On March 22, 2017, the U.S. Securities and Exchange Commission (SEC) announced the unanimous passage of an amendment to Rule 15c6-1(a), shortening the standard settlement cycle for most broker-dealer securities transactions from three business days (T+3) to two business days (T+2). The new T+2 settlement cycle will apply to the same securities transactions covered by T+3, including transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds traded through a broker, and limited partnerships that are not listed on an exchange; provided, however, parties still retain the right to expressly agree to a longer settlement cycle pursuant to the “override provision” of Rule 15c6-1(a). Sales of securities exempt from the T+2 settlement cycle are exempted securities, government securities, municipal securities, commercial paper, banker’s acceptances and commercial bills.

The amendment also does not apply to contracts for the sale of securities for cash that are priced after 4:30 p.m. Eastern time on the date of pricing of the securities that are either (i) sold pursuant to a firm commitment underwritten offerings registered under the Securities Act of 1933 by the issuer to an underwriter or (ii) sold to an initial purchaser by a broker-dealer participating in such offering. Such firm commitment offerings remain outside of the settlement cycle pursuant to Rule 15c6-1(c) and (d) as long as the alternative settlement date is expressly agreed to by the managing underwriter and issuer for all securities sold in the offering at the time of the transaction.

The SEC states that this amendment aligns with the SEC’s desire that regulations reflect the technology of modern times. Shortening the settlement cycle is aimed to increase efficiency and reduce risk for market participants, including the risk of a counterparty defaulting.

Compliance by broker-dealers with the T+2 amendment is not required until September 5, 2017, consistent with the Industry Steering Committee’s target implementation date. In order to assist compliance preparation, inquiries regarding the amendment may be submitted to the SEC staff at T2settlement@sec.gov.

The SEC press release announcing the amendment and the release adopting the change to Rule 15c6-1(a) are available at https://www.sec.gov/news/press-release/2017-68-0 and https://www.sec.gov/rules/final/2017/34-80295.pdf, respectively.

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Since the inception of the Consumer Financial Protection Bureau in July 2011 as part of the Dodd-Frank Act, the financial services industry has watched as the Bureau has proposed a large number of regulations and created law by entering into consent decrees with financial institutions and a host of other creditors. There is no argument that the CFPB has radically changed the manner in which the financial services industry is regulated with its preferred method of legislating through consent decrees. Recently, however, it has been under scrutiny by each branch of the government because of what many see as its potential overreach in power. Recent case law, new bills and presidential executive orders are aimed at reining in the CFPB and its aggressive director, Richard Cordray.

Husch Blackwell’s Financial Services & Capital Markets team is watching these developments and advising clients on the effects of the potential changes. This particular alert addresses the recent executive order by President Trump to “dismantle” the Dodd-Frank Act and how the administration’s “Core Principles for Regulating the United States Financial System” are likely to pertain to providers of consumer financial services.

Continue Reading 2017 Financial Services Update: The Uncertain Future of the Consumer Financial Protection Bureau

On August 5, 2015, the Securities and Exchange Commission (“SEC”) adopted rule amendments to implement Section 953(b) of the Dodd-Frank Act, requiring that public companies disclose the “pay ratio” between its CEO’s annual total compensation and the median annual total compensation of all other employees of the company. The new rule, located in Item 402(u) of Regulation S-K, is effective in the first full fiscal year commencing on or after January 1, 2017, and the initial pay ratio disclosure will be required in the company’s first annual meeting proxy statement following the conclusion of such year.

Below is a short guide that will assist companies in preparing for pay ratio disclosure.

Does pay ratio apply to my company?

Pay ratio applies to all companies required to provide summary compensation table disclosure pursuant to Item 402(c) of Regulation S-K. Smaller reporting companies, emerging growth companies, foreign private issuers, multijurisdictional disclosure system filers and registered investment companies are exempt.

What is the required disclosure?

