Dodd-Frank ActKey points for companies beyond the financial services sector

2013 update

1 | Dodd-Frank Act: key points for companies beyond the financial services sector | 2013 update

Although notable progress has been made, regulators continue to face a challenging environment:

• Congressional scrutiny: Members of Congress are sharply divided in their views of the Act. During the 2012 election cycle, some members called for revisions to and even outright repeal of the Act. Given the continued divide in Congress (i.e., Democratic controlled Senate and Republican controlled House), attempts to repeal or significantly revise the Act are not expected to bear fruit any time soon. Instead, supporters and critics of the Act are expressing their views during oversight hearings at which they challenge the speed and design of Dodd-Frank rules, closely question nominees for leadership positions about Dodd-Frank implementation plans and scrutinize agency budgets.

• Judicial scrutiny: Private-sector opponents of the law have had some success in the courts in challenging Dodd-Frank rules, causing regulators to re-examine rule-making efforts. For example, in 2013, the US Chamber of Commerce and other business organizations won a lawsuit to overturn a Dodd-Frank rule requiring resource extraction issuers to publicly disclose payments to governments.1 The SEC has indicated that it will re-propose the rule rather than appeal the court decision.

• Cost-benefit analysis: A subset of the issues on which the courts and Congress have focused is cost-benefit analysis. Regulators are facing pressure to carry out comprehensive analyses of Dodd-Frank rules by a combination of court decisions,2 Congressional interest and market participants concerned about increasing costs of regulation. This process can slow down rule-making, as quantifying both costs and benefits can be difficult. Inadequate cost-benefit analysis of rules likely will remain an issue in legal actions challenging Dodd-Frank-related rule-making.

1 American Petroleum Institute, et al. v. Securities and Exchange Commission, US District Court for the District of Columbia, 1:12-cv-01668 (2 July 2013). 2 Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission, US Court of Appeals for the District of Columbia, 647 F.3d

1144 (22 July 2011).3 Key developments of the 2013 proxy season, EY Corporate Governance Center, June 2013.

he Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank, the Act) is now well into its third year of implementation. Since passage of the Act, regulatory agencies, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Consumer Financial Protection Bureau (CFPB) and the federal banking agencies, have issued over 150 final rules,

or about 40% of the total requirements under the Act. Another 120 or more rules have been proposed for public comment. Over 100 rules, or about 30%, have not yet been proposed.

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In areas where Dodd-Frank rule-making is complete, companies continue to adjust their activities as they seek to address the letter and spirit of the law. For example, because of new and enhanced disclosure requirements, companies are re-evaluating their shareholder communications and seeking greater and more continuous interaction with shareholders on a variety of topics, not just those covered by the Act. Companies continue to adapt to the Dodd-Frank whistleblower provisions and find ways to modify compliance programs developed under the Sarbanes-Oxley Act to better incentivize employees to report problems internally instead of going only to the SEC.

Although almost 60% of Dodd-Frank rule-making remains unfinished, public companies can consider certain broader themes that have become evident, including the two key points below.

2Companies have an opportunity to influence rule-making by providing quantitative data in response to rule proposals. Regulators face challenges in obtaining data necessary to conduct thorough and accurate cost-benefit analyses. By providing data, companies and other interested parties have the opportunity to solidly ground arguments for or against rule proposals, with the potential to significantly affect final rules.

Driven by Dodd-Frank, company-investor engagement on governance topics has become more common. Since passage of the Act, many companies have developed year-round investor outreach programs. From 2012 to 2013 alone, there was a 22% increase in the number of Fortune 100 companies that disclosed engaging with investors in connection with Dodd-Frank-required say-on-pay (SOP) proposals.3 While much of the company-initiated engagement focuses on executive compensation, companies also are expanding outreach efforts on other topics and increasingly highlighting governance changes made in response to shareholder feedback. Companies are increasing voluntary disclosures across a wide range of topics, including board composition and leadership, executive compensation policies and practices, audit committee roles and responsibilities, and various environmental and social topics. These practices are continuing to help generate higher support for director elections and compensation programs through SOP shareholder votes.

Key points

3 | Dodd-Frank Act: key points for companies beyond the financial services sector | 2013 update

IntroductionThe following update, the fifth in our series, highlights recent Dodd-Frank rule-making activity for sections of the Act affecting the public company community. The material addresses rules both adopted and proposed since the release of our 2012 Fall Update4 and provides observations on certain implementation efforts.

