoption of amendments to require the use of the Inline XBRL format in certain filings, which were proposed in 2017 and have been under study for many years. The amendments require the use of the Inline eXtensible Business Reporting Language (“XBRL”) format for the submission of operating company financial statement information and fund risk/return summary information and make related changes.  Inline XBRL involves embedding XBRL data directly into the filing so that the disclosure document is both human-readable and machine-readable. Phase-in for operating companies: Large accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2019. Accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2020. All other filers will be required to comply beginning with fiscal periods ending on or after June 15, 2021. Filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date. The requirement for operating companies and funds to post XBRL data on their websites will be eliminated upon the effective date of the amendments. A proposal that would permit certain exchange-traded funds to operate without first obtaining a fund-specific exemptive order from the Commission, which is a process that has not changed since the first ETF was approved in 1992.    Adoption of amendments related to disclosures of liquidity risk management for open-end funds, which were proposed earlier this year.    A proposal to amend rules that govern the Commission’s whistleblower program.  It has been seven years since these rules were adopted. The Commission is seeking public comment and data on a broad range of issues relating to the whistleblower program, and will then consider further action on the proposal, which includes provisions: Allowing awards based on deferred prosecution agreements and non-prosecution agreements entered into by the DOJ or a state AG in a criminal case, or a settlement agreement entered into by the Commission. Providing the Commission with flexibility to increase awards on smaller actions, while decreasing larger awards.  In the Wall Street Journal, Stephen Kohn, executive director of the National Whistleblower Center, criticized the proposal, saying that scaling back payouts is tantamount to "killing the goose that lays the golden egg."  The Commission would have discretion to increase awards that could yield a payout of less than $2 million , and establish awards for enforcement actions that do not currently qualify as covered actions because they do not meet the more than $1 million threshold requirement.  Meanwhile, the Commission would have discretion to reduce larger awards, though in no event would awards be adjusted below $30 million, and awards would still be subject to the 10% statutory minimum. The SEC's related Fact Sheet notes that 40% of funds paid out by the Commission to whistleblowers have been paid out in only three awards. Eliminating potential double recoveries under the current definition of "related action." Modifying Rule 21F-2 to comport with the Supreme Court's holding in Digital Realty Trust, Inc. v. Somers, where the Court held that whistleblower provisions of the Exchange Act require that a person report a possible securities law violation to the Commission in order to qualify for protection against employment retaliation under that Rule. Increasing the efficiency of the claims review process. Clarifying and enhancing certain policies and procedures and issuing interpretive guidance to help clarify the meaning of "independent analysis" as that term is defined in Exchange Act Rule 21F-4 and utilized in award applications. An archived webcast of the meeting will be available on sec.gov

The SEC announced that it has voted to amend the definition of "smaller reporting company," or "SRC," expanding the population of companies that qualify for a range of scaled (reduced) disclosure requirements. The rules will become effective 60 days after publication in the Federal Register. Examples of scaled disclosure include that SRCs, in their annual reports on Form 10-K, are not obligated to include risk factors, and selected and supplementary financial data. They may include only two years of income statements (vs three years) and a comparison of two years (vs three years) of financial results. In their proxy statements, SRCs are not required to include a CD&A, CEO pay ratio and certain executive compensation tables. They may include fewer NEOs, and only two years of compensation in the Summary Compensation Table. Under the new definition, companies with a public float of less than $250 million (vs $75 million) will qualify as SRCs. A company with no public float or with a public float of less than $700 million will also qualify as an SRC if it had annual revenues of less than $100 million (vs $50 million) during its most recently completed fiscal year. Commission staff estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition. The SEC released the following summary of the amendments to the definition of an SRC:   Criteria Previous SRC Definition Revised SRC Definition Public Float Public float of less than $75 million Public float of less than $250 million Revenues Less than $50 million of annual revenues and no public float Less than $100 million of annual revenues and no public float, or public float of less than $700 million For purposes of determining whether or not it is an SRC, a reporting issuer (vs. a non-reporting issuer filing its first registration statement) must measure its public float annually, on the last trading day of the second fiscal quarter of the previous fiscal year. Qualifying issuers are then eligible to use scaled disclosure rules for the first quarterly report on Form 10-Q for the fiscal year following the determination. Newly eligible SRCs may "early adopt" those rules for the quarterly report immediately following the determination. Once a company fails to qualify as an SRC, it may continue to report under SRC disclosure requirements through the end of that fiscal year. However, in order to re-qualify as an SRC, the company must meet more stringent qualification thresholds. The subsequent qualification thresholds, set forth in the table below, are set at 80% of the initial qualification thresholds in the table above. Criteria Previous SRC Definition Revised SRC Definition Public Float Public float of less than $50 million Public float of less than $250 million Revenues Less than $40 million of annual revenues and no public float Less than $80 million of annual revenues, if it previously had $100 million or more of annual revenues; and Less than $560 million of public float, if it previously had $700 million or more of public float. It is worth noting that a company may qualify as an SRC, but still be an accelerated filer. The amendments do not change the threshold in the “accelerated filer” definition that requires, among other things, that filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting. However, the SEC staff has begun to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition to reduce the number of companies that qualify as accelerated filers. In addition to amendments to the definition of "smaller reporting company," the SEC also adopted amendments to Rule 3-05(b)(2)(iv) of Regulation S-X, in order to increase the net revenue threshold in that rule from $50 million to $100 million. As a result, companies may omit financial statements of businesses acquired or to be acquired for the earliest of the three fiscal years otherwise required by Rule 3-05 if the net revenues of that business are less than $100 million.

