SEC Meeting on Cross -Border SBS Rules and Pay vs. Performance
Securities and Exchange Commission
Open Meeting
Wednesday, April 29, 2015
Key Topics & Takeaways
Cross-Border SBS Proposal
- Approval of Cross-Border Related Proposal: The SEC unanimously approved a proposal which seeks to address the application of certain Title VII requirements to SBS transacted by a non-U.S. persons that utilize U.S.-located personnel to “arrange, negotiate or execute” an SBS transaction.
- Market Facing Activity: SEC Chair White said that “a non-U.S. dealer would need to look only to where its own personnel or its agent’s personnel engage in certain market-facing activity with respect to a particular security-based swap transaction.”
- Registration Threshold: White noted that transactions subject to the proposal would count towards the de minimis threshold for security-based swap dealer registration, and that such transactions would also be subject to requirements on trade reporting and public dissemination of transaction data.
- Scope of Proposal: SEC’s Luparello noted that staff developed the proposal with a focus on dealer registration, customer protection, trade reporting, and public dissemination. He added that mandatory clearing and trade execution requirements would not be required for these transactions under the proposal.
- Benefits vs. Negative Consequences: SEC’s Flannery said the proposal was appropriately tailored to limit possible negative consequences, including anti-competitiveness, liquidity fragmentation, and the relocation of jobs outside of the U.S.
Pay vs. Performance Proposal
- Approval of Pay vs. Performance Proposal: The SEC voted 3-2, with Republican Commissioners Gallagher and Piwowar dissenting, to approve a proposal that would give shareholders a new metric for assessing a company’s executive compensation relative to its financial performance
- “Actual Pay”: SEC’s Higgins explained that the pay vs. performance proposal would require a clear description of the relationship between “actual pay” and financial performance of the company for the principal executive officer as well as the average compensation paid to other named executive officers.
- Equity Awards: SEC’s Aleman noted that equity awards would be considered “actually paid” on the date of vesting and at fair value on that date
SEC Commissioners
- Mary Jo White, Chair, Securities and Exchange Commission
- Luis A Aguilar, Commissioner, Securities and Exchange Commission.
- Daniel M. Gallagher, Commissioner, Securities and Exchange Commission.
- Kara M. Stein, Commissioner, Securities and Exchange Commission.
- Michael S. Piwowar, Commissioner, Securities and Exchange Commission.
Opening Statements – Chair White
Cross-Border SBS Proposal
Securities and Exchange Commission (SEC) Chair Mary Jo White provided opening remarks discussing proposed rules that would require a non-U.S. entity that uses U.S. personnel to “arrange, negotiate or execute” a security-based swap (“SBS”) transaction to include that transaction in calculations towards its security-based swap dealer registration threshold. White stated that the proposed rule was important for the SEC’s regulation of the SBS market, as it would “ensure that both U.S. and non-U.S. dealers are subject to our registration, reporting, public dissemination and business conduct requirements when they engage in security-based swap activity in the United States, resulting in increased transparency and enhanced stability and oversight.”
White noted that the Commission carefully considered comments received in response to its initial proposed approach, as well as those received by the Commodity Futures Trading Commission (“CFTC”) in response to its November 2013 Staff Advisory “that addressed similar issues.” She also said the two agencies have coordinated closely in working to develop approaches aimed at addressing cross-border concerns. White noted, however, that given differences in the swaps and SBS markets regulated by the agencies, differences in their respective rules may be justified.
White went on to provide details on how, in her view, the proposal improves upon the Commission’s previously proposed approach. White stated, “[the proposal] now centers on activity that is carried out by a non-U.S. person or its agent in the United States in connection with its dealing activity, rather than focusing on the activity of any counterparty to a security-based swap transaction,” and further clarified that “… a non-U.S. dealer would need to look only to where its own personnel or its agent’s personnel engage in certain market-facing activity with respect to a particular security-based swap transaction.”
White noted that a transaction meeting such criteria “would count in the calculations made by non-U.S. persons to determine whether they need to register with the Commission as dealers, thus ensuring their dealing activity in the United States at levels above the threshold would be subject to appropriate oversight and provide the Commission access to their books and records.” White further highlighted that trade reporting and public dissemination of transaction data would apply to such transactions.
