ISS Releases 2013 Updates to Proxy Voting Guidelines

On November 16, 2012, the ISS released its final 2013 Updates to its U.S. Corporate Governance Policy. ISS also will release a FAQ document in December 2012 for further guidance. The Updates will be effective for meetings on or after February 1, 2013.

Highlights of the 2013 Updates include:

• Stock Pledges/Hedges: In response to comments, ISS will be taking a case-by-case approach in determining whether pledging of company shares rises to a level of serious concern for shareholders. Also in response to comments, ISS is including significant pledging of company stock as a failure of risk oversight and thus considered a governance failure for which directors should be held accountable (rather than communicating concern through a say-on-pay recommendation as originally proposed). However, hedging of company stock, through covered call, collar or other derivative transactions, will be considered a problematic practice warranting a negative voting recommendation on the election of directors.

• Failure to Act on Shareholder Proposals: ISS will keep its current policy in effect for 2013, with some modifications: ISS will recommend a negative vote for individual directors, committee members or the entire board, if the board failed to act on a shareholder proposal that received the support of either (i) a majority of the outstanding shares or (ii) a majority of the votes cast in the last year and one of the two previous years. Beginning in 2014, ISS will recommend a vote negative vote if the board failed to act on a shareholder proposal that received the support of a majority of shares cast in the previous year. Under the Update, the ISS now has the flexibility to recommend a negative vote on members of the board as deemed appropriate, not necessarily the full board. The ISS also has included more guidance on the case-by-case examination of the sufficiency of a company’s action in response to a majority-supported shareholder proposal.

• Peer Groups: The new methodology incorporates information from companies’ self-selected pay benchmarking peer groups in order to identify and prioritize Global Industry Classification Standard (GICS) industry groups beyond the subject company’s own GICS classification. The methodology draws peers from the subject company’s GICS group as well as from GICS groups represented in the company’s peer group, while maintaining the approximate proportions of these industries in the final peer group where possible. The methodology additionally focuses initially at an 8-digit GICS resolution to identify peers that are more closely related in terms of industry. Finally, when selecting peers, the methodology prioritizes peers that maintain the company near the median of the peer group, are in the subject company’s peer group, and that have chosen the subject company as a peer. The peer group methodology maintains its focus on identifying companies that are reasonably similar to the subject company in terms of industry profile, size, and market capitalization. Other changes to the peer group methodology include using slightly relaxed size requirements, especially at very small and very large companies, and using revenue instead of assets for certain financial companies.

• Realizable Pay: Realizable pay is being added to the research report for large capitalization companies. Realizable pay will consist of the sum of relevant cash and equity-based grants and awards made during a specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. Stock options or stock appreciation rights will be revalued using the remaining term and updated assumptions, as of the performance period, using the Black-Scholes Option Pricing model. The realizable pay consideration may mitigate or exacerbate the CEO’s pay for performance concerns.

• Voting on “Say on Golden Parachute” Proposals: The Update will (i) include existing change-in-control arrangements maintained with named executive officers rather than focusing only on new or extended arrangements and (ii) place further scrutiny on multiple legacy problematic features (e.g. single trigger equity, tax gross –ups, etc.) in change in control agreements.

SEC Provides Further Relief in the Wake of Hurricane Sandy

On November 14, 2012, the Securities and Exchange Commission announced  the issuance of an order providing regulatory relief to publicly traded companies, investment companies, accountants, transfer agents and others affected by Hurricane Sandy.  To address compliance issues caused by the hurricane and its aftermath, the order conditionally exempts affected persons from the requirements of the federal securities laws with respect to:  (i) Exchange Act filing requirements for the period from October 29, 2012 to November 20, 2012 (and imposes a new deadline of November 21, 2012 for missed filings); (ii) proxy and information statement delivery requirements for companies attempting to deliver materials to affected areas; (iii) Investment Company Act requirements for the transmittal to shareholders in affected areas of annual and semi-annual reports during the period of  October 29, 2012 to November 20, 2012; (iv) transfer agent compliance with certain Exchange Act requirements for the period from October 29, 2012 to December 1, 2012; and (v) auditor independence requirements as they relate to reconstruction of previously existing accounting records of clients. 

The Commission has also directed the SEC staff generally to take the position that filings subject to and filed in compliance with the regulatory relief granted by the order be considered timely for the purposes of eligibility to use Form S-3 (and well-known seasoned issuer status, which is based in part on Form S-3 eligibility), and to consider companies making such filings to be current in their Exchange Act reporting requirements for purposes of Form S-3 and Form S-8 eligibility and availability of current public information under the Securities Act Rule 144.  The Commission has also directed the staff to take similar positions with respect to various investment company and investment adviser filing requirements.