The Securities and Exchange Commission (the "SEC") announced Tuesday that Altaba, the entity formerly known as Yahoo! Inc., has agreed to pay a $35 million penalty to settle charges that it misled investors by failing to disclose one of the world’s largest data breaches in which hackers stole personal data relating to hundreds of millions of user accounts. According to the SEC’s order, within days of the December 2014 intrusion, Yahoo’s information security team learned that Russian hackers had stolen what the security team referred to internally as the company’s “crown jewels”: usernames, email addresses, phone numbers, birthdates, encrypted passwords, and security questions and answers for hundreds of millions of user accounts.  Although information relating to the breach was reported to members of Yahoo’s senior management and legal department, Yahoo failed to properly investigate the circumstances of the breach and to adequately consider whether the breach needed to be disclosed to investors.  The fact of the breach was not disclosed to the investing public until more than two years later, when in 2016 Yahoo was in the process of closing the acquisition of its operating business by Verizon Communications, Inc. In the order, the SEC finds that Yahoo's post-breach disclosure in quarterly and annual reports was too general, stating that the company faced only the risk of, and negative effects that might flow from, data breaches.  The company failed to disclose the actual breach or its potential business impact and legal implications. In addition to deficiencies in Yahoo's disclosure to investors, the SEC’s order found that Yahoo did not share information regarding the breach with its auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings. Finally, the SEC’s order found that Yahoo failed to maintain disclosure controls and procedures designed to ensure that reports from Yahoo’s information security team concerning cyber breaches, or the risk of such breaches, were properly and timely assessed for potential disclosure. In its Statement and Guidance on Public Company Cybersecurity Disclosures, released earlier this year, the SEC reiterates that public companies are required to disclose material risks and incidents, including those related to cybersecurity, in their current and periodic reports.  The SEC encourages companies to continue to use current reports to disclose material cybersecurity-related information promptly as this practice reduces the risk of selective disclosure.  Furthermore, beyond requirements explicitly found in SEC regulations, companies are also required to disclose material information and revisit previous disclosure, especially during a cybersecurity investigation, as may be necessary to ensure the company’s filings are not misleading.  Notably, perhaps in recognition of how rapidly the scope of a breach may evolve, the SEC provides that companies “have a duty to correct prior disclosures that the company determines were untrue at the time it was made, or a duty to update a disclosure that becomes materially inaccurate after it is made.”  See our earlier memo for a summary of the SEC's guidance. In evaluating the range of potential disclosure for quarterly and annual reports, companies should consider that cybersecurity breaches or the risk of such breaches may trigger disclosure in the Management's Discussion and Analysis, if the breach presents a material event, trend or uncertainty that has had or is reasonably likely to have a material effect on results of operations, liquidity or financial condition.  Furthermore, financial statements may need to reflect costs incurred, insurance proceeds and contingent liabilities resulting from claims.  A cybersecurity breach may also need to be addressed in the description of business, discussion of legal proceedings and effectiveness of internal controls and disclosure controls and procedures. Even before the next quarterly or annual report, companies should consider whether the information available on the cybersecurity breach is material and should be communicated to investors in a current report in order to reduce the risk of selective disclosure in violation of Regulation FD.  If material information on a cybersecurity breach is not publicly disclosed in a current report, companies should consider whether it is appropriate to impose an event-specific blackout on trading in the company's stock, in accordance with applicable insider trading policies.  Determining the population of employees and other individuals who know, or in hindsight should have known, about the breach, and who should be subject to the event-specific blackout, deserves careful consideration, as demonstrated by the Equifax experience, where high-ranking executives traded in the company's stock after a cybersecurity breach was discovered but before it was announced.      

As companies prepare their Form 10-K and proxy statement disclosures, they will be challenged with disclosing the impact of the Tax Cuts and Jobs Act on performance results for the purposes of financial reporting as well as for compensation measurement. Here is a short list of issues to be aware of. Form 10-K Disclosure Implications of Tax Reform: Sections in the MD&A likely to be affected by tax reform include the discussion of operating results and financial condition and discussion of critical accounting estimates. Companies also are adding or modifying their risk factors to acknowledge the impact of the Tax Cuts and Jobs Act. In the MD&A, companies are required to describe any “known trends or uncertainties that have had or that the company reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” There are comparable requirements for known trends or uncertainties impacting liquidity and capital resources. Companies should be prepared to assess the potential impact of tax reforms including: Reduction of top corporate tax rate from 35% to 21% beginning in 2018 Capital expenditure deductions: Expensing of new and qualified property placed in service after September 27, 2017, through 2022 Limit on net interest deductions to 30% of EBITDA Net operating loss (NOL) deduction limited to 80% of taxable income with indefinite carryforward; carrybacks generally eliminated R&D expenditures paid or incurred after 2021 must be capitalized and amortized over a five-year period Adoption of a territorial tax regime: foreign source portion of a qualified dividend received by a 10% U.S. corporate shareholder is exempt from U.S. tax Deemed repatriation: 15.5% tax on post-1986 foreign earnings held in cash and an 8% rate on all other post-1986 earnings To the extent that companies use reasonable estimates of the tax reform impact in their disclosure in accordance with SAB 118, they may want to caution readers that they are in the process of determining the actual impact, and that their reasonable estimates are based on provisional amounts that may be adjusted upon obtaining, preparing, or analyzing additional information. Proxy Disclosure Implications of Tax Reform: Changes to Internal Revenue Code Section 162(m) will eliminate deductibility of compensation for “covered employees” (including now the CFO) over $1 million, even for qualified, performance-based compensation. However, arrangements in place before November 3, 2017, and that are not materially modified will be grandfathered; IRS guidance is forthcoming. Disclosure and governance considerations include: CD&A Disclosure: 162(m) deductibility will still be a relevant discussion for past awards and grandfathered awards and for distinguishing what’s deductible vs not deductible. CD&A Disclosure: Discuss tax reform impact on performance results, and whether those results are adjusted to exclude the impact of tax reform for compensation purposes (e.g., revaluation of deferred tax asset or deferred tax liability based on new corporate tax rate may result in a big non-cash gain or loss in Q4 of 2017). CD&A Disclosure: Elimination of 162(m) deductibility is a significant change for compensation programs going forward and may impact compensation design. D&O questionnaires: Continue to confirm that compensation committee members qualify as “outside” directors for purposes of certifying grandfathered awards and for certifying vesting of grandfathered performance awards. Covered employees: A “covered employee” will now be anyone who has ever been the CEO, CFO, or one of the three most highest compensated officers in any fiscal year beginning after December 31, 2016. Thus, the new rule is essentially “once a covered employee, always a covered employee.” If possible, employers should not structure one-off payments that would cause an individual to become one of the three highest compensated officers in a particular year, when he or she typically would not be one in other years. In addition, employers should track “covered employees” and their compensation arrangements.