Companies must disclose (1) the annual total compensation, but not the identity, of the employee whose compensation falls at the mathematical median of compensation for all employees of the company (except the CEO), (2) the annual total compensation of the CEO and (3) the ratio of (1) to (2) (the “pay ratio”). The total compensation may be calculated consistent with Item 402(c)(2)(x) of Regulation S-K or the company can use its own methodology provided the disclosure contains the material assumptions, estimates, adjustments and exclusions (including relating to cost-of-living, non-U.S. employees, business combinations and acquisitions) used in the identification of the median employee and the calculation of that employee’s annual total compensation.

How is the ratio presented?

The Ratio must be presented as either:

  1. a ratio in which the median compensation equals one; or
  2. a narrative in terms of the multiple that the CEO compensation bears to the median compensation.

For example, if the Median Compensation is $100 and the CEO compensation is $1,000, the ratio can be presented as: (1) 10 to 1, (2) 10:1 or (3) “The CEO compensation is ten times the median compensation.”

How do I determine who the median employee is?

The median employee may be identified:

  • using the company’s entire employee population or by means of statistical sampling and/or other reasonable methods;
  • once every three years, assuming no significant changes in either (a) the median employee’s circumstances or (b) the company’s compensation levels or employee composition;
  • using any date within the last three months of the last completed fiscal year;
  • using annual total compensation or any consistently applied compensation measure;
  • by making cost-of-living adjustments for employees in jurisdictions other than the jurisdiction in which the CEO resides.

In determining who the median employee is, companies must include all full-time, part-time, seasonal, temporary and non-U.S. employees of the company and its consolidated subsidiaries. Independent contractors and “leased” workers providing services to the company are excluded from the definition as long as they are employed by an unaffiliated third party and their compensation is determined by such party. Companies may exclude:

  • employees employed in a foreign jurisdiction in which the laws or regulations governing data privacy are such that, despite reasonable efforts to obtain or process the necessary information, the company is unable to do so without violating such data privacy laws or regulations
  • a de minimis number of non-U.S. employees (up to five percent of the company’s global workforce, including any employees excluded under the foreign data privacy law exemption)

What reports require the pay ratio disclosure?

Companies must include disclosure in any annual report on Form 10-K, proxy or information statement or registration statement that requires executive compensation disclosure pursuant to Item 402 of Regulation S-K.

What pay ratio disclosure is required if my company files a registration statement before filing its proxy?

A company does not need to update its pay ratio disclosure until it files its annual report on Form 10-K or, if later, its proxy statement or information statement for its next annual meeting of shareholders.

How does my company comply with the rule if it transitions from being a smaller reporting company or an emerging growth company after January 1, 2017?

Companies that cease to be smaller reporting companies or emerging growth companies are not required to provide the pay ratio disclosure until they file a report for the first fiscal year after they cease to be a smaller reporting company or emerging growth company.

How does my company comply with the rule if it acquires new employees through a business combination during any part of the fiscal year?

The rule permits companies that engage in a business combination or acquisition to omit the employees of a newly-acquired entity from their pay ratio calculation for the first fiscal year in which their business combination or acquisition occurs.

Should my company begin providing pay ratio disclosures before the first reporting period in which such disclosures are required?

You may if you choose to do so. A number of companies began voluntarily providing pay ration disclosures in their 2016 proxy statements. By going through the disclosure process before the pay ratio reporting period begins, companies are able to address a number of key issues that require management consideration well in advance of the reporting period. Additionally, companies that voluntarily report ahead of the reporting period get the benefit of SEC Staff review of their pay ratio disclosures before the disclosures are mandated. At the very least, companies should start thinking about issues that will go into developing the pay ratio disclosures. First, what method will the company adopt in determining the median employee?  Second, how will annual compensation be determined? If the company will not follow Item 402 of Regulation S-K in determining annual compensation, what methodology will the company use and what material assumptions, estimates, or adjustments are required? What accompanying disclosures are needed in the pay ratio disclosure to provide the appropriate context needed to make the disclosure helpful to investors? We believe it is prudent for all companies to begin implementing and testing their procedures to support these disclosures now, if they have not already done so, regardless of whether the company plans to elect early compliance. This will allow any unforeseen difficulties that arise in the company’s implementation process to be addressed in a deliberate manner, without the pressure of looming disclosure deadlines.


