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


In March, the U.S. Securities and Exchange Commission (SEC) issued a no-action letter regarding satisfaction of the required holding period under its Rule 144 safe harbor for certain resales of “restricted securities” without registration under the Securities Act of 1933 (the “Securities Act”), in the context of sales of common stock of a public real estate investment trust (REIT) acquired in exchange for the same REIT’s operating partnership (OP) units. In contrast to the SEC staff’s general position that a holder exchanging a security of one issuer for a security issued by a different (albeit related) entity may not satisfy the safe harbor’s requirements by “tacking” its holding period for the two securities, this letter affirmed that when REIT common stock is received by holders in exchange for OP units in a customary umbrella partnership real estate investment trust (UPREIT) structure, notwithstanding that the REIT and its OP are not the “same issuer,” such holders generally may count their holding period for the OP units, plus their holding period for the REIT common stock following such exchange, in determining whether they meet Rule 144’s holding period requirement.

The Basics

Generally, securities issued without registration – which is normally the case for OP units issued in exchange for real property as well as common stock that may be issued in exchange for OP units in a typical UPREIT structure – are classified as “restricted securities” under the Securities Act. In order to avoid Securities Act registration for the resale of restricted securities by not being classified as “underwriters” pursuant to the Rule 144 safe harbor, a holder must satisfy a number of requirements, including a requirement under Rule 144(d) that such securities have been held for a period of at least six months[1] before they are transferred or sold.

UPREIT partnership agreements typically require that OP units issued in exchange for a contribution of real property assets must be held for a specified period (usually one year) before they may be exchanged for REIT common stock, which represents an economic interest in the underlying portfolio of real estate assets substantially identical to that of the OP units. Notwithstanding this fact, prior to this no action letter informal SEC guidance under Rule 144 indicated the SEC would not allow holders to “tack” the holding periods of the two securities. Thus, the REIT common stock had to separately satisfy the Rule 144(d) holding period before it could be sold without registration under Rule 144.  Under this new guidance, the holding period generally will begin to run as soon as the OP units are acquired.

The Application

The guidance issued will be applicable to transactions that conform to the facts and circumstances addressed in the underlying no-action request submitted on behalf of Bank of America, N.A, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“BAML”). Because that request did not address a particular REIT or transaction, however, it should be applicable for all exchanges of UPREIT OP units that conform to the four factors cited by the SEC as the basis for its grant of the required “no action” relief:

  • Unit holders must pay the full purchase price for the OP units at the time they were acquired from the OP[2];
  • An OP unit must be the economic equivalent of a share of REIT common stock, representing the same right to the same proportional interest in the same underlying pool of assets;
  • The exchange of REIT common stock for OP units must be at the discretion of the REIT; and
  • No additional consideration is required to be paid by the OP unit holders for issuance of the shares of REIT common stock in exchange for the OP units.

The SEC noted that absence of any of these factors could result in a different conclusion concerning the application of the Rule 144(d)(1) holding period to the exchanged shares.

What This Means to You

This guidance should benefit both REITs and the holders of their OP units by eliminating the need, in most cases, for a “selling stockholder” registration statement or prospectus to be filed under the Securities Act before the REIT common stock issued in exchange for OP units may be sold into the public market by the exchanging holder. Where exchanging holders of OP units have been granted the right to have the REIT register their securities for public resale under the Securities Act, such agreements typically provide that no registration statement need be filed, or that an existing resale registration may be discontinued, if the selling holders are able to utilize the Rule 144 safe harbor for their transactions. The elimination or significant reduction of such resale registration statement filings will save REITs both time and money, and may also avoid potential conflicts with primary offerings by the REIT, under a shelf registration statement or otherwise, in other capital raising transactions.

OP unit holders also benefit from this guidance, which provides additional flexibility and certainty concerning their ability to freely transfer REIT common stock acquired upon the exercise of OP unit exchange rights without the delays previously associated with waiting for a resale registration to be completed or for the full Rule 144 holding period to run after acquiring their stock.

[1] The six month holding period applies to securities of issuers that are SEC reporting companies and are current in their Exchange Act reporting requirements.  For non-reporting companies, or for any reporting company that is not current in its Exchange Act filings, the required holding period is one year.

