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A Proxy Season Update: Preparing for 2013

As the landscape surrounding proxy materials and annual report disclosures continues to shift, it is important for public companies to anticipate such changes and ensure they are best positioned to respond. Below is a summary of current and anticipated changes that may impact reporting requirements in the coming year.

Current Action Required

Compensation Consultant Conflicts of Interest 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) added Section 10C to the Securities Exchange Act of 1934 (the “Exchange Act”). This new section requires the SEC to adopt rules that institute certain compensation committee and compensation advisor requirements. Section 10C(c)(2) requires issuers to include proxy disclosures that address (i) whether the compensation committee has retained or obtained the advice of a compensation consultant, and (ii) whether the work of the compensation consultant has raised any conflict of interest and, if so, the nature of such conflict and how the conflict is being addressed. 

In response to Section 10C(c)(2), the SEC recently adopted a change to Item 407 of Regulation S-K that will impact proxy statements beginning in 2013. While an issuer was already obligated to disclose the involvement of compensation consultants under Item 407(e)(3)(iii), newly adopted Item 407(e)(3)(iv) requires an issuer to disclose the nature of the conflict along with details about how the conflict is being addressed. This disclosure is required regardless of whether the compensation consultant was retained by management, the compensation committee, or any other board committee. Consulting on broad-based, non-discriminatory plans and providing non-customized benchmark data continues to be an exemption from the requirements under Item 407(e)(3), including this new disclosure of conflicts of interest. 

Disclosures in accordance with Item 407(e)(3)(iv) are required in any proxy statement for an annual meeting of shareholders at which directors will be elected after January 1, 2013. 

Required Action: Disclose conflicts with compensation consultants and measures to address such conflicts in 2013 proxy materials. 

Expiration of the Say-on-Pay Exemption for Smaller Reporting Companies 

The say-on-pay and say-on-frequency rules adopted in 2011 included a two year exemption for “smaller reporting companies”. A smaller reporting company is an issuer that had less than $75 million of public float or, in the case of an issuer whose public float is zero, had less than $50 million in annual revenues. In accordance with Rule 14a-21(a), shareholder meetings on or after January 21st at which directors will be elected should provide shareholders a non-binding say-on-pay advisory vote. This advisory vote is based on the executive compensation disclosures contained in the Compensation Discussion and Analysis (“CD&A”), proxy tables, and narrative disclosures. Previously exempt companies must also provide for a separate non-binding advisory vote at least once every 6 years to determine the frequency of the say-on-pay votes; Rule 14a-21(b) states that say-on-pay votes can be held every one, two, or three years. 

Required Action: Smaller reporting companies must comply with say-on-pay rules for meetings after January 21, 2013 

Specialized Disclosures

  • Conflict Minerals – In August, the SEC adopted a final rule regarding disclosures relating to the use of conflict minerals. A “conflict mineral” is defined as either cassiterite, columbite-tantalite, gold, wolframite, or their derivatives, or any other minerals of their derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country. Any company that files reports with the SEC under Section 13(a) or 15(d) of the Exchange Act must disclose that company’s use of conflict minerals that are necessary to the functionality or production of a product it manufactures. Such disclosures should be made each calendar year on form SD, a newly developed form for specialized disclosures. Disclosures under this new rule are due on May 31 each year beginning in 2014.
    • Required Action: Disclose the use of conflict minerals each year; the first reports are due on May 31, 2014.
  • Resource Extraction Issuers – The SEC adopted a final rule requiring resource extraction issuers to disclose information relating to any payment made by the issuer or any subsidiary to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. This report, filed on form SD, is due within 150 days after the end of the issuer’s fiscal year.
    • Required Action: Disclose information relating to certain payments to a foreign or the Federal Government within 150 days of the end of your fiscal year.
  • Mine Safety – Section 1503 of the Dodd-Frank Act requires that mining companies include information about mine safety and health in their annual and quarterly reports. Late last year, the SEC issued final mine safety rules that require disclosure of mine safety or other regulatory violations in annual and quarterly reports. Such disclosures must be made for each mine subject to the Federal Mine Safety and Health Act of 1977. Additionally, the new rules require a company to file form 8-K when they receive certain notices from the Mine Safety and Health Administration. The new mine safety rules became effective on January 27, 2012.
    • Required Action: Disclose mine safety and other regulatory violations in annual and quarterly reports.

ISS Policy Changes for 2013

Institutional Shareholder Services (“ISS”), a private company and leading proxy advisory firm focused on managing governance risk for the benefit of shareholders, has developed a number of policy changes based on the results of its 2012-2013 policy survey. A summary of the key changes that may impact shareholder voting for 2013 is laid out below. 

Board Response to Majority Supported Proposals 

According to its current policy, ISS will recommend a vote against or withhold from the entire board of directors if the board failed to act on a shareholder proposal that received either the support of a majority of the shares outstanding in the last year, or a majority of the shares cast in the last year and one of the previous two years. 

