SEC Guidance on Common Financial Reporting Issues Facing Smaller Reporting Companies

Posted by Rick Jordan on April 03, 2013

The SEC recently posted to its website a slide deck (PDF) from a staff presentation at the Forums on Auditing in the Small Business Environment.  The slides describe, among other things, some of the issues that the SEC frequently encounters in periodic filings made by smaller reporting companies.

When commenting on the periodic reports of smaller reporting companies, the SEC generally requests:

  • additional information;
  • additional or clarifying disclosure in future filings; or
  • filing amendments to revise financial statements or disclosure.

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Say-On-Pay and Say-On-Frequency Votes for Smaller Reporting Companies

Posted by Richard A. Tulli on January 24, 2013

About two years ago, the Securities and Exchange Commission adopted rules implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (.PDF) that require public companies subject to the SEC's proxy rules to conduct two non-binding shareholder-advisory votes at annual meetings:

  • A vote to approve the compensation of the named executive officers as described in the proxy statement for the meeting (a “say-on-pay vote”); and
  • A vote on whether the company's say-on-pay vote should be held annually, every second year, or every third year (a “say-on-frequency vote”).

Those votes were first required for most public companies beginning with an annual meeting held on or after January 21, 2011, but the requirement was delayed for smaller reporting companies. Effective for annual meetings held on or after January 21, 2013, however, smaller reporting companies will be required to conduct a say-on-pay vote and a say-on-frequency vote.

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Making Your Section 409A List and Checking it Twice: Year-end Deadline for Amending Agreements Providing for Certain Severance Payments Contingent on Employee Action

Posted by T. Mark Edwards on December 07, 2012

Section 409A of the Internal Revenue Code (the “Code”) governs deferred compensation arrangements and requires such arrangements to comply with very specific rules to avoid the imposition of additional taxes (at the rate of 20%), interest and penalties on the deferred compensation payable to covered employees and other service providers.  With certain exceptions described briefly below, compensation arrangements providing for severance payments, such as severance agreements or policies, employment agreements and change in control agreements, are subject to Section 409A of the Code.

The IRS takes the position that the timing of the payment of Section 409A covered severance benefits based upon when the employee signs a release or other required agreement is a Section 409A violation.  The IRS has issued guidance (Notice 2010-80) that provides transition relief by permitting employers to correct certain documents that condition payment upon employee action, such as execution of a release or other agreement by the employee and the timing of the payment is based on the date the employee executes the release or other agreement, provided the correction is made no later than Dec. 31, 2012.

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Say on Pay: A Practice Pointer

Posted by Rick Jordan on February 15, 2012

This week, the SEC released a new Compliance and Disclosure Interpretation (“C&DI”) for Exchange Act Rule 14a-21.  This rule sets forth one of the say-on-pay requirements mandated by the Dodd-Frank Act.  It requires issuers to periodically afford shareholders the right to a nonbinding (i.e., advisory) vote on the compensation of the issuer’s named executive officers.

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You Need to Be Focused on Fringe Benefits and Reimbursement Arrangements

Posted by T. Mark Edwards on July 27, 2011

Does your public company reimburse employees’ business or moving expenses?  Provide company vehicles, achievement awards, safety awards, education assistance, tuition reimbursements, company credit cards or other fringe benefits or expense reimbursements?  Reward employees with gift cards?  If so, you should be aware the Internal Revenue Service is focused on fringe benefits as part of its efforts to close the “tax gap”.

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Stock Options and Non-Competition Agreements

Posted by Gardere Wynne Sewell LLP on July 22, 2011

Stock options for executives and other key employees are a significant component of compensation packages.  They give the employee an equity stake in the company and provide an incentive for future performance.  The options signal the importance of the employee to the company, and the company has an interest in protecting the company’s goodwill, which is enhanced by the employee’s contribution and at risk if the employee leaves the company.