Pay vs. Performance Proposal
White said the pay vs. performance proposal would give shareholders a new metric for assessing a company’s executive compensation relative to its financial performance and would assist shareholders in assessing a company’s executive compensation practices and policies. She said the proposal would require disclosure “that can be compared across companies, while also continuing to allow companies flexibility in how they set forth their pay vs. performance relationship” and how they supplement their disclosure “to reflect their specific situation.”
White explained that the proposal would apply to all companies other than foreign private issuers, registered investment companies, and emerging growth companies, which are statutorily exempted and noted that requirements for smaller reporting companies would be scaled and phased-in over time.
White said she was interested receiving comments on: 1) whether total shareholder return the is optimal measure of financial performance; 2) how the information will be used and whether shareholders are likely to use the information with respect to investments or voting decisions; and 3) if the interactive data format requirement will be useful.
Staff Presentations
Cross-Border SBS Proposal
Steve Luparello, Director of the Division of Trading and Markets, and staff next provided an overview of their proposal recommendation. Luparello stated that the staff based its recommendation on preliminary conclusions that any location-based approach should consider the need for coordination between the CFTC and SEC. He added that such an approach should focus on “dealing activity,” with a focus on dealer registration (including the resulting application of entity level rules), customer protection, trade reporting and public dissemination. Luparello went on to state that mandatory clearing and trade execution requirements would not be applied to transactions subject to the proposal.
Mark Flannery, Director of the Division of Economic and Risk Analysis, described the potential benefits and impacts that were considered, noting that the proposed requirements would serve to enhance customer protection and market transparency. He said, however, that it was necessary to appropriately balance the benefits of the proposed approach against possible negative consequences, including anti-competitiveness, liquidity fragmentation, and the relocation of jobs outside of the U.S. He stated that the proposal was appropriately tailored to limit burdens on market participants and negative consequences.
Pay vs. Performance Proposal
Keith Higgins, Director of the Division of Corporation Finance, explained that the proposal would amendment Section 14(i) of the Exchange Act, as mandated by Section 953(a) of the Dodd-Frank Act to require a clear description of the relationship between “actual pay” and financial performance of the company for the principal executive officer as well as the average compensation paid to other named executive officers. This compensation information, he noted, would need to be presented in a table format and included in proxy statements or information statements where executive compensation disclosure is required. He also noted that this proposal is the first to require data to be tagged in XBRL format.
Eduardo Aleman, Division of Corporation Finance, added that the proposal requires companies to disclose their total shareholder return (TSR) on an annual basis, as well as the TSR of peer companies over the last five fiscal years, or over the last three years if the company is a “small reporting company.”
Aleman noted that equity awards would be considered “actually paid” on the date of vesting and at fair value on that date and that pension amounts would be adjusted to include their change in value and cost of services. He then mentioned that the proposal provides a phase-in period for all companies and that it would be scaled for small companies.
Flannery noted that a substantial amount of this compensation information is already available to shareholders and explained that the proposal contains a new computation of this information to make the data more readily accessible to shareholders. He stressed that registrants are still permitted to determine how to best design their pay vs. performance models.
Cross-Border SBS Proposal
Commissioner Luis Aguilar, in his statement, noted that the two main requirements of the proposal are 1) that non-U.S. dealers must include these cross-border transactions in their de minimis calculations (which determine whether an entity is required to register with the SEC and thus become subject to certain entity-level requirements; and 2) that U.S. business would be subject to external business conduct requirements.
He said the rules would result in 99 percent of SBS activity being subject to the SEC’s rules, explaining that non-dealer transactions between non-U.S. persons are not included in the rule’s scope. He further stressed that the rules prevent “restructuring charades” used to avoid the requirements of Dodd-Frank.
Aguilar noted that the SEC “still lags behind” the CFTC in its Title VII rulemaking responsibilities and urged the adoption of the remaining SBS rules.
