Considerations for the 2018 Annual SEC Reporting and Proxy Season

Transcription

1 Considerations for the 2018 Annual SEC Reporting and Proxy Season by David R. Fishkin, J.D. WHITE PAPER

2 2 Considerations for the 2018 Annual SEC Reporting and Proxy Season Several recent SEC rulemaking initiatives have resulted in new or revised disclosure requirements that specifically impact the upcoming annual reporting and proxy season. In the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd- Frank) and the Jumpstart Our Business Startups Act of 2012 (JOBS Act), the Securities and Exchange Commission (SEC) continues its principal mission to focus on critical disclosure priorities and initiatives that both enhance disclosure effectiveness for investor protection and streamline and simplify disclosure requirements in order to reduce costs and burdens on public companies. Several recent rulemaking initiatives have resulted in new or revised disclosure requirements that specifically impact the upcoming annual reporting and proxy season. There are also additional initiatives on the horizon. This Special Report covers the below topics: Pay Ratio Disclosures Scaled Disclosure Emerging Growth Companies Exhibit Hyperlink Requirements Non-GAAP Financial Measures and Revenue Recognition Proxy Access 2017 Highlights Future Initiatives Checkpoint Search Tips: Standards Tracker: To quickly learn what rulemaking activity may impact your upcoming annual reporting and proxy filing process, use Standards Tracker Create-a-Chart to quickly gather relevant activity for the year. Use Keywords, Dates and Forms to streamline results; review relevant activity with complete summary, effectiveness and compliance information and cross-references to relevant news and analysis. SEC Expert: From Standards Tracker, link directly to SEC Expert, to review highlights and concise, expert guidance on updated rules, regulations and forms. Use the integrated inline links to access relevant sample disclosures or related primary source and interpretive guidance and the checklists to prepare your filings. Pay Ratio Disclosures In 2015, as mandated by Section 953(b) of Dodd-Frank, the SEC adopted new Item 402(u) of Regulation S-K, which requires public companies to disclose the ratio of their CEO s annual compensation to that of their median employee. Despite efforts to repeal, or delay, implementation of this rule, it is doubtful that any such efforts will be successful before the 2018 proxy season. Thus, companies should continue to prepare to comply with the rule or begin their preparation if they have not already done so, in conformity with the mandate that registrants provide pay ratio disclosure for the first fiscal year beginning on or after January 1, 2017 (i.e., in early 2018). The purpose of the new pay ratio disclosure rule is to allow shareholders greater transparency to better understand and assess a particular registrant s executive compensation practices and pay ratio disclosures, rather than to facilitate a comparison of this information from one registrant to another. Consistent with this view, the SEC is seeking to provide flexibility in order to reduce the costs and burdens for registrants, while preserving the purpose and intended benefits of the required disclosure. The following new and updated SEC guidance provides clarification and illustrative examples to assist companies in their efforts to comply with the new requirements: Interpretive Release No , Commission Guidance on Pay Ratio Disclosure, and companion publication, Guidance on Calculation of Pay Ratio Disclosure In September 2017, the SEC published interpretive guidance to assist registrants in preparing their pay ratio disclosures. Compliance and Disclosure Interpretations (C&DIs): Regulation S-K In October 2016 (updated September 2017), the SEC issued C&DIs concerning the

3 Considerations for the 2018 Annual SEC Reporting and Proxy Season 3 identification of the median employee as well as the application of the so-called consistently applied compensation measure. Determination of Median Employee Use of Reasonable Estimates The pay ratio rule affords flexibility in determining appropriate methodologies to identify the median employee and in calculating such employee s total compensation. Required disclosure may be based on a registrant s reasonable belief, the use of reasonable estimates, assumptions and methodologies and reasonable efforts to prepare the disclosures. Specifically, it permits reasonable estimates to identify the median employee, including the use of statistical sampling and a consistently applied compensation measure (CACM), such as payroll or tax records. It also permits reasonable estimates in calculating annual total compensation (or any elements thereof). Further, significant changes in methodology or material assumptions, adjustments or estimates must be disclosed, including the reasons for the change. In light of the potential imprecision that could result vis-à-vis the use of such estimates, assumptions and statistical sampling and the resulting concerns over compliance uncertainty and liability, the SEC has determined that so long as a registrant uses reasonable estimates, assumptions and methodologies, the pay ratio calculation and related disclosure will not provide the basis for an SEC enforcement action, unless the company lacked a reasonable basis for the disclosure or it was not made in good faith. Use of Internal Records The pay ratio rule affords flexibility in determining appropriate methodologies to identify the median employee and in calculating such employee s total compensation. Item 402(u) requires disclosure of the median of the total annual compensation of all its employees excluding its CEO. The SEC provides guidance as to the use of existing internal records, such as tax or payroll records, to make this determination: Non-U.S. Employees: Employees, as defined, includes both U.S. and foreign employees. Including non-u.s. employees raises compliance costs for multi-national companies. To address concerns about such costs, the rule permits registrants to exempt non-u.s. employees where they account for 5% or less of the registrant s total employees the so-called de minimis exemption. A registrant may use appropriate existing internal records, such as tax or payroll records, in determining whether the 5% de minimis exemption is available. Median Employees: Instruction 4 to Item 402(u) permits a registrant to identify its median employee using a consistently applied compensation measure, such as information derived from the registrant s tax or payroll records. A registrant may use internal records that reasonably reflect annual compensation to identify the median employee, even if those records do not include every element of compensation, such as equity awards widely distributed to employees. Also, in the event a registrant determines that there are anomalous characteristics of an identified median employee s compensation which result in such employee having a significantly higher or lower impact on the pay ratio, the registrant may substitute another employee with substantially similar compensation to the original identified median employee based on the compensation measure used to select the median employee.