NASDAQ Has Proposed Changes to Its Compensation Committee Rules. What Should We Do Now?

If you work for a Nasdaq-listed company, you should pay close attention to Nasdaq’s proposal related to compensation committees rules.  The proposal was issued last week in response to the SEC’s Rule 10C-1 and Section 952 of the Dodd-Frank Act that required the SEC to direct the national securities exchanges to prohibit the listing of any equity security of an issuer, subject to certain exemptions, that does not comply with the Act’s requirements relating to compensation committees and compensation advisers. 

 Summary of Nasdaq’s Proposal

 Generally, Nasdaq has proposed the following changes to its compensation committee rules:

  •  companies must have a compensation committee consisting of at least two members, each of whom must be an independent director as defined in Nasdaq’s current listing rules;
  • compensation committee members must not accept directly or indirectly any consulting, advisory or other compensatory fee, other than for board service, from a company or any subsidiary thereof;
  • in determining whether a director is eligible to serve on a compensation committee, a company’s board of directors must consider whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company; and
  •  companies must adopt a formal, written compensation committee charter that must specify, among other matters, the compensation committee responsibilities and authority as set forth in Rule 10C-1 relating to the: (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.

 Effective Dates

 Proposed Nasdaq Listing Rule 5605(d)(3), which requires compensation committees to have the specific responsibilities and authority relating to compensation consultants, independent legal counsel and other compensation advisers, will be effective immediately upon the SEC’s approval of the Nasdaq’s proposal. 

 Nasdaq-listed companies must comply with the remaining amended listing rules described aboveby the earlier of: (1) their second annual meeting held after the date of approval of the proposed rules; or (2) December 31, 2014.  A company must certify to Nasdaq, no later than 30 days after the implementation deadline applicable to it, that it complied with the amended listing rules on compensation committees (Nasdaq will provide a form for this certification).

 What Should We Do Now?

 Please see below a list of suggested action items in connection with such proposals:

  1.  If you do not have a compensation committee and a majority of independent directors is making, or recommending to the board, compensation decisions related to executive officers of the company, start evaluating potential candidates for compensation committee membership.
  2. If you have a compensation committee consisting of one director, start evaluating potential candidates to expand the compensation committee to two members, as suggested by the SEC, or even to three members in order to avoid giving each director a veto power.
  3. Consider whether existing members of the compensation committee or potential members of the compensation committee are getting any compensatory fees from the company or any of its subsidiaries or are affiliated with the company or a subsidiary of the company or an affiliate of a subsidiary of the company.  Evaluate whether any changes to the current composition of the compensation committee are necessary.
  4. Implement new responsibilities and authority applicable to compensation committees, or independent directors involved in compensation decisions, relating to: (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers through a charter amendment or board resolution.
  5. Draft a new, or revise an existing, compensation committee charter.


NYSE Amends its Compensation Committee and Committee Adviser Independence Proposed Rules

Yesterday the NYSE filed an amendment to its proposed compensation committee and committee adviser independence rules.  According to the rule filing, the amendment corrects an error in the rule text under the heading “Transition Periods for Compensation Committee Requirements.”  According to the amended rule text, listed companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new director independence standards with respect to compensation committees.  The other proposed rules, including those related to compensation committee advisers, will become effective on July 1, 2013.


On September 26, 2012, the Securities and Exchange Commission announced that starting October 1, 2012, certain emerging growth companies and foreign private issuers would be able to submit to the SEC draft registration statements for non-public and confidential review via a modified EDGAR system instead of via the current secure e-mail submission process.  Once the EDGAR Filer Manual for EDGAR Release 12.2 becomes effective, eligible issuers desiring to take advantage of the confidential review process will be required to use the new EDGAR system. 

To assist issuers with the use of the new confidential filing procedures, the SEC posted a set of detailed instructions on how to prepare an electronic submission of a draft registration statement, or an amendment.  In addition, issuers that file via the new EDGAR system will no longer need to file copies of previously submitted draft registration statements as exhibits to their publicly-filed registration statements to comply with the JOBS Act’s mandate that the drafts become publicly available at least 21 days prior to the start of the road show.  The new EDGAR system will allow issuers to direct the EDGAR system to publicly file the drafts as individual documents on EDGAR.

The new EDGAR system is part of the SEC’s efforts to meet the requirements of Section 106(a) of the JOBS Act mandating that certain pre-IPO emerging growth companies be provided an opportunity to submit draft registration statements to the SEC for confidential review.  In addition, the new EDGAR system will support the SEC’s policies and procedures allowing certain foreign private issuers that are not emerging growth companies to submit registration statements to the SEC for non-public review.