At last Friday's ABA annual meeting, Bill Hinman (with the standard disclaimer that he is speaking for himself and not on behalf of the SEC) confirmed that the SEC will not be delaying implementation of the CEO pay ratio rule, which will require most public companies to report the pay ratio in their 2018 proxy statements, for the first fiscal year beginning on or after Jan. 1, 2017.  (Foreign private issuers, MJDS filers, emerging growth companies and smaller reporting companies are exempt from the rule.)  Bill Hinman is the Director of the SEC's Division of Corporation Finance. Director Hinman also mentioned that the Division will be issuing additional guidance on the CEO pay ratio rule in the near future.  This earlier blog entry includes a summary of the SEC's previous guidance on implementing the CEO pay ratio rule. In a recent Compensation Standards survey, Liz Dunshee reported on trending practices in pay ratio preparation.

Insider trading allegations have surfaced at Equifax, a credit rating agency that last week announced a data breach that could potentially affect 143 million consumers in the United States, nearly half of the country’s population. SEC filings show that three Equifax executives sold nearly $2 million in shares of the company’s common stock days after the cyberattack was discovered but before the news was publicly announced. It was unclear whether their share sales had anything to do with the breach. None of the SEC filings list the sales as being conducted as part of pre-established 10b5-1 trading plans. Equifax said in a statement that the three executives sold a “small percentage” of their shares on August 1 and August 2, adding they “had no knowledge that an intrusion had occurred at the time they sold their shares.” Following the company’s announcement of the data breach on September 9, Equifax shares traded down by almost 14 percent. The SEC has not commented on the share sales. The developing circumstances at Equifax serve as a reminder for public companies to consider several important provisions when implementing or revising an insider trading policy. Read more in our eUpdate here: www.dorsey.com/newsresources/publications/client-alerts/2017/09/equifax-data-breach.

As previously reported on this blog, Vanguard received a shareholder proposal requesting additional disclosure on its climate change voting record, and the proposal was scheduled to appear on the agenda for Vanguard's 2017 annual meeting.   Today, Vanguard announced that it had negotiated the proposal's withdrawal. Glenn Booraem, the Vanguard Funds’ Investment Stewardship Officer, commented: “Climate change represents an evolving set of risks and opportunities for companies in many sectors. Vanguard has prioritized climate risk on our engagement agenda, and we have discussed the topic with more companies over the past year than ever before. Our discussions have centered on advocating for disclosure of material risks to companies’ long-term business prospects and the value of their assets under a range of forward-looking scenarios. It is crucial to our fund investors that market participants have access to consistently comparable information to incorporate these risks and opportunities into market prices.

Companies who engage with their large institutional shareholders on environmental and social issues during the 2018 proxy season should keep in mind that these investors are facing pressure from other investors on their voting policies. Large institutional investors are receiving shareholder proposals from a coalition of smaller investors, urging them to take a more engaged approach to environmental and social proposals.  During the 2017 proxy season, investors  including Vanguard, BlackRock, Bank of New York Mellon, T.Rowe Price, JP Morgan Chase & Co. and Fidelity Investments received shareholder proposals from investors including Walden Asset Management, requesting that management issue reports on their proxy voting policies and practices related to climate change. Some of these proposals were withdrawn, based on vote changes, updated voting policies and greater disclosure, as reported by BNA Bloomberg.  However, Vanguard's November 15th annual meeting agenda will include Walden's proposal.  This is Vanguard's first shareholder meeting since 2009 (Vanguard is not required to hold a meeting unless there is a proposal for a shareholder vote).  In its preliminary proxy filing, Vanguard opposes Walden's proposal, for reasons including that the report requested is duplicative of information that's already publicly available, and that direct, ongoing engagement with companies is often more effective than votes for shareholder proposals. Vanguard and many other institutional investors have historically voted against climate change shareholder proposals, given the challenges of demonstrating a material business impact over a definitive time horizon.  However, their positions have evolved over recent proxy seasons.1  Earlier this year, Vanguard voted for shareholder proposals at Exxon Mobil and Occidental Petroleum Corp. requiring that the companies report on climate change.  Vanguard had voted against a similar proposal at Exxon Mobil in 2016.  These climate change proposals, and another one at PPL Corp., subsequently passed.  More broadly, during the 2017 proxy season, shareholders submitted 144 environmental proposals.  Of the 55 proposals voted on, support averaged 28.9% of votes cast, compared to 71 proposals that received 25.1% of votes cast in 2016. 1Vanguard's updated proxy voting guidelines state that Vanguard will consider environmental and social proposals on their merits, and that it may support those proposals where there is a link to long-term shareholder value.  According to Vanguard's proxy voting guidelines, some of the factors considered when evaluating these proposals include the materiality of the issue, the quality of current disclosures/business practices, and any progress by the company toward the adoption of best practices and/or industry norms. (See Liz Dunshee's blog for additional articulation of Vanguard's approach).  