The Securities and Exchange Commission’s (“SEC”) Advisory Committee on Small and Emerging Companies (the “Committee”) met on Wednesday, May 18, 2016, to discuss two main topics (1) the definition of “accredited investor” and (2) Regulation D. The discussion on the definition of accredited investor was necessitated by the SEC’s recent publication of its report analyzing such definition. As background, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) directed the SEC to review the definition of accredited investor every four years in order to determine whether or not the definition should be modified.  The SEC published its first report under such Dodd-Frank requirement on December 18, 2015, entitled “Report on the Review of the Definition of ‘Accredited Investor’” (the “2015 Report”), which served as the basis for the discussion by the Committee. Continue Reading Committee on Small and Emerging Companies Met to Discuss the Definition of Accredited Investor and Issues under Section 506 of Regulation D

cyber-codeOn May 3, 2016, the Securities and Exchange Commission (SEC) approved rule amendments to implement changes liberalizing certain rules related to registration thresholds, termination of registration, and suspension of periodic reporting obligations under Section 12(g) and Section 15(d) of the Securities Exchange Act of 1934 (Exchange Act), as mandated by the Jumpstart Our Business Startup Act (JOBS Act) and the Fixing America’s Surface Transportation Act (FAST Act). The following highlights the three major revisions implemented by the amendments. Continue Reading SEC Adopts Rule Amendments Related to Reporting Thresholds

Overview.  Last week, the Securities and Exchange Commission (SEC) adopted new rules permitting “crowdfunding,” a method for growing businesses to raise capital over the Internet by soliciting small investments from a large number of individuals.  The new rules are the final significant rulemaking procedure required by the Jumpstart of Business Startups (JOBS) Act of 2012 and aim to increase access to capital for new companies nationwide.

For Companies Seeking to Raise Capital.  The crowdfunding rules permit issuers to raise up to $1 million in a 12-month period through a funding portal registered with the SEC or through specific online broker-dealer platforms.  Only one offering through one intermediary platform is allowed at any time, and advertisements of the offering outside of the platform are limited to information similar to traditional “tombstone” ads.  To protect investors from the inherent risks associated with crowdfunding offerings, the SEC requires each issuer to provide certain detailed information on a new Form C, including among other things: a detailed description of the business; the target offering amount; the price of the securities offered; the company’s financial statements (subject to scaled requirements based on the targeted offering size); the intended use of the proceeds; all related-party transactions; and the identities of all significant stakeholders, as well as updates when certain milestones are reached in the offering on a prescribed Form C-U.  Issuers will also be required to file annual reports with the SEC on a new Form C-AR and provide the same to investors.

Certain companies are not be eligible to be issuers, such as non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies subject to prior disqualification, and companies with no business plan other than to execute a merger or acquisition.

For Individuals Seeking to Invest.  Under the new rules, the SEC established limits on the amounts that an individual can invest in crowdfunding offerings, based on the individual’s income level.  Investors with an annual income or net worth greater than $100,000 may invest up to ten percent of their income or net worth every 12 months (in total, across all crowdfunding platforms).  For investors with an annual income or net worth below $100,000, the aggregate investment limit is equal to the greater of (i) $2,000 or (2) five percent of their net worth.  Regardless of income level, the amount of securities sold to an investor may not exceed $100,000 in a 12-month period.

