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

The National Credit Union Administration, or NCUA, became the first of six Agencies to unveil a revised rule proposal under Section 956 of the Dodd-Frank Act:

  • prohibiting incentive-based payment arrangements that the Agencies determine encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss; and
  • requiring those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate Federal regulator.

The other five Agencies that will issue the proposed rule are the Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); and U.S. Securities and Exchange Commission (SEC).  These five Agencies are expected to issue the proposal in the near future.

Background.

The Agencies proposed a rule in 2011, rather than guidelines, to establish requirements applicable to the incentive-based compensation arrangements of all covered institutions. The 2011 Proposed Rule would have supplemented existing rules, guidance, and ongoing supervisory efforts of the Agencies.

The Agencies are re-proposing a rule, rather than proposing guidelines, to establish general requirements applicable to the incentive-based compensation arrangements of all covered institutions. The proposed rule reflects the Agencies’ collective supervisory experiences since they proposed the 2011 Proposed Rule. These supervisory experiences have allowed the Agencies to propose a rule that incorporates practices that financial institutions and foreign regulators have adopted to address the deficiencies in incentive-based compensation practices that helped contribute to the financial crisis that began in 2007.

Scope and Initial Applicability.

Similar to the 2011 Proposed Rule, the proposed rule would apply to any covered institution with average total consolidated assets greater than or equal to $1 billion that offers incentive-based compensation to covered persons.

The definition of “covered institution” depends on the Agency issuing the rule, but for the most part includes national banks, federal savings associations, state member banks, bank holding companies, credit unions, broker dealers, and the like.

The compliance date of the proposed rule would be no later than the beginning of the first calendar quarter that begins at least 540 days after a final rule is published in the Federal Register. The proposed rule would not apply to any incentive-based compensation plan with a performance period that begins before the compliance date.

Applicability

The proposed rule identifies three categories of covered institutions based on average total consolidated assets:

  • Level 1 (greater than or equal to $250 billion);
  • Level 2 (greater than or equal to $50 billion and less than $250 billion); and
  • Level 3 (greater than or equal to $1 billion and less than $50 billion).

Requirements and Prohibitions Applicable to All Covered Institutions.

Similar to the 2011 Proposed Rule, the proposed rule would prohibit all covered institutions from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk by providing covered persons with excessive compensation, fees, or benefits or that could lead to material financial loss to the covered institution.

Also consistent with the 2011 Proposed Rule, the proposed rule provides that compensation, fees, and benefits will be considered excessive when amounts paid are unreasonable or disproportionate to the value of the services performed by a covered person, taking into consideration all relevant factors, including:

  • The combined value of all compensation, fees, or benefits provided to a covered person;
  • The compensation history of the covered person and other individuals with comparable expertise at the covered institution;
  • The financial condition of the covered institution;
  • Compensation practices at comparable institutions, based upon such factors as asset size, geographic location, and the complexity of the covered institution’s operations and assets;
  • For post-employment benefits, the projected total cost and benefit to the covered institution; and
  • Any connection between the covered person and any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the covered institution.

The proposed rule is also similar to the 2011 Proposed Rule in that it provides that an incentive-based compensation arrangement will be considered to encourage inappropriate risks that could lead to material financial loss to the covered institution, unless the arrangement:

  • Appropriately balances risk and reward;
  • Is compatible with effective risk management and controls; and
  • Is supported by effective governance.

However, unlike the 2011 Proposed Rule, the proposed rule specifically provides that an incentive-based compensation arrangement would not be considered to appropriately balance risk and reward unless it:

  • Includes financial and non-financial measures of performance;
  • Is designed to allow non-financial measures of performance to override financial measures of performance, when appropriate; and
  • Is subject to adjustment to reflect actual losses, inappropriate risks taken, compliance deficiencies, or other measures or aspects of financial and non-financial performance.

The proposed rule also contains requirements for the board of directors of a covered institution that are similar to requirements included in the 2011 Proposed Rule. Under the proposed rule, the board of directors of each covered institution (or a committee thereof) would be required to:

  • Conduct oversight of the covered institution’s incentive-based compensation program;
  • Approve incentive-based compensation arrangements for senior executive officers, including amounts of awards and, at the time of vesting, payouts under such arrangements; and
  • Approve material exceptions or adjustments to incentive-based compensation policies or arrangements for senior executive officers.

The 2011 Proposed Rule contained an annual reporting requirement, which has been replaced by a recordkeeping requirement in the proposed rule. Covered institutions would be required to create annually and maintain for at least seven years records that document the structure of incentive-based compensation arrangements and that demonstrate compliance with the proposed rule. The records would be required to be disclosed to the covered institution’s appropriate Federal regulator upon request.

Disclosure and Recordkeeping Requirements for Level 1 and Level 2 Covered Institutions.

