Sarbanes-Oxley Act- Implications for Executive Compensation
August 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (Act), which makes far-reaching changes in federal regulation applicable to corporate America and its executives, auditors and advisers. In addition to corporate governance and accounting reforms, the Act makes several changes that immediately impact many executive compensation arrangements and their administration. Directors, executives, Section 16 compliance officers and human resources administrators will want to consider closely the following provisions under the Act:
- prohibition on personal loans to directors and executive officers
- accelerated Section 16 filing deadlines
- restrictions on company stock sales during retirement plan blackout periods
- disgorging executive pay due to accounting restatements
- freeze on extraordinary payments to directors and officers
This On The Subject… summarizes the key points of these provisions, suggests actions for publicly held companies to consider taking immediately with respect to their executive compensation practices, identifies significant interpretative issues and considers important related executive compensation developments
Prohibition on Personal Loans to Directors and Executive Officers
Section 402 of the Act amends Section 13 of the Securities Exchange Act of 1934 (Exchange Act) to prohibit publicly held companies and other "issuers" (see definition below) from making or extending personal loans to directors and executive officers. Section 402 became effective on July 30, 2002, subject to grandfathering provisions and limited exceptions discussed below.
Section 402 raises several important interpretative questions that ultimately will need to be resolved through regulatory guidance by the U.S. Securities and Exchange Commission (SEC) or legislative clarification. While we anticipate many requests for interpretative rules, it appears that guidance under Section 402 will not be forthcoming for some time due to several other demands on the SEC under the Act. In light of the immediate effective date and the potential civil and even criminal ramifications of violating Section 402, publicly held companies should review immediately all arrangements that might be viewed as prohibited extensions of credit under the personal loan prohibition.
General Rule Prohibition Under Section 402
Section 402 states that "[i]t shall be unlawful for any issuer (as defined in Section 2 of the Sarbanes-Oxley Act of 2002), directly or indirectly, including through any subsidiary, to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of that issuer." Unless grandfathering treatment or an exception applies, commencing on July 30, 2002, issuers are prohibited from extending a personal loan in any manner to a director or executive officer.
Extension of Credit
Many types of transactions that might not ordinarily be viewed as loans may involve an extension of credit. In other contexts, the SEC has interpreted the term "extension of credit" to include a wide range of transactions, such as loans, guarantees and installment sales. Even if not directly making funds available, a publicly held company might be viewed to "arrange for extension of credit" by helping establish a financing arrangement, such as selecting or recommending a lending institution.
It is also important to note that the prohibition includes attribution rules. The extension of credit may be "direct or indirect" and may be "to" or "for" the benefit of an executive officer or director. It seems likely that an extension of credit to an immediate family member of, or an entity controlled by, a director or executive officer will be subject to Section 402 if such extension qualifies as a "personal loan."
Personal Loan
It is unclear what types of arrangements and transactions will be considered to be an extension of credit "in the form of a personal loan." The Act does not define the term "personal loan," and there is no discussion of this provision in the Conference Report to the Act. Currently, there is no indication as to how the SEC will interpret this provision. What can be said at this point is that a loan determined to be non-personal in nature will not be prohibited. We expect that publicly held companies and their advisors will request the SEC to establish rules recognizing that loans primarily furthering the interests of a publicly held company or that are an integral part of existing lawful benefit arrangements are business, and not personal, loans.
Directors and Executive Officers
The term "director" is defined in Section 3(a)(7) of the Exchange Act as "any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated." There are real questions about advisory, emeritus, or honorary directors, and the SEC interpretations under Section 16 of the Exchange Act may be relevant to this issue. The SEC has indicated in various releases that it believes that advisory and emeritus directors generally should be treated as directors for Section 16 purposes, but that honorary directors should not be so treated.
As noted above, the provisions of Section 402 of the Act are implemented as an amendment to the Exchange Act. Accordingly, unless and until the SEC adopts a different definition, the term "executive officer" under Section 402 should be interpreted in a manner consistent with existing SEC rules. Exchange Act Rule 3b-7 defines an "executive officer" (for purpose of, among others, proxy, 10-K and other Exchange Act disclosure) as the "president, any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant." Executive officers of subsidiaries may be deemed executive officers of a publicly held company if they perform policy-making functions for the publicly held company.
