Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

Last weekend, voters in Switzerland strongly backed a plan giving shareholders unprecedented authority over executive pay.  The Minder Initiative, named after the Swiss businessman who created it, was supported by approximately 68% of Swiss voters.  The measure gives shareholders of Swiss companies the power to approve or block proposed compensation for executives and directors.

Novartis AG and UBS AG are two of the multinational companies listed in Switzerland that will be affected by the Minder proposals.  The proposals now go to the government for legislative drafting.  Implementation is not expected until 2014 at the earliest.

Switzerland has provided a supportive environment for Mr. Minder's ideas.  In 2008, the Swiss government was forced to bail out UBS, the country's largest bank.  Also lending support to the success of the Minder Initiative was Daniel Vasella, the departing chairman of Novartis.  He was to receive 72 million Swiss francs ($76 million) over six years as part of his exit.  Novartis went back to the drawing board on Mr. Vasella's package after it created backlash among the Swiss people.

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The SEC has approved the listing standard changes relating to compensation committee independence and consultants for both Nasdaq and the NYSE.

The proposed listing standards implement Rule 10C-1 under the Securities Exchange Act of 1934, which was added by the Dodd-Frank Act.

With respect to the Nasdaq listing standard changes, most listed companies will be required to comply with the new rules, but Nasdaq has exempted "smaller reporting companies" from compliance.  First, by July 1, 2013, the listed company must have a formal written charter that provides:

• The compensation committee will review and reassess the adequacy of the charter on an annual basis;
• The scope of the committee's responsibilities and how it carries out those responsibilities, including structure, processes, and membership requirements;
• The committee's responsibility for determining or recommending to the board for determination, the compensation of the CEO and all other executive officers of the company, and provide that the CEO may not be present during voting or deliberations on his or her compensation; and
• The committee's responsibilities and authority with respect to retaining its own advisers; appointing, compensating, and overseeing such advisers; considering certain independence factors before selecting advisers; and receiving funding from the company to engage them.

The compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser, other than in-house legal counsel, only after taking into consideration the following factors:

• The provision of other services to the company by the person that employs the compensation consultant, legal counsel or other adviser;
• The amount of fees received from the company by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;
• The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;
• Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee;
• Any stock of the company owned by the compensation consultant, legal counsel or other adviser; and
• Any business or personal relationship of the compensation consultant, legal counsel or other adviser or the person employing the adviser with an executive officer of the company.

The rule clarifies that nothing in the rule requires a compensation consultant, legal counsel or other adviser to be independent, only that the committee considered the enumerated independence factors before selecting, or receiving advice from, a compensation adviser.  Further, the committee is not required to conduct an independence assessment for a compensation adviser that acts in a role limited to the following activities for which no disclosure is required: (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the company, and that is available generally to all salaried employees; and/or (b) providing information that either is not customized for a particular company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.

By the earlier of a listed company's first annual annual meeting after January 14, 2014, or October 14, 2014, the company's compensation committee must comply with the new director independence standards applicable to the compensation committee.  The listed company must have a compensation committee composed of at least two members, each of whom must be an independent director as defined in Nasdaq's rules, and not accept directly or indirectly any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries, not including (i) fees received as a member of the compensation committee, the board of directors, or any other board committee; or (ii) the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the company, provided that such compensation is not contingent in any way on continued service.  The board must also consider whether a director is affiliated with the company and whether such affiliation would impair the director's judgment as a member of the compensation committee.

A listed company must certify to Nasdaq, no later than 30 days after the final implementation deadline applicable to it, that it has complied with the committee charter and independence provisions.

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Proxy statement disclosures regarding executive compensation may require special attention this year as the plaintiffs’ bar increasingly pursues strike suits alleging inadequate or misleading disclosure. At least 18 such suits were filed in various state courts last year seeking injunction of annual meeting shareholder votes on say-on-pay and votes to increase the authorized share reserve under equity compensation plans. The basis of the allegations is that the proxy statement does not provide all of the information needed for an informed shareholder vote.

Some of these suits have been settled for over $600,000 (despite many commentators asserting the suits are without merit) because the cost of settlement is perceived as less than the cost and consequences of postponing the annual meeting.