4 4 Considerations for the 2018 Annual SEC Reporting and Proxy Season Independent Contractors Item 402(u) defines employees to exclude those workers whose compensation is determined by an unaffiliated third party, but who provide service to the registrant as independent contractors or leased workers. In the original pay ratio release, the SEC indicated that such exclusion was appropriate because registrants generally do not control the level of such workers compensation. There is a concern that the SEC should allow registrants to use widely recognized tests to determine what constitutes an employee for purposes of Item 402(u). Because registrants already make determinations as to whether a worker is an employee or independent contractor in other legal and regulatory contexts, such as for employment law or tax purposes, there is a concern that the SEC should allow registrants to use widely recognized tests other than the one set forth above to determine what constitutes an employee for purposes of the rule. Accordingly, the SEC believes it would be consistent with Item 402(u) for a registrant to apply a widely recognized test under another area of law that the registrant otherwise uses to determine whether its workers are employees. Best Practice Considerations: In terms of the evolving landscape of the pay ratio rule, the SEC has indicated a certain degree of latitude with respect to reasonable estimates, internal records and the definition of employees, provided that registrants are acting in good faith and utilizing assumptions with an underlying reasonable basis. Checkpoint Search Tips: As noted above, the disclosure of the ratio of the CEO s annual compensation to that of the median employee is required to be provided in annual reports for fiscal years beginning on or after January 1, It is expected that such disclosure will be included in Forms 10-K filed in early SEC Expert: To review the latest requirements for pay ratio and executive compensation disclosures, see the following: Standard-Setting Highlight: SEC Guidance Pay Ratio Requirements Regulation S-K, Item 402 Form 10-K, Item 11 Form 8-K, Item 5.02 Proxy Statement, Item 25 SECPlus Advanced: To find EDGAR filing examples during the upcoming annual reporting period (Q1 2018), use SECPlus Advanced Filings Search. Add keywords and run a Selected Section only search to retrieve just that portion of the 10-K that contains the disclosure; specify Company Group or Company Names to further limit your results to specific peers: Sample Search Terms: Keywords: pay ratio and median pay ratio /p median Selected Sections only Form: 10-K Sections: Executive Compensation Filing Date: last 12 months Company Names: NorthWestern The following screenshots from SECPlus Advanced illustrate CEO pay ratio disclosures from (1) NorthWestern Corporation s DEF 14A, filed March 16, 2017 and (2) Novagold Resources Inc. s DEF 14A, filed March 23, 2017.

5 Considerations for the 2018 Annual SEC Reporting and Proxy Season 5 Scaled Disclosure Emerging Growth Companies Title I of the JOBS Act amended both the Securities Act and the Exchange Act to provide several exemptions from a number of shareholder voting, disclosure and other regulatory requirements for an issuer that qualifies as an emerging growth company (EGC). Title I also defined an EGC and requires the SEC, once every five years, to index to inflation the annual gross revenue amount used to determine EGC status Amendments In March 2017, the SEC issued Final Rulemaking Release No , Inflation Adjustments and Other Technical Amendments under Titles I and III of the JOBS Act, adopting amendments to certain disclosure rules relating to EGCs with respect to both an inflation adjustment and scaled disclosure requirements.