For Crowdfunding Platforms.  Each crowdfunding intermediary is required to register with the SEC and become a member of FINRA.  To reduce the risk of fraud, the new rules establish additional operating and process requirements for intermediaries, such as: providing investors with educational materials (on both the issuer and the investment process); reviewing and timely disseminating all issuer disclosures; providing clear channels for prescribed communications; and reasonably policing monetary exchanges.  The rules also prohibit certain intermediary activities, including: offering investment advice; having a financial interest in an issuer (unless received as compensation for its intermediary service, subject to restrictions); compensating promoters; and providing platform access to fraudulent companies.

What’s Next?  The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register.  The forms enabling intermediaries to register with the SEC will be effective on January 29, 2016.

The Securities and Exchange Commission (“SEC”) released a proposed rule on July 14, 2015 that will require publicly traded companies to create and enforce a clawback policy (called a “recovery policy” by the SEC) to recover incentive-based compensation (“IBC”) paid to executives for specific metrics for which the company has to issue revised financial statements because those metrics were overstated. While the rule is discussed in more length in a previous post, this blog post discusses two tax issues that companies and executives should be aware of when creating a clawback policy. The first issue arises if a company’s recovery policy were to provide for clawback from nonqualified deferred compensation before it becomes payable, which could result in a significant tax penalty on an affected executive under Section 409A of the Internal Revenue Code. The second issue arises when an executive has already paid taxes on the IBC, as the rule requires the clawback be equal to the bonus amount pre-tax, not the amount that the executive netted from the bonus.

Section 409A generally does not allow the payment of deferred compensation at times other than upon certain events specified in the statute (separation from service, disability, or death) or on a fixed date. Acceleration of payment is generally prohibited. Under the existing Section 409A guidance, the ability of a company to clawback IBC from deferred compensation that is not yet payable generally would violate the anti-acceleration rule of Section 409A, potentially triggering severe tax consequences for affected executives. Companies should draft their recovery policies so that clawback will come from sources other than deferred compensation subject to the anti-acceleration rule of Section 409A.

The second issue arises when the executive has already paid taxes on IBC, but the amount to be recovered is on a pre-tax basis.   The executive generally should be able to claim the clawback repayment as a miscellaneous itemized deduction in the year of the repayment. However, there will be instances where the tax benefit from this deduction will not completely offset the amount of additional taxes incurred in the year the IBC was received (e.g., when the executive’s tax rate is different in the year of receipt of the IBC than the year the clawback takes place and due to limitations on miscellaneous itemized deductions). While Section 1341 generally provides relief in the situation where the deduction in the year of repayment does not fully compensate a taxpayer for the additional taxes previously paid on such repaid amount, tax practitioners are skeptical that Section 1341 will always be available to executives in these situations. This issue likely will not affect how companies draft their policies; rather, it will inform how executives make financial and tax decisions, particularly given that executives will generally have to make the clawback repayment of (and therefore will generally be “out of pocket” for) the full pre-tax amount of the bonus before realizing any tax benefits from the repayment.

On July 1, 2015, the Securities and Exchange Commission published a Concept Release on Possible Revisions to Audit Committee Disclosures. This comes on the heels of a PCAOB request for comments regarding whether public accounting firms are required to release the name of audit engagement partners and certain participants in audits. While not strictly related, these new possible rules highlight regulators’ renewed concern for audit disclosures. At this time, the SEC is seeking comments regarding (1) the idea of revisions to the existing requirements in general, and (2) specific areas of possible disclosure. The SEC cites some shareholders expressing the view that the existing “rules do not provide investors with sufficient useful information regarding the role and responsibilities carried out by the audit committee in public companies.” The SEC is particularly careful to point out that many companies “voluntarily provide information beyond the disclosures required by [the SEC’s] current rules.” The areas of possible disclosure seem to cover a wide array of issues, indicating that the SEC may be strongly influenced by the input from comments.