The proposed rule includes more detailed disclosure and recordkeeping requirements for larger covered institutions than the 2011 Proposed Rule. The proposed rule would require all Level 1 and Level 2 covered institutions to create annually and maintain for at least seven years records that document:

  • the covered institution’s senior executive officers and significant risk-takers, listed by legal entity, job function, organizational hierarchy, and line of business;
  • the incentive-based compensation arrangements for senior executive officers and significant risk-takers, including information on the percentage of incentive-based compensation deferred and form of award;
  • any forfeiture and downward adjustment or clawback reviews and decisions for senior executive officers and significant risk-takers; and
  • any material changes to the covered institution’s incentive-based compensation arrangements and policies. Level 1 and Level 2 covered institutions would be required to create and maintain records in a manner that would allow for an independent audit of incentive-based compensation arrangements, policies, and procedures, and to provide the records described above in such form and frequency as the appropriate Federal regulator requests.

Deferral, Forfeiture and Downward Adjustment, and Clawback Requirements for Level 1 and Level 2 Covered Institutions.

The proposed rule would require incentive-based compensation arrangements that appropriately balance risk and reward. For Level 1 and Level 2 covered institutions, the proposed rule would require that incentive-based compensation arrangements for certain covered persons include deferral of payments, risk of downward adjustment and forfeiture, and clawback to appropriately balance risk and reward. The 2011 Proposed Rule required deferral for three years of 50 percent of annual incentive-based compensation for executive officers of covered financial institutions with $50 billion or more in total consolidated assets.

The proposed rule would apply deferral requirements to significant risk-takers as well as senior executive officers, and, as described below, would require 40, 50, or 60 percent deferral depending on the size of the covered institution and whether the covered person receiving the incentive-based compensation is a senior executive officer or a significant risk-taker.

Unlike the 2011 Proposed Rule, the proposed rule would explicitly require a shorter deferral period for incentive-based compensation awarded under a long-term incentive plan. The proposed rule also provides more detailed requirements and prohibitions than the 2011 Proposed Rule with respect to the measurement, composition, and acceleration of deferred incentive-based compensation; the manner in which deferred incentive-based compensation can vest; increases to the amount of deferred incentive-based compensation; and the amount of deferred incentive-based compensation that can be in the form of options.

Deferral. Under the proposed rule, the mandatory deferral requirements for Level 1 and Level 2 covered institutions for incentive-based compensation awarded each performance period would be as follows:

  • A Level 1 covered institution would be required to defer at least 60 percent of a senior executive officer’s “qualifying incentive-based compensation” (as defined in the proposed rule) and 50 percent of a significant risk-taker’s qualifying incentive-based compensation for at least four years. A Level 1 covered institution also would be required to defer for at least two years after the end of the related performance period at least 60 percent of a senior executive officer’s incentive-based compensation awarded under a “long-term incentive plan” (as defined in the proposed rule) and 50 percent of a significant risk-taker’s incentive-based compensation awarded under a long-term incentive plan. Deferred compensation may vest no faster than on a pro rata annual basis, and, for covered institutions that issue equity or are subsidiaries of covered institutions that issue equity, the deferred amount would be required to consist of substantial amounts of both deferred cash and equity-like instruments throughout the deferral period. Additionally, if a senior executive officer or significant risk-taker receives incentive-based compensation in the form of options for a performance period, the amount of such options used to meet the minimum required deferred compensation may not exceed 15 percent of the amount of total incentive-based compensation awarded for that performance period.
  • A Level 2 covered institution would be required to defer at least 50 percent of a senior executive officer’s qualifying incentive-based compensation and 40 percent of a significant risk-taker’s qualifying incentive-based compensation for at least three years. A Level 2 covered institution also would be required to defer for at least one year after the end of the related performance period at least 50 percent of a senior executive officer’s incentive-based compensation awarded under a long-term incentive plan and 40 percent of a significant risk-taker’s incentive-based compensation awarded under a long-term incentive plan. Deferred compensation may vest no faster than on a pro rata annual basis, and, for covered institutions that issue equity or are subsidiaries of covered institutions that issue equity, the deferred amount would be required to consist of substantial amounts of both deferred cash and equity-like instruments throughout the deferral period. Additionally, if a senior executive officer or significant risk-taker receives incentive-based compensation in the form of options for a performance period, the amount of such options used to meet the minimum required deferred compensation may not exceed 15 percent of the amount of total incentive-based compensation awarded for that performance period.

The proposed rule would also prohibit Level 1 and Level 2 covered institutions from accelerating the payment of a covered person’s deferred incentive-based compensation, except in the case of death or disability of the covered person.