Pay vs. Performance Proposal
Aguilar said the proposal is important to “shine a light” on the link between executive compensation and firm performance, especially considering the large growth seen in equity-based compensation. He also stressed that the rules do not define or direct what executives can be paid and called the proposal a “positive step in the direction of better corporate governance.”
Commissioner Gallagher
Cross-Border SBS Proposal
Commissioner Daniel Gallagher, in his statement, said he was pleased that the SEC took a data-driven approach in developing its proposal, and that the Commission followed Administrative Procedures Act] procedures. He said he is interested in hearing comments on how the proposal will impact U.S. competitiveness, whether U.S. markets may become “unattractive” to foreign participants and if U.S. participants may look to markets outside the U.S.
Gallagher stressed that regulators should be pursuing a “vibrant” substituted compliance regime and “must not allow deference to be subverted by bureaucratic posturing.”
Pay vs. Performance Proposal
Gallagher expressed concern that the SEC was acting on the pay vs. performance proposal, saying that the Commission has “other, more germane, rulemakings to complete,” and said the proposal takes a prescriptive approach. He doubted if the “actually paid” definition is the most useful in this context and said only requiring disclosure of the principal executive officer “would solve some issues.”
Gallagher expressed concern with using TSR for the performance measure, saying it could “be gamed” by cutting spending and risks exacerbating focusing on short term performance. He also said that retail investors may not understand these disclosures and that issuers should have flexibility in communicating with their shareholders.
Commissioner Stein
Cross-Border SBS Proposal
Commissioner Kara Stein, in her statement, said that as SBS transactions are arranged, negotiated, or executed by personnel in the U.S., they should be subject to reporting and public dissemination requirements, and that those transactions should be counted towards the amounts of activity measured under dealer registration requirements. Stein noted that there are questions about how to handle transactions where “different parts or pieces” are broken up across jurisdictions, and queried whether removing the requirement to transact on security-based swap execution facilities (SBSEFs) could result in a loss of liquidity.
Stein said that while the proposal does not apply clearing or trade execution requirements, the SEC will monitor activity moving forward and “take any needed steps” if they “wish to change the rules over time.” She added that the CFTC and SEC should “seek to coordinate” their rules, but noted that “one size may not fit all” due to differences in their respective markets.
Pay vs. Performance Proposal
Stein said the “thoughtful” proposal makes it easier for shareholders to analyze companies before they vote and that these disclosures would “add to corporate responsibility.” She noted that companies have flexibility to describe the pay vs. performance relationship through graphs, charts, or narrative form and stressed the importance of having a data tagging requirement, saying it is the first step in having the entire proxy statement tagged.
Commissioner Piwowar
Cross-Border SBS Proposal
Commissioner Michael Piwowar, in his statement, said the proposal seeks to address a common dealer model used by many non-U.S. entities. Piwowar explained, “dealers often rely on personnel operating within the United States to not only interact with U.S. persons, but also to transact with other non-U.S. counterparties,” and that “[g]lobal derivatives dealers developed this model as an efficient method of client engagement in a marketplace nearly devoid of regulation and without regard to national boundaries.” He stressed that he would like to see comments on how the proposal impacts this model, and stressed that the Commission, “… must balance a number of relevant considerations, including how to effectively implement our regulatory authority, the potential market impact of any rules we put in place, and concerns related to competition between market participants.”
Pay vs. Performance Proposal
Piwowar said the proposal was a “questionable use of resources” because it does not address any of the issues related to the financial crisis. He said he would have supported the initial draft that was circulated to the Commissioners, but that the final proposal changed to become “a highly prescriptive measure.” He said the one year TSR approach will not work and was disappointed this requirement did not exclude small reporting companies. He said this requirement may cause more stock buy-backs as firms seek to increase returns in the short term.
VoteResults
The Commission voted 5-0 to approve a proposal on cross-border security-based swap rules regarding activity in the U.S.
The Commission voted 3-2 to approve rules to require companies to disclose the relationship between executive pay and a company’s financial performance, with Commissioners Gallagher and Piwowar dissenting.
For more information on this meeting and to view an archived webcast, please click here.