6 6 Considerations for the 2018 Annual SEC Reporting and Proxy Season Inflation Adjustment An EGC is defined as an issuer with total annual gross revenues of less than $1 billion, with such amount indexed for inflation every five years by the SEC to reflect the change in the CPI-U during its most recently completed fiscal year. The new threshold adopted in Release No is $1,070,000,000. Scaled Disclosure Requirements An EGC is defined as an issuer with total annual gross revenues of less than $1 billion. Rule 3-02 of Regulation S-X Item 301 of Regulation S-K Item 303(a) of Regulation S-K Conformed to permit EGCs to present only two years of audited financial statements in IPO registration statements (instead of three). Conformed such that an EGC need not present selected financial data for any period prior to the earliest audited period presented in its IPO registration statement or in its first effective Exchange Act registration statement. Conformed to permit EGC that provides audited financials for two years to provide the required MD&A discussion for its two most recent fiscal years (instead of three). Article 2-02 of Regulation S-X; Item 308 of Regulation S-K; Forms 20-F and 40-F Conformed to specify that the auditor of an EGC need not attest to, and report on, management s report on internal control over financial reporting; and that management need not include such report in its annual report. Item 402(l) of Regulation S-K Conformed to permit EGCs to provide the scaled executive compensation disclosure required by smaller reporting companies, pursuant to Items 402(m) (r) of Regulation S-K. Exchange Act Rule 14a-21; Item 402(t) of Regulation S-K; Instruction 1 of Item 1011(b) of Regulation S-K Conformed to specify that EGCs are not required to conduct shareholder advisory votes on say-on-pay, say-on-frequency and golden parachute compensation or provide the related disclosures. Also conformed Rule 14a-21 to reflect transition period after entity exits EGC status. Form 20-F (Instructions to Items 3.A. and 8.A.); Form 40-F Forms S-1; S-3; S-4; S-8; S-11; F-1; F-3; F-4; 10; 8-K; 10-Q; 10-K; 20-F; 40-F Conformed to reflect the availability of the scaled financial disclosure requirements to foreign private issuers that are also EGCs. Conformed to include two check boxes on cover page for an issuer to indicate whether, at the time of filing, the issuer is an EGC and whether it has elected not to use the extended transition period for complying with any new or revised applicable financial accounting standards.

7 Considerations for the 2018 Annual SEC Reporting and Proxy Season 7 Best Practice Considerations: Registrants should plan ahead for the inevitable transition to non-egc status, after which they will be required to provide full, non-scaled disclosures. The transition from EGC to non-egc status occurs when the entity meets any one of the following: 5th anniversary of an IPO 1st fiscal year after annual gross revenues reach $1 billion Date on which company has issued more than $1 billion in non-convertible debt over previous three years Date on which company becomes a large accelerated filer Checkpoint Search Tips: SEC Expert: For more information on emerging growth companies, see the following: Standard-Setting Highlights: SEC Guidance C&DI Updates Regarding Securities Act Forms and the FAST Act and SEC Final Rule Inflation Adjustments and Other Technical Amendments Under Titles I And III of the Jobs Act General Instructions and Cover Page for impacted forms Exhibit Hyperlink Requirements In March 2017, the SEC issued Final Rulemaking Release No , Exhibit Hyperlinks and HTML Format, which adopted amendments requiring registrants that file registration statements and reports subject to the exhibit requirements under Item 601 of Regulation S-K (or registrants that file Forms F-10 or 20-F) to include a hyperlink to each exhibit listed in the exhibit index of these filings (unless the exhibit is paper-filed pursuant to a hardship exemption under Rule 201 or 202 of Regulation S-T). To enable the inclusion of such hyperlinks, the amendments also require that registrants submit all such filings in HyperText Markup Language (HTML) format. To enable the inclusion of such hyperlinks, the amendments also require that registrants submit all such filings in HyperText Markup Language (HTML) format. Compliance dates are as follows: Compliance is required for registrants, in general, on all filings submitted on or after September 1, For smaller reporting companies, and companies that are neither large accelerated filers nor accelerated filers, that submit filings in ASCII, compliance is required on all filings submitted on or after September 1, Compliance is delayed for issuers filing on Form 10-D that must include hyperlinks to any exhibit filed with Form ABS-EE, until the SEC Staff completes technical programming changes to allow issuers to include such forms in a single submission. Such changes are expected to be released into production on December 11, 2017, as part of EDGAR Release Best Practice Considerations: Hyperlinking of exhibits is now a new and permanent fixture of SEC rules. Registrants are advised to work with their financial printers well in advance of required filing due dates in order to work out the kinks from a logistical and technology perspective.