It is no coincidence that the suits attack the same types of disclosures that the SEC has long stated are often inadequate, namely compensation data for peer group companies. Commission guidance has consistently stated that when companies engage in “benchmarking,” they must provide meaningful insight into the basis for selecting the peer group of companies, and the relationship between actual compensation paid and the data used to benchmark the peer group. One of the drawbacks of the Commission’s “principles-based” approach to executive compensation disclosure is that each company must decide the material aspects of its benchmarking, which in turn leaves room for strike suits alleging insufficient disclosure.
 

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Institutional Shareholder Services Inc. ("ISS") issued its 2013 Draft Policies for review and comment.  These draft policies are intended to update ISS' benchmark proxy voting guidelines.  The draft policies that have been provided for comment include the following topics:

• Board Response to Majority-Supported Shareholder Proposals (U.S.);
• Director Over-boarding (Hong Kong & Singapore);
• Board Tenure Exceeding Nine Years (Hong Kong & Singapore);
• Board Nominee Disclosure (Global);
• Management Say-on-Pay Proposals (U.S.);
• Say on Golden Parachute Proposals (U.S.);
• Pay for Performance (Canada); and
• Environmental and Social Non-Financial Performance Compensation-Related Proposals (U.S.).

All comments to the 2013 Draft Policies should be sent to ISS no later than October 31, 2012.

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On Monday, April 2, 2012, the SEC announced that it has filed suit in federal court in Austin, Texas against Michael A. Baker, the former CEO of ArthroCare Corporation, and Michael Gluk, the former CFO, to recover bonus compensation and stock sale profits they received during an accounting fraud at the company. As the SEC pointed out in its press release, the two men "are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements during 2006, 2007, and the first quarter of 2008."

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In an Opinion and Order dated February 23, 2012, Judge Michael Mosman adopted the January 11, 2012 Findings and Recommendations of Magistrate Judge John Acosta to dismiss the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. Magistrate Judge Acosta recommendation to dismiss the say-on-pay" lawsuit was the first of its kind. Judge Mosman agreed that plaintiffs' failure to make a presuit demand was not excused under the arguments they raised regarding the Board members' exercise of the business judgment rule or their lack of independence or disinterest. Plaintiffs have until March 26, 2012 to amend their complaint.

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On Monday, January 30, 2012, the SEC filed two lawsuits in federal court in Indiana and commenced two administrative proceedings stemming from an accounting fraud scheme at the Thornton Precision Components ("TPC"), which is the Sheffield, England subsidiary of Symmetry Medical Inc. ("Symmetry"), an Indiana-based manufacturer of medical devices and aerospace products. According to the Commission, the accounting fraud at TPC "was so pervasive that it distorted the financial statements of the parent company." In those proceedings, the Commission settled charges with Symmetry and eight individuals, including the parent company's CEO and the subsidiaries' outside accountants.

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On January 11, 2012, Magistrate Judge John Acosta recommended the dismissal of the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. The lawsuit was filed after the shareholders, in an advisory vote, rejected the Board-approved executive compensation program. The Magistrate Judge found that the plaintiffs failed to make a presuit demand as required for a derivative suit and were not excused from doing so under the arguments they raised regarding the Board members' exercise of the business judgment rule or their lack of independence or disinterest. As Broc Romanek of theCorporateCounsel.Net Blog pointed out, "[t]his is the first federal court decision to dismiss such an action." Magistrate Judge Acosta has referred his Findings and Recommendations to District Judge Michael W. Mosman for review and final determination.

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Today and tomorrow, the Federal Securities Litigation Blog will take a break from discussing the most recent events and, with a larger-than-usual entry, examine the Top 10 securities litigation stories that were the most intriguing in 2011. Undoubtedly, others will be preparing similar lists and this is not intended to be a definitive or complete version. Instead, these are the stories that piqued my interest. Half of the list will be discussed today and the other half tomorrow.

Here's a quick headline look at the bottom half of the Top 10:

10. The D.C. Circuit Vacates SEC Exchange Rule 14a-11 Regarding Shareholders' Rights to Include Board Nominee on Proxy Materials.

9. The Jenkins Litigation: Settlement Negotiations in Clawback Case Collapse, But Are Ultimately Resolved.

8. The SEC's Director of the Division of Enforcement Now Has Authority To Issue Witness Immunity Orders.

7. Where is That File? The SEC Addresses Issues Related to the Destruction of Documents and Discovery Issues Relating to their Notes.