Additional Materials:
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Securities and Exchange Commission
Open Meeting
Wednesday, April 29, 2015
Key Topics & Takeaways
Cross-Border SBS Proposal
- Approval of Cross-Border Related Proposal: The SEC unanimously approved a proposal which seeks to address the application of certain Title VII requirements to SBS transacted by a non-U.S. persons that utilize U.S.-located personnel to “arrange, negotiate or execute” an SBS transaction.
- Market Facing Activity: SEC Chair White said that “a non-U.S. dealer would need to look only to where its own personnel or its agent’s personnel engage in certain market-facing activity with respect to a particular security-based swap transaction.”
- Registration Threshold: White noted that transactions subject to the proposal would count towards the de minimis threshold for security-based swap dealer registration, and that such transactions would also be subject to requirements on trade reporting and public dissemination of transaction data.
- Scope of Proposal: SEC’s Luparello noted that staff developed the proposal with a focus on dealer registration, customer protection, trade reporting, and public dissemination. He added that mandatory clearing and trade execution requirements would not be required for these transactions under the proposal.
- Benefits vs. Negative Consequences: SEC’s Flannery said the proposal was appropriately tailored to limit possible negative consequences, including anti-competitiveness, liquidity fragmentation, and the relocation of jobs outside of the U.S.
Pay vs. Performance Proposal
- Approval of Pay vs. Performance Proposal: The SEC voted 3-2, with Republican Commissioners Gallagher and Piwowar dissenting, to approve a proposal that would give shareholders a new metric for assessing a company’s executive compensation relative to its financial performance
- “Actual Pay”: SEC’s Higgins explained that the pay vs. performance proposal would require a clear description of the relationship between “actual pay” and financial performance of the company for the principal executive officer as well as the average compensation paid to other named executive officers.
- Equity Awards: SEC’s Aleman noted that equity awards would be considered “actually paid” on the date of vesting and at fair value on that date
SEC Commissioners
- Mary Jo White, Chair, Securities and Exchange Commission
- Luis A Aguilar, Commissioner, Securities and Exchange Commission.
- Daniel M. Gallagher, Commissioner, Securities and Exchange Commission.
- Kara M. Stein, Commissioner, Securities and Exchange Commission.
- Michael S. Piwowar, Commissioner, Securities and Exchange Commission.
Opening Statements – Chair White
Cross-Border SBS Proposal
Securities and Exchange Commission (SEC) Chair Mary Jo White provided opening remarks discussing proposed rules that would require a non-U.S. entity that uses U.S. personnel to “arrange, negotiate or execute” a security-based swap (“SBS”) transaction to include that transaction in calculations towards its security-based swap dealer registration threshold. White stated that the proposed rule was important for the SEC’s regulation of the SBS market, as it would “ensure that both U.S. and non-U.S. dealers are subject to our registration, reporting, public dissemination and business conduct requirements when they engage in security-based swap activity in the United States, resulting in increased transparency and enhanced stability and oversight.”
White noted that the Commission carefully considered comments received in response to its initial proposed approach, as well as those received by the Commodity Futures Trading Commission (“CFTC”) in response to its November 2013 Staff Advisory “that addressed similar issues.” She also said the two agencies have coordinated closely in working to develop approaches aimed at addressing cross-border concerns. White noted, however, that given differences in the swaps and SBS markets regulated by the agencies, differences in their respective rules may be justified.
White went on to provide details on how, in her view, the proposal improves upon the Commission’s previously proposed approach. White stated, “[the proposal] now centers on activity that is carried out by a non-U.S. person or its agent in the United States in connection with its dealing activity, rather than focusing on the activity of any counterparty to a security-based swap transaction,” and further clarified that “… a non-U.S. dealer would need to look only to where its own personnel or its agent’s personnel engage in certain market-facing activity with respect to a particular security-based swap transaction.”
White noted that a transaction meeting such criteria “would count in the calculations made by non-U.S. persons to determine whether they need to register with the Commission as dealers, thus ensuring their dealing activity in the United States at levels above the threshold would be subject to appropriate oversight and provide the Commission access to their books and records.” White further highlighted that trade reporting and public dissemination of transaction data would apply to such transactions.