Forfeiture and Downward Adjustment. Compared to the 2011 Proposed Rule, the proposed rule provides more detailed requirements for Level 1 and Level 2 covered institutions to reduce:

  • incentive-based compensation that has not yet been awarded to a senior executive officer or significant risk-taker, and
  • deferred incentive-based compensation of a senior executive officer or significant risk-taker.

Under the proposed rule, “forfeiture” means a reduction of the amount of deferred incentive-based compensation awarded to a person that has not vested. “Downward adjustment” means a reduction of the amount of a covered person’s incentive-based compensation not yet awarded for any performance period that has already begun. The proposed rule would require a Level 1 or Level 2 covered institution to make subject to forfeiture all unvested deferred incentive-based compensation of any senior executive officer or significant risk-taker, including unvested deferred amounts awarded under long-term incentive plans. This forfeiture requirement would apply to all unvested, deferred incentive-based compensation for those individuals, regardless of whether the deferral was required by the proposed rule. Similarly, a Level 1 or Level 2 covered institution would also be required to make subject to downward adjustment all incentive-based compensation amounts not yet awarded to any senior executive officer or significant risk-taker for the current performance period, including amounts payable under long-term incentive plans. A Level 1 or Level 2 covered institution would be required to consider forfeiture or downward adjustment of incentive-based compensation if any of the following adverse outcomes occur:

  • Poor financial performance attributable to a significant deviation from the covered institution’s risk parameters set forth in the covered institution’s policies and procedures;
  • Inappropriate risk-taking, regardless of the impact on financial performance;
  • Material risk management or control failures;
  • Non-compliance with statutory, regulatory, or supervisory standards resulting in enforcement or legal action brought by a federal or state regulator or agency, or a requirement that the covered institution report a restatement of a financial statement to correct a material error; and
  • Other aspects of conduct or poor performance as defined by the covered institution.

Clawback. In addition to deferral, downward adjustment, and forfeiture, the proposed rule would require a Level 1 or Level 2 covered institution to include clawback provisions in the incentive-based compensation arrangements for senior executive officers and significant risk-takers. The term “clawback” refers to a mechanism by which a covered institution can recover vested incentive-based compensation from a senior executive officer or significant risk-taker if certain events occur. The proposed rule would require clawback provisions that, at a minimum, allow the covered institution to recover incentive-based compensation from a current or former senior executive officer or significant risk-taker for seven years following the date on which such compensation vests, if the covered institution determines that the senior executive officer or significant risk-taker engaged in misconduct that resulted in significant financial or reputational harm to the covered institution, fraud, or intentional misrepresentation of information used to determine the senior executive officer or significant risk-taker’s incentive-based compensation.

Additional Prohibitions.

The proposed rule contains a number of additional prohibitions for Level 1 and Level 2 covered institutions that were not included in the 2011 Proposed Rule. These prohibitions would apply to:

  • Hedging;
  • Maximum incentive-based compensation opportunity (also referred to as leverage);
  • Relative performance measures; and
  • Volume-driven incentive-based compensation.

Risk Management and Controls.

The proposed rule’s risk management and controls requirements for large covered institutions are generally more extensive than the requirements contained in the 2011 Proposed Rule. The proposed rule would require all Level 1 and Level 2 covered institutions to have a risk management framework for their incentive-based compensation programs that is independent of any lines of business; includes an independent compliance program that provides for internal controls, testing, monitoring, and training with written policies and procedures; and is commensurate with the size and complexity of the covered institution’s operations. In addition, the proposed rule would require Level 1 and Level 2 covered institutions to:

  • Provide individuals in control functions with appropriate authority to influence the risk-taking of the business areas they monitor and ensure covered persons engaged in control functions are compensated independently of the performance of the business areas they monitor; and
  • Provide for independent monitoring of: (1) incentive-based compensation plans to identify whether the plans appropriately balance risk and reward; (2) events related to forfeiture and downward adjustment and decisions of forfeiture and downward adjustment reviews to determine consistency with the proposed rule; and (3) compliance of the incentive-based compensation program with the covered institution’s policies and procedures.

Governance.

Unlike the 2011 Proposed Rule, the proposed rule would require each Level 1 or Level 2 covered institution to establish a compensation committee composed solely of directors who are not senior executive officers to assist the board of directors in carrying out its responsibilities under the proposed rule. The compensation committee would be required to obtain input from the covered institution’s risk and audit committees, or groups performing similar functions, and risk management function on the effectiveness of risk measures and adjustments used to balance incentive-based compensation arrangements. Additionally, management would be required to submit to the compensation committee on an annual or more frequent basis a written assessment of the effectiveness of the covered institution’s incentive-based compensation program and related compliance and control processes in providing risk-taking incentives that are consistent with the risk profile of the covered institution. The compensation committee would also be required to obtain an independent written assessment from the internal audit or risk management function of the effectiveness of the covered institution’s incentive-based compensation program and related compliance and control processes in providing risk-taking incentives that are consistent with the risk profile of the covered institution.