SEC Approves Rule Requiring a Single, Consolidated Audit Trail System to Track Trading Activity

On July 11, 2012, the Securities and Exchange Commission announced that it approved Rule 613 pursuant to the Securities Exchange Act of 1934 requiring the national securities exchanges and the Financial Industry Regulatory Authority (collectively, the “SROs”) to develop a detailed, comprehensive plan for creating, implementing, and operating a single, market-wide consolidated audit trail system.  The rule requires that the system, when implemented, collect and accurately identify every order, cancellation, and trade execution for all “National Market System” securities.  

Currently, there is no single, readily accessible database regarding orders and executions.  Instead, such information must be compiled from separate audit trail systems established by the various SROs that cover orders only in their respective markets.  Presently, preparing such a compilation can be a long and tedious process.  For example, according to comments from SEC Chairman Mary L. Shapiro, after the Flash Crash of May 6, 2010, it took dozens of highly-trained economists, financial professionals, and data technologists four months to assemble and process information necessary to fully analyze just a few hours of trading on a single day. 

While the rule was approved, Commissioner Aguilar did not support the rule, stating in part that “today’s rule falls short of establishing the process that investors deserve. . . . I am concerned that the [proposed rule] fails to set appropriately specific requirements to ensure the creation of a comprehensive market surveillance system . . . .”

The rule will become effective 60 days after publication in the Federal Register and requires the SROs to submit their plan for the consolidated audit trail system to the SEC within 270 days after publication of the SEC adopting release in the Federal Register.  The plan will not be implemented unless and until approved by the SEC.


What has changed in compensation committee requirements and disclosures after the issuance of the new SEC release last week? What should we do now?

Due to the SEC’s adoption of a new Rule 10C-1, Listing Standards Relating to Compensation Committees, we are one step closer to having the mandate of Section 952 of the Dodd-Frank Act fully implemented and to securities exchanges adopting listing standards relating to the independence of the compensation committee members, the committee’s authority to retain compensation advisers, and the committee’s responsibility for the appointment, compensation and oversight of the work of a compensation adviser. Each national securities exchange must provide to the SEC proposed rules that comply with Rule 10C-1 no later than September 25, 2012 and must have final rules that comply with Rule 10C-1 no later than June 27, 2013.

Public companies will also have to comply with a new disclosure requirement related to the conflicts of interest of compensation consultants in any proxy statement for a meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.  Pursuant to this new requirement under Item 407(e)(3)(iv) of Regulation S-K,  public companies will have to disclose the nature of the conflict of interest, if any, related to the compensation consultant’s work on executive and director compensation and how the conflict is being addressed. 

In addition to monitoring the rulemaking of national securities exchanges related to the implementation of Rule 10C-1 directives, public companies should consider taking the following actions in connection with the required analysis of the conflicts of interest related to the work of a compensation consultant:

  • establish procedures for obtaining information about (i) all services provided to the company by the compensation consultant and the entity that employs the consultant during the last completed fiscal year, (ii) the amount of fees received from the company by the entity that employs the compensation consultant as a percentage of the total revenue of such entity, and (iii) any stock of the company owned by the compensation consultant;
  • request and review the policies and procedures of the entity that employs the compensation consultant that are designed to prevent conflicts of interest; and
  • update directors’ and officers’ questionnaires to include questions related to the business or personal relationships of (i) the compensation consultant with a member of the compensation committee; and (ii) the compensation consultant, or the entity employing the compensation consultant, with an executive officer of the company.

NASDAQ Speaks – Potential Changes to Compensation Committee Rules and Roll-out of New and Improved Reference Library

At the “NASDAQ Speaks ’12: Latest Developments and Interpretations” webcast  held on June 7th, there were a couple of interesting items to note.  With respect to compensation committee rules, NASDAQ is considering the following changes, subject to the SEC adopting final rules under the Dodd-Frank Act and NASDAQ issuing proposed rules which become final:

  1. All companies will be required to have a compensation committee with at least 2 members.  This differs from the audit committee NASDAQ rule which requires at least 3 directors to serve on the audit committee.  Under the current NASDAQ rules, either  a compensation committee or  independent directors may approve or recommend executive compensation; and
  2. For a director to serve on the compensation committee, similar to the audit committee rules, such director will not be able to accept any consulting, advisory or other compensatory fee, directly or indirectly, other than for board services.  Additionally, the board must consider affiliation a director has with the company.   NASDAQ does not think significant ownership of the company’s securities should bar a director from serving on the compensation committee.

This summer NASDAQ is also going to roll-out its new and improved reference library which will permit a user to search reference sources by category, such as staff interpretations, listing council decisions and frequently asked questions.  The new reference liability will have an advanced search feature allowing users to search across different reference sources, by year, category and sub-category and keywords.  The search results will be expandable and color coded by source.