Pay vs. Performance Proposal
White said the pay vs. performance proposal would give shareholders a new metric for assessing a company’s executive compensation relative to its financial performance and would assist shareholders in assessing a company’s executive compensation practices and policies. She said the proposal would require disclosure “that can be compared across companies, while also continuing to allow companies flexibility in how they set forth their pay vs. performance relationship” and how they supplement their disclosure “to reflect their specific situation.”
White explained that the proposal would apply to all companies other than foreign private issuers, registered investment companies, and emerging growth companies, which are statutorily exempted and noted that requirements for smaller reporting companies would be scaled and phased-in over time.
White said she was interested receiving comments on: 1) whether total shareholder return the is optimal measure of financial performance; 2) how the information will be used and whether shareholders are likely to use the information with respect to investments or voting decisions; and 3) if the interactive data format requirement will be useful.
Staff Presentations
Cross-Border SBS Proposal
Steve Luparello, Director of the Division of Trading and Markets, and staff next provided an overview of their proposal recommendation. Luparello stated that the staff based its recommendation on preliminary conclusions that any location-based approach should consider the need for coordination between the CFTC and SEC. He added that such an approach should focus on “dealing activity,” with a focus on dealer registration (including the resulting application of entity level rules), customer protection, trade reporting and public dissemination. Luparello went on to state that mandatory clearing and trade execution requirements would not be applied to transactions subject to the proposal.
Mark Flannery, Director of the Division of Economic and Risk Analysis, described the potential benefits and impacts that were considered, noting that the proposed requirements would serve to enhance customer protection and market transparency. He said, however, that it was necessary to appropriately balance the benefits of the proposed approach against possible negative consequences, including anti-competitiveness, liquidity fragmentation, and the relocation of jobs outside of the U.S. He stated that the proposal was appropriately tailored to limit burdens on market participants and negative consequences.
Pay vs. Performance Proposal
Keith Higgins, Director of the Division of Corporation Finance, explained that the proposal would amendment Section 14(i) of the Exchange Act, as mandated by Section 953(a) of the Dodd-Frank Act to require a clear description of the relationship between “actual pay” and financial performance of the company for the principal executive officer as well as the average compensation paid to other named executive officers. This compensation information, he noted, would need to be presented in a table format and included in proxy statements or information statements where executive compensation disclosure is required. He also noted that this proposal is the first to require data to be tagged in XBRL format.
Eduardo Aleman, Division of Corporation Finance, added that the proposal requires companies to disclose their total shareholder return (TSR) on an annual basis, as well as the TSR of peer companies over the last five fiscal years, or over the last three years if the company is a “small reporting company.”
Aleman noted that equity awards would be considered “actually paid” on the date of vesting and at fair value on that date and that pension amounts would be adjusted to include their change in value and cost of services. He then mentioned that the proposal provides a phase-in period for all companies and that it would be scaled for small companies.
Flannery noted that a substantial amount of this compensation information is already available to shareholders and explained that the proposal contains a new computation of this information to make the data more readily accessible to shareholders. He stressed that registrants are still permitted to determine how to best design their pay vs. performance models.
Cross-Border SBS Proposal
Commissioner Luis Aguilar, in his statement, noted that the two main requirements of the proposal are 1) that non-U.S. dealers must include these cross-border transactions in their de minimis calculations (which determine whether an entity is required to register with the SEC and thus become subject to certain entity-level requirements; and 2) that U.S. business would be subject to external business conduct requirements.
He said the rules would result in 99 percent of SBS activity being subject to the SEC’s rules, explaining that non-dealer transactions between non-U.S. persons are not included in the rule’s scope. He further stressed that the rules prevent “restructuring charades” used to avoid the requirements of Dodd-Frank.
Aguilar noted that the SEC “still lags behind” the CFTC in its Title VII rulemaking responsibilities and urged the adoption of the remaining SBS rules.