The 2012-2013 policy survey results revealed that eighty-six percent of institutional investor respondents and almost half of issuer respondents expect that a board should implement shareholder proposals supported by a majority of shares cast in the previous year. In response, ISS has revised its policy for 2013. Under the new policy, a majority of shares cast at a single meeting will become the trigger to evaluate a company’s response to majority supported shareholder proposals. Additionally, the revised policy includes the flexibility to recommend votes against individual members of the board for non-responsiveness instead of recommending votes against the entire board. Because these policy changes are effective for 2013, ISS’s recommended voting will not reflect the revised triggers until meetings in 2014. 

Pledging or Hedging 

As a result of responses to the policy survey, ISS now identifies the practice of hedging or significant pledging as a failure in risk oversight. In instances of hedging or where ISS determines pledging rises to a level of serious concern, it may recommend against or withhold votes for directors individually or for the entire board. Such recommendations are a shift from the original policy under which ISS proposed adding these practices as additional problematic pay practices, thus resulting in a vote against a company’s say-on-pay proposal.

Pending and Future Changes

Rules regarding the following requirements set forth in the Dodd-Frank Act have not been finalized; however, it is prudent for companies to be aware of the status of anticipated changes that may impact future proxy statements and annual reports. 

Compensation Committee and Compensation Advisor Independence 

Section 10C of the Exchange Act, discussed above, also requires the SEC to adopt rules mandating that the national securities exchanges ensure listed issuers’ compliance with certain compensation committee and compensation advisor requirements. In response, the SEC adopted Rule 10C-1, directing the national securities exchanges to establish listing standards that address compensation committee and advisor independence. Rule 10C-1 requires that the revised listing standards mandate that:

  1. Each member of an issuer’s compensation committee is both a member of the board and “independent”; 
  2. Each compensation committee has the authority to fund and retain or obtain the advice of compensation advisors; and
  3. The compensation committee takes into consideration specific factors affecting the independence of such advisors before selecting them.

The Rule identifies a member’s source of compensation (including any consulting, advisory, or compensatory fees paid by the issuer) and whether the member is affiliated with the issuer as two factors to consider in determining a committee member’s independence. Likewise, the Rule lists six factors to consider in determining an advisor’s independence: (i) the provision of other services to the issuer, (ii) the amount of fees received from the issuer as a percentage of the advisor’s total revenue; (iii) the policies and procedures of the advisor that are designed to prevent conflicts of interest; (iv) any business or personal relationships existing between the advisor and members of the compensation committee; (v) any stock of the issuer owned by the advisor; and (vi) any business or personal relationships existing between executive officers of the issuer and the compensation advisor. 

Both the New York Stock Exchange and NASDAQ have proposed revised listing standards pursuant to the Rule and the SEC has until January 13, 2013 to take action on them. Rule 10C-1 requires that the revised listing standards be approved no later than June 27, 2013, but the date by which issuers must comply is dictated by each exchange. The New York Stock Exchange and NASDAQ have proposed that their listed companies have until the earlier of the first annual meeting after January 15, 2014 or October 31, 2014 to meet the revised compensation committee independence standards and until July 1, 2013 to comply with the remaining provisions. 

Pay-for-Performance Disclosures 

Section 953 of the Dodd-Frank Act requires the SEC to adopt rules requiring companies to disclose information illustrating the relationship between the amount of executive compensation paid and the financial performance of the company. Such information must take into account any change in the value of the shares of stock and dividends of the company. No proposed rules have been published regarding this requirement. 

Internal Pay Comparison 

Section 953 of the Dodd-Frank Act requires the SEC to amend Item 402 of Regulation S-K to mandate the disclosure of: (1) the median annual total compensation of all employees of the company, other than the CEO; (2) the annual total compensation of the CEO; and (3) the ratio between one and two. No proposed rules have been published regarding this requirement. 


Section 955 of the Dodd-Frank Act requires the SEC to adopt rules that mandate disclosure in a public company’s proxy statement as to whether directors or employees are permitted to purchase financial instruments designed to hedge any decrease in the market value of company securities. No rules have been published regarding this requirement. 


Section 955 of the Dodd-Frank Act requires public companies to disclose whether its directors or employees are permitted to purchase financial instruments designed to hedge any decrease in the market value of such company’s securities. This clawback provision must cover both current and former executive officers. No rules have been published regarding this requirement.

© 2023 Dinsmore & Shohl LLP. All rights reserved.National Law Review, Volume II, Number 363

About this Author

Susan B. Zaunbrecher, Dinsmore Shohl, Acquisitions and Securities Lawyer,

Susan B. Zaunbrecher is Chair of the Corporate Department and Chair of the Financial Institutions Practice Group. Susan is a member of the firm's Board of Directors. She is the founder, former chair and now member of the firm's Professional Development Committee and Leadership Academy and founder and member of the...