Policies and Procedures.

The proposed rule would require all Level 1 and Level 2 covered institutions to have policies and procedures that, among other requirements:

  • Are consistent with the requirements and prohibitions of the proposed rule;
  • Specify the substantive and procedural criteria for forfeiture and clawback;
  • Document final forfeiture, downward adjustment, and clawback decisions;
  • Specify the substantive and procedural criteria for the acceleration of payments of deferred incentive-based compensation to a covered person;
  • Identify and describe the role of any employees, committees, or groups authorized to make incentive-based compensation decisions, including when discretion is authorized;
  • Describe how discretion is exercised to achieve balance;
  • Require that the covered institution maintain documentation of its processes for the establishment, implementation, modification, and monitoring of incentive-based compensation arrangements;
  • Describe how incentive-based compensation arrangements will be monitored;
  • Specify the substantive and procedural requirements of the independent compliance program; and
  • Ensure appropriate roles for risk management, risk oversight, and other control personnel in the covered institution’s processes for designing incentive-based compensation arrangements and determining awards, deferral amounts, deferral periods, forfeiture, downward adjustment, clawback, and vesting and assessing the effectiveness of incentive-based compensation arrangements in restraining inappropriate risk-taking.

These policies and procedures requirements for Level 1 and Level 2 covered institutions are generally more detailed than the requirements in the 2011 Proposed Rule.

Indirect Actions.

The proposed rule would prohibit covered institutions from doing indirectly, or through or by any other person, anything that would be unlawful for the covered institution to do directly under the proposed rule. This prohibition is similar to the evasion provision contained in the 2011 Proposed Rule.

Enforcement.

For five of the Agencies, the proposed rule would be enforced under section 505 of the Gramm-Leach-Bliley Act, as specified in section 956. For FHFA, the proposed rule would be enforced under subtitle C of the Safety and Soundness Act.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Jesse M. Fried, Cambridge, Massachusetts, recently published a paper on the required Dodd-Frank compensation clawback.  In Mr. Fried’s view, the SEC’s proposed Dodd-Frank clawback, while reducing executives’ incentives to misreport, is overbroad. According to Mr. Fried, the economy and investors would be better served by a more narrowly targeted “smart” excess-pay clawback that focuses on fewer issuers, executives, and compensation arrangements.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Financial Stability Oversight Council, or FSOC, released an update of its review of asset management products and activities.  The statement notes that its review of the use of leverage in the hedge fund industry suggests a need for further analysis of the activities of hedge funds. FSOC is creating an interagency working group that will share and analyze relevant regulatory information in order to better understand whether certain hedge fund activities might pose potential risks to financial stability. In particular, the working group will:

  • Use regulatory and supervisory data to evaluate the use of leverage in combination with other factors—such as counterparty exposures, margining requirements, underlying assets, and trading strategies—for purposes of assessing potential risks to financial stability;
  • Assess the sufficiency and accuracy of existing data and information, including data reported on Form PF, for evaluating risks to financial stability, and consider how the existing data might be augmented to improve the ability to make such evaluation; and
  • Consider potential enhancements to and the establishment of standards governing the current measurements of leverage, including risk-based measures of leverage.

The working group will seek to report its consolidated findings to the Council by the fourth quarter of 2016. If risks to financial stability are identified, the Council will:

  • consider what actions regulators can take using existing authorities;
  • assess whether existing regulatory and supervisory tools are sufficient to address risks; and
  • evaluate whether additional authorities may be needed for market regulators or other supervisory agencies.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

 

On April 18, 2016 the Delaware Supreme Court, in a 4-1 decision, held that a foreign corporation does not expressly consent to general jurisdiction by merely registering to do business in the state and appointing an agent for service of process. In Genuine Parts Company v. Cepec, No. 528, 2015 (Del. Sup. Ct. Apr. 18, 2016), the court reached its conclusion largely based on two recent U.S. Supreme Court cases construing the constitutional limits of personal jurisdiction, Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S. Ct. 2846 (2011) and Daimler AG v. Bauman, 134 S. Ct. 746 (2014).  In doing so, it overturned at least part of the holding in the leading Delaware case on the issue, Strenberg v. O’Neil, 550 A. 2d 1105 (Del. 1988).

Background

Genuine Parts Co. involved an asbestos-related claim against the parent company of Napa auto-parts stores.  Genuine Parts is a Georgia corporation with headquarters in Atlanta and the alleged harms occurred in Florida.  Genuine Parts is lawfully registered to do business in Delaware as a foreign entity pursuant to § 371 of the DGCL and its designated agent for service of process is in Wilmington in accordance with DGCL § 376.  The defendants argued that general personal jurisdiction was proper is this case because Genuine Parts consented to the general jurisdiction of the Delaware courts when it qualified to do business and appointed an agent for service of process.  This argument is consistent with Strenberg, which has been the law in Delaware for nearly thirty years.