The SEC's semi-annual update of its rulemaking docket was released on July 20. Overall, the SEC has cut its rulemaking agenda by about half under the Trump administration. A number of long-anticipated Dodd-Frank rulemakings on executive compensation disclosure are missing from the docket: Pay Versus Performance Listing Standards for Recovery of Erroneously Awarded Compensation (Clawbacks) Disclosure of Hedging by Employees, Officers and Directors Incentive Compensation at Financial Institutions. Likewise, the Universal Proxy rulemaking was missing. Still on the docket of proposed rulemakings: Amendments to the XBRL Program Business and Financial Disclosures required by Regulation S-K Guide 3 Bank Holding Company Disclosure Reporting of Proxy Votes on Executive Compensation and Other Matters Concept Release on Possible Revisions to Audit Committee Disclosures Rulemaking to Simplify Regulation S-K Provisions Governing Non-Financial Disclosures

In Henry v. Phixios Holdings, Inc., C.A. No. 12504-VCMR,the Delaware Court of Chancery held that pursuant to Section 202 of the General Corporation Law, in order for a stockholder to be bound by stock transfer restrictions that are not “noted conspicuously on the certificate or certificates representing the security,” he must have actual knowledge of the restrictions before he acquires the stock. If the stockholder does not have actual knowledge of the stock transfer restrictions at the time he acquires the stock, he can become bound by the stock transfer restrictions after the acquisition of the stock only if he affirmatively assents to the restrictions, either by voting to approve the restrictions or by agreeing to the restrictions. The Chancery Court concluded that the plaintiff did not have actual knowledge of the restrictions, though the restrictions were contained in the company's bylaws provided to the plaintiff prior to his purchase of the company's stock, and that as a result, the company could not rescind his shares pursuant to the restrictions contained in the bylaws. Since it can be challenging to prove "actual knowledge,"  issuers are reminded to place appropriate legends on their restricted securities prior to sale.  With regard to book-entry shares, versus certificated shares, issuers should provide notice of such restrictions pursuant to Section 151(f) of the General Corporation Law.  Issuers may also obtain an agreement, a vote or other evidence that purchasing securityholders accepted the applicable restrictions on transferability prior to sale. Under the Securities Act, issuers are required to take steps to prevent distribution to the public of securities that are neither registered nor exempt from registration.  Restrictions on transfer may also be required under an issuer's charter documents or in an agreement with a stockholder. Common types of legends include: a "'33 Act" legend that indicates that securities have not been registered under the Securities Act and may not be resold unless they are either registered or exempt from registration, an "affiliate" legend for control shares held by directors, executives or large stockholders, and a "lockup" legend that indicates that a contract prohibits the stockholder from selling the shares for a period of time.  

For U.S. and Canadian companies with annual meetings to be held between September 16, 2017, and January 31, 2018, the window for alerting Institutional Shareholder Services (ISS) about changes to self-selected peer groups used for executive compensation benchmarking closes this Friday, July 21st, at 8:00 pm EDT. Information on self-selected peer groups may influence ISS as it constructs the peer groups that it uses in its pay for performance analysis in its voting reports. According to the ISS press release, companies that have made no changes to their previous proxy-disclosed executive compensation benchmarking peers, or companies that do not wish to provide this information in advance, do not need to participate. For companies that do not submit changes, the proxy-disclosed peers from the company’s last proxy filing will automatically be factored into ISS’ peer group construction process. More information on ISS’ peer group selection process, including a link to the form for submitting peer group changes, is available here.