8 8 Considerations for the 2018 Annual SEC Reporting and Proxy Season Checkpoint Search Tips: SEC Expert: To review the latest requirements for the new hyperlink requirements, see the Standard-Setting Highlight, SEC Final Rule Exhibit Hyperlinks and HTML Format, and detailed discussion at Regulation S-K, Item 601. SECPlus Advanced: To quickly review EDGAR filing examples illustrating the use of hyperlinks, run a Base Forms Only search, and specify Company Names to limit your results to specific peers. Sample Search Terms: Base Forms Only Form: 10-Q Sections: Exhibit Index Filing Date: last month Company Names: Constellation Brands, Rite Aid The screenshots below from SECPlus Advanced show how Constellation Brands, Inc. and Rite Aid Corp. have used hyperlinks in their disclosures. Once in a document, side line links in the document give you quick access to relevant analysis and primary source content on Checkpoint. Click the document outline links to navigate throughout the document or select a checkbox for a specific section to filter your view to just that section. Add that section to the Compare Center for future document comparison needs by clicking the Add to Compare icon in the document toolbar.

9 Considerations for the 2018 Annual SEC Reporting and Proxy Season 9 Non-GAAP Financial Measures and Revenue Recognition Non-GAAP Financial Measures In October 2017, the SEC issued an update to its C&DIs concerning non-gaap financial measures in the context of M&A: Financial measures provided to a financial advisor in connection with a business combination transaction are not subject to Regulation G as non-gaap financial measures, if (1) they are included in forecasts for purposes of rendering a financial advisory opinion related to the transaction, and (2) the forecasts are being disclosed to comply with Item 1015 of Regulation M-A (or state or foreign law) regarding disclosure of the advisor s analyses or substantive work. The exemption from Regulation G and Item 10(e) of Regulation S-K for non-gaap financial measures disclosed in communications relating to a business combination transaction is not available where such communications are disclosed in a registration, proxy or tender offer statement. In May 2016, the SEC issued C&DIs on the use of non-gaap financial measures to clarify the types of examples in two broad categories: Misleading non-gaap measures Presentation of non-gaap measures with greater prominence than the comparable GAAP measures Examples of misleading non-gaap measures: A performance measure that excludes normal, recurring or cash operating expenses necessary to operate a registrant s business. A non-gaap measure that adjusts a particular charge or gain in the current period, while similar charges and gains were not adjusted in prior periods, without disclosing the change and the reason for it. Sometimes it may be necessary to recast prior measures to conform to the current presentation and place the disclosure in appropriate context. A non-gaap measure that adjusts only for non-recurring charges but not for non-recurring gains. Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP. Use of individually tailored recognition and measurement methods for other financial statement line items may also be considered misleading.

10 10 Considerations for the 2018 Annual SEC Reporting and Proxy Season Examples of disclosure of non-gaap measures as more prominent: When analyzing whether the non-gaap measure can be used as a liquidity measure, the staff typically focuses on the substance of the non-gaap measure as opposed to management s characterization. Presenting a full income statement of non-gaap measures or presenting a full non-gaap income statement when reconciling non-gaap measures to the most directly comparable GAAP measures Omitting comparable GAAP measures from an earnings release headline or caption that includes non-gaap measures Presenting a non-gaap measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-gaap measure over the comparable GAAP measure A non-gaap measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption) Describing a non-gaap measure as, for example, record performance or exceptional without at least an equally prominent descriptive characterization of the comparable GAAP measure Providing tabular disclosure of non-gaap financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table Excluding a quantitative reconciliation with respect to a forward-looking non-gaap measure in reliance on the unreasonable efforts exception in Item 10(e)(1)(i)(B) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence Providing discussion and analysis of a non-gaap measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence The guidance also prohibits presenting non-gaap liquidity measures on a per-share basis in documents filed or furnished with the SEC. When analyzing whether the non-gaap measure can be used as a liquidity measure, the staff typically focuses on the substance of the non-gaap measure as opposed to management s characterization. The C&DIs also indicate that, in regards to the calculation of income tax effects on non-gaap measures, if a measure is a performance measure, the registrant should include current and deferred income tax expense in respect of the non-gaap measure of profitability. Non-GAAP adjustments should not be presented net of tax. Income taxes must be identified as a separate adjustment with explanation. In 2016, the SEC also issued Concept Release No , Business and Financial Disclosures Required by Regulation S-K, seeking public comment on modernizing certain business and financial disclosure requirements in Regulation S-K, including those related to non-gaap financial measures. The Concept Release is part of a comprehensive evaluation of the SEC s disclosure requirements recommended by SEC Staff in Report on Review of Disclosure Requirements in Regulation S-K, which was mandated by Section 108 of the JOBS Act.

