The Advisors' Blog

Late last week, the Corp Fin Staff issued nine new Regulation S-K Compliance and Disclosure Interpretations and updated one existing Regulation S-K Compliance and Disclosure Interpretation to provide guidance regarding the pay versus performance disclosure requirements. Here’s what Dave shared about these CDIs on TheCorporateCounsel.net:

The new CDIs address the following areas:

Question 128D.14 – Awards granted in fiscal years prior to an equity restructuring (such as a spin-off) that are retained by the holder must be included in the calculation of executive compensation actually paid.

Question 128D.15 – The change in fair value of awards granted prior to the date of an issuer’s IPO must be based on the fair value of those awards as of the end of the prior fiscal year for purposes of determining executive compensation actually paid (not based on other dates, such as the date of the IPO).

Question 128D.16 – In accordance with FASB ASC Topic 718, the effect of a market condition should be reflected in the fair value of share-based awards with such a condition. In addition, for purposes of the table required by Item 402(v)(1) of Regulation S-K, market conditions should also be considered in determining whether the vesting conditions of share-based awards have been met.

Question 128D.17 – The fair value of an award that did not meet vesting conditions during the year because the performance or market conditions were not met, but for which there is still potential for the award to vest in the future, should not be subtracted under Item 402(v)(2)(iii)(C)(1)(v) of Regulation S-K because it failed to vest in the current year.

Question 128D.18 – If retirement eligibility is the only vesting condition for a stock or option award, that condition would be considered satisfied for purposes of the pay versus performance disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible.

Question 128D.19 – A performance-based vesting condition is considered satisfied when the applicable condition is achieved; however, a provision which requires the compensation committee to certify the level of performance attained should be analyzed to determine if it creates an additional substantive vesting condition, such as an employee does not vest in the award unless and until they remain employed through the date such certification occurs, in considering whether the award is vested for purposes of the Item 402(v) of Regulation S-K disclosures at the end of the fiscal year-end.

Question 128D.20 – An issuer may satisfy the requirement in Item 402(v)(2)(iii)(C)(3) of Regulation S-K with respect to the fair value of all equity awards being computed in a manner consistent with the methodology used to account for share-based payments under GAAP by using a valuation technique that differs from the one used to determine the grant date fair value of the equity-based awards that are classified as equity in the financial statements, as long as the valuation technique would be permitted under FASB ASC Topic 718, including that it meets the criteria for a valuation technique and the fair value measurement objective.

Question 128D.21 – To comply with Item 402(v)(2)(iii)(C)(3) of Regulation S-K, the methodology used to compute the fair value amounts of all equity awards must be consistent with the methodology used to account for share-based payments in the financial statements under GAAP. It is not acceptable to value these awards as of the end of a covered fiscal year based on methods not prescribed by GAAP.

Question 128D.22 – If the assumptions disclosure required by Item 402(v)(4) would involve confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm for the issuer, the issuer may omit such information to the extent such information would be subject to the confidentiality protections of Instruction 4 to Item 402(b) of Regulation S-K. However, the issuer must provide as much information responsive to the Item 402(v)(4) requirement as possible without disclosing the confidential information, such as a range of outcomes or a discussion of how a performance condition impacted the fair value. In addition, consistent with Instruction 4 to Item 402(b), the issuer should also discuss how the material difference in the assumption affects how difficult it will be for the executive or how likely it will be for the issuer to achieve undisclosed target levels or other factors.

The Staff also updated Regulation S-K CDI Question 118.08, which addresses the approach for satisfying Item 10(e) of Regulation S-K and Regulation G with respect to non-GAAP financial measures that are presented in pay-related circumstances in the proxy statement. The same principles articulated in Question 118.08 continue to apply, where an issuer can refer to annex or cross-reference the non-GAAP financial measure disclosure in the Form 10-K, but the Staff updated the language in the CDI to replace references to “the relationship between pay and performance” with “how pay is structured and implemented to reflect the registrant’s or a named executive officer’s performance.”

– Meredith Ervine