Below are some of the areas that the SEC is considering for additional disclosures:

  • the audit committee’s oversight of the auditor, including: communications between the committee and auditor (which would provide information about actions taken in the most recent fiscal year); meetings between the auditor and audit committee; committee review of the auditing firm’s internal controls; and how the committee reviews the auditor’s objectivity and professional skepticism;
  • the audit committee’s process for appointing and retaining the auditor, including assessments, proposals, and shareholder input;
  • qualifications of the audit firm, such as the engagement team and number of years the firm has audited the company;
  • whether the audit committee disclosures should be included in IPO and other registration statements; and
  • requirements for smaller and emerging growth companies.

While some of these disclosures appear to be less difficult than others, such as how long an auditor has audited a company, others appear to be more in depth, such as requiring disclosure of the committee’s review of the auditor’s internal controls, or others that could be hard to explain, such as why ABC Co. chose KPMG over PWC. It is unclear from the SEC’s release how these disclosures will help the average investor make wise investment decisions. Arguably the process would be more transparent, but the flip-side is that it becomes more burdensome on companies to disclose more and more, and may overload investors with information. However, the SEC is seeking comment, and issuers may be able to influence the direction and scope of the rules by submitting comments.

It is clear from the SEC’s broad request for comments that the necessity, demand, and scope of the rules is not yet clear, which is good reason for reporting companies to take advantage of the request for comments. Companies should consider the effect this may have on small versus large companies, as well as the possible disclosures regarding justification – and what burden that might entail. Additionally, there are also forthcoming PCAOB regulations requiring public disclosures that might make some of these rules redundant, and perhaps the SEC rules would be better created after the scope of the PCAOB regulations is determined. If companies wish to submit comments to the SEC, Husch Blackwell LLP is here to help.

Alex Gross, a summer associate at the firm, assisted in the preparation of this post.

On July 1, 2015, the Securities Exchange Commission (“SEC”) took action to fulfill the final executive compensation rulemaking mandate of Section 954 of the Dodd-Frank Act. The SEC proposed a rule that directs national securities exchanges and associations to establish listing standards that would require companies to develop and implement executive compensation clawback policies. Under the proposed rule, if a company is required to prepare an accounting restatement due to a material noncompliance with any financial reporting requirement, executive officers—defined in the proposed rule to include the same “officers” subject to Section 16 short-swing trading disclosures under SEC Rule 16a-1(f)—must relinquish the compensation they received in excess of what would have been received based on the restated financial results. Proposed Rule 10D-1 would apply to incentive-based compensation that current and former executives received for any of the three completed fiscal years preceding the date the company is required to prepare a covered restatement.

The driving principle behind the rule is that “executive officers should not be permitted to retain incentive-based compensation that they should not have received in the first instance, but did receive because of material errors in their companies’ publicly reported financial statements,” as SEC Chair Mary Jo White stated. Executives will be prevented from keeping “erroneously awarded” compensation without any regard to fault, misconduct, or an executive’s responsibility for the financial statements that prompted the accounting restatement, which is not required by the Dodd-Frank Act. Ms. White and other supporters hope the rule will “result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the market.” SEC Commissioner Luis A. Aguilar commented that the proposed rule rests on the perceived foundational idea that “Americans believe you should earn your money” and that “if you did not earn your compensation, you should not keep it.”

Not all incentive-based compensation will fall under the proposed rule’s scrutiny and be subject to recovery. As proposed, the rule defines incentive-based compensation as “any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any financial reporting measure.” Financial reporting measures may include three pieces of information: accounting-related metrics used to prepare a company’s financial statements, stock price, or total shareholder return. For example, compensation that could be subject to a clawback policy includes stock options, non-equity incentive plans, bonuses paid from a bonus pool, and other compensation that was earned or granted based wholly or in part on satisfying a performance goal tied to a financial reporting measure. Excluded from the proposed rule’s contemplated umbrella of incentive-based compensation are salaries, discretionary and time-vested awards that don’t depend on financial reporting metrics, and incentive compensation awarded based on the occurrence of a non-financial event, such as consummating a merger, opening a certain number of stores, or obtaining regulatory approval of a product. However, the clawback requirement would apply to all incentive-based compensation that is “received” for any portion of the covered three-year period – which would include compensation paid out after the end of such period based on the achievement of any specified financial reporting measure during the period in question.

