Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC’s Division of Corporation Finance staff issued seven Tender Offers and Schedules C&DIs on November 18th in relation to aspects of the tender offer rules under Regulations 14D and 14E. As administered by the Division’s Office of Mergers and Acquisitions (OM&A), these interpretations shed additional light on certain discrete disclosure requirements under Schedule 14D-9 and provide clarification on the staff’s application of the positions expressed in the Abbreviated Tender or Exchange Offers for Non-Convertible Debt Securities no-action letter (issued January 23, 2015).

Schedule 14D-9 refers to the filing required to be filed by an issuer in response a tender offer in which the issuer provides its recommendation to shareholders of the subject securities as to whether they should accept, reject or take other action with respect to the tender offer. The specified disclosure requirements are derived from the applicable disclosures required under Regulation M-A.

In Question 159.01, the staff indicates that the required summary of material terms of employment or other compensation arrangements for parties making recommendations with respect to the tender offer applies to a financial advisor engaged by an issuer’s board or independent committee for the exclusive purpose of providing financial advice on the underlying transaction.

The interpretation provides that the disclosure, as triggered by Item 5 of Schedule 14D-9 and Item 1009(a) of Regulation M-A, is required for such a financial advisor whose analyses or conclusions are discussed in the issuer’s Schedule 14D-9 even if such party expressly states that it is not soliciting or making a recommendation to the shareholders.

The OM&A staff again focuses on the required disclosure of the “material terms” of employment arrangements for third party advisors in Question 159.02, effectively advising against generic references to “customary compensation” in response to the applicable disclosure requirement and providing some guidance on the types of information that may provide a sufficient summary of applicable compensation terms for third party advisors.

Although determinations as to the sufficiency of disclosure is always subject to the staff’s standard facts and circumstances analysis, the interpretation clearly suggests that the staff is seeking further specificity on this point to ensure that shareholders have sufficient information to evaluate “the merits of the solicitation or recommendation and the objectivity of the financial advisors’ analyses or conclusions.”  Moreover, the staff notes that this interpretation is consistent with the overall purposes of disclosure under Schedule 14D-9 which is to “assist security holders in making their investment decision and in evaluating the merits of a solicitation/recommendation.”

Question 159.02 further suggests some specific disclosures that, while not expressly required by the rules, could reflect a sufficient summary of material compensation elements including:

  • the types of fees payable to the financial advisors;
  • a sufficiently-detailed narrative disclosure of fees (if there is, otherwise, no quantification of the fees);
  • any contingencies to the payment of the financial advisors’ compensation; and
  • any other information about the compensatory arrangement that would be material (including any material incentives or conflicts).
  • The remaining interpretations released by the staff (Questions 162.01 – 162.05) are each aimed at providing clarification on the application of the staff’s determination in The Abbreviated Tender or Exchange Offers for Non-Convertible Debt Securities no-action letter.

As background, the no-action letter discusses the parameters in which the staff would not object to a “Five Business Day Tender Offer” for non-convertible debt that would otherwise violate rules Rule 14e-1(a) or Rule 14e-1(b) under the Exchange Act (which, respectively, require that a tender offer must be open for no less than twenty business days and require a 10-day extension of the open period for a tender offer following certain increases and decreases to the class of securities being sought, the consideration, or the soliciting fee).

The 2015 no-action letter was a further relaxation of the staff’s application of the tender offer rules for non-convertible debt tenders (e.g., allowing a shorter offering period – five business days instead of 7-10 calendar days and the exchange of qualified debt securities as part of the tender offer). Historically, the staff’s accommodations for tender offers for non-convertible debt securities reflect the view that such offerings may not be subject to same concerns as tender offers for equity securities (and, thus, may not require the same protections).

The related interpretations issued by the staff clarify the following:

  • A foreign private issuer relying on the no-action letter to conduct an abbreviated offer can satisfy the stated requirement thereunder to furnish a press release announcing the abbreviated offer on a Form 8-K (on the first business day of the offer) by instead filing such notice on Form 6-K, the applicable form for foreign private issuers (Question 162.01);
  • References in the no-action letter to the requirement that abbreviated offers must be made “for any and all” subject debt securities do not preclude such offers from including minimum tender conditions (Question 162.02);
  • Under the letter, abbreviated offers for consideration consisting of Qualified Debt Securities may be made to qualified institutional buyers (QIBs) and non-U.S. persons for a fixed amount of Qualified Debt Securities so long as a fixed amount of cash consideration is concurrently offered to persons other than QIBs and non-U.S. persons. The cash to be offered to persons other than QIBs and non-U.S. persons may be calculated with reference to a fixed spread to a benchmark (provided that the calculation is the same as the calculation used in determining the amount of Qualified Debt Securities) (Question 162.03);
  • An offeror can still rely on the letter to conduct an abbreviated offer if it issues “Qualified Debt Securities” to “Eligible Exchange Offer Participants” pursuant to Securities Act Section 3(a)(9) (instead of Section 4(a)(2) or Rule 144A, as required in the no-action letter) (Question 162.04); and
  • Offerors relying on the no-action letter may announce an abbreviated offer at any time but may not commence the offer prior to 5:01 p.m. on the tenth business day after the first public announcement of a purchase, sale or transfer of a material business or amount of assets described as further defined in the letter. (Question 162.05).

Something must be afoot inside the Beltway, because Sen. Sherrod Brown (D-OH) and Rep. Maxine Waters (D-CA) sent a letter to Senate and House leaders stating they will oppose ideological policy riders to year-end funding legislation aimed at rolling back protections of the Dodd-Frank Wall Street Reform law. The letter stated in part as follows:

“Specially, Congress must not include in end-of-year funding legislation any riders designed to repeal, undermine, or delay any provisions of Wall Street reform, including those targeted at the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, altering the bankruptcy code for financial institutions, changing our housing finance system, preventing the Securities and Exchange Commission from moving forward with rulemaking to require disclosure of political campaign spending, or other similar roll-backs.”

The foregoing quote looks like a thinly veiled reference to the Financial Choice Act, often touted as a vehicle to replace the Dodd-Frank Act.

The SEC’s Division of Corporation Finance released four new compliance and disclosure interpretations (C&DIs) on November 17th addressing aspects of offerings under Regulation A and Regulation D.  The staff’s new interpretations clarify the requirements for post-qualification amendments to offering statements under Regulation A, extend the same accommodations available to EGCs under the FAST Act to issuers making offerings under Regulation A, and discard traditional integration analysis for private offerings under 506(b) and subsequent offer sales using general solicitation under Rule 506(c).

The first of three C&DIs focused on “small issues” offerings under Regulation A (Question 182.12), discusses the applicable form requirements for a post-qualification amendment to an offering statement on Form 1-A to qualify an additional class of securities.  In particular, the C&DI highlights that the disclosure provided under Item 4 to Part I of Form 1-A (“Summary Information Regarding the Offering and Other Current or Proposed Offerings”) need only include information about the additional class of securities being qualified.  The C&DI also reminds issuers to update Item 6 to Part I of Form 1 A in the post-qualification amendment to reflect any class of securities previously issued or sold in a Regulation A offering over the past year as part of its description of “Unregistered Securities Issued or Sold Within One Year.”

The second Regulation A C&DI (Question 182.13) discusses how an issuer should calculate whether a change in the price of the offering exceeds 20% of the maximum aggregate offering such that a post-qualification amendment might be necessary to revise the pricing information (as discussed in the note to Rule 253(b) of Regulation A).  The C&DI clarifies that the 20% may be measured from either the high end of the price range (for an increased offering price) or the low end (for a decreased offering price) while noting that the provision may not be used to make an offering in excess of the Tier 1 or Tier 2 limits set forth in Rule 251(a) or if the change would result in a Tier 1 offering becoming a Tier 2 offering.