6. The FCPA Sting Case: One Hung Jury, One On-Going Trial, A Conspiracy Count Dismissed and More to Come.

These five stories are discussed in greater detail after the jump.

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On Tuesday, November 15, 2011, the SEC announced that it had reached a settlement with Maynard L. Jenkins, the former chief executive officer of CSK Auto Corporation, who agreed to re-pay approximately $2.8 million of the over $4 million in bonus compensation and stock profits that he received while the company was committing accounting fraud. This settlement, which still most be approved by the Court, comes almost four months after the SEC rejected a previous settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint (as previously discussed here).

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On Wednesday November 2, 2011, several media outlets reported on the details of the settlement in the shareholders derivative action filed against executives of Chesapeake Energy Corporation. The case, which was filed in state court in Oklahoma in April 2009, was on appeal after the claims were dismissed in February 2010. Under the terms of the settlement, CEO Aubrey McClendon, whose compensation in 2008 included a $75 million bonus (following a six-month period where the company's share price fell from $74 to $16.17 a share), will buy back an art collection which he sold to the company for approximately $12 million in 2008.

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A pair of articles appeared this week that traced trends in particular areas of securities enforcement. The Wall Street Journal presented data showing an increase in the length of sentences in insider trading cases over the last eighteen years. A second article which appeared in Corporate Counsel suggested that the SEC's settlement of a case involving back-dated options "may have symbolized the end of an era."

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In a September 20, 2011 Opinion, Judge Timothy Black of the Southern District of Ohio ruled that a lawsuit brought against senior executives and directors of Cincinnati Bell, Inc. alleging a breach of fiduciary duty regarding compensation would be allowed to proceed. The lawsuit focuses on the "say-on-pay" provisions of the Dodd-Frank Act: specifically, attacking the Board's decision to increase 2010 executive compensation in light of the nonbinding vote by 66% of the voting shareholders to reject that increase. Although the defendants argued that they are entitled to rely upon the business judgment rule in proceeding with the increase in compensation, the Court held that the issue of whether defendants properly exercised that judgment or, as plaintiff claimed, acted with deliberate intent to injure the company (or reckless disregard for the company) would be an issue based on the evidence (at trial or summary judgment) and not decided at the pleading stage.

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On Friday, September 9, the Department of Justice announced that it had entered into a Non-Prosecution Agreement with CSK Auto Corporation, a retailer of automotive parts and accessories which used to be publicly traded, to settle a criminal investigation into alleged securities law violations stemming from a corporate earnings manipulation and double-billing scheme. Under the terms of the agreement, CSK Auto will pay a $20.9 million penalty. The resolution of this matter is the latest in a series of matters being handled by both DOJ and the SEC regarding the events at CSK Auto.

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On August 30, 2011, the SEC announced it had settled a case with James O'Leary, the former CFO of Beazer Homes USA under Section 304 of the Sarbanes-Oxley Act. Section 304's "clawback" provision requires the reimbursement of compensation from executives under certain circumstances when their companies were in material non-compliance of financial reporting requirements due to misconduct. In Mr. O'Leary's case, although he was not charged with any misconduct, he has agreed to reimburse $1.4 million he received after fraudulent financial statements were filed.

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The SEC's Commissioners have rejected a proposed settlement to "claw back" a portion of the bonuses and stock sale profits a former CEO received during a period of accounting fraud. The SEC had previously described the case as the first clawback case under the Sarbanes-Oxley Act against an individual who was not alleged to have otherwise violated the securities laws. The negotiations failed when, according to a report in the Washington Post (available here), the SEC rejected the settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint.

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President Obama, on July 21, 2010, signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Although the Act focuses primarily on banking, the Act does contain a section that requires the Securities and Exchange Commission to publish rules that direct the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement an appropriate clawback policy.