Pay vs. Performance Proposal
Aguilar said the proposal is important to “shine a light” on the link between executive compensation and firm performance, especially considering the large growth seen in equity-based compensation. He also stressed that the rules do not define or direct what executives can be paid and called the proposal a “positive step in the direction of better corporate governance.”
Commissioner Gallagher
Cross-Border SBS Proposal
Commissioner Daniel Gallagher, in his statement, said he was pleased that the SEC took a data-driven approach in developing its proposal, and that the Commission followed Administrative Procedures Act] procedures. He said he is interested in hearing comments on how the proposal will impact U.S. competitiveness, whether U.S. markets may become “unattractive” to foreign participants and if U.S. participants may look to markets outside the U.S.
Gallagher stressed that regulators should be pursuing a “vibrant” substituted compliance regime and “must not allow deference to be subverted by bureaucratic posturing.”
Pay vs. Performance Proposal
Gallagher expressed concern that the SEC was acting on the pay vs. performance proposal, saying that the Commission has “other, more germane, rulemakings to complete,” and said the proposal takes a prescriptive approach. He doubted if the “actually paid” definition is the most useful in this context and said only requiring disclosure of the principal executive officer “would solve some issues.”
Gallagher expressed concern with using TSR for the performance measure, saying it could “be gamed” by cutting spending and risks exacerbating focusing on short term performance. He also said that retail investors may not understand these disclosures and that issuers should have flexibility in communicating with their shareholders.
Commissioner Stein
Cross-Border SBS Proposal
Commissioner Kara Stein, in her statement, said that as SBS transactions are arranged, negotiated, or executed by personnel in the U.S., they should be subject to reporting and public dissemination requirements, and that those transactions should be counted towards the amounts of activity measured under dealer registration requirements. Stein noted that there are questions about how to handle transactions where “different parts or pieces” are broken up across jurisdictions, and queried whether removing the requirement to transact on security-based swap execution facilities (SBSEFs) could result in a loss of liquidity.
Stein said that while the proposal does not apply clearing or trade execution requirements, the SEC will monitor activity moving forward and “take any needed steps” if they “wish to change the rules over time.” She added that the CFTC and SEC should “seek to coordinate” their rules, but noted that “one size may not fit all” due to differences in their respective markets.
Pay vs. Performance Proposal
Stein said the “thoughtful” proposal makes it easier for shareholders to analyze companies before they vote and that these disclosures would “add to corporate responsibility.” She noted that companies have flexibility to describe the pay vs. performance relationship through graphs, charts, or narrative form and stressed the importance of having a data tagging requirement, saying it is the first step in having the entire proxy statement tagged.
Commissioner Piwowar
Cross-Border SBS Proposal
Commissioner Michael Piwowar, in his statement, said the proposal seeks to address a common dealer model used by many non-U.S. entities. Piwowar explained, “dealers often rely on personnel operating within the United States to not only interact with U.S. persons, but also to transact with other non-U.S. counterparties,” and that “[g]lobal derivatives dealers developed this model as an efficient method of client engagement in a marketplace nearly devoid of regulation and without regard to national boundaries.” He stressed that he would like to see comments on how the proposal impacts this model, and stressed that the Commission, “… must balance a number of relevant considerations, including how to effectively implement our regulatory authority, the potential market impact of any rules we put in place, and concerns related to competition between market participants.”
Pay vs. Performance Proposal
Piwowar said the proposal was a “questionable use of resources” because it does not address any of the issues related to the financial crisis. He said he would have supported the initial draft that was circulated to the Commissioners, but that the final proposal changed to become “a highly prescriptive measure.” He said the one year TSR approach will not work and was disappointed this requirement did not exclude small reporting companies. He said this requirement may cause more stock buy-backs as firms seek to increase returns in the short term.
VoteResults
The Commission voted 5-0 to approve a proposal on cross-border security-based swap rules regarding activity in the U.S.
The Commission voted 3-2 to approve rules to require companies to disclose the relationship between executive pay and a company’s financial performance, with Commissioners Gallagher and Piwowar dissenting.
For more information on this meeting and to view an archived webcast, please click here.
Additional Materials: