Level 2 Corporate and Securities Law

Question 1

Clawbacks under the Dodd-Frank Act of 2010

Answer 1

• Recovery of realized incentive compensation
• Triggered by material non-compliance with financial reporting requirements that results in financial restatement

Question 2

Who is subject to Clawbacks under the Dodd-Frank Act of 2010

Answer 2

• Current and former executive officers
• Whether or not individual participated in action leading to restatement
• Includes incentive comp received during 3 years preceding a restatement resulting from material non-compliance with SEC rules
• Includes proceeds from incentive comp awards tied to accounting-related metrics, stock price or total shareholder return

Question 3

Dodd-Frank Act of 2010 Corporate Governance – Pay Ratio Disclosure

Public companies must disclose these in any filing (including registration statements, periodic reports and proxy statements:

Answer 3

• Median annual total compensation of all employees (except the CEO)
• Annual total compensation of the CEO, and
• Ratio of the median annual total compensation of all employees to the annual total compensation of the CEO

Question 4

Dodd-Frank Act of 2010 Corporate Governance – Pay Ratio Disclosure

Median Employee

Answer 4

the employee whose pay is higher than one-half of the pay of all employees and lower than the pay of the other half

Question 5

Dodd-Frank Act of 2010 Corporate Governance – Pay Ratio Disclosure

Pay Ratio

Answer 5

Once the company identifies the median employee and calculates the compensation, the company will then calculate the ratio by which the CEO’s compensation exceeds the median employee’s compensation.

Question 6

Corporate Governance – Stock Market Regulations

Requirements for Companies who are on the NYSE/NASDAQ

Answer 6

• Shareholder approval of equity plans
• Shareholder approval of material revisions or amendments to such plans
• Evergreen Provisions
• limit the term of the plan to 10 years.

Question 7

Corporate Governance – Stock Market Regulations

Companies who are on the NYSE/NASDAQ if Equity Plan is longer than 10 years

Answer 7

Nasdaq will require re-approval every 10 years while the NYSE will require shareholder approval for each increase in the share reserves from such evergreen provision.

Question 8

Corporate Law – Board of Directors

Requirements around Compensation Committee in regards to 16b-3

Answer 8

Grants may be approved by a committee of two or more nonemployee directors while the NYSE and Nasdaq requires that the compensation committee be comprised solely of independent directors.

Question 9

Corporate Law – Board of Directors

Under 16b-3, who is a nonemployee director

Answer 9

Not currently an officer or otherwise employed by the company or a parent or subsidiary; does not receive compensation from the company, parent or subsidiary as a consultant, and a few other limitations.

Question 10

Corporate Law – Board of Directors

Under 16b-3, who is an independent board of director

Answer 10

This section also lists the standards for determining independence based on specific criteria over the previous three years such as “is or has not been an employee” or “is or has not been a current partner or employee of a firm that is the listed company’s internal or external auditor”

Question 11

Corporate Law –Data Protection

Answer 11

• Personal Data should be protected in respect to collection, processing and transfer from one country to another
• The company MUST implement proper protections around data sharing between the US and non-US entities as well as with third-party providers

Question 12

Corporate Law –Data Protection

Relationship between US and EU on data privacy

Answer 12

The US is not considered by the EU to have adequate protections in place for personal data, so transfers of data from an affiliate in the EU to the US and onward to third-party service providers may violate data privacy laws.

Question 13

Corporate Law – International Planning Considerations

International Employment Law

Answer 13

Whenever you are considering adding equity plans outside of the US, it is important to review how labor laws in the particular country work so as not to create big issues. Here is an overview of the types of situations you might run into.

Question 14

Corporate Law – International Planning Considerations

Entitlement or Acquired Right

Answer 14

It might not be able to be taken away or adjusted, the value might have to be included in severance benefits, or the employee may have the right to receive such awards in the future.

Being very clear in all equity award communications can help minimize the risk of the award becoming an acquired right.

Question 15

Securities Act of 1933 – Form S-8

Effect of Delinquent Annual or Quarterly Filings

Answer 15

• These are part of the prospectus materials incorporated by reference
• If late or suspended the S-8 will be invalid until these filings are brought current or corrected

Question 16

Securities Act of 1933 – Form S-8

Prospectus

Answer 16

A written document that provides all material information about an offering of securities. Form S-8 does not require the company to file a prospectus with the SEC, but it instead must provide employees with a prospectus containing specified information about the stock incentive plan.