11 Considerations for the 2018 Annual SEC Reporting and Proxy Season 11 Checkpoint Search Tips: SEC Expert: To review the latest analysis of non-gaap disclosure, see the detailed discussion at Regulation G and Regulation S-K, Item 10. SECPlus Advanced: Perform a full text keyword search in SEC Comment Letters to quickly find examples of non-gaap disclosure discussions in comment letters between the SEC and registrants. Navigate to the SEC Correspondence search template and run a search by Keyword and Underlying Forms to narrow your search results. Sample Search Terms: Keyword: non-gaap CORRESP UPLOAD Filing Date: last 6 months Underlying Forms: 10-K CIK: The following screenshot from SECPlus Advanced shows a June 8, 2017 letter from the SEC to Whole Foods Market Inc., concerning non-gaap disclosures in the registrant s Form 10-K. Click the SEC Letters and SEC Filings top line links to see all comment letters in the string and relevant source filings. Revenue Recognition In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Revenue from Contracts with Customers (Topic 606), setting forth its new revenue recognition standard, Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. FASB ASC Topic 606 is a principles-based approach to revenue recognition that will be effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. Topic 606 will replace nearly all U.S. GAAP revenue recognition requirements and is likely to not only affect companies accounting and financial functions, but also have broad impacts on sales, marketing and other business operations, as well as on information systems. In many cases, Topic 606 will require companies to disclose new information about customer contracts and create budgets and forecasts on a new measurement basis.

12 12 Considerations for the 2018 Annual SEC Reporting and Proxy Season The FASB subsequently issued ASU No , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This ASU permits public business entities, certain not-for-profit entities and certain employee benefit plans to apply the guidance in ASU No to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that annual period. The new standard mandates that auditors: 1. Identify the contract with the customer 2. Understand the performance obligations under the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when (or as) the reporting organization satisfies a performance obligation To satisfy this standard, auditors must develop a high degree of knowledge and understanding of the contracts in order to identify relevant performance obligations, allocate the transaction price among multiple obligations and assess when a performance obligation has been satisfied. In August 2017, the SEC issued Staff Accounting Bulletin (SAB) No. 116, which modified Topics 8, 11 and 13 to bring the existing guidance into conformity with FASB ASC Topic 606. Among other things, SAB No. 116 eliminated Topic 13, Revenue Recognition, as it will no longer be applicable following an issuer s adoption of Topic 606, which supersedes Topic 605. Best Practice Considerations: In terms of the new revenue recognition standard, it is critical that public companies streamline the process and timing of auditor review of contracts, enlisting as applicable in-house legal and finance teams, as well as outside counsel. Until adoption of FASB ASC Topic 606, registrants should continue to refer to prior SEC and Staff guidance on revenue recognition topics. Checkpoint Search Tips: SECPlus Advanced: To quickly review EDGAR filing examples discussing the potential impact or adoption of ASC Topic 606, use SECPlus Advanced to run a Selected Sections Only search with keyword. Sample Search Terms: Keyword: Topic 606 /s Revenue Selected Sections Only Form: 10-K Sections: Notes to Financial Statements Filing Date: last 12 months Once on the results page, filter by a specific industry to see how peer companies have provided disclosures. The following screenshots from SECPlus Advanced for the above sample search show the search results filtered by industry and a Form 10-K for The Home Depot, Inc., filed March 23, 2017.

13 Considerations for the 2018 Annual SEC Reporting and Proxy Season 13 Proxy Access 2017 Highlights Proxy access the process that allows shareholders to nominate directors and include such director nominees with a company s own proxy materials, as opposed to a shareholder submitting its own, separate proxy materials continues to be an important and much-discussed topic among shareholders, public companies and institutional investors. Proxy access is demonstrably different from a proxy contest, whereby a dissident shareholder circulates an alternative proxy card with a rival slate of board candidates. Proxy access involves only one proxy card, reducing the confusion and expenses associated with dueling proxy cards. Another key difference is that proxy access has a substantial long-term ownership requirement, whereas any shareholder can launch a proxy contest. Further, an important distinction is that proxy access typically accommodates only minor board turnover, whereas a proxy contest gives the nominating shareholder the option of pursuing a change-in-control.1 1 Council of Institutional Investors, Proxy Access, 2017, accessed October 18, 2017, cii.org/proxy_access.