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INSURANCE DOESN'T ENSURE COMPLIANCE FOR DISCRIMINATORY POST-EMPLOYMENT HEALTH COVERAGE ARRANGEMENTS

Posted by T. Mark Edwards on April 26, 2011

Employers, often including those that are publicly traded, traditionally have used fully insured medical programs to provide coverage for certain current and former executive officers and other key employees under employment agreements, severance arrangements and similar programs established to provide non-uniform coverage for such selected individuals. Prior to the Patient Protection and Affordable Care Act, as amended (the “PPACA”), such insurance programs provided employers with a means to provide discriminatory health coverage to selected highly compensated employees and former employees without the unfavorable tax results associated with self-insured medical plans.

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Benefit and Compensation Programs: Focus on More Than Disclosures

Posted by T. Mark Edwards on March 21, 2011

At a time of the year when a company’s board of directors and its compensation committee are focusing on shareholder-related disclosures and summaries of the company’s compensation practices, they also should focus on the purpose, relative importance and value to employees and technical compliance oversight matters relating to the company’s compensation and benefit programs, given the likely changes in the demographics of company’s workforce and business during the recent economic decline as well as significant changes in the costs of benefits and regulatory compliance considerations.  For example, the assumptions under which compensation and benefit programs were established may not continue to be valid in the current economic and business environment and current programs may not provide the same level of importance and incentive to employees as existed when the programs were established. A significant portion of a company’s revenue may be used to provide incentive compensation programs and employee benefit arrangements and it is important that those benefit programs and arrangements continue to produce the desired results for the company and cover the proper employees.

In making these determinations, the board or compensation committee should consider changing demographics of its workforce based on economic or product changes applicable to the company, the costs of each program relative to the actual and perceived benefits to employees and the manner in which the programs being reviewed for technical compliance from time to time. This review should include, for example, who is responsible for overseeing the timely adoption of required amendments for retirement plans intended to be tax-qualified and reviewing the investments offered under the plans if participants are given the opportunity to direct investments, the company’s health plan design and compliance with health care reform laws, including participant notices and nondiscrimination coverage considerations and HIPAA privacy and security rules, the application of Section 409A of the Internal Revenue Code to deferred compensation plans, including severance programs, in-kind benefits and reimbursements, employment agreements, bonus programs and awards of phantom stock and restricted stock units.

OUR TAKE:  Proxy season is a good time for boards and compensation committees to ask management to identify each benefit and compensation arrangement by category, such as qualified retirement plans, non-qualified deferred compensation plan and arrangements, bonus programs, severance programs, health and welfare plans and stock and performance based compensation plans, not simply for shareholder disclosure purposes, but to determine with respect to each program the continued value to its employees, the cost to the company and the manner in which legal and operational compliance issues are being monitored.

REQUIRED SAY-ON-PAY VOTES IN 2011 OR 2013

Posted by Richard A. Tulli on January 26, 2011

All U.S. public companies, except for smaller reporting companies, are now required to conduct three say-on-pay shareholder votes beginning in 2011 based upon rules adopted by the SEC on Jan. 25, 2011 (PDF).  Most of the requirements will not apply to smaller reporting companies until 2013.

The SEC's new rules implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.  That legislation requires three kinds of say-on-pay shareholder advisory votes.  Two of those are votes at an annual meeting:  one regarding approval of compensation to the company's named executive officers, and one regarding how often that approval vote should occur.  The third is a vote regarding a company's golden parachute payments in connection with a change-in-control transaction; that vote would typically be at the time of the transaction.

The most significant departure from the proposed rules published by the SEC in Oct. 2010 is a delay in requiring smaller reporting companies to conduct the two annual-meeting advisory votes.  Those companies, with a public float of less than $75 million, will not have to conduct those votes until after Jan. 21, 2013.  Like all other public companies, however, smaller reporting companies will have to conduct the golden-parachute vote after Apr. 25, 2011.

OUR TAKE:  Public companies, other than smaller reporting companies, should plan on spending the additional time and effort on their proxy statements this year to comply with the annual-meeting say-on-pay requirements.  One of the key determinations that a company will need to make is whether to propose an advisory vote take place every year, or only every two or three years.  Smaller reporting companies will have a somewhat easier task in preparing this and next year's proxy statements and will have the benefit of other companies' experiences before they must comply.