This week, during his opening remarks at the 2017 National Conference of the Society for Corporate Governance, SEC Commissioner Michael Piwowar remarked on prospects for repealing or delaying the CEO pay ratio rule. Under the rule, most public companies must disclose the median of the annual total compensation of all employees (including non-U.S., part-time, temporary and seasonal workers), except for the CEO; the annual total compensation of the CEO; and the ratio of the two amounts, as calculated under proxy rules. The disclosure must be prepared for fiscal years beginning on or after January 1, 2017, which would be disclosed in 2018 proxy statements. Emerging growth companies, smaller reporting companies and foreign issuers are not subject to the rule. Commissioner Piwowar expressed his support for repealing the rule, which would require Congressional action. In terms of delaying effectiveness of the rule, he stated that public commentary would determine whether that alternative is feasible in light of the associated costs and benefits of implementing the rule. Though the latest comment period on the rule has ended, he urged interested parties to continue to submit comment letters describing specific reasons why the rule is burdensome, as well as proposed fixes. During the latest comment period, the SEC received approximately 180 unique comments, with 150 of those comments in favor of the rule. Given the approaching 2018 proxy season, we advise companies not to count on a repeal or delay of the rule. Companies should continue preparing for the CEO pay ratio disclosure, and keep in mind that there is significant latitude for how the ratio may be calculated, in accordance with Item 402(u) of Regulation S-K and related guidance in C&DIs 128C.01-128C.05. In particular: The median employee, which must be identified once every three years absent a significant change, may be identified from a survey of the entire employee population, a statistical sample or other reasonable method. A de minimis exemption allows companies to exclude non-U.S. employees who account for 5% or less of their employees, including employees whose inclusion would result in a violation of foreign privacy data laws. If certain employees are excluded, then all employees from that jurisdiction must be excluded. Companies may use a consistently applied compensation measure (“CACM”) other than annual total compensation to identify the median employee, as long as the CACM reasonably reflects the annual compensation of employees. For example, total cash compensation could be a CACM unless the company also distributed annual equity awards widely among its employees. Companies may select a determination date within three months prior to the end of their fiscal year, in order to determine employee population from which to identify the median. In applying the CACM to identify the median employee, companies are not required to use a compensation period that includes the determination date. Nor are they required to use a full annual period. As an example, the SEC states that a company may use annual total compensation from its prior fiscal year so long as there has not been a change in the registrant’s employee population or employee compensation arrangements that would result in a significant change of its pay distribution to its workforce. Workers whose compensation is determined by an unaffiliated third party may be excluded from the pay ratio calculation. This population may include leased workers, independent contractors who determine their own compensation, and even workers whose minimum level of compensation is set by the company. Companies should consider testing alternative methodologies in order to assess the quality and consistency of results. While there is considerable latitude to design a pay ratio methodology, companies should let reason be their guide and be prepared to explain the decisions that they make. Companies are required to describe in their proxy statements the methodology used, as well as any material assumptions, adjustments and estimates. Not surprisingly, CEO pay ratios have varied significantly depending on the companies surveyed and the methodology. The AFL-CIO’s annual report on CEO pay calculated a CEO-to-worker-pay ratio of 347-to-1 for 2016, based on the average total compensation package for 400 of the S&P 500 CEOs of $13.1 million last year, and the average annual cash income only (excluding fringe benefits) for America’s 100,525,000 rank-and-file workers of $37,632. In contrast, a 2016 Mercer study found the ratio among respondents to be less than 200-to-1.

Companies frequently wrestle with perks in their proxy executive compensation disclosure. Whether an item constitutes a perk often requires judgment based on the facts and circumstances,¹ and disclosure may elicit intense, public scrutiny over what amounts to a relatively small percentage of an executive’s total compensation package.² From time to time, the SEC issues a cautionary tale that perks need to be accounted for and reported with care. The SEC recently announced that Miles Nadal, the former CEO of marketing company MDC Partners, has agreed to pay $5.5 million to settle charges that his perks were not properly disclosed to shareholders. While MDC Partners disclosed certain perks received by Mr. Nadal, including an annual allowance of $500,000, it failed to disclose payments for personal use of private airplanes, charitable donations in Mr. Nadal’s name, yacht and sports car expenses, cosmetic surgery, and a wide range of other perks totaling an additional $11.285 million from 2009 through 2014. The SEC order notes that MDC Partners, which agreed to a $1.5 million settlement of the matter earlier this year, understated Mr. Nadal’s perks by an average of almost 300% each year. While MDC Partners’ example is an egregious one, companies should verify that they have implemented internal controls that are capturing the full range of perks and potential perks, particularly where there is temptation to omit or mischaracterize these items, and that they have implemented disclosure controls that ensure the accurate reporting of these items. 1  In its adopting release for the “Executive Compensation and Related Person Disclosure,” Release Nos. 33-8732A, 34-54302A, File No. S7-03-06 (Aug. 29, 2006), the SEC established a two-step analysis for whether an item constitutes a perk: An item is not a perquisite if it is “integrally and directly related” to the performance of the executive’s duties, even if there is an element of personal benefit, so no disclosure would be required. If an item is not integrally and directly related to the performance of the executive’s duties, and it confers a direct or indirect benefit that has a personal aspect, then the item is a perquisite, unless it is generally available on a non-discriminatory basis to all employees. It does not matter whether the item may be provided for some business reason or for the convenience of the company. 2  Under Item 402(c)(2)(ix) of Regulation S-K, perquisites or other personal benefits paid to the named executive officers in the proxy statement must be disclosed in the summary compensation table, unless their total value is less than $10,000. Each perquisite or personal benefit must be identified by type, and each one that exceeds the greater of $25,000 or 10% of the total amount of perquisites and personal benefits must be quantified and disclosed in a footnote. Perquisites and other personal benefits are to be valued based on their aggregate incremental cost to the company.  