In Question 182.14, the staff indicates that an issuer relying on Regulation A may omit financial information for historical periods in a Form 1-A if it reasonably believes that those financial statements will not be required at the time of the qualification consistent with the treatment of “emerging growth companies” under the FAST Act.  A company would still be obligated to amend its offering statement prior to qualification to include all required financial information at the time of qualification and redistribute solicitation materials at the time that any previously omitted financial information has been included in an amended offering statement.

The final C&DI (Question 256.34) released by the staff reveals a novel interpretation of the applicable integration analysis for offerings initially made on a  private basis under Rule 506(b) and subsequently conducted using general solicitation under 506(c) where there is less than six months separating such offers and sales.  The new interpretation clarifies that such offerings would not be integrated if all of the applicable requirements of Rule 506(b) were met for offers and sales that occurred prior to the general solicitation.

In reliance on the logic of Rule 152 of the Securities Act (i.e. “transactions by an issuer not involving any public offering” remain exempt under Section 4(a))2) even if “subsequently thereto the issuer decides to make a public offering and/or files a registration statement”), the staff indicates that, under such circumstances, prior offerings made pursuant to 506(b) would remain exempt from registration and an issuer would be permitted to make subsequent offers and sales pursuant to Rule 506(c) (provided its continued compliance with the obligation “to take reasonable steps to verify the accredited investor status of all subsequent purchasers”).

The staff’s interpretation specifically states that the traditional integration analysis under the note to Rule 502(a) of the Securities Act (as derived from Release No. 33-4552 (November 6, 1962)) is not “the sole means by which the issuer determines whether all of the offers and sales constitute a single offering.”  However, in light of the staff’s expressed position in Question 256.34, it difficult to imagine a scenario in which the staff will ever apply the Rule 502(a) analysis to integrate proximate offerings under Rules 506(b) and 506(c) going forward.

Insights into an SEC composed of Trump appointees can be gleaned from Financial Services Committee Chairman Jeb Hensarling’s (R-TX) opening statements at a committee hearing on SEC oversight, with testimony by outgoing SEC Chair Mary Jo White. Congressman Hensarling noted some concerns and disagreements with the SEC, possibly foreshadowing policies of the incoming Trump administration:

  • The SEC’s ongoing failure to develop a capital formation agenda. Notwithstanding two very minor rule changes approved last month, the SEC has done little to promote capital formation since Congress passed the JOBS Act in 2012. The failure by the SEC stems in part from the Commission’s refusal to act on recommendations made by its Small Business Capital Formation Forum.
  • The SEC has not implemented the directive passed by Congress requiring the SEC to simplify its disclosure regime. The FAST Act, which became law nearly a year ago, requires the SEC to eliminate or reduce burdensome, duplicative or outdated disclosures. The SEC has an obligation to follow the law and not appease extremists whose ideological objectives that have nothing to do with the SEC’s core mission
  • The SEC’s failure to require the electronic delivery of mutual fund documents is disappointing.
  • Given the disturbing national debt clock, Congressman Hensarling sees no need for the SEC to receive a pre-funded escrow account of more than $290 million for a potential move of its headquarters. The SEC will have to increase its fees to pre-fund the move, which is nothing less than a tax on capital formation.
  • Claims that the SEC is underfunded are not supported by the facts since the SEC’s budget has increased by a whopping 325 percent since the year 2000—an increase the American people do not enjoy. Moreover, the SEC’s current budget of $1.605 billion does not account for money in its Reserve Fund, which can include up to $100 million – plus another $25 million in unused funds that carry over from a previous fiscal year.
  • Whenever there is a transfer of power from one presidential administration to another, there is a temptation for federal agencies to rush pending rulemakings to completion, as a way of cementing the policy priorities of the outgoing administration. But this type of “midnight rulemaking” is neither conducive to sound policy nor consistent with principles of democratic accountability.
  • As there are currently two vacancies at the Commission, absent an emergency and given Chair White’s current reputation and legacy, the SEC should respect the results of last week’s election and resist the temptation to finalize any regulations, including Dodd-Frank Title VII regulations, in deference to the right of the incoming administration to set its own priorities upon taking office in January.

Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, set forth her political agenda, and denounced President-elect Trump’s stances on financial services and Congressional Republicans’ deregulatory Wall Street agenda. Congresswoman Waters noted:

  • We are facing uncertain times, and at the forefront of that uncertainty is a President-elect who does not have a coherent or consistent stance on anything. We don’t know if he’s building a wall or just a fence. We don’t know if he’s repealing Obamacare or cherry picking some provisions that he now seems to support. We don’t know who he is, what he stands for, or what kind of president he will be. We cannot rely on anything he says because it changes from one day to the next.
  • So when Mr. Trump talks about financial services reform and dismantling Dodd-Frank, what does he mean? Does he mean letting the Wall Street banks he’s so indebted to write their own rules? Does it mean repealing the fair housing laws the Department of Justice sued him over decades ago? Does he want to repeal investor protections and make it harder for the SEC to go after bad actors? Does he want to gut the Consumer Financial Protect Bureau, despite the agency being the strongest champion of every day consumers?

The CFTC approved a final rule amending a CFTC regulation addressing the timing for filing chief compliance officer annual reports for certain registrants.

The final rule amends CFTC regulation 3.3 to provide futures commission merchants, swap dealers, and major swap participants 90 days following their fiscal year-end to file chief compliance officer annual reports and clarifies the filing requirements applicable to swap dealers and major swap participants located in jurisdictions for which the CFTC has granted a comparability determination with respect to the contents of the reports. The final rule codifies and supersedes CFTC Staff Letter No. 15-15 issued March 27, 2015.

The final rule is effective immediately upon publication in the Federal Register.

 

In a recently issued no-action letter, the staff of the SEC’s Division of Corporate Finance allowed a company to exclude a shareholder proposal seeking specific changes to the company’s existing proxy access bylaw.  According to the November 4th letter,  Oshkosh Corporation successfully argued that it had substantially implemented a shareholder proposal based on its modifications to an existing proxy access bylaw such that exclusion of the proposal was warranted in reliance on the basis for exclusion of shareholder proposals available under Rule 14a-8(i)(10).

The staff’s determination in this letter marks the first time the staff has concurred with the exclusion under (i)(10) of a proxy access proposal aimed at making specific changes to an existing proxy access framework, also known as a “Fix Proxy Access” proposal (as distinguished from proposals seeking first-time implementation of proxy access or “Adopt Proxy Access” proposals).

In a key distinction from prior (i)(10) letters, Oshkosh was able to highlight specific modifications to its existing proxy access bylaw made after receiving the shareholder proposal in making its successful (i)(10) argument.

By contrast, in several no-action letters issued over the past six months, the staff has consistently expressed an unwillingness to concur with arguments that Fix Proxy Access proposals should be excluded under (i)(10). One such letter released in late September (available here) embodies the staff’s prevailing view that companies may not merely point to an existing proxy access bylaw as evidence that a shareholder proposal seeking specified changes to such bylaw has already been implemented.

The most striking take-away from the November 4th letter, however, may relate to the specific modifications made in response to the shareholder proposal.  In particular, Oshkosh chose to implement only a subset of the total modifications sought by the proponent which included:

  • Reducing the eligibility threshold (from 5% to 3%)
  • Eliminating the 25% vote minimum for renomination, and
  • Eliminating the requirement that nominating shareholder represents it would continue ownership for one year following the meeting.

Oshkosh obtained exclusion despite the fact that they did not implement certain other elements of the shareholder proposal which suggests that the staff might not necessarily view the following elements as essential objectives of the submitted Fix Proxy Access Proposal:

  • Increasing the cap on the percentage of shareholder-nominated candidates to the greater of 25% of directors then serving or two (from the greater of 20% of directors or two),
  • Eliminating the 20-person cap on aggregation or
  • Eliminating the requirement that, to count loaned securities toward eligibility thresholds, there must be a right to recall the shares upon five business days’ notice.