Strenberg

Strenberg involved a double-derivative suit against the Ohio parent of a Delaware subsidiary alleging breach of fiduciary duty due to mismanagement.  Chief Justice Strine, writing for the majority, pointed out that Strenberg actually provided two alternate grounds for its ruling.  The first ruling, as described above, determined that general jurisdiction existed in light of the Ohio parent’s decision to qualify to do business and appoint a service of process agent, regardless of the absence of specific language in the statute regarding consent to jurisdiction.  The alternate ruling, however, stated that specific personal jurisdiction existed as well:

The reality is that Sternberg‘s ruling on § 376 was not necessary to the resolution of the case because the Court also found that the foreign corporation had sufficient minimum contacts with Delaware through owning and managing its Delaware subsidiary for over thirty years to provide a constitutional basis for specific jurisdiction.

Genuine Parts Co. at 32. Rather than reading consent to general jurisdiction into the statute requiring foreign corporation to appoint an agent for service of process, the majority in Genuine Parts Co., stated that “[section] 376 can be given a sensible reading by construing it as requiring a foreign corporation to allow service of process to be made upon it in a convenient way in proper cases [i.e. those cases where specific personal jurisdiction is present], but not as a consent to general jurisdiction.” Id. at 34.

Moreover, the majority in Genuine Parts Co. decided that the first Strenberg ruling embraced the prevailing federal jurisprudence in favor of a broad interpretation of personal jurisdiction but that this view has been discredited and is not in sync with Due Process.

Goodyear and Daimler

According to the majority, the U.S. Supreme Court decisions in Goodyear and Daimler were meant to reign in broad interpretations of business qualification statutes like the deemed consent found in Strenberg.  Under Goodyear, a “court may only exercise general jurisdiction over foreign corporations to hear any and all claims against them when their affiliations with the State are so ‘continuous and systematic’ as to render them essentially at home in the forum State.” Goodyear, 131 S. Ct. at 2851.  Daimler further clarified that the standard under Goodyear “is not whether a foreign corporation’s in-forum contact can be said to be in some sense continuous and systematic,” but that the presence is so pervasive that it is equitable to consider it at home in the state. Daimler, 134 S. Ct. at 761 (emphasis added).  Therefore, under this line of analysis the only two places where a corporation is subject to general jurisdiction are its place of incorporation and its principal place of business.  The Genuine Parts Co. approved of this analysis, noting: “It is one thing for every state to be able to exercise personal jurisdiction in situations when corporations face causes of action arising out of specific contacts in those states; it is another for every major corporation to be subject to the general jurisdiction of all fifty states.”  Genuine Parts Co. at 35.

Alternative Approaches and Dissenting Opinion

There are many courts that would disagree with the outcome in Genuine Parts Co. and the majority “acknowledge[d] that some courts have maintained in Daimler‘s wake that implied consent by virtue of simple registration to do business remains a constitutionally valid basis for general jurisdiction over a nonresident corporation.” Justice Vaughn, as the lone dissenter, noted that “just last month” a federal circuit court judge authored a concurring opinion in a case originating in Delaware supporting the proposition that “Daimler did not overrule the line of Supreme Court authority establishing that a corporation may consent to jurisdiction over its person by choosing to comply with a state’s registration statute.” Genuine Parts Co. (dissenting opinion, at 2).

Conclusion

After Genuine Part Co., plaintiffs cannot sue non-resident corporations in Delaware if the claims are unrelated to the company’s contacts within the state.

It will be interesting to see whether other jurisdictions will be persuaded by the Delaware Supreme Court’s ruling in Genuine Auto Parts.  Only Pennsylvania expressly provides by statute that registering to do business in the state is a sufficient basis for general jurisdiction over a foreign corporation but perhaps more states may consider similar legislation in light of Genuine Parts Co.

You can read the full opinion here (starts automatic download of .pdf file).

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ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Many are aware of the Dodd-Frank requirement to disclose the ratio of the median employee’s annual total compensation to the total annual compensation of the principal executive officer. We have published some examples of early adopters.

Others have taken the internal pay equity issue further and disclosed ratios related to the CEO’s compensation to other named executive officers. We have set forth examples below:

Headwaters Inc.

BEST PRACTICE ELEMENT   OUR PRACTICE
No excessive pay differential between CEO and next highest paid executive officer The pay ratio between the CEO and the next highest paid executive was 3.4 in fiscal year 2015, which we believe is reasonable.

Stanley Black & Decker, Inc.