Question 17

Securities Act of 1933 – Form S-8

Technical Requirements

Answer 17

Issuers must have timely filed their periodic reports in the last 12 months. Since issuers can incorporate by reference their periodic reports, the Form S-8 is simpler than most registration statements.

Question 18

Securities Act of 1933 – Form S-8

Uses of Basic Filing Obligations

Answer 18

• Coverage for Gifted/Transferred Stock
• Information Dissemination
• Registering Resales on Form S-8

Question 19

Securities Act of 1933 – Form S-8

Must be for a specific number of shares

Answer 19

• When the original reported Plan reserve is used up, a new S8 must be filed
• If the reserve increase is through an Evergreen provision that was reported in the original S-8 filing, then the increase is reported through an amended S-8, not a new filing

Question 20

Securities Act of 1933 – Form S-8

The filing fee for a form S-8

Answer 20

Based on most recent stock price for the class of shares being registered.

Question 21

Securities Act of 1933 – Form S-8

Related Corporate Filings

Answer 21

All of those related filings must remain up to date for the duration of the S-8, and any late or suspended filings will cause any documents that incorporate those filings to be invalid until the filings are brought current or corrected.

Question 22

Rule 144 – Holding Period, Calculation

When can Non-affiliates in a non-reporting company sell restricted stock?

Answer 22

Can sell restricted stock after holding the shares for one year.

Question 23

Rule 144 – Holding Period, Calculation

When can Non-affiliates in a reporting company sell restricted stock?

Answer 23

Can sell restricted stock under the Rule 144 exemption so long as the stock has been held for at least six months.

Question 24

Rule 144

Reporting Company

Answer 24

Refers to a company that is subject to the requirements of Section 13 of the 1934 Act.

Once a company passes the asset and shareholder limitations of Section 13, it’s automatically subject to the reporting requirements even if the stock is not publicly traded.

Question 25

Rule 144

Three key elements when looking at exam questions:

Answer 25

• Is the participant an affiliate or non-affiliate?
• Is the security registered or restricted?
• Is the company reporting or non-reporting?

Question 26

Rule 144 – Holding Period

Sales under Rule 144 by affiliates of reporting companies

Answer 26

• Company must be current in its information disclosures
• Restricted stock must have been beneficially owned for at least six months
• Must be within quantity limits
• Must be “broker’s transaction”
• Notice of intended sale must be filed with the SEC if transaction exceeds 5,000 shares or $50,000 in proceeds

Question 27

Resales under Rule 701 by affiliates of reporting companies – 90 days after issuer becomes reporting company

Answer 27

• Holding period waived for affiliates and nonaffiliates
• Information requirements waived for nonaffiliates only, if nonaffiliate status for more than 3 months

Question 28

Rule 701

Answer 28

federal exemption under the Securities Act of 1933 that allows private companies to issue securities to employees and other service providers. This is especially useful when not all of your employees or service providers are accredited investors eligible for other securities exemptions like Regulation D.

Question 29

Securities Exchange Act of 1934 - Regulation S-K

Under Item 402 of Regulation S-K

Answer 29

Director Compensation Table which discloses specific categories of compensation for each director including:

• Aggregate dollar amount of all fees earned or paid in cash for services as a director
• Grant date fair value for equity awards granted during the year
• Value of non-equity incentive plan compensation
• Aggregate change in the actuarial present value of accumulated benefits under all defined benefit
• Actuarial pension plans during the year
• other compensation that doesn’t fit in any other column
• Total Compensation – sum of all the other columns.

Question 30

Securities Exchange Act of 1934 – Regulation S-K

Named Executive Officers (NEOs)

Answer 30

• Anybody who served as CEO during the year
• Anybody who served as CFO during the year
• Each of the company’s three most highly compensated executive officers (other than the CEO and CFO)
• Up to two additional individuals who would have been among the three most-highly compensated executive officers but they were not serving as an executive officer at the end of the year

Question 31

Securities Exchange Act of 1934 - Regulation S-K

Grants of Plan-Based Awards table

Answer 31

This is a more detailed table that reconciles back to the summary. This is a single year table so it will only show new grants issued in the last completed fiscal year with one line item for each individual employee grant

Question 32

Securities Exchange Act of 1934 – Regulation S-K

The Plan-Based awards table covers four categories of compensation:

Answer 32

• non-equity incentive plan awards
• equity incentive plan awards
• service-based stock awards
• service-based stock option awards.
  The bullet points on this slide give a good summary of the contents of the Plan-Based Awards table so you might want to print it out and put it in your binder.