Proposed Rule 10D-1 would also require all listed companies—except certain registered investment companies to whom the rule would not apply—to file their clawback policy as an exhibit to their annual reports and disclose actions they’ve taken pursuant to their policy. Significantly, this means that companies which happen to list only debt securities—and previously have not been required to identify which of their executives are “officers” for purposes of equity-based Section 16 compliance—will need to do so to comply with this new rule. Additionally, companies will have to disclose, in any proxy statement that requires executive compensation disclosure, whether during the most recent fiscal year the company completed an accounting restatement that required recovery of erroneously paid excess compensation, and whether there was an outstanding unrecovered balance of excess incentive-based compensation from the application of the company’s clawback policy to a prior restatement. Companies that fail to adopt any compensation recovery policy, fail to disclose such policy in accordance with the rule, or fail to comply with their clawback policy could face delisting.

One of the distinctive characteristics of the proposed rule is that boards of directors will be able to exercise discretion not to recover any excess incentive-based compensation only if: (1) recovery would violate the home-country laws of a foreign private company; or (2) the expense of enforcing recovery would be expected to exceed the amount of incentive-based compensation that would be recovered. Commenters noted in response to a preliminary SEC proposal that boards should have this discretion because the costs of recovering excess incentive-based compensation may outweigh the benefits of obtaining it. The proposed rule recognizes this fact, but also notes that allowing boards to exercise too much discretion could undermine the entire purpose of the rule—to bar an executive officer from retaining incentive-based compensation that he or she did not earn.

On the other hand, some commenters argue that allowing a board to forego the costs of recovering erroneous compensation based on the impracticality of pursuing the compensation would align with investors’ interests. But as SEC Commissioner Piwowar noted, the breadth of the proposal—requiring companies to pursue a clawback unless it would be “impracticable” to do so—may end up unnecessarily committing more shareholder resources to clawbacks. Under the proposed rule, the only criteria that would factor into a determination of “impracticability” are those related to whether the recovery would be cost effective. Thus, before a company can conclude the costs of recovering excess incentive-based compensation impractically outweigh the benefits, they may need to first make a reasonable attempt to recover the incentive-based compensation, and then determine it would not be cost-effective. By engaging in this process, companies may still end up expending more shareholder resources than the excess compensation would justify.

Concerning the exercise of Board discretion, the SEC is seeking comment on a variety of topics, including: (1) whether this discretionary provision will hinder effectuation of the rule’s purpose; (2) whether the provision grants companies a substantial loophole to avoid compliance; (3) whether the standard for exercising discretion not to recover should be limited to situations in which it is impracticable; and (4) whether other circumstances exist in which companies should be allowed not to pursue recovery.

Opponents of Proposed Rule 10D-1 argue the rule as proposed could have the unintended effect of increasing the overall compensation of executive officers. In opposing the rule, SEC Commissioner Michael Piwowar pointed to the fact that the rule will breed uncertainty in executive compensation. Due to the threat that some of their compensation may ultimately be subject to a “clawback” triggered by a financial restatement even in the absence of any misconduct, executives are likely to demand higher salaries or insist that a smaller portion of their compensation come from incentive-based awards. These consequences could potentially defeat the purpose of the increased emphasis on pay-for-performance in designing executive compensation.

The method for calculating certain types of compensation subject to recovery constitutes another source of uncertainty. Unlike incentive-based compensation that bears a clear relationship to the financial reporting measure that triggered the payment, erroneously-awarded compensation that is based on stock price or total shareholder return cannot be recalculated with mathematical precision from the new information in an accounting restatement. In recognition of this difficulty, the rule proposes to allow companies to use a reasonable estimate of the effect of the accounting restatement on the stock price or total shareholder return on which the erroneous compensation was based. Companies would have to document their methodology in determining such a reasonable estimate and provide the information to their national securities exchange. We expect a number of comments to question whether this is feasible or would require too many assumptions, or result in additional, unnecessary expense to shareholders as companies engage third party experts to provide support for their estimates.

