Sec Proposes Anticipated Rules on Pay-Versus-Performance Disclosure

On April 29, 2015, the SEC, in a 3-2 vote of the SEC Commissioners, approved proposed rules (the “pay-versus-performance disclosure”) that would require an issuer to disclose the relationship between the issuer’s executive compensation and the issuer’s financial performance. The proposed rules would implement a disclosure obligation required under Section 953(a) of the Dodd-Frank Act. Chair White noted, in the SEC press release announcing the proposed rules, that the pay-versus-performance disclosure “would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance.”

In particular, the proposed rules would amend Item 402 of Reg. S-K by adding a new Item 402(v) which would require issuers to disclose, in each proxy or information statement requiring executive compensation disclosure under Item 402 of Reg. S-K, the following:

  • the executive compensation “actually paid” to the issuer’s principal executive officer (“PEO”);
  • the executive compensation “actually paid” to the issuer’s named executive officers (“NEOs” ), expressed as an average for all such NEOs;
  • the issuer’s total shareholder return (“TSR” ); and
  • the TSR of a peer group of issuers.

Like all disclosures required under Item 402 of Reg. S-K, the pay-versus-performance disclosure would be subject to the say-on-pay advisory vote.

Compensation Actually Paid

Under the proposed rules, the executive compensation “actually paid” by an issuer means the total compensation for a particular executive disclosed in the summary compensation table adjusted by certain amounts related to pensions and equity awards. The adjusted disclosure represents an attempt by the SEC to reflect the compensation awarded to, or earned by, such executive officer in a particular year of service. In order to calculate the compensation “actually paid” to a particular executive officer, the total compensation disclosed for such executive officer in the summary compensation table would be adjusted to:

  • deduct the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans reported in the Summary Compensation Table;
  • add back the actuarially determined service cost for services rendered by the executive officer during the applicable year;
  • exclude the grant date value of any stock and option awards granted during the applicable year that are subject to vesting; and
  • add back the value at vesting of stock and option awards that vested during the applicable year, computed in accordance with the fair value guidance in FASB ASC Topic 718.

An issuer would need to include footnotes to the pay-versus-performance summary table (see below for the form table) which describes the amounts excluded from and added to the total compensation reported in the summary compensation and the issuer’s vesting date valuation assumptions used (if materially different from the grant date assumptions disclosed in the issuer’s financial statements).

In addition to the required disclosure, an issuer would be permitted to make disclosures to capture the issuer’s specific situation and industry, provided that any supplemental disclosure is not misleading and not presented more prominently than the required pay-versus-performance disclosure. Examples of supplemental disclosure provided in the proposed rules include the disclosure of “realized pay” or “realizable pay” or additional years of data beyond the time periods required.

Peer Group

The peer group utilized for the TSR comparison would be the same peer group used by the issuer in its stock performance graph or in describing the issuer’s benchmarking compensation practices in its CD&A.


The pay-versus-performance disclosure must be provided in tabular form as set forth below.

Year(a) Summary Compensation Table Total For PEO(b) Compensation Actually Paid to PEO(c) Average Summary Compensation Table Total for non PEO Named Executive Officers(d) Average Compensation Actually Paid to non PEO Named Executive Officers(d) Total Shareholder Return(f)

Peer Group Total Shareholder Return


Following the pay-versus-performance disclosure table, the issuer would be required to describe the relationship between the issuer’s executive compensation actually paid and the issuer’s TSR and the relationship between the issuer’s TSR and the peer group’s TSR.

Issuers will generally need to make the pay-versus-performance disclosure for its five (or three years, in the first applicable filing following the effectiveness of the proposed rule) most recently completed fiscal years.  However, smaller reporting companies will only need to make the disclosure for three years (or two years, in the first applicable filing following the effectiveness of the proposed rule).  In addition, a smaller reporting company would not be required to (i) disclose amounts relating to pensions (consistent with current executive compensation disclosure obligations); nor (ii) present the TSR of a peer group in its pay-versus-performance disclosure.


Companies would be required to tag the pay-versus-performance disclosure using XBRL.  Smaller reporting companies would not be required to comply with the tagging requirement until the third filing in which the pay-versus-performance disclosure is provided.

Companies to which Disclosure Requirement Applies

The proposed pay-versus-performance disclosure rules would apply to all reporting companies, except registered investment companies, foreign private issuers and emerging growth companies.


It is unclear whether the pay-versus-performance disclosure will be adopted (and in effect) in time for the 2016 proxy season.  The SEC is seeking comments on the proposed rules for 60 days following their publication in the Federal Register.

Spreading Sunshine in Private Equity

Title: Spreading Sunshine in Private Equity

On May 6, 2014, Andrew J. Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”), gave a speech entitled “Spreading Sunshine in Private Equity” to the Private Fund Compliance Forum (sponsored by Private Equity International) in New York.

The OCIE administers the SEC’s “examination and inspection” program, and oversees a multitude of registrants, including investment advisers, investment companies and broker-dealers. As a result of the Dodd-Frank Act, many private equity and other funds are now required to register with the SEC and are also subject to SEC inspection and certain other regulatory requirements. This statutory change brought an end to the minimal regulatory environment in which most private equity funds operated in for decades.

At the outset, Director Bowden presented an overview of the OCIE’s initial efforts to understand, and begin oversight of, the private equity industry. Director Bowden highlighted certain differences – some inherent and some borne of practice – in the private equity industry that pose different regulatory (including disclosure) challenges than those associated with regulating publicly-traded registrants. Some of these differences, certain of which have been addressed publicly by other SEC officials, include:

  • A private equity fund’s control over its privately-held portfolio companies, and the ability of the fund to influence the management and decision-making of such companies;
  • The typically “voluminous” limited partnership agreement that permits a fund a wide latitude of control and contains terms that are often subject to varying interpretations; and
  • That a fund typically is not subject to significant scrutiny by its limited partners (i.e., the lack of information rights).