Internal pay ratio between our Chairman and Chief Executive Officer and our President and Chief Operating Officer is not excessive.

Idacorp, Inc.

Review of Total Compensation Structure and Internal Pay Ratios

Each year, the compensation committee reviews the total compensation structure for each NEO, including the elements and mix of compensation, levels of historic compensation, potential termination and retirement benefits, internal equity, and IDACORP stock ownership, to determine whether it should adjust an executive officer’s total target direct compensation. The internal pay equity analysis presented by our management showed the ratios below for internal pay equity based on proposed (as of the date of the review) 2015 total target direct compensation amounts.

Officer Comparison Set Internal Pay Ratio – 2015 Total Target Direct Compensation
CEO to executive and senior vice presidents 2.68x
CEO to pay grade S-3 and higher senior managers 9.13x
CEO to all senior managers 10.86x

Based on these reviews, the compensation committee determined that no changes to the general structure of our compensation programs or to the forms of compensation payable to our executive officers for 2015 were necessary, though it did make some adjustments as described below. In making this determination, the compensation committee relied on its subjective judgment.

West Marine

Reasonable CEO/NEO Pay Ratio

* Our CEO’s total target direct compensation (consisting of base salary, target bonus and equity awards [collectively, “TTDC”]) is reasonable at 1.8x the TTDC of our next highest paid Executive.

Ionis Pharmaceuticals, Inc.

CEO Pay Ratio. An executive officer’s salary plus bonus represents the officer’s total cash compensation. Our philosophy has been to have the CEO’s total cash compensation be between 20-30 times the lowest levels of compensation received by an employee. Dr. Crooke’s total cash compensation, over the last three years, was on average 26.13 times that of the average cash compensation for our lowest level employees and 2.03 times greater than the average of our other executive officers.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

On April 7, 2016, sixteen attorneys from Stinson Leonard Street’s Minneapolis and Kansas City offices and representatives from Chartwell Financial Advisory presented an afternoon of CLE designed to provide updates on a variety of business law topics.  The Power Point Presentations for the afternoon are included here.

The speakers and topics were as follows:

The Business Law Update is an annual event hosted by Stinson Leonard Street in all of its major markets, and is designed to keep in-house attorneys and other practitioners apprised of the major legal updates from the past year in key areas.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC has issued a concept release on business and financial disclosure required by Regulation S-K. The goal of the release is to assess whether the requirements of Regulation S-K continue to provide the information that investors need to make informed investment and voting decisions and whether any of the SEC’s rules have become outdated or unnecessary.

The focus of the release is on business and financial disclosures that registrants provide in their periodic reports, which are a subset of the disclosure requirements in Regulation S-K.  The SEC focused on these requirements because many of them have changed little since they were first adopted. The SEC is not at this time revisiting other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants. However, the SEC welcomes and encourages comments on any other disclosure topics not specifically addressed in the concept release.

At 341 pages in length, the release appears to leave no stone unturned within its scope. Even if you are not into writing comment letters, the release includes a good historical analysis of each of the provisions on which it seeks comment.

Some of the areas will not be without controversy. The SEC solicits comment on the importance of sustainability and public policy matters to informed investment and voting decisions.

Another area of controversy will be on the value of quarterly reporting and whether semi-annual reporting should be the standard, at least for some issuers.

Sadly, the SEC does not specifically request comment on the complete elimination of XBRL requirements.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

GAO has issued a report which noted the FDIC and Federal Reserve have developed separate but similar review processes for determining whether a resolution plan, often referred to as a “living will,” is “not credible” or would not facilitate a company’s orderly resolution under the Bankruptcy Code. Both regulators have processes for staffing review teams, determining whether a plan includes all required information, assessing whether a plan’s strategy mitigates obstacles to the company’s orderly resolution, and documenting and vetting team findings and conclusions. Although the regulators’ review processes are separate, the regulators coordinate with each other by meeting jointly with companies, working together to discuss and share review findings, and jointly issuing guidance and feedback to companies.

GAO noted that the FDIC and Federal Reserve have not disclosed their frameworks for determining whether a plan is not credible. They also developed but have not disclosed their criteria for reducing plan requirements for many smaller companies. According to GAO, without greater disclosure, companies lack information they could use to assess and enhance their plans. The regulators view such information as confidential, but a federal directive on open government recognizes that transparency promotes accountability by providing more information on government activities. A lack of information on how the regulators assess plans and allow some companies to file reduced plans could undermine public and market confidence in resolution plans.

House Financial Services Committee Chairman Jeb Hensarling noted “The secrecy and lack of accountability can lead to abuse by Washington regulators and is a tool for them to potentially exercise de facto management authority over major financial institutions. Once again we’re seeing the uncertainty created by Dodd-Frank and its regulatory burden that impedes economic growth and makes it more difficult for working Americans to achieve financial independence.”