Question 33

Securities Exchange Act of 1934 – Regulation S-K

405 Material

Answer 33

Issuer shall not be an ineligible issuer if the Commission determines, upon a showing of good cause, that it is not necessary under the circumstances that the issuer be considered an ineligible issuer.

Question 34

Securities Exchange Act of 1934 – Regulation S-K

16(a) Late Filing Consequences

Answer 34

Public companies are required to report an noncompliance (late or missed filings).

There is a check box on the cover page of the issuer’s Form 10-K regarding delinquent Section 16 filers.

The SEC can impose fines for late filings or even block the late filer from serving as a director or officer of the issuer or even other public companies.

Question 35

Securities Exchange Act of 1934 – Regulation S-K

Option Exercises and Stock Vesting

Answer 35

Is not required from an emerging growth company or a smaller reporting company. This table reports on exercises of stock options or SARS and vesting of restricted stock awards and units during the last fiscal year. The amounts can be aggregated. The table includes number of shares and aggregate dollar realized.

Question 36

Securities Exchange Act of 1934 – Regulation S-K

Outstanding Equity Awards at Fiscal Year-End Table

Answer 36

For stock options must include:
* Number of unexercised vested option shares
* Number of unexercised unexercisable option shares
* Number of unexercised performance-based options not earned
* Option exercise price and option expiration date. Other equity awards may be disclosed on an aggregated basis.

Question 37

Securities Exchange Act of 1934 – Regulation S-K

What happens when a company has one or more equity plans that have not been approved by shareholders

Answer 37

Must disclose the material features of each non-approved plan and attach a copy of the plan as an exhibit to the Form 10-K, unless the plan is immaterial in amount or significance.

Question 38

Securities Exchange Act of 1934 – Section 16

Adjustment of Ownership for ESPP

Answer 38

Transactions in tax-conditioned plans which includes Employee Stock Purchase Plans are **NOT required to be reported.

However, the SEC does require that the net result of the transactions be reported in the total ownership column with a footnote explanation on a future Form 4 or 5. Failure to do so does NOT make the individual a delinquent filer.

Question 39

Securities Exchange Act of 1934 – Section 16

An exercise of a stock option or SAR is exempt from Section 16(b)

Answer 39

Approved by the Board of Directors, by a committee consisting solely of two or more nonemployee directors, or by the issuer’s shareholders. Otherwise, there are some potential exemptions that may be available

Question 40

Securities Exchange Act of 1934 – Section 16

Stock swaps or a stock-for-stock exercise

Answer 40

In an exercise where an employee uses the value of already owned shares to pay the option price and taxes, such disposition would be exempt as long as the terms of the award provided for that type of exercise.

Question 41

Securities Exchange Act of 1934 – Section 16

16(b) exemptions include grants and awards if they meet one or more of the following conditions:

Answer 41

• Approved by BOD or committee of the board comprised solely of two or more non-employee directors
• Shareholder approval in advance or ratify it not later than the date of the next annual meeting
• Insider holds the securities acquired for 6 months.

Question 42

‘34 Act – Section 16(a), Deemed Execution Date

Sec 16 reporting form 4 requirements

Answer 42

Generally, all reported within 2 business days following the transaction. There are certain circumstances in which the reporting is 5 business days of a “deemed execution date”

Question 43

‘34 Act – Section 16(a), Deemed Execution Date

Deemed Execution Date

Answer 43

In short the deemed execution date is the earlier of the date of trade notification (ie email or phone call from the broker) or the 3rd business date following the actual trade date .

Question 44

‘34 Act – Section 16(a), Deemed Execution Date

Reporting Date

Answer 44

Once you’ve figured out which date is the Deemed Execution Date, you still add 2 business days.

Question 45

‘34 Act - Sections 16(a)

How can transfers of stock or options to family members, or to a family-controlled entity for estate planning purposes can be reported on?

Answer 45

Year-End Form 5 or a voluntary Form 4

Question 46

Reporting for transfers of an option, SAR, stock award or performance shares pursuant to a domestic relations order, including a divorce decree

Answer 46

Not required to be reported, but the SEC does require the net result of these transactions be reported in the total ownership column with a footnote of explanation.