The Act requires that the SEC rules require the clawback policy to provide that in the event that the issuer is required to restate its financial statements because of a material violation of any financial reporting requirements under the securities’ laws, the issuer will recover from any current or former executive officer who received incentive-based compensation (including stock options) during the 3-year period preceding the date on which the restatement is required, the amount in excess of what would have been paid to the executive officer under the issuer’s restated financial statements. In other words, public companies must recover the difference between the actual pay-out under the original financial statements and the amount payable under the restated financial statements. The Act also requires that companies disclose this clawback policy to shareholders.

The effective date of the Act is July 22, 2010; however, the clawback policy requirement is not fully effective until the SEC publishes its regulations. The SEC currently is suggesting it will publish these rules to be effective for the 2011 proxy season. As such, all public companies should review their clawback policies now, or if they have not yet developed one, they should begin to develop a clawback policy. Although many companies have adopted clawback policies already, it appears that once the SEC publishes its regulations, all clawback policies may need to be revised.
 

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On Wednesday, June 10, Secretary of the Treasury, Timothy Geithner outlined the Obama administration’s new proposals on executive compensation. The proposals focused on greater independence of corporate compensation committees and giving shareholders a nonbinding vote on executive compensation, commonly known as ‘say on pay’ provisions. Geithner outlined five guiding principals for executive compensation, namely:

1. compensation plans should properly measure and reward performance;
2. compensation should be structured to account for the time horizon of risks by aligning executive (and highly compensated individual) pay with long-term value creation;
3. compensation should be aligned with sound risk management;
4. golden parachutes and supplemental retirement packages should properly align the interests of executives with the interests of shareholders; and
5. the compensation setting process should promote transparency and accountability.

Geithner promoted the administration’s support for legislation requiring greater compensation committee independence for companies listed on the national securities exchanges. The proposed legislation would require compensation committee members to meet the stringent independence standards required of audit committee members under the Sarbanes Oxley Act. In addition, the proposed legislation would provide compensation committees with the right to (i) hire compensation consultants, (ii) hire legal counsel, and (iii) require each company to “appropriately” fund the compensation committee to allow it to execute its independent compensation oversight responsibilities.

In addition, Geithner promoted the administration’s support for legislation requiring non-binding ‘say on pay’ votes by shareholders. The legislation would require all public companies to include a proposal to allow shareholders to approve or disapprove of the compensation arrangements listed in a company’s annual proxy statement. It is unclear whether the proposed legislation would require annual non-binding shareholder votes to affirm previously approved executive compensation plans.

Noticeably absent from the newly announced proposals were the threatened executive compensation caps similar to those that the Treasury Department imposed on the largest recipients of TARP funds in February. According to Geithner, the proposed legislation seeks to avoid compensation caps or precise prescriptions for how companies should set compensation.

Less than a day after Geithner announced the administration’s executive compensation proposals, however, Rep. Barney Frank, Chairman of the House Financial Services Committee, and other committee Democrats indicated that they were less interested in merely reforming the independence of the compensation committee and requiring non-binding resolutions. Rep. Frank stated that he would prefer a bill that altered the structure of executive pay. Rep. Frank flatly rejected the administration’s “hope” that compensation committee independence would lead to greater oversight and curtail excessive risk taking. In addition, Rep. Brad Sherman voiced his support for binding ‘say on pay’ shareholder votes.

To its credit, the administration’s proposals have the full support of both FED Chairman Ben Bernanke and SEC Chairman Mary Schapiro. In addition, many commentators have voiced relief and support for the seemingly modest executive compensation proposals. It is clear, however, that some of the Congressional Democrats will require more convincing before they can sign-off on the executive compensation proposals.
 

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Grant Thornton has a relatively recent (February 2009) survey on its website regarding executive compensation that reports 50% of companies surveyed are freezing executive base salaries for 2009 and 15% are reducing salaries. 227 companies responded to the survey, of which the “typical” company seems to be publicly traded with revenues below $100 million and 100-499 employees.

The numbers highlight a motivation problem for companies and their employees, namely how to structure a compensation program when bonuses, salaries, and stock prices are down. Companies that lower bonus targets, re-price options, and start “special retention programs” risk investor criticism for rewarding the executives who contributed to the company’s decline. Conversely, investors who recognize that a decline is not necessarily the result of poor executive performance often want to continue to motivate key employees.
 

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Yesterday, President Obama announced that the Treasury had adopted new guidelines for financial institutions that are receiving government assistance. The Treasury press release discusses these new restrictions.