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Loretta Lynch, United States Attorney General, explained in a letter to Paul Ryan, Speaker of the House, why the United States did not submit a writ of certiorari with respect to the conflict minerals decision:

  • The panel majority and the dissenting judge disagreed as to the proper standard of scrutiny for First Amendment challenges to compelled-disclosure requirements of the sort at issue here. But because the majority concluded in the alternative that the challenged requirements would be unconstitutional even under the more lenient standard, this would be a poor case in which to seek Supreme Court clarification of the proper standard of scrutiny.
  • The panel majority and the dissenting judge also disagreed on the question whether the disclosure requirements at issue here -which compel some issuers to state publicly that their products have “not been found to be ‘DRC conflict free”‘ -are properly characterized as involving “purely factual and uncontroversial information.” The need to resolve that case-specific issue could likewise make it difficult for the Supreme Court to provide useful guidance concerning the application of the First Amendment to more typical disclosure requirements.
  • The panel majority also expressly recognized that its holding of unconstitutionality may apply only to the Commission’s rule rather than to the underlying statute. If, after remand, it is determined that the statute itself does not require use of the specific phrase “not been found to be ‘ DRC conflict free,'” the Commission could promulgate an amended disclosure rule that attempts both to fulfill the statutory mandate and to comport with the court of appeals’ view of the First Amendment. The decision not to seek Supreme Court review will allow the Commission or the district court to determine in the first instance, subject to further review, whether such an amended rule can and will be promulgated.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

Some companies have begun to disclose pay ratios in their proxy statements in advance of the SEC requirement. We have included a sample below. Of course, you’ll want to compare the samples to the rules before relying on them.

Novagold Resources Inc.

CEO Pay Ratio – 13.5:1

We believe our executive compensation program must be consistent and internally equitable to motivate our employees to perform in ways that enhance shareholder value. We are committed to internal pay equity, and the Compensation Committee monitors the relationship between the pay of our executive officers and the pay of our non-executive employees.  The Compensation Committee reviewed a comparison of our CEO’s annual total compensation in fiscal year 2015 to that of all other Company employees for the same period.  The calculation of annual total compensation of all employees was determined in the same manner as the “Total Compensation” shown for our CEO in the “Summary Compensation Table” on page 45 of this Circular.  Pay elements that were included in the annual total compensation for each employee are:

–salary received in fiscal year 2015

–annual incentive payment received for performance in fiscal year 2015

–grant date fair value of stock option and PSU awards granted in fiscal year 2015

–Company-paid 401(k) Plan or RRSP match made during fiscal year 2015

–Company-paid ESPP match made during fiscal year 2015

–Company-paid life insurance premiums during fiscal year 2015

–Auto allowance paid in fiscal year 2015

–Reimbursement for Company-paid executive physical during fiscal year 2015

Our calculation includes all employees as of November 30, 2015. We applied a Canadian to U.S. dollar exchange rate to the compensation elements paid in Canadian currency.

We determined the compensation of our median employee by: (i) calculating the annual total compensation described above for each of our employees, (ii) ranking the annual total compensation of all employees except for the CEO from lowest to highest (a list of 12 employees), and (iii) since we have an even number of employees when not including the CEO, determining the average of the annual total compensation of the two employees ranked sixth and seventh on the list (“Median Employee”).

he annual total compensation for fiscal year 2015 for our CEO was $5,207,257, and for the Median Employee was $386,962. The resulting ratio of our CEO’s pay to the pay of our Median Employee for fiscal year 2015 is 13.5 to 1.

Adams Resources & Energy, Inc.

Pay Ratio Disclosure Rule

In August 2015 pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd – Frank Act”), the Securities and Exchange Commission adopted a rule requiring annual disclosure of the ratio of the median employee’s annual total compensation to the total annual compensation of the principal executive officer (‟PEO”). The Company’s PEO is Mr. Smith.  Registrants must comply with the pay ratio rule for the first fiscal year beginning on or after January 1, 2017.  The purpose of the new required disclosure is to provide a measure of the equitability of pay within the organization.  The Company believes its compensation philosophy and process yield an equitable result and is presenting such information in advance of the required disclosure date as follows:

Median Employee total annual compensation   $ 60,052

Mr. Smith (‟PEO”) total annual compensation   $ 400,000

Ratio of PEO to Median Employee Compensation 6.7:1.0

In determining the median employee, a listing was prepared of all employees as of December 31, 2015. Employees on leave of absence were excluded from the list and wages and salaries were annualized for those employees that were not employed for the full year of 2015.  The median amount was selected from the annualized list.  For simplicity, the value of the Company’s 401(k) plan and medical benefits provided was excluded as all employees including the PEO are offered the exact same benefits and the Company utilizes the Internal Revenue Service safe harbor provision for 401(k) discrimination testing.  As of December 31, 2015 the Company employed 809 persons of which 557 are professional truck drivers.