14 14 Considerations for the 2018 Annual SEC Reporting and Proxy Season Although Exchange Act Rule 14a-11, enacted in 2010, was vacated in 2011 by the United States Court of Appeals for the District of Columbia Circuit, many public companies have adopted socalled proxy access bylaws, which set forth the parameters and restrictions concerning proxy access. No absolute mandated uniform standard is currently promulgated by SEC rules; however, certain parameters have become more common in the context of proxy access bylaws, often referred to as the 3/3/20/20 structure. This is similar in many respects to vacated Rule 14a-11 and is summarized as follows: A single shareholder or group of up to 20 shareholders who have ownership of at least three (3) percent of a company s shares for at least three (3) years Such shareholder (or group) may nominate candidates for up to 20 percent of board seats In many cases, proxy access bylaws contain secondary features that amount to company representations or outright restrictions, such as a minimum level of support for a nominee to be eligible to be re-nominated in subsequent years; a representation not to intend to change or influence control over the company; or constraints concerning concurrent proxy contests Proxy Access Adoption From roughly the end of the 2016 proxy season through the greater part of the 2017 proxy season, an additional 175 public companies adopted proxy access bylaws (or charter provisions), for a total of more than 425, including more than 60 percent of companies in Standard & Poor s 500 (S&P 500) index, as depicted in the chart below: 2 Investor interest in proxy access remains strong as evidenced by shareholder proposal voting results (described below). The trend suggests that 2017/2018 will principally see large-cap companies adopting proxy access bylaws and the percentage of S&P 500 companies with proxy access could exceed 75 or 80 percent by early The following chart sets forth proxy access through 2016 in terms of number of proposals voted on as compared with number of proposals passed: 2 Marc S. Gerber, Skadden, Arps, Slate, Meagher & Flom, LLP, Proxy Access: Highlights of the 2017 Proxy Season, Harvard Law School Forum on Corporate Governance and Financial Regulation, July 2017, accessed October 18, 2017, corpgov.law.harvard.edu/2017/07/01/proxy-access-highlights-of-the-2017-proxyseason.

15 Considerations for the 2018 Annual SEC Reporting and Proxy Season 15 Investor interest in proxy access remains strong as evidenced by shareholder proposal voting results (described below). The trend suggests that 2017/2018 will principally see large-cap companies adopting proxy access bylaws, and the percentage of S&P 500 companies with proxy access could exceed 75 or 80 percent by early The following chart sets forth proxy access through 2016 in terms of number of proposals voted on as compared with number of proposals passed: 3 Support for Proxy Access Bylaws As depicted in the table below, 4 for the 2017 proxy season to date, shareholder proposals seeking the adoption of a proxy access bylaw typically received majority support. At the one company where the proposal fell short of majority support, it nevertheless received 49.6 percent of votes cast. On the other hand, 2017 shareholder proposals seeking to amend proxy access bylaws containing standard provisions have universally failed to achieve majority support, indicating that investors are generally satisfied with middle of the road bylaws. Half of these shareholder proposals sought a single amendment to change the aggregation limit from 20 shareholders to 40 or 50 shareholders. The other half sought multiple amendments typically the elimination of any aggregation limit, an increase in the number of access nominees from 20 to 25 percent of board seats and the removal of any limitations on the re-nomination of proxy access candidates. Voting results were substantially similar for both types of amendment proposals. 3 See supra note 1. 4 See supra note 2.

16 16 Considerations for the 2018 Annual SEC Reporting and Proxy Season The SEC s record on no-action letters is suggestive of a certain degree of predictability. The SEC s record on no-action letters is suggestive of a certain degree of predictability. Companies have continued to be able to exclude as substantially implemented proposals to adopt proxy access by adopting a proxy access bylaw under the 3/3/20/20 structure, as described above. Further, during the 2017 proxy season, companies also were able to exclude as substantially implemented proposals to amend aggregation limits from 20 shareholders to 40 or 50 by providing company-specific data to support the view that the company already provided a meaningful proxy access right to its shareholders. In contrast, proposals seeking multiple amendments to proxy access bylaws were not excludable as substantially implemented, unless a company could show that it had adopted at least some of the proposed changes. 5 Use in Practice It appears that only one attempt to use proxy access in the U.S. has occurred (National Fuel Gas Company GAMCO/Gabelli Funds) and it was withdrawn when National Fuel asserted that GAMCO and Gabelli were not eligible to use proxy access because of an inability to represent a lack of intent to change or influence control of the company. Although this matter does not appear to have influenced continued issuer adoption of proxy access bylaws or shareholder support for proxy access shareholder proposals, it is likely that eventually, a proxy access election contest will transpire. 6 Best Practice Considerations: Although SEC rules do not currently mandate proxy access, prudence for larger-cap companies in the current climate of greater shareholder activism suggests adoption of proxy access bylaws in the construct of the 3/3/20/20 scheme. 5 Id. 6 See id.