Issuer
The Act defines issuer as "an issuer (as defined in section 3 of the Securities Exchange Act of 1934…), the securities of which are registered under section 12 of that Act …or that is required to file reports under section 15(d)." This definition does not distinguish between a U.S. company and a non-U.S. issuer. Unless and until the SEC exempts non-U.S. issuers, Section 402 applies to all such issuers regardless of the domicile of the lender (or the director or executive officer) or the place of the loan transaction.
Identifying Transactions Potentially Subject to Section 402
The ambiguity as to what is a "personal loan" and the breadth of what may be considered an arrangement for "extension of credit" suggest that publicly held companies should immediately identify all transactions potentially subject to Section 402. Common arrangements discussed below that may be viewed to involve an extension of credit are split-dollar life insurance and cashless stock option exercises. The following is a partial list of other transactions with directors and executives officers that may be treated as an extension of credit:
- loans to purchase stock, a personal residence or other property
- loans to meet margin calls upon a decline in the price of the company’s stock
- loans for relocation to a different geographic area
- routine advances for business purposes (such as reimbursement accounts and travel expense allowances), particularly if repaid over long period of time
- personal use of company credit cards
indemnification payments made under company by-laws or an employment - agreement before a determination of entitlement to such payment
- use of company funds to meet an executive's payroll tax obligations for non-qualified deferred compensation benefits
- signing bonuses subject to repayment on early termination of employment
- loans from a Section 401(k) plan
Until further regulatory guidance is available, publicly held companies should consider suspending immediately additional extensions of credits to executives and directors that may be viewed as personal in nature.
Split-Dollar Life Insurance
Many publicly held companies provide permanent life insurance protection to their executives in the form of split-dollar life insurance. A publicly held company that provides split-dollar life insurance to its executives will pay all or substantially all of the premiums on policies subject to the arrangement. The executive is then required to return the company’s premium payments to the company at some later point in time, which is usually the executive’s termination of employment or death. This type of split-dollar arrangement is often referred to as an "equity" split-dollar arrangement (Equity SDA), because the executive owns all policy cash surrender value (i.e., equity) in excess of the company's recovery right.
Recently, the IRS proposed to treat premium payments made under Equity SDAs as loans when the executive owns the split-dollar policy and has rights to all cash surrender value in excess of premium payments. Other forms of split-dollar life insurance (including Equity SDAs when the employer owns the policy) in which the company receives repayment of its premium payments upon termination of the arrangement have not been considered by the IRS to involve loans. (See our prior On the Subject … Tax Rules Proposed for Split-Dollar Life Insurance Arrangements (July 2002) describing different forms of split-dollar life insurance and the recently issued regulations proposing loan treatment for Equity SDAs.)
It is unclear whether the existence of an Equity SDA or payment of premiums under such an arrangement will be treated as a "personal loan" under Section 402. It appears that Congress did not consider how the personal loan prohibition might apply to split-dollar life insurance. Senator Sarbanes has publicly stated that split-dollar was "raised with us at the last minute and it’s a fairly complicated issue and we weren’t able to address it."
Cashless Stock Option Exercises
Another common executive compensation practice that may be impacted by Section 402 is the cashless exercise of stock options facilitated through a broker. In a cashless exercise, the option holder instructs a brokerage firm to sell a sufficient number of the shares being obtained by the option exercise to satisfy the option price and any withholding taxes applicable. The broker sells the shares and remits the exercise price and any taxes required to be withheld to the company with any balance remitted to the option holder. The company delivers the requisite number of shares to the broker and the balance to the option holder.
There are two common methods to execute a cashless exercise of a stock option. A broker may sell the shares on the date of receipt of exercise instructions and remit the exercise price and withholding taxes to the company a few days later, on the date of the settlement of the sale of those shares. Alternatively, a broker may sell the shares on the date of receipt of the instructions and remit the exercise price and withholding taxes immediately to the company, treating the amount as a margin loan to the option holder. Other variations on this practice also exist.
Any cashless exercise method involving an issuers may be viewed as resulting in an "extension of credit" under Section 402. A broker-assisted direct sale involves the company making stock or cash available to the option holder for the exercise, albeit only for a very short period of time. While a margin loan from a broker does not involve the use of the company funds, it may also be subject to Section 402 to the extent that the issuer is viewed to "arrange" this financing by establishing the cashless exercise program with the brokerage firm. None of these methods would seem to be the type of loan targeted by the Congress under the Act. To date, the SEC has not take a formal position regarding whether Section 402 prohibits cashless exercise programs.