While passage in the House seems likely, the Financial Choice Act may undergo significant changes before it may pass in the Senate. Here is a summary of certain governance and executive compensation provisions that are included in the discussion draft: Prohibit Universal Proxy Ballots. Currently, companies are not required to use a universal proxy ballot in the event of a proxy contest, so shareholders receive one ballot listing candidates nominated by the board of directors and separate ballot(s) listing candidates nominated by the shareholder proponents. The Financial CHOICE Act would prohibit the SEC from requiring that companies use a universal proxy ballot. Modernize Shareholder Proposal Thresholds. The Financial CHOICE Act would increase share ownership thresholds for submitting shareholder proposals, from ownership of 1% of outstanding shares or $2,000 for one year, to 1% of outstanding shares for three years; increase resubmission thresholds; and prohibit proposals by a proxy other than the shareholders. Amend Frequency of Say-on-Pay Votes. Currently, under the Dodd-Frank Act, non-binding shareholder votes approving executive compensation must occur at least once every three years. The Financial CHOICE Act would amend the frequency to “each year in which there has been a material change to the compensation..." Require proxy advisory firms to register with the SEC and to provide companies with an opportunity to review and provide meaningful comment on draft recommendations. The registration application would include a certification that the firm has the financial and managerial resources to consistently provide proxy advice based on accurate information. The firm would be required to disclose the procedures and methodologies used in developing proxy voting recommendations, its organizational structure, whether or not it has a code of ethics, any potential or actual conflict of interest, and its policies and procedures to manage conflicts of interest. The registration would be updated as there are material changes, and at least on an annual basis. Repeal CEO Pay Ratio Disclosure. The Financial CHOICE Act would repeal the section of the Dodd-Frank Act which requires companies to disclose the ratio of pay between CEOs and the median employees. Acting SEC Chairman Michael S. Piwowar’s has requested an expedited review of unanticipated challenges to implementing the CEO pay ratio disclosure rule. Repeal Incentive-Based Compensation Disclosure by Covered Financial Institutions. The Financial CHOICE Act would repeal the Dodd-Frank provision which requires enhanced disclosure and reporting of incentive-based compensation by covered financial institutions. This Dodd-Frank Act provision targets excessive compensation and compensation that could lead to material financial loss. More broadly, President Trump has issued an executive order mandating that the Department of the Treasury review financial regulations, including the Dodd-Frank Act. Repeal Disclosure of Hedging Policies. The Financial CHOICE Act would repeal the Dodd-Frank requirement that companies disclose whether employees or directors may engage in hedging transactions in the company’s equity securities. Limit Clawbacks. Under the Dodd-Frank Act, companies that haven’t developed and implemented compensation clawback polices cannot be listed on national securities exchanges and associations. The Financial CHOICE Act would limit the scope of the clawback rule to current and former executives who had “control or authority over the financial reporting that resulted in the accounting restatement.” Pay vs. Performance Disclosure. The future of the pay versus performance provision is uncertain because it isn’t addressed by the Financial CHOICE Act or Hensarling’s memo. Section 953(a) of Dodd-Frank requires companies to disclose the relationship between executive compensation actually paid and the financial performance of the company.

On January 6, 2017, the SEC Staff granted no-action relief that would allow companies to exclude shareholder proposals preventing management or the board from accessing preliminary voting results on uncontested matters prior to the annual meeting, including a running tally of votes for and against, and using that information to solicit votes. See, The Boeing Company, Ferro Corporation, Honeywell International Inc., L-3 Communications Holdings, Inc., NiSource Inc., and Praxair, Inc. Under the shareholder proposals, this enhanced confidential voting requirement would apply to management or board-sponsored resolutions seeking approval of executive pay or for other purposes, including votes mandated under applicable stock exchange rules; proposals required by law, or the company’s bylaws, such as say-on-pay votes; and Rule 14a-8 shareholder proposals included in the proxy. The proposals would not apply to director elections, or contested proxy solicitations, except at the board’s discretion, and they would not prevent companies from monitoring voting for purposes of achieving a quorum.  In its no-action letters, the companies cited a history of relief granted for shareholder proposals that seek to restrict management’s access to preliminary voting results, to manage the conduct of annual shareholder meetings, and to restrict a company’s solicitation of its shareholders. The Staff concluded that the companies may rely on the “ordinary business” basis for exclusion under Rule 14a-8(i)(7), and noted that each proposal “relates to the monitoring of preliminary voting results with respect to matters that may relate to [the company’s] ordinary business.”  The Staff does not conclude that the monitoring of preliminary voting results and the solicitation of votes per se are part of ordinary business operations, which leaves open the question of whether the proposals would survive if they were limited to matters that the Staff deems unrelated to the company’s ordinary business.  This series of no-action letters represents the latest volley in the debate over the disparity between boards and management versus shareholder proponents, in terms of their ability to access voting information and to communicate with shareholders on proposals. As described in the 1998 amendments to Rule 14a-8, the underlying policy of the “ordinary business” basis for exclusion is “to confine the resolution of ordinary business problems to management and board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.” There are two frequently cited considerations for evaluating whether an activity is within the ken of “ordinary business”: (1) whether the tasks are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight,” and (2) whether the proposals seek to “micro-manage” the company by “probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”