17 Considerations for the 2018 Annual SEC Reporting and Proxy Season 17 Checkpoint Search Tips: SECPlus Advanced: To find examples of proxy access disclosures in SEC filings, consider a search by keyword, as shown here: Sample Search Terms: Keyword: proxy access /p bylaws Complete Filings Form: Proxy Statement To review coverage relevant to proxy access in SECPlus Filings Highlights (or other SEC compliance editorial content), go to the WG&L Analysis search template. Select the SECPlus Filings Highlights checkbox and add proxy access in the keyword field. To narrow your results, specify a Form. The screenshot below shows the Goldman Sachs Group, Inc. DEF 14A filing from April 2016; the Filings Highlights top line link shows the related SECPlus Filings Highlight created regarding the company s adoption of revised bylaws regarding proxy access in late 2015.

18 18 Considerations for the 2018 Annual SEC Reporting and Proxy Season Future Initiatives Inline XBRL Inline XBRL, also referred to as ixbrl, is a format that allows filers to embed XBRL data directly into an HTML document. Potential advantages of this format include a number of benefits to companies and users of the information, such as decreasing filing preparation costs, improving the quality of structured data and increasing the use of XBRL data by investors and other market participants. The SEC currently permits certain registrants to use ixbrl, including those that use the IFRS taxonomy for their financial statements. Currently there is no requirement to use ixbrl and the below 2017 proposed rulemaking remains outstanding: Date Issued Release No. and Title Summary Comments Due October 11, 2017 Release No , FAST Act Modernization and Simplification of Regulation S-K If adopted, multiple data points on cover sheet would be tagged in XBRL and provided in inline XBRL. As an alternative (if inline XBRL is not yet adopted), the cover page data points would be provided in an XBRL exhibit to the filing. January 2, 2018 March 1, 2017 Release No , Inline XBRL Filing of Tagged Data If adopted, would require the use of ixbrl for operating company financial statement information and mutual fund risk/return summaries (on a phased-in basis). May 16, 2017 EDGAR submissions filed in ixbrl would enable users to view information about the reported XBRL data contained in embedded tags on the SEC s website, using any recent standard internet browser, without the need to access a separate document. When viewing an HTML filing with ixbrl, users would be able to see tags and the related metadata, including definitions, reporting period information, data type and related references. Registrants (and the public) can explore the functionality of the Inline XBRL viewer that is in use on EDGAR by accessing a mock filing on the SEC website: sec.gov/ix?doc=ixviewer/samples/bst/out/bst htm

19 Considerations for the 2018 Annual SEC Reporting and Proxy Season 19 Financial CHOICE Act In June 2017, the U.S. House of Representatives passed the Financial CHOICE Act of 2017 (CHOICE Act). The U.S. Senate has not yet taken action in respect thereof. The principal focus of the CHOICE Act would be to reverse certain provisions of Dodd-Frank. With particular regard to corporate governance and disclosure, the following are examples of proposed provisions contained in the CHOICE Act: Shareholder Proposals Eligibility requirements would be increased from owning $2,000 in company stock for at least one year to owning 1% of the company s stock for a minimum of three years. So-called resubmission thresholds (minimum level of support required for a proposal to be eligible for inclusion in a registrant s proxy statement in subsequent years) would be raised to 6% of the vote (from 3%) if the original proposal was voted on once in the last five years; 15% (from 6%) if voted on twice in the last five years; or 30% (from 10%) if voted on three times in the last five years. Companies would be prohibited from including in proxy statements shareholder proposals submitted by proxies or representatives of shareholders. Registration of Proxy Advisory Firms Say-on-Pay/ Say-on-Frequency Clawback of Erroneously Awarded Compensation Repeals The CHOICE Act would require registration of proxy advisory firms, which would, among other requirements, mandate such firms to provide financial statements and an annual report to the SEC; disclose potential conflicts of interest and methodology for the formulation of proxy voting policies and voting recommendations; adopt a code of ethics; and establish, enforce and disclose policies and procedures relating to managing conflicts of interest. The requirement for public companies to hold an advisory, non-binding shareholder vote on executive compensation the say on pay vote would be amended to require such vote only in those years in which there has been a material change to the compensation of executives from the previous year (from the present requirement of once every three years). Further, the say-on-frequency vote would be eliminated (from the present requirement of once every six years). The Dodd-Frank clawback provision for erroneously awarded compensation would be limited to situations where executive officer had control or authority over the financial reporting that resulted in the accounting restatement. Certain provisions of Dodd-Frank would be repealed if the CHOICE Act were to become law, including, but not limited to: Pay ratio rule Required disclosure concerning whether employees and directors can hedge company equity securities Authorization of SEC to adopt proxy access rules Required disclosure concerning conflict minerals, resource extraction issuers and mine safety