Please note that Section 402 only applies with respect to extensions of credit by the issuer (or a related party) or extensions of credit that have been arranged by the issuer for a director or executive officer. A cashless exercise should not be prohibited if a director or executive officer arranges the cashless exercise without any involvement from the issuer and the credit extension is from the broker or other third party and not the issuer.
Section 401(k) Plans
It has been suggested that Section 402 of the Act may prohibit loans to executive officers from a Section 401(k) plan. The basis for this concern is that the employer has "arranged" for the loan under the terms of the plan. Interpreting Section 402 of the Act to prohibit Section 401(k) loans to executive officers is very questionable, as ERISA does not provide an employer discretion as to which employees should be eligible to receive a loan. Any extension of credit by a 401(k) plan allowing for loans to participants is subject to fiduciary duties under ERISA. These duties include requirements that plan loans be made on a "reasonably equivalent basis" and that fiduciaries follow the terms of the plan document. In interpreting this requirement, the U.S. Department of Labor has stated that "[i]n order to justify an exclusion of active participants of any kind, a plan would need to establish that a commercial lender would refuse to make a loan in analogous circumstances because the risk of default would be so great as to make the granting of the loan prohibitively risky."
Grandfather Protection
A limited grandfather provision provides some relief but raises many questions. Section 402 exempts loans maintained before July 30, 2002, "provided that there is no material modification to any term of any such extension of credit or any renewal of any such extension of credit" on or after July 30, 2002. A material modification of any term results in loss of grandfather treatment. Any action that might be considered to be a change to the terms of a loan should be carefully considered given that Section 402 may be violated even if the change is minor and does not affect the overall financing arrangement.
Another significant issue is determining when an "extension of credit" takes place for purposes of Section 402. For example, if Section 402 is considered to cover Equity SDAs, it is unclear whether the Equity SDA itself or future premium payments would be treated as the "extension of credit." If each premium payment is treated as a separate "extension of credit," any additional payments after July 30, 2002 violate Section 402. Unless this ambiguity is resolved, the issuer may be required to choose between potentially violating Section 402 and breaching an existing legal obligation to an executive officer.
Other Exceptions
A personal loan that is not grandfathered may nevertheless be allowed under Section 402 if it qualifies for one of two exceptions. The first exception applies to extensions of credit that are provided in the ordinary course of the issuer’s consumer credit business, so long as the issuer generally makes available the extension of credit to the public and the credit is on market terms or terms no more favorable than those the issuer offers to the general public. A second exception allows for loans made by FDIC-insured institutions (i.e., banks and thrifts).
Failure to Repay Loan
A significant question that the Act does not directly address is what happens if a grandfathered loan is not repaid when due. To the extent that a loan is secured solely by company stock and the executive’s personal net worth is less than the amount of the loan, a significant risk of non-payment might exist. A failure to exercise the company’s legal rights with respect to collection of a grandfathered loan could be viewed as a modification of the loan, resulting in a violation of the Act. Non-payment or forgiveness of a loan will often raise complicated corporate governance, SEC reporting, tax and accounting issues. A perceived failure by some publicly held companies to handle these issues in a timely and proper manner has resulted in shareholder derivative suits.
Accelerated Section 16 Filing Deadlines
Section 403 of the Act amended Section 16(a) of the Exchange Act to require Section 16 reporting persons (directors, ten percent or more stockholders and certain executive officers) to report changes in beneficial ownership of issuer securities within two business days. The two-day filing requirement became effective August 29, 2002 under amended Section 16 rules adopted by the SEC on August 27, 2002 (SEC Release No. 34-46421).
The Act also requires the SEC to adopt rules requiring that Section 16(a) reports be filed electronically (rather than in paper form) no later than July 30, 2003. The SEC has indicated that they intend to promulgate such rules much sooner than July 2003. To file electronically, SEC rules require each Section 16 reporting person to apply for and obtain his or her own access codes to the SEC’s Electronic Data Gathering, Analysis and Retrieval System (EDGAR).
Foreign Private Issuers
Currently, foreign private issuers with securities registered under the Exchange Act are not subject to any aspect of Section 16. The SEC has indicated that it does not intend to change the exemption for foreign private issuers.