The fact that the proponent in Oshkosh sought and received a specified reduction to the share ownership eligibility threshold for shareholder(s) to nominate a director (from 5% to 3%) may have been an additional motivating factor contributing to the staff’s substantial implementation determination.  As evidenced by its prior (i)(10) decisions in letters involving  Adopt Proxy Access proposals, the staff has consistently indicated that such ownership thresholds represent an essential element of proxy access.  In particular, the staff has repeatedly denied exclusion of proposals under (i)(10) where a company’s proxy access bylaw differs from the shareholder proponent’s proposal on share ownership eligibility threshold (e.g., where the shareholder proponent sought a 3% threshold while the company implements a 5% threshold).  It seems possible that the determination of the staff in Oshkosh was driven at least partially by the company’s willingness to implement this critical aspect of the shareholder’s proposal.

While the staffs’ concurrence in Oshkosh provides some perspective on what may be viewed as essential and non-essential elements of a Fix Proxy Access proposal, the staff’s determination is, as always, issuer and proposal-specific.  For example, it remains unclear how the staff might assess a company’s substantial implementation of a Fix Proxy Access proposal which does not include modification to the share ownership eligibility thresholds.   Likewise, would the staff continue to view changes to the nominee cap, shareholder aggregation limits, or power-to-recall for loaned securities as non-essential if they represented the only elements of a Fix Proxy Access proposal?  With the likely increase in the submission of Fix Proxy Access proposals next proxy season, such questions will continue to plague issuers.

At the very least, the staff’s determination in Oshkosh serves as notice that a company must take specific action to modify its proxy access system by implementing aspects of a Fix Proxy Access proposal in order to “substantially implement” a Fix Proxy Access proposal for purposes of exclusion under (i)(10).

To perhaps oversimplify things greatly, the new GAAP for lease accounting will require operating leases to be recorded on the balance sheet much like the current treatment for capital leases. This shift in GAAP could wreak havoc with the statutory net capital requirements for broker dealers.  Fortunately, in a no-action letter, the SEC has provided broker-dealers with relief as follows:

“Based on the facts and representations set forth in your letter and discussions with the Staff as collectively set forth in this letter, the Division will not recommend enforcement action to the Commission under Exchange Act Rule 15c3-1 if a broker-dealer computing net capital adds back an operating lease asset to the extent of the associated operating lease liability. If the value of the operating lease liability exceeds the value of the associated operating lease asset, the amount by which the liability’s value exceeds the associated lease asset must be deducted for net capital purposes. A broker-dealer cannot add back an operating lease asset to offset an operating lease liability unless the asset and the liability arise from the same operating lease; nor can a broker-dealer add back combined or aggregated operating lease assets to offset combined or aggregated operating lease liabilities.

Further, based on the facts and representations set forth in your letter and discussions with the Staff as collectively set forth in this letter, the Division will not recommend enforcement action to the Commission under Exchange Act Rule 15c3-1 if a broker-dealer determining its minimum net capital requirement using the AI standard does not include in its aggregate indebtedness an operating lease liability to the extent of the associated operating lease asset. If the value of the operating lease liability exceeds the associated operating lease asset, the amount by which the lease liability exceeds the lease asset must be included in the broker-dealer’s aggregate indebtedness. A broker-dealer cannot add back an operating lease asset to offset an operating lease liability unless the asset and the liability arise from the same operating lease; nor can a broker-dealer add back combined or aggregated operating lease assets to offset combined or aggregated operating lease liabilities.”

Observers widely believe President-Elect Trump will attempt to dismantle much of the Dodd-Frank Act. While to many it is an interesting idea, it may not have the consequences many believe.