20 20 Considerations for the 2018 Annual SEC Reporting and Proxy Season Observation: The Financial CHOICE Act is unlikely to become the law of the land in the near term inasmuch as the Senate has not even commenced drafting its own version, wherein it will likely seek a bipartisan bill that would be able to clear the 60-vote filibuster proof majority. Should a version of this law be enacted by Congress and signed into law by the President, much of the substantive corporate governance provisions of Dodd-Frank would be eliminated or substantially curtailed. Conflict Minerals In April 2017, the SEC issued Updated Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule, stating that it would no longer recommend enforcement action against any company that does not comply with Item 1.01(c) of Form SD, which requires companies to conduct due diligence to determine the source and custody of conflict minerals in their supply chain and to prepare and disclose a Conflict Minerals Report setting forth their findings. This followed the (1) August 2015 ruling by the U.S. Court of Appeals for the District of Columbia Circuit that reaffirmed its prior holding in National Association of Manufacturers, et al. v. SEC, et al. (No (D.C. Cir. April 14, 2014)) that Section 13(p)(1) of the Exchange Act and Rule 13p-1 promulgated thereunder violate the First Amendment to the extent the statute and the rule require regulated entities to report to the SEC and to state on their website, that any of their products have not been found to be DRC conflict free; and (2) April 2017 final judgement in the National Association case and remand to the SEC, by the U.S. District Court for the District of Columbia. Compliance with Items 1.01(a) and (b) of Form SD is still required, which mandates companies that determine conflict minerals are necessary to the functionality or production of their products to make a good faith effort to determine the country of origin of those minerals and to briefly describe their findings on Form SD. The SEC has indicated that the District Court s remand presents significant issues for the SEC to address in the context of potential future conflict minerals rulemaking. The SEC has also received comments regarding the desirability of additional guidance or whether relief under the rule is appropriate. The District Court left open the question of whether the statement that products have not been found to be DRC conflict free is required by the statute or, rather, is a product of SEC rulemaking. Environmental, Social and Governance ( ESG ) Matters The purpose of SEC Concept Release No , Business and Financial Disclosures Required by Regulation S-K, was issued, in part, to move forward with the SEC s disclosure effectiveness initiative and it sought comment on modernizing certain disclosure requirements under Regulation S-K. In particular, it introduced the topic of sustainability, which encompasses a range of topics, including climate change, resource scarcity, corporate social responsibility and good corporate citizenship broadly characterized as ESG concerns. Historically, the SEC concluded that it would require disclosure relating to ESG concerns only if such information were important to the reasonable investor, i.e., material. While conceding that the current statutory framework for adopting disclosure requirements has not changed, the SEC recognizes that ESG issues may be evolving and potentially playing a larger role in investors voting and investment decisions than they did in the past, as some investors are increasingly engaging on certain ESG matters. Observation: The SEC has solicited and received numerous comments on the ESG topic and continues to review and examine this issue. However, it is important to note that, to date, no specific ESG disclosure is required and it does not appear likely that any such rulemaking is imminent.

21 Considerations for the 2018 Annual SEC Reporting and Proxy Season 21 Checkpoint Search Tips: SECPlus Advanced: To review in-house coverage relevant to ESG disclosures, go to the WG&L Analysis search template, select the SECPlus Filings Highlights checkbox and add climate change or ESG in the keyword field. See, for example, the June 2017 highlight, Exxon Mobil Shareholders Vote in Favor of Climate Change Shareholder Proposal Despite Board Opposition. Click the Relevant Filings top line link to see all related filings. The following screenshot from SECPlus Filings Highlights shows Exxon s Relevant Filings in the contents panel. DAVID R. FISHKIN, J.D. has extensive experience in corporate law, with concentrations in corporate finance, securities, mergers and acquisitions and corporate governance. Mr. Fishkin s expertise also comprises general business organization and transactions, as well as contract negotiation and drafting. He has represented a wide range of domestic and international companies, from individual entrepreneurs to large publicly-held companies, in connection with public and private securities offerings, mergers and acquisitions and general corporate matters. Mr. Fishkin has advised management, boards of directors and their committees with respect to structural, legal and fiduciary issues, as well as strategic planning and development. Mr. Fishkin currently holds the position of Senior Vice President General Counsel and Secretary at Planet Payment, Inc., a NASDAQ publicly-traded company in the payment processing business. He has practiced at several law firms, including Sidley Austin Brown & Wood, Parker Chapin and Snow Becker Krauss, where he joined the firm as a member in Mr. Fishkin is admitted to practice in the State of New York. He graduated from Brooklyn Law School in 1993 where he was an editor of the Brooklyn Law Review. Mr. Fishkin received a B.A. in Economics from Binghamton University where he graduated with honors.

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