SEC Rulemaking
Highlights of the revised Section 16 reporting rules are follows:
- All transactions that occurred before August 29, 2002 remain reportable under prior Section 16 reporting rules. This means, for example, that a stock option exercise on August 28th would still be reportable on a Form 4 by September 10th and that a "discretionary transaction" (such as a transfer in or out of a company stock fund) under a 401(k) plan on August 28th can be deferred until 45 days after the end of the issuer’s fiscal year and reported on a Form 5.
- All transactions occurring on or after August 29th must be reported on a Form 4 received by the SEC no later than 5:30 p.m. (Eastern Time) on the second business day following the transaction date except as set forth in Sections 4, 5 and 6 below. These include:
- option grants and exercises
- stock awards, performance share awards and SARs
- option re-pricings, cancellations, regrants and amendments
- dispositions to the issuer
- open market purchases and sales
- All of the reporting deferrals for transactions between the issuer and Section 16 reporting persons set forth in Rule 16b-3 will be subject to two-business day reporting on Form 4 except for the following:
- routine purchases under the payroll deduction provisions of a 401(k) plan (including an excess benefit plan) or employee stock purchase plan or ESOP, which transactions remain exempt from reporting (but must be included in the shares beneficially owned column).
- "discretionary transactions" under 401(k) and other employee benefit plans and certain transactions made pursuant to so-called Rule 10b5-1 plans, which transactions must be reported on a Form 4 under a special "deemed execution" rule discussed below, that can allow up to five-business day reporting.
- All of the exemptions contained in the Section 16(a) rules remain in effect and may either be voluntarily reported on a Form 4 at any time up to the due date of the Form 5 or reported on a Form 5 within 45 days of the end of the issuer’s fiscal year. These include:
- gifts
- expiration of options without consideration
- small acquisitions but not from the issuer or an employee benefit plan
- sponsored by the issuer
- stock splits and stock dividends
- pro-rata distributions
- transfers under domestic relations orders
- changes in form of beneficial ownership
- regular dividend reinvestment plan contributions
- The SEC has adopted special limited deferred reporting rules (up to five business days depending upon circumstances) for the following transactions:
- transactions pursuant to a contract, instruction or written plan for the purchase or sale of issuer equity securities that satisfies the affirmative defense conditions of Rule 10b5-1(c) and where the Section 16 reporting person does not select the date(s) of execution (such as the first date of each month)
- discretionary transactions where the Section 16 reporting person does not select the date(s) of execution
- deferred compensation plan investments in a company stock fund but only if they fall within the scope of a Rule 10b5-1 plan.
- transactions that occur over more than one day but only if they fall within the scope of a Rule 10b5-1 plan.
These transactions are subject to reporting on Form 4 within two business days of the "deemed execution" date of the transaction. The deemed execution date of the transaction will be the earlier of (a) the date on which the executing broker, dealer or plan administrator notifies the Section 16 reporting person of execution of the transaction, and (b) the third business day following the trade date. (The SEC noted in its Release adopting the new rules that a trade confirmation sent through the mail could take several days to arrive and the SEC would, therefore, usually expect brokers, dealers and plan administrators to provide the information needed for Section 16(a) reporting purposes to the Section 16 reporting person either electronically or by telephone.)
- The rules with respect to the timing of the filing of Form 3 (initial statement of beneficial ownership) have not changed. For a company that is already public, the Form 3 must be filed within ten days of the person becoming a Section 16 reporting person. For companies going public, the Form 3 must be filed before the company goes public. The SEC noted that a transaction might be required to be filed on Form 4 before the due date of Form 3. In this situation, the SEC encouraged the filing of both the Form 3 and the Form 4 by the due date of the Form 4.
- Until new forms are printed, the old forms should be used with appropriate modifications. Electronic filings made on EDGAR need not be presented in the standard box format and may omit the horizontal and vertical lines separating information items, so long as all required information is presented in the proper order. Specific information is required when a deemed execution date is applicable.
Recommendations
In sum, we recommend that in order to comply with the revised Section 16 rules public companies should:
- Have a mandatory pre-clearance policy for all transactions as to which the timing is within the control of the Section 16 reporting person. Attached is a suggested form of such pre-clearance policy (click here^).
- For transactions as to which timing is outside the control of the Section 16 reporting person, require brokerage firms conducting transactions for Section 16 reporting person to provide promptly upon trade execution, and certainly by the third business day, the information needed for Section 16(a) reporting purposes to the Section 16 reporting person either electronically or by telephone.