First Trinity Financial Corporation

2015 Compensation Disclosure Ratio of the Median Annual Total Compensation of All Company Employees to the Annual Total Compensation of the Company’s Chief Executive Officer

The 2015 compensation disclosure ratio of the median annual total compensation of all Company employees to the annual total compensation of the Company’s chief executive officer is as follows:

Category                                                                     2015 Total Compensation

and Ratio

Median annual total compensation of

all employees (excluding Gregg E. Zahn)                                  $ 87,538

 

 

Annual total compensation of Gregg E. Zahn,

Chief Executive Officer                                                           $ 716,780

 

Ratio of the median annual total compensation

of all employees to the Annual total compensation

of Gregg E. Zahn, Chief Executive Officer                               12.21 %

 

NorthWestern Corporation

CEO Pay Ratio and Wealth Accumulation

For several years, we have voluntarily disclosed our CEO to median employee pay ratio in our proxy statement. To determine the median for our prior calculation, we considered only full-time employees as of the last day of the calendar year. Our prior calculation of the ratio included all components of compensation available to our CEO and other employees – base salary, annual cash incentive (at the targeted level), and long-term incentive awards (at the targeted level) – and excluded any benefits (which do not differ materially between executives and employees generally) and any overtime pay that employees received.

As a result of the recently adopted rules under Dodd-Frank Act, beginning with our 2018 proxy statement, the SEC will require disclosure of the CEO to median employee pay ratio for 2017 compensation. The method of calculating the required disclosure for 2017 compensation will differ from the method we previously used in calculating our ratio. Among other differences, we will be required to include: (i) part-time and full-time employees to determine the median employee; and (ii) overtime pay and the value of benefits in the calculation of total compensation.

Accordingly, in the pay ratio table below, we have presented two calculations of our CEO to median employee pay ratio. The first ratio is calculated using the methodology we have used in our prior proxy statements. We will refer to this ratio as the NorthWestern Calculation. The second ratio is calculated in accordance with what the SEC will require in the future pursuant to Item 402(u) of Regulation S-K. We will refer to the second ratio as the Dodd-Frank Calculation. We believe presentation of these two ratios this year will provide an informative bridge from our practice of voluntarily disclosing our CEO to median employee pay ratio using the NorthWestern Calculation these past several years to the required disclosure of such ratio in the future using the Dodd-Frank Calculation.

 

With respect to the Dodd-Frank Calculation, we identified the median employee by examining the 2015 total cash compensation for all individuals, excluding our CEO, who were employed by us on December 18, 2015, the last day of our payroll year (whether employed on a full-time, part-time, or seasonal basis). For such employees, we did not make any assumptions, adjustments, or estimates with respect to total cash compensation, and we did not annualize the compensation for any full-time employees that were not employed by us for all of 2015. After identifying the median employee, we calculated annual total compensation for such employee using the same methodology we use for our named executive officers as set forth in the 2015 Summary Compensation Table later in this proxy statement.

 

As illustrated in the table below, our CEO to median employee pay ratio is 19:1 when calculated using the Dodd-Frank Calculation and 26:1 when using the NorthWestern Calculation.

    NorthWestern Calculation   Dodd-Frank Calculation
 

President

and CEO

   Median Employee   President and CEO   Median Employee
Base Salary   $ 578,231   $ 79,539   $ 573,567   $ 86,838
Annual Cash Incentive                
  Percent of base salary   80 %   6 %        
  Targeted annual cash incentive   $ 462,585 $ 4,772        
Non-Equity Incentive Plan Compensation           $ 370,068   $ 1,703

Performance Unit Awards under

Long-Term Incentive Program

                
  Percent of base salary   150 %   — %        
  Targeted long-term incentive   $ 867,347   $ —        

Restricted Share Grants under

Executive Retention / Retirement Program

                
  Percent of base salary   50 %   — %        
  Targeted executive retention / retirement incentive   $ 289,116   $ —        
Stock Awards           $ 1,131,121   $ —
Change in Pension Value and Nonqualified Deferred Compensation Earnings (1)           $ 39,285   $ 2,755
All Other Compensation           $ 41,564   $ 22,734
TOTAL   $ 2,197,279   $ 84,311   $ 2,155,605   $ 114,030
                 
CEO Pay as Multiple of Median Employee   26 : 1   19 : 1
(1) These amounts are attributable to a change in the value of each individual’s defined benefit pension account balance and do not represent earned or paid compensation. Pension values are dependent on many variables including years of service, earnings, and actuarial assumptions.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.