Take, for instance, the Dodd-Frank conflict minerals provisions. This appears easy enough to repeal logistically.  But many American companies have invested enormous resources in developing responsible supply chains, such as Apple.  Apple and others could easily require their suppliers remain conflict free and report annually. Compliance could actually be more difficult, if major companies adopt inconsistent requirements.

Another example might be elimination of Dodd-Frank’s say-on-pay vote requirements. ISS could easily adopt a policy that it will recommend a vote against directors of companies that do not hold regular votes.  Or the exchanges could adopt rules requiring listed companies to have claw-back policies even if not mandated by Dodd-Frank, although this would require the cooperation of the SEC.

On another note, President-Elect Trump’s Contract with the American Voter contains a pledge to implement a requirement that for every new federal regulation, two existing regulations must be eliminated. So it would place many in a conundrum.  If you want to implement a universal proxy card, what two SEC regulations do you want to jettison?  Maybe SEC Rule 14a-8? What else?

The SEC issued three new C&DIs on fee calculations:

Question 240.11

Question: An issuer has a Form S-8 on file that registers shares of common stock to be issued upon the exercise of outstanding options. The issuer has decided to stop granting stock options and believes that it has more shares registered on the Form S-8 than it will need to cover the exercise of the outstanding options. May the issuer transfer to a new registration statement the filing fees associated with the securities that the issuer believes it will not need to issue, and continue to use the Form S-8 to cover the exercise of the outstanding options?

Answer: No. Rule 457(p) permits filing fees to be transferred only after the registered offering has been completed or terminated or the registration statement has been withdrawn. As a result, the issuer may not transfer the fees associated with the excess securities until it completes or terminates the offering registered on Form S-8. However, as provided in Securities Act Forms CDI 126.43, if the excess securities are or may become authorized for issuance under another issuer plan, the issuer may file a post-effective amendment to the Form S-8 to disclose that these securities will be sold under the other plan. The Part I information delivered pursuant to Rule 428 with respect to each plan should be specific to that plan. [Nov. 9, 2016]

Question 240.15

Question: An issuer has an effective Form S-8 that registers shares of common stock to be issued under the issuer’s 2006 equity compensation plan, and has recently adopted a new 2016 equity compensation plan. The 2006 plan authorized the issuer to grant awards for up to 20 million shares, and to date the issuer has granted options (all of which remain outstanding) exercisable for 15 million shares. Upon effectiveness of the 2016 plan, no further awards may be granted pursuant to the 2006 plan and the 5 million shares not covered by any award under the 2006 plan become authorized for issuance under the 2016 plan. The terms of the 2016 plan provide that the 15 million shares underlying outstanding options granted pursuant to the 2006 plan will also become authorized for issuance under the 2016 plan when the outstanding options under the 2006 plan expire or are terminated or canceled. The issuer plans to file a new Form S-8 to register 10 million shares that are newly authorized for issuance under the 2016 plan. May it also include on that registration statement the 5 million shares and an estimated number of shares that will become available upon the cancellation or termination of awards, all of which were previously authorized for issuance pursuant to the 2006 plan and that will roll over to the 2016 plan? Alternatively, is there another way the issuer can offer and sell under the 2016 plan the 5 million shares that are not subject to outstanding options under the 2006 plan and any shares that become authorized under the 2016 plan upon the cancellation or termination of options under the 2006 plan without paying a new registration fee?

Answer: Yes, the issuer may register on the new Form S-8 the 5 million shares that have become authorized for issuance under the 2016 plan, an estimated number of shares that will become authorized for issuance under the 2016 plan upon cancellation or termination of awards granted under the 2006 plan, and the newly authorized 10 million shares. Because the offering is not yet completed under the 2006 plan, however, Rule 457(p) does not permit the registrant to claim the registration fee associated with the shares from the 2006 plan as an offset against the registration fee due for the new registration statement. See Securities Act Rules CDI 240.11.