- Review and update the procedures for discretionary transactions under benefit plans to ensure that the Section 16 reporting person receives timely notification (no later than three business days) of execution of the transaction from the plan administrator.
- Educate all Section 16 reporting persons by a memorandum that they should read, sign and return.
- Obtain power of attorney with multiple attorneys-in-fact from all Section 16 reporting persons.
- Adopt electronic filing as soon as possible and apply immediately for EDGAR access codes for all Section 16 reporting persons. Section 16 reporting persons can obtain a Form ID for obtaining EDGAR access codes from the SEC at: http://www.sec.gov/about/forms/formid.pdf .
Restrictions on Company Stock Sales During Retirement Plan Blackout Periods
Section 306(a) of the Act prohibits directors and executive officers from purchasing or selling during any "blackout period" an equity security of the issuer that the director or officer "acquires in connection" with his or her service with the issuer. Any profits realized by a director or an executive officer in violation of Section 306(a) are recoverable by the company or by stockholders in a derivative action. Section 306(a) is effective 180 days after the date of enactment.
Prohibited Purchases and Sales
It is unclear how the purchase and sale prohibitions under Section 306(a) will apply to transactions due to significant drafting irregularities in the statute. Subsection (a)(1) states,
"[I]t shall be unlawful for any director or executive officer …. directly or indirectly, to purchase, sell, or otherwise acquire or transfer any equity security of the issuer …. during any blackout period with respect to such equity security if such director or officer acquires such equity security in connection with his or her service or employment as a director or executive officer (emphasis added)."
The first portion of the sentence purports to prohibit both acquisitive and dispositive transactions during blackout periods and if the sentence had stopped before the portion italicized above, it would stand on its own. However, the latter part of the sentence, particularly the word "acquires," makes the sentence unworkable. Read literally, it means only that during a blackout period one cannot purchase or acquire an equity security in connection with one’s service or employment. Dispositions are simply not addressed. This is because a security that the director or officer "acquires" in connection with service or employment is not being sold or transferred. Some commentators have suggested that Congress intended to use "acquired" in place of "acquires." This is tempting because this provision was, of course, prompted by sales by Enron executives during a blackout period. But changing the tense means acquisitions are not addressed. An equity security that a director or officer "acquired" can only be disposed of. It is possible that Congress intended to say "acquires or acquired." However, even if one reads that into the statute, a director or officer selling founders stock, inherited stock or stock acquired on the open market would not be prohibited by Section 306 from doing so during a blackout period. The provisions of Section 306 also do not appear to prohibit purchases on the open market during a blackout, even though those purchases could change the person’s economic position. At the same time, the provisions do appear to prohibit the exercise of an option even though that transaction has no economic consequence unless followed by a sale of the underlying stock. It is difficult to harmonize these results with the apparent rationale for Section 306.
Rulemaking
The Act expressly directs the SEC, in consultation with the U.S. Department of Labor, to issue rules "to clarify the application" of the purchase and sale restrictions under Section 306(a). We do not yet have any indication how the SEC intends to address these drafting irregularities. Until regulations are issued, good faith compliance with the requirements of Section 306(a) shall be treated as compliance with such provisions.
Blackout Period
The blackout period for purposes of the restrictions under Section 306 is any period of more than three consecutive business days during which 50 percent or more of plan participants and beneficiaries under "individual account plans" (such as a Section 401(k) or profit sharing plan) are unable to buy and sell company stock. Blackout periods do not include regularly scheduled suspension periods during which participants and beneficiaries are unable to buy or sell company stock if the suspension is incorporated into plan documents and timely disclosed to participants. A special exception is also provided for suspension periods imposed in connection with an individual becoming or terminating participant status as part of a corporate merger, acquisition, divestiture or similar transaction.
Notification
A publicly held company must provide timely notice of any blackout period to officers, directors and the SEC. Note that this notice is different than the notice required to be provided by a plan administrator to individuals covered under an individual account plan.
Disgorging Executive Pay Due to Accounting Restatements
Section 304 of the Act requires that the chief executive officer and chief financial officer forfeit certain bonuses and gains on stock sales in connection with the filing of an "accounting restatement due to material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws" during a specified recapture period. The "recapture period" is the 12-month period following "the first public issuance or filing with the SEC (whichever first occurs) of the financial document embodying such financial reporting requirement." Section 304 became effective on July 30, 2002 and absent interpretive relief applies retroactively to compensation paid or gains realized prior to that date. Like other sections of the Act, Section 304 has many ambiguous provisions that raise several interpretative questions. Until the SEC clarifies the scope of Section 304, any restatements of financial statements raise the possibility for triggering the forfeiture requirement.