Others who have spoken out against the proposed rule criticize its scope. Tom Quaadman, the Vice President of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness has called the plan “extremely prescriptive” in that it includes more executive officials than the statute contemplated. The rule has expanded on the Sarbanes-Oxley Act’s clawback provisions, which only apply to CEOs and CFOs, by applying to any president, principal financial officer, principal accounting officer, vice president in charge of a principal business unit, division, or function, or any other person who performs a similar policy-making function at the company. Some have argued that the rule’s aggressive “no fault” clawback policy should apply to a smaller group of executives who are responsible for the preparation of the financial statements. Alternatively, some argue the proposed rule could apply to a larger group of executives, but the application of the rule should be limited to only those who had a hand in causing the financial misstatement.

The proposed rule also raises certain questions concerning how the clawback amount will be treated for tax purposes. For instance, while the proposed rule would allow “erroneously awarded” compensation to be recovered over time from an executive’s future salary or other incentive awards, companies should be careful to ensure that any amounts recovered through an offset against future awards of deferred compensation do not result in an impermissible acceleration of deferred compensation payments that could trigger tax penalties under Section 409A of the Internal Revenue Code. Additionally, the clawback is calculated on a pre-tax basis, but the officers would be returning the compensation with after-tax money, requiring them to seek to recover any resulting overpayment of income tax from the IRS.

Under the SEC’s clawback proposal, each exchange will have 90 days after the date the SEC adopts Rule 10D-1 in definitive form to file its proposed listing standards to implement the new rule, and its rules must become effective no later than one year following the publication date of the exchange’s proposed rules. Listed companies would be required to have a clawback policy in place that complies with such rules no later than 60 days after the date on which their exchange’s rules become effective. Accordingly, while these rules are not likely to be applicable until early 2017, listed companies of all sizes should begin now to proactively evaluate the impact they may ultimately have on existing company policies and on the design of their executive compensation programs.

Madison Benedict, a summer associate at the firm, assisted in the preparation of this post.

An announcement by the SEC of a $400,000 award to a whistleblower highlights the need for companies to properly investigate and address complaints raised internally.

On July 31, the SEC announced that it paid an award to a whistleblower who first reported fraud internally (several times, according to the SEC press release), only to have his claims ignored.  The whistleblower eventually took his claims to the SEC Office of the Whistleblower.

The SEC’s Office of the Whistleblower oversees the SEC whistleblower program, which was created by the Dodd-Frank Act.  The program rewards high-quality, original information that leads to an enforcement action resulting in sanctions over $1 million.  Awards can range from 10 percent to 30 percent of the money collected.  The SEC received 3,328 tips and complaints in 2013 alone.

Under the SEC program, whistleblowers are eligible for an award if they “voluntarily provided original information to the Commission that led to the successful enforcement” of the claim.  The claim in this matter did not meet the “voluntary” requirement as implemented by the SEC’s Rule 21F-4(a), because the matter had been subject to a prior inquiry by a self-regulatory organization (“SRO”).  The SEC nonetheless found that it was appropriate to waive the regulatory “voluntary” requirement and grant the award, because the whistleblower had worked “aggressively internally” to bring the violations to the attention of appropriate personnel, and because the SRO inquiry was based, in part, on the whistleblower’s efforts in identifying the issue, as told to the SRO by a third party.  “When it became apparent that the company would not address the issue, the whistleblower came to the SEC in a final effort to correct the fraud and prevent investors from being harmed.”

The award highlights the need for companies to have robust internal reporting procedures, to follow through with proper investigations of claims, and to take necessary steps to address complaints that are raised.