Alternatively, the issuer can file a post-effective amendment to the earlier Form S-8 for the 2006 plan to indicate that the registration statement will also cover the issuance of those shares under the 2016 plan once they are no longer issuable pursuant to the 2006 plan and instead become authorized for issuance under the 2016 plan. The post-effective amendment, which would be required under Item 512(a)(1)(iii) of Regulation S-K to disclose a material change in the plan of distribution, should identify both the 2006 plan and the 2016 plan on the cover page, and describe how shares that will not be issued under the 2006 plan have or may become authorized for issuance under the 2016 plan. No new filing fee would be due upon the filing of the post-effective amendment. Because additional securities may not be added to a registration statement by means of a post-effective amendment (see Securities Act Rule 413(a)), the newly authorized 10 million shares must be registered on a separate registration statement. This alternative applies only with respect to Form S-8. [Nov. 9, 2016]

Question 240.16

Question: When filing fees paid in connection with a prior registration statement are used to offset fees due on a subsequent registration statement pursuant to Rule 457(p), what information pertaining to the offset should the issuer include in a note to the Calculation of Registration Fee table?

Answer: Rule 457(p) requires a note to the table to state the name of the registrant, the file number and initial filing date of the earlier registration statement from which the offset is claimed and the dollar amount of the offset. In addition, to assist the staff in assessing the registrant’s eligibility for offset, the registrant should quantify the amount of unsold securities from the prior registration statement associated with the claimed offset and disclose either that the prior registration statement has been withdrawn or that any offering that included the unsold securities has been terminated or completed. An offering registered on Form S-8 is only completed or terminated when no additional securities will be issued pursuant to the plan covered by the Form S-8, including through the exercise of any outstanding awards. [Nov. 9, 2016]

The SEC also issued three new CD&I’s on Form S-8.   New Questions 126.43 and 126.44 mirror Questions 240.15 and 240.16 above, and the third provides:

Question 126.06

Question: May a company register securities to be issued pursuant to two plans on the same registration statement? If so, how is this done?

Answer: Yes. The full title of each plan should be listed on the face of the registration statement on the appropriate line. The Part I information delivered pursuant to Rule 428 with respect to each plan should be specific to that plan. If any Part II information relates specifically to one plan, the disclosure should make that relationship clear. [Nov. 9, 2016]

ISS announced changes to the methodology underlying its pay-for-performance models for companies in the U.S. and other markets to take effect Feb. 1, 2017.

ISS will present relative evaluations of return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth in proxy voting reports issued on companies in the U.S. The additional financial measures will supplement ISS’ legacy (and continued) use of total shareholder return (TSR) as a key metric for assessing corporate performance in the context of evaluating executive compensation.

Pay-for-performance updates for U.S. companies include the following:

  • A new standardized comparison of the subject company’s CEO pay and financial performance ranking relative to its ISS-defined peer group will be added to ISS’ benchmark policy proxy research reports beginning Feb. 1, 2017. Financial performance will be measured by a weighted average of multiple financial metrics including return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth. The metrics and weightings will be based on the company’s four-digit GICS industry group, and are based on extensive back-testing over multiple years. The financial performance and pay ranking information will be displayed for all companies subject to ISS’ quantitative pay-for-performance screens. While this information will not impact the quantitative screening results during the 2017 proxy season, it may be referenced in the qualitative review and its consideration may mitigate or heighten identified pay-for-performance concerns.
  • Relative Degree of Alignment (RDA) assessment will only be considered in the overall quantitative concern level when the subject company has a minimum of two years of pay and TSR data. Companies that only have one year of data will receive an N/A (not applicable) concern for their RDA test. The RDA measure uses annualized three-year TSR – i.e., the annualized rate of the three 12-month periods in the three-year measurement period (calculated as the geometric mean of the three TSRs). TSR reflects stock price appreciation plus the impact of reinvestment of dividends (and the compounding effect of dividends paid on reinvested dividends) for the period.