Last Friday, ISS released new and updated FAQS on U.S. Equity Compensation Plans, as summarized below. These FAQs provide new and updated guidance on ISS’s evaluation of equity compensation plan proposals, including treatment of performance-based awards in burn rate calculations, bundling of plan amendment proposals, updates to ISS’s Equity Plan Scorecard (EPSC) policies, and the EPSC as it applies to newly public companies. Since 2015, ISS has evaluated proposals for equity compensation plans and certain amendments to these plans using the EPSC. The ESPC analysis is based on three pillars: Plan cost ("shareholder value transfer" or SVT), relative to the company's market and industry peers, Plan features, and The company's historical grant practices, including its 3-year average burn rate relative to market and industry peers. ISS scores proposals according to factors under each of these three pillars, using its proprietary model. Proposals may receive a maximum of 100 total points, with a threshold of 53 points required to receive a favorable recommendation (absent egregious factors). Summary of New and Updated FAQs 19. If a company grants performance-based awards, how will the shares be accounted for the purposes of calculating burn rate? Both time- and performance-based awards will be counted in the year in which they are granted for the burn rate calculation, but performance-based awards will be counted in the year in which they are earned if the company provides a table of awards granted and earned each year for the past three years, either in the 10-K or proxy statement. There’s a sample table in the FAQ. The aggregate of performance-based awards from all plans to all participants must be disclosed, and not just awards for NEOs. For performance awards that are subject to additional time vesting, the shares generally will be counted at the end of the time-vesting period if the number is disclosed. ISS advises companies to continue to make the additional disclosure, so that ISS may capture performance awards going forward and to provide a clear view of the year-to-year status of the performance award program. 28. How does ISS evaluate an equity plan proposal seeking approval of one or more plan amendments? If the proposed amendments do not request additional shares (or other modifications deemed to potentially increase cost), ISS will make a recommendation based on an analysis of whether the amendments are deemed to be “overall beneficial or contrary to shareholders’ interests.” If the proposed amendment is bundled with a material new share request (or are deemed to potentially increase cost), or this is the first time shareholders may vote on the plan, then ISS generally will support the amendments if there is a passing EPSC score, unless the amendments represent a “substantial diminishment to shareholders’ interests.” ISS will generally support proposals seeking approval of performance measures for Section 162(m) tax deductibility purposes, unless they are bundled with other plan amendments. For ISS’s treatment of bundled amendments, see FAQ #30. 30. How are proposals that include 162(m) reapproval along with plan amendments evaluated? ISS encourages companies to unbundle plan amendments from proposals seeking 162(m) reapproval, since the latter are generally supported by ISS (see FAQ #28). ISS will analyze bundled amendments to determine whether they are, on balance, positive or negative with respect to shareholders' interests. ISS may consider both an EPSC score and/or the balance of positive and negative impacts from the bundled amendments. 32. How does ISS view a plan amendment to increase the tax withholding rate applicable upon award settlement? This type of amendment is generally viewed as an administrative change neutral to shareholders' interests. However, if the plan contains a liberal share recycling feature (such as recycling of shares tendered as payment for an option exercise, shares withheld to cover taxes, shares added back that have been repurchased using stock option exercise proceeds, and stock-settled awards where only the actual shares delivered are counted against the plan reserve), then a company can mitigate ISS’s concern by providing that only the number of shares withheld at the minimum statutory rate may be recycled, even if the tax withholding is at a higher rate. See also, Nasdaq Doesn’t Require Shareholder Approval of Equity Compensation Plan Amendments to Increase Tax Withholding. 36. What changes were made to the EPSC policy for 2017? Effective for meetings as of Feb. 1, 2017, the following adjustments will apply to EPSC evaluations: Payment of dividends on unvested awards (new factor): Full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award. Accrual of dividends that are only payable upon vesting is allowed. No points will be earned if this prohibition is absent or incomplete (i.e. not applicable to all award types). Minimum vesting terms (updated factor – see also, FAQ #47): Full points are awarded only if the equity plan specifies a minimum vesting period of one year for all equity awards. Also, no points will be earned if the plan allows for the administrator to reduce or eliminate the one-year vesting requirement. Companies are permitted to carve out 5% of equity awards granted under the plan, which do not have to be subject to the minimum vesting requirement. Burn rate data: For companies with between 33 and 36 months of trading history at the applicable quarterly data download date, the EPSC model index will be based on whether the company has disclosed three years of burn rate data. Special Cases models apply for companies with 32 or fewer months of trading history. Factor scoring adjustment (see also, FAQ #42 and 43): Scoring for certain EPSC factors has been adjusted, though ISS does not provide specifics under its proprietary model. 41. How will equity plan proposals at newly public companies be evaluated? Newly public companies, including recent IPOs, spinoffs, and bankruptcy-emergent companies, may be evaluated under an EPSC model that includes fewer factors. In addition to these FAQS, ISS also released new and updated FAQs on U.S. Executive Compensation Policies and updated Pay-for-Performance Mechanics (which details ISS’s new Relative Pay and Financial Performance Assessment).

As the 2017 proxy season begins to unfold, proxy access continues to be a focus of shareholder proposals. Last year, companies that had already adopted mainstream proxy access bylaws, or that were planning to put mainstream proxy access bylaws up for a shareholder vote, were largely successful in being able to exclude shareholder proposals to adopt proxy access bylaws on the grounds that such proposals had already been “substantially implemented.” This year, companies have received a wave of new shareholder proposals seeking to amend their existing proxy access bylaws. Until recently, the SEC staff had generally denied requests to exclude such proposals. In two recent no-action letters, however, the staff has provided relief where the company adopted several of the requested amendments. In addition, for the first time in the United States, a shareholder attempted to use a proxy access bylaw to nominate a director candidate and to have that candidate included in the company’s proxy statement. Read more about these recent developments in our full summary here: https://www.dorsey.com/newsresources/publications/client-alerts/2016/12/recent-developments-in-proxy-access

