June 16, 2015
By: James H. Nicoll
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) includes provisions that are designed to address shareholder rights and executive compensation practices. One such provision is Section 953(a), which directed the Securities and Exchange Commission to adopt rules requiring public companies to disclose the relationship between executive compensation actually paid and the financial performance of the company. On April 29, 2015, the SEC proposed rules to implement Section 953(a). The proposed rules are subject to a public comment period and are not binding on public companies.
The proposed rules would require public companies to provide disclosure relating to (1) the relationship between executive compensation actually paid to the company’s named executive officers and the cumulative total shareholder return (TSR) of the company, and (2) the relationship between the company’s TSR and the TSR of a peer group chosen by the company, over each of the company’s five most recently completed fiscal years. In addition, the proposed rules would allow public companies to supplement their disclosure regarding pay-versus-performance to reflect the specific situation of the company and its industry. The foregoing disclosure would be required to be included in any proxy or information statement for which executive compensation disclosure is required, but would not be required to be included in annual reports or registration statements filed under the Securities Act.
Some of the key aspects of the proposed rules are as follows:
• The pay-versus-performance disclosure requirements would apply to all companies that are registered under Section 12 of the Securities Exchange Act, except emerging growth companies.
• The pay-versus-performance disclosure requirements would not apply to foreign private issuers, registered investment companies or companies with reporting obligations only under Section 15(d) of the Securities Exchange Act.
• Business development companies would be treated in the same manner as other public companies and, accordingly, would be subject to the pay-versus-performance disclosure requirements.
• Smaller reporting companies would be subject to the pay-versus-performance disclosure requirements, but would be permitted to provide scaled disclosure.
• The proposed rules provide for a transition period whereby pay-for-performance disclosure would be required for three fiscal years, instead of five fiscal years, in the first applicable filing after the rules become effective. Pay-for-performance disclosure would be required for an additional year in each of the two subsequent annual proxy filings where such disclosure is required.
• The proposed rules contain separate transition periods for smaller reporting companies and new public companies. New public companies would be required to provide pay-versus-performance disclosure for only the most recently ended fiscal year in their first year as a public company, and for the two most recently completed fiscal years in their second year as a public company. Smaller reporting companies would be required to provide pay-for-performance disclosure for only the last two fiscal years in the first applicable filing after the rules become effective. In subsequent years, smaller reporting companies would be required to provide disclosure for the last three fiscal years.
• The pay-for-performance disclosure would not be deemed to be incorporated by reference into any filing under the Securities Act or the Securities Exchange Act, except to the extent that a company specifically incorporates such disclosure by reference.
• The disclosure would be required to be formatted using eXtensible Business Reporting Language (XBRL).