[2] Based on the assumptions set forth in BAML’s request and the SEC’s response, it seems clear that this includes issuances in exchange for real property contributed to an UPREIT’s operating partnership.

The SEC staff recently conducted a preliminary review of the disclosure requirements under Regulation S-K, which was the initial step in a plan to conduct a comprehensive review of the regulation to address reporting requirements and presentation and delivery issues for public companies.  The SEC has launched a website dedicated to gathering information from companies, investors and other market participants on what information is important to investors, how disclosure enhancements can be made, how disclosure can be simplified and how technology can play a role in these items.

In an April 2014 speech to the American Bar Association Business Law Section, Keith M. Higgins, Director of the SEC’s Division of Corporate Finance, expanded on this SEC effort to eliminate duplication and reduce disclosure burdens for public companies, while continuing to provide material information to investors.  In addition, Mr. Higgins recommended companies not to wait for any comprehensive updates to Regulation S-K, but made several suggestions that public companies and their counsel can begin now to make disclosure more effective, including the following:

  • Reduce repetition – Mr. Higgins encouraged companies, for example, to reconsider whether including a verbatim disclosure from the footnotes in MD&A is necessary.
  • Focus disclosure – Mr. Higgins cautioned companies that more is not always better, but that a company should consider whether something is truly applicable to the company, and not include just because it is a “hot button” issue for the staff or all of the company’s peers appear to include it.
  • Eliminate outdated information – Lastly, Mr. Higgins encouraged companies to allow their disclosure to evolve over time and eliminate disclosure once no longer material, even if it was originally included as a response to a SEC staff comment.

Companies are encouraged to carefully consider the disclosures included in their periodic reports, and may want to ask themselves some of the following questions as they draft: Are you including certain disclosure because it is truly material to a description of your company or required by the regulations?  Is there disclosure you could eliminate that is only included because it has always been included, but is no longer relevant to the total mix information that investors need?  Taking a fresh look at the disclosure may be the best first step in beginning to improve the disclosure process.

Rule 165 of the Securities Act of 1933 permits the offeror of securities in a business combination transaction to make public statements related to or in connection with the transaction, both before and after the filing of a registration statement related to the transaction, as long as the statement contains a legend:

  • urging investors to read the relevant documents containing important information filed or to be filed with the Securities & Exchange Commission (the “SEC”);
  • explaining that investors can obtain those documents for free from the SEC; and
  • describing which of those documents can be obtained from the offeror free of charge.

As social media outlets have become widely used, the SEC has issued guidance for companies wishing to use social media to make these and other public disclosures.  Because the required legend must accompany the social media post, questions arose regarding how such public statements could be made in compliance with Rule 165 on social media websites, like Twitter, that limit the number of characters in a single post. 

On April 22, the SEC issued a new Compliance Discussion & Interpretation (“CDI”) to provide guidance on this issue, which also applies to legends required by Rules 14a-12 (proxy solicitations before furnishing a proxy statement), 13e-4(c), 14d-2(b) and 14d-9(a) (tender offer communications) of the Securities Exchange Act of 1934, but the CDI has raised more questions than it answers. 

Commonly, when Twitter users want to tweet more information than would be permitted by the 140 character limit, they add a link to the tweet to separate websites containing additional text, articles and photos.  The hyperlinks themselves take up approximately 10 of the 140 permitted characters. 

The SEC has taken the position that a tweet can link to a separate page that contains the required legend, but the tweet must include language conveying that the hyperlink contains important information.  Additionally, where a social media platform allows the offeror sufficient characters to include the legend in the post in its entirety, the offeror may not use the hyperlink method to meet the legend requirement.  

Including both the hyperlink and the additional language conveying that the hyperlink is important eats up valuable “tweet-estate.”  Since each character in a tweet, including hyperlinks, must be carefully chosen to stay within the 140 character limit, presumably, a hyperlink would not be included in a tweet if it were not important and intended to be clicked by the reader.

Questions remain regarding whether each tweet in a series of tweets that, together, constitute a single statement must include both the hyperlink and language conveying the importance of the hyperlink or whether their inclusion in the initial tweet will suffice. 

Time will tell whether the SEC will relax its position on required legends in social media.  In the meantime, companies should take a conservative approach and include both the hyperlink and language conveying its importance in each tweet or series of tweets that constitutes a public statement related to or in connection with a business combination transaction.