Misconduct
Section 304 does not define the type of actions (or omissions) that constitute "misconduct" triggering the forfeiture requirement. In addition, Section 304 does not identify whose misconduct is relevant. In the absence of guidance to the contrary, it appears that forfeiture may be triggered regardless of who engaged in the misconduct resulting in the accounting restatement. Section 304 does provide the SEC authority to exempt any person from the forfeiture requirement.
Applicable Amounts Subject to Forfeiture
If the forfeiture requirement is triggered under Section 304, the chief executive officer and chief financial officer must reimburse the issuer for "any bonus or other incentive-based or equity-based compensation received by that person from the issuer" (targeted compensation) and "any profits realized from the sale of securities of the issuer," during the recapture period after the filing of the "financial document embodying such financial reporting requirements." As a result, only targeted compensation "received" and profits from securities sales "realized" during the recapture period are subject to forfeiture.
It is unclear how one determines when targeted compensation is "received" for purposes of Section 304. Consider how Section 304 might apply to common executive compensation arrangements.
Is equity-based compensation "received" upon the grant of a stock option, the exercise of a stock option or both? Is restricted stock "received" upon grant or vesting? Are performance-based non-qualified deferred compensation benefits "received" in the year earned or in the year of actual receipt? Do constructive receipt principles similar to those under tax laws apply? These types of interpretative questions will require regulatory guidance or legislative clarification.
The scope of securities forfeiture provision is quite broad. Reimbursement is required even if the director or executive officer did not direct the sale, as would be the case with a Rule 10b5-1 program. It also does not matter when the company stock was acquired, how the company stock was acquired or if the gain realized was attributable to movement in the stock price during a recapture period. To appreciate the scope of this provision, consider an executive officer holding stock purchased on the open market in 1990 for $10 per share that is worth $50 per share at the beginning of the recapture period. Assume further that the stock is sold for $40 during the recapture period. It appears that Section 304 requires the executive officer to reimburse the company for the entire profit of $30 even though it accrued entirely before the accounting restatement or for that matter even before the beginning of the period restated.
Interplay with CEO and CFO Certifications
Section 906 of the Act and an SEC order currently applicable to 947 of the largest public companies require that chief executive officers and chief financial officers must certify the company’s periodic reports. If a company makes a restatement in order that their chief executive and chief financial officers can provide compliant certification, it would appear that those officers would be required to disgorge their targeted compensation for the recapture period if the restatement is determined to be attributable to misconduct.
Enforcement
It is unclear what the enforcement mechanism will be for alleged violations of Section 304. Unlike Section 306 of the Act (which contains express authority for derivative actions by shareholders to prosecute prohibited sales during a retirement plan blackout period), Section 304 does not expressly contain any enforcement provisions. Strike lawyers will undoubtedly seek to file actions under Section 304 on behalf of shareholders in a manner similar to actions to recover short-swing profits under Section 16(b) of the Exchange Act.
Freeze on Extraordinary Payments to Directors and Officers
Section 1103 of the Act allows the SEC, during an investigation of an issuer or its directors, officers, partners, controlling persons or other employees, to seek a temporary order in federal court requiring the issuer to escrow "extraordinary payments" to such person for 45 to 90 days (or, if such person is charged with a violation of the securities laws, until conclusion of the proceedings). There is no definition of "extraordinary payments" other than to indicate that it includes compensation. "Extraordinary payments" might include bonuses, stock option exercises, payments under a non-qualified deferred compensation plan and severance pay.
What’s Next in Executive Compensation?
We are entering a new chapter in executive compensation. Perceived abusive executive compensation packages at numerous publicly held corporations have triggered intense scrutiny by legislators and regulators. The Sarbanes-Oxley Act may be the first of several changes this year that will restrict or eliminate longstanding executive compensation practices. Other actions currently being considered include pending legislation to tax immediately deferred compensation, proposals to require stockholder approval for all option plans of NYSE and NASDAQ listed companies, and mandatory adoption of "fair value" accounting for stock options. The IRS is also in the process of finalizing its proposed regulations governing golden parachute payments and split-dollar life insurance. We will continue to monitor these activities and inform you of new developments.