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According to RiskMetrics, the Laborers’ International Union of North America and the International Brotherhood of Teamsters don’t think Treasury’s bailout program does enough to curb executive compensation.

The unions want a number of reforms, including:

• Incentive compensation not to exceed one times annual salary;
• Stock option awards tied to increased company performance relative to a peer group;
• Stock award holding requirements for the full term of an executive’s employment;
• No accelerated vesting; and
• Limits on severance payments.

The labor funds have submitted proxy statement proposals to JPMorgan Chase, KeyCorp, Bank of America, American Express, and SunTrust Banks, and plan to submit proposals to more than 45 other firms planning to participate in the Troubled Asset Relief Program (TARP).

Participation in the TARP requires some limits on executive compensation so companies may be able to argue exclusion of the labor union proposals from the proxy on the grounds they have “substantially implemented” the requests.

The debate continues as to whether executive compensation is a product of free market labor costs or the market is flawed and needs executive compensation regulation.
 

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The IRS issued Revenue Ruling 2008-13 to clarify what constitutes “performance-based” compensation under Internal Revenue Code Section 162(m).  This classification is important because Code Section 162(m) generally prohibits public companies from deducting compensation in excess of $1 million to the CEO and certain named executive officers.  If the compensation is performance-based, however, this deduction limitation does not apply.

Under prior guidance, an executive could receive a performance award (either cash or equity) upon involuntary termination without cause, termination for good reason, or retirement, without regard to whether performance goals were actually met. In Revenue Ruling 2008-13, the IRS reversed its position, holding that such an award will not be treated as performance-based compensation under Code Section 162(m). This ruling puts many executive compensation plans and employment agreements at risk in light of the new restrictions on deductions for non-performance-based compensation that exceeds $1 million.

For more information on this latest guidance, you may view our recent law alert.

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Last week the House of Representatives Committee on Oversight and Government Reform rescheduled a hearing on CEO termination payments in connection with the mortgage lending crisis. In January, Committee Chairman Henry Waxman sent letters to Citigroup, Merrill Lynch and Countrywide Financial asking them to justify payments to outgoing CEOs despite significant subprime-related losses and decreasing stock values. The hearing follows a December 2007 hearing on the use of compensation consultants to determine CEO pay. Scheduled to testify, presumably to justify their compensation, are Angelo Mozilo, CEO of Countrywide, E. Stanley O’Neal, former CEO of Merril Lynch, and Charles Prince, former CEO of Citigroup.

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The SEC has published its observations regarding executive compensation disclosure for the first round of proxy statements that were filed under the new executive compensation rules. In summary, two themes were the focus of the report:

1. The Compensation Discussion and Analysis (CD&A) needs more attention to how and why compensation decisions are made; and
2. Companies are encouraged to think about how they present information, including by use of plain English, tables, and graphs.

The full report contains suggestions for improved disclosure and an explanation of the types of comments that the SEC issued. The following are some highlights:

1. Emphasize material information and de-emphasize less important information;
2. In the CD&A, emphasize the how and why of compensation levels and de-emphasize compensation program mechanics;
3. Charts, tables, and graphs not required by the rules were almost always helpful (for example, tables that explain payments upon a hypothetical termination or change-in-control);
4. Disclosure that is clear and concise does not have to be long;
5. Disclose how decisions affecting one element of compensation affected other elements as well; and
6. Explain how subjective performance targets translate into objective pay determinations.

The SEC isn’t the only one concerned with executive compensation. Executive compensation has been mentioned by some of the front-runner candidates for president and recently by President Bush. Specifically, compensation for CEOs of large companies may be a point of discussion in next year’s election.

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As the SEC continues to review the first round of proxy statements filed last spring under the new executive compensation rules, publicly traded companies should consider thinking about how to improve disclosures for next year.

The importance of analyzing compensation decisions, as opposed to merely stating what types of compensation are paid, is evident by the language of the rules for drafting the Compensation Discussion & Analysis (CD&A) section of the proxy statement. The rules require that the following material elements of compensation for named executive officers be discussed, described, and explained:

1. the objectives of the compensation program;
2. what the compensation program is designed to reward;
3. each element of compensation;
4. why the company chooses to pay each element;
5. how the company determines the amount/formula for each element; and
6. how decisions regarding each element fit into the compensation objectives.