Given these differences, Director Bowden described a number of observations from more than 150 examinations of private equity funds conducted by OCIE. In over half of the examinations, Director Bowden noted that OCIE found what it believes to be “violations of law or material weaknesses in controls” with respect to the treatment of fees and expenses. Director Bowden seemed to, at a fundamental level, take the position that private equity funds do not adequately disclose to investors the manner in which the funds allocate fees and expenses. For instance, the Director noted the typical practice of allocating “operating partner” expenses to a fund’s portfolio companies or to the fund itself, which the Director characterized as creating a “back door” fee that investors do not expect. In addition, Director Bowden spent some time discussing the inconsistent valuation methodologies that are sometimes used by a private equity fund, especially during the fundraising cycle, although he noted that OCIE only seeks to ensure consistency of valuation methodologies and has no intention of determining the type of methodologies employed by any particular fund.

In his concluding remarks, the Director stated that there is room for improvement in the overall compliance programs of many funds. In addition to promoting a culture of compliance, Director Bowden posited that funds would foster more effective compliance by involving compliance personnel in the deal-making process, including participating in investment committee meetings and reviewing deal memos.

Pay Ratio Rules to be Proposed this Week

On Wednesday, September 18, 2013 at 10:00 a.m. the SEC will hold an open meeting to consider whether to propose rules to require companies to disclose the median annual total compensation of all employees and the ratio of that median to the annual total compensation of the company’s chief executive officer as mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Upcoming SEC Roundtables

Recently, the SEC announced two roundtables – the Credit Ratings Roundtable  and the Fixed Income Roundtable.  

The Credit Ratings Roundtable will be held on May 14, 2013 in response to the SEC Staff report on Assigned Credit Ratings.  The SEC staff issued the credit ratings report in response to Section 939F of the Dodd-Frank Act.  Section 939F requires the SEC to study various issues relating to credit rating process and report its findings to Congress.  The credit rating process report focuses on conflicts of interest in the credit rating process for structured finance products, the feasibility of alternative credit rating systems, metrics that could be used to judge the accuracy of credit ratings for structured finance products and alternative compensation structures that would provide incentives for accurate credit ratings. 

The Fixed Income Roundtable will be held on April 16, 2013 and focus on the corporate bond market and the municipal securities market.  The municipal securities market was the subject the SEC’s July 2012 Report on the Municipal Securities Market.    The 2012 report makes a host of recommendations regarding the municipal securities market, including recommendations to improve price transparency, strengthen brokers’ existing obligations to provide investors with the best execution and fair pricing, and enhance disclosure, as well as increases in the SEC authority to regulate the municipal securities markets. 

Both roundtables will be held at the SEC’s headquarters in Washington, D.C., open to the public and webcast live.

NYSE Proposes New Rules Related to Compensation Committee and Committee Adviser Independence

Earlier this week, the NYSE filed proposed rule changes with the SEC related to compensation committee independence and the hiring of compensation advisers.  The NYSE proposed such rules to comply with Exchange Act Rule 10C-1 adopted in June.  Rule 10C-1 requires national securities exchanges to adopt listing standards which effectuate the compensation committee and committee adviser independence requirements of Section 952 of the Dodd-Frank Act.   The NYSE’s proposed rules do not expand upon or vary much from the SEC rules.  The NYSE proposed to have its new listing standards effective on July 1, 2013; however, companies would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the such new standards.  Set forth below is a summary of the NYSE’s proposed rules:

 Compensation Committee Independence

The NYSE proposed rules do not establish any new bright line standards specific to compensation committee independence.  Instead, the NYSE proposed rules require that, in affirmatively determining the independence of any director who will serve on a compensation committee, a listed company’s board “consider all  factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to, the two factors explicitly enumerated in Rule 10C-1(b)(ii)”:

  • the source of the director’s compensation, including any consulting, advisory or other compensatory fee paid by the listed company to such director; and
  • whether the director has an affiliate relationship with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company.

The proposing release specifically provides that the NYSE does not believe that board compensation should be considered as part of the independence determination.  Further, commentary to the proposed NYSE rules provides that “the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company’s executive compensation. Similarly, when considering any affiliate relationship a director has with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company, in determining his independence for purposes of compensation committee service,. . . the board should consider whether the affiliate relationship places the director under the direct or indirect control of the listed company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair his ability to make independent judgments about the listed company’s executive compensation.”

 Compensation Committee Adviser Independence

The NYSE proposed rules related to compensation committee advisers provide that prior to hiring a compensation adviser, the compensation committee must consider the six factors set forth in Rule 10C-1(b)(4).  The NYSE proposed rules do not add any factors for a compensation committee to consider prior to hiring an adviser, as the “Exchange believes that the list included in Rule 10C-1(b)(4) is very comprehensive and the proposed listing standard would also require the compensation committee to consider any other factors that would be relevant to the adviser’s independence from management.”

The NYSE’s proposed new rules are subject to SEC review and comment.  We believe it is unlikely that the SEC will have many objections to the proposed rules, as they essentially mirror the SEC’s rules.  In light of the NYSE proposed rules, NYSE listed companies should be reviewing their compensation committee charters, the composition of the compensation committee and their relationships with the compensation advisers in order to identify whether any modifications or changes may be in order to comply with the coming NYSE standards.