ISS has published an executive summary of 2017 updates to its benchmark proxy voting policies for the Americas, EMEA, and Asia-Pacific regions.  The updated policies will generally be applied to shareholder meetings on or after February 1, 2017. U.S. policy changes are summarized below, and companies should keep them in mind as they consider policies on director compensation, dividend and vesting policies for stock awards, and shareholder rights to amend bylaws.  For companies contemplating IPOs, governance structures that have a material adverse impact on shareholder rights, including multi-class shareholder structures, generally will lead to recommendations against director candidates.  It’s worth noting that in certain situations where ISS finds a practice problematic, it will result in ongoing (versus one-time) recommendations against directors (see the last two policies described below). In December 2016, ISS will release a complete set of updated policies, and it will release updated Frequently Asked Questions ("FAQ") documents on certain U.S. policies, including the Equity Plan Scorecard. Non-Employee Director Pay:  While ISS does not evaluate stand-alone non-employee director (“NED”) plans according to its Equity Plan Scorecard he EPSC model, these plans do receive a standard cost evaluation for Shareholder Value Transfer (SVT).  Under the updated policies, NED pay proposals will be evaluated across “a broader range of factors and more nuanced consideration of director pay.”  ISS will assess advisory proposals seeking shareholder approval of NED pay, and certain NED equity plan proposals that are determined to be relatively costly, considering the following, additional qualitative factors: The relative magnitude of director compensation as compared to companies of a similar profile; The presence of problematic pay practices relating to director compensation; Director stock ownership guidelines and holding requirements; Equity award vesting schedules; The mix of cash and equity-based compensation; Meaningful limits on director compensation; The availability of retirement benefits or perquisites; and The quality of disclosure surrounding director compensation. This policy update is consistent with recent judicial scrutiny of director compensation.  In Calma v. Templeton, the Delaware Chancery Court denied Citrix’s motion to dismiss the plaintiff’s breach of fiduciary duty claim against the Citrix board of directors, and furthermore, held that director compensation decisions would be judged by the heightened entire fairness standard (versus the deferential business judgment rule), where the director compensation program did not include “meaningful limits.” Dividends and Minimum Vesting for Stock Awards:  ISS added a factor on dividend payments on unvested awards.  ISS will award full points if the equity plan expressly prohibits dividend payments for all award types before the vesting of the underlying award.  Accrual of dividends payable upon vesting is acceptable.  No points will be earned if this prohibition is absent or incomplete (i.e. not applicable to all award types).  Notably, a company's general practice of not paying dividends until vesting, if it is not memorialized in the plan document, is insufficient to earn full points. The minimum vesting factor was also updated so that an equity plan must specify a minimum vesting period of one year for all award types under the plan in order to receive full points for this factor.  No points will be earned if the plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement. Restrictions on Shareholder Amendments to Bylaws:  ISS will make ongoing recommendations against governance committee members if the company's charter imposes undue restrictions on shareholders' ability to amend the bylaws.  These restrictions include but are not limited to a prohibition on the submission of binding shareholder proposals or ownership/holding requirements for such shareholder proposals that exceed those in the SEC’s Rule 14a-8. IPOs with Multi-Class Shareholder Structures:  If prior to or in connection with a company's public offering, the company or its board adopted bylaw or charter provisions materially adverse to shareholder rights, or implemented a multi-class capital structure in which the classes have unequal voting rights, ISS will generally recommend withhold or against votes on directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case).  Unless the adverse provision and/or problematic capital structure is reversed or removed, ISS will recommend a vote case-by-case on director nominees in subsequent years.  

Institutional Shareholder Services (ISS) is rebranding its governance scoring solution “ISS QuickScore” to “ISS QualityScore,” though the underlying methodology appears very similar.  As in the past, covered companies can review, verify and provide feedback on the data used to determine their scores via a complimentary Data Verification tool accessed through the Governance Analytics platform.  See instructions for accessing the Data Verification tool here. Data verification for covered companies will be open from October 31, 2016, to November 11, 2016. The methodology for QualityScore does not appear to have changed significantly from QuickScore.  Like QuickScore, QualityScore uses a numeric, decile-based score that indicates a company’s governance risk relative to their index or region, and companies receive an overall QualityScore and a score for each of four pillars: Board Structure, Compensation/ Remuneration, Shareholder Rights, and Audit & Risk Oversight, which were the same four categories in the QuickScore methodology. A score in the 1st decile (QS:1) indicates relatively higher quality governance practices and relatively lower governance risk, and, conversely, a score in the 10th decile (QS:10) indicates relatively higher governance risk.  Unlike QuickScore, QualityScores will be refreshed daily. Companies may continue to have questions about the transparency of the weighting assigned to each governance factor.  Over 200 factors are analyzed, with the specific factors under analysis varying by region.  Each factor is assigned a weight, based on an understanding of the impact of governance practices, ISS voting policy, and prevailing governance standards within each region. New and updated factors address issues such as proxy access terms, board diversity metrics, exclusive forum provisions  and fee shifting provisions. Effective November 21, subscribers to ISS QualityScore will be able to view details on covered companies’ proxy access provisions, such as ownership thresholds, holding periods, and certain restrictions on the number of shareholder nominees and the ability to act in concert. QualityScore will also offer increased coverage of board composition issues, such as additional refreshment and diversity measures, for US companies. Subscribers will also have the ability to access and analyze the underlying data from which the scores are generated, allowing them to screen covered companies for particular governance practices, and to compare covered companies’ practices.

Rule 303A.08 of the NYSE Listed Company Manual requires that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions to such plans, with limited exceptions specified in the Rule. The NYSE issued clarifications to certain FAQs on the Rule on August 18, 2016, which are summarized in the following memo: https://www.dorsey.com/newsresources/publications/client-alerts/2016/08/nyse-clarifies-answers-to-certain-faqs