 The following are suggestions for improved disclosure, as prompted by the new rules:

• Keep detailed minutes throughout the year regarding not only what compensation decisions are made but why they are made. When compensation decisions are made, the compensation committee should articulate, in writing, as many aspects of elements (1) through (6) above as possible. This allows an understanding of compensation decisions to develop throughout the year as opposed to at the last minute when it comes time to draft the proxy.
• Amend the compensation committee charter to state that the committee will review and discuss disclosures in the CD&A with management and recommend that such disclosures be included in appropriate filings.
• Draft a related party transactions policy. The new rules require companies to explain how such a policy is evidenced if not in writing. This policy will be the responsibility of either the audit committee or the nominating committee and will describe the policies for review, approval, and ratification of any related party transactions required to be disclosed.
• Monitor perks paid to executives and directors throughout the year to avoid embarrassing items that are hard to justify.
• Draft future stock option plans to ensure that a stock option’s exercise price is the same as the company’s stock price on the date of grant. Increased disclosure is required if this is not the case, including a description of the company’s methodology for determining the exercise price.
• Draft future employment agreements in a manner that makes it easy to determine what executive officers will be paid upon a hypothetical termination or change in control. Determining what executives will be paid at termination is a necessary exercise for both public and private companies that use employment agreements, but the provisions that control payments are often unclear.

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Earlier this week former Brocade CEO Gregory Reyes was found guilty of all charges in connection with stock option backdating and failing to report such backdating to auditors, regulators, and investors. This is the first conviction of an executive in the government’s option backdating investigation, and it occurred despite the fact Reyes never cashed in on his backdated options.

Reyes faces years of prison time and significant fines. More convictions are expected in a post-Enron era where juries are willing to convict not only instigators of backdating plans, but those who go along with illegal practices as well.  

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The IRS has issued a directive identifying backdated stock options as a Tier 1 Compliance Issue. The directive explains the tax implications of backdated options, including the fact that options backdated to produce a “build-in” profit do not qualify as incentive stock options (ISOs). Corporations that intended backdated options to qualify as ISOs may be required to withhold and pay income and employment taxes when the option is exercised, and the individual may owe additional taxes at the time of exercise. As the directive explains, there are also 162(m) and 409A issues.  

The designation of option backdating as a Tier 1 Compliance Issue means it is a mandatory examination item for taxpayers with backdated stock option grant and/or exercise prices.

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The IRS has revised the definition of “covered employee” under Section 162(m) of the Internal Revenue Code. The old definition used to mirror the SEC’s definition of Named Executive Officer (officers for whom compensation must be disclosed), but the SEC’s recent changes to executive compensation disclosure rules caused the two definitions to be out-of-sync.

Under new guidance from the IRS, the text of which is not yet available on the IRS website, “covered employee” means any employee who is either the principal executive officer or whose total compensation is required to be reported by the SEC for being one of the three highest paid officers. This definition aligns 162(m) with the SEC’s new executive compensation disclosure rules. Interestingly, a corporation’s principal financial officer is excluded as a “covered employee” if his or her compensation disclosure required by the SEC is simply on account of he or she being the principal financial officer.  

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As our corporate department recently reported, the U.S. Treasury has issued final regulations under Internal Revenue Code Section 409A. The following includes a summary of actions that employers should take by December 31, 2007 to comply with the final regulations and to guard against taxation of nonqualified deferred compensation and a 20 percent excise tax:

1. Review all types of compensatory arrangements to determine whether they are subject to Section 409A. Arrangements that create a legally binding right to compensation in one year that is payable in a later year are typically subject to Section 409A.
2. Amend plan documents in writing to comply with Section 409A.
3. Determine which nonqualified plan deferrals that are linked to qualified plans comply with Section 409A and which ones do not. The arrangements that are not in compliance with Section 409A should be unlinked from the qualified plans or amended.
4. Consider amending plan documents to allow participants to change the time and form of payment of amounts subject to Section 409A.
5. Consider whether stock rights that are not exempt from Section 409A should be replaced with stock rights that are exempt.
6. Update severance and employment arrangements in light of the final regulations.

Click here for the full text of the Executive Compensation Law Alert.

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