Final rules and agency developmentsVolcker Rule The final Volcker Rule,5 which prohibits banks from engaging in proprietary trading and limits certain investment in, and sponsorship of, private equity and hedge funds, was approved on 10 December 2013. The rule has been subject to extensive public debate as well as concerted coordination among the federal banking and financial regulatory agencies. The impact of the final rule on banks is expected to be significant. In comparison to the proposed rule, there is relief in some areas, such as the market-making exemption, but the overall level of effort required for compliance by the largest banks remains high. Additional relief was provided in that the conformance period was extended from 2014 to July 2015.

Observations: While mostly affecting financial institutions, other businesses also could be affected by implementation of the Volcker Rule as the rule could potentially increase the cost of capital for all companies.

Resource extraction issuer paymentsIn August 2012, the SEC adopted final rules under the Dodd-Frank resource extraction provisions.6 These rules would have required annual disclosure of payments to foreign and US governments by companies with respect to oil, gas and mining projects, and were set to take effect in late 2013. On 2 July 2013, however, the federal district court in the District of Columbia vacated the rule.7 The SEC did not appeal the ruling; instead, SEC staff commented that the Commission will re-propose the resource extraction rule to address the court’s concerns. The SEC has not set a timetable for issuing a new rule proposal.

Observations: The court’s decision was based on grounds that (1) the Act did not require public disclosure of all information submitted by issuers, which the SEC’s rule would have mandated, and (2) the SEC did not adequately justify the lack of exemptions to the reporting requirements for countries that prohibit disclosure of the payment information, given the potential burdens on competition that this would cause. This past fall, SEC Chair Mary Jo White gave a speech in which she argued that the SEC’s independence should be respected and given greater deference by those outside the agency, including the judiciary.8

Consumer Financial Protection Bureau (CFPB)On 16 July 2013, the US Senate confirmed Richard Cordray as the first Director of the CFPB. His confirmation renders moot legal action that brought into question both the legality of his recess appointment in 2012 and the actions taken by the Bureau in the intervening year.

Before Cordray’s confirmation, the CFPB issued final rules in June 2013 that established procedures to bring its supervisory authority to certain non-banks. The CFPB continues to build a strong program to supervise these entities, including credit card issuers, mortgage lenders, pay-day lenders and collection agencies. The CFPB also has expanded its complaints portal to capture complaints across a broad array of products and services. The CFPB uses this data to inform policy-making, supervision and enforcement activities.

4 Dodd-Frank Act: key points for companies beyond the financial services sector, Fall 2012 update, EY, September 2012 (SCORE No. JJ0004). 5 The Rule implements Section 619 of the Dodd-Frank Act, and is available, along with a fact sheet, at http://www.federalreserve.gov/newsevents/press/bcreg/20131210a.htm.6 SEC, http://www.sec.gov/rules/final/2012/34-67717.pdf.7 American Petroleum Institute, et al. v. Securities and Exchange Commission, US District Court, District of Columbia Circuit, 1:12-cv-01668 (2 July 2013).8 “The Importance of Independence,” 14th Annual A.A. Sommer, Jr. Corporate Securities and Financial Law Lecture, Fordham Law School, 3 October 2013.9 To The Point: SEC proposes rule requiring most companies to disclose ‘pay ratio’

http://www.ey.com/Publication/vwLUAssets/TothePoint_CC0375_PayRatio_19September2013/$FILE/TothePoint_CC0375_PayRatio_19September2013.pdf.

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The CFPB continues to emphasize assessing the sophistication of regulated institutions’ systems for managing compliance with the consumer protection laws and regulations. Specific areas of emphasis have included adequacy of oversight and governance, training programs, complaint management systems, testing and oversight of third-party vendors.

Observations: With Director Cordray firmly in place, the CFPB has taken actions against a number of industry players for allegedly steering customers to higher-priced mortgage products, taking illegal “kick-backs,” charging illegal fees, deceiving customers and engaging in unfair billing practices related to “add-on products.” This trend will likely continue. The CFPB has been analyzing complaint data, which could help it determine its next steps. The CFPB is expected to continue its focus on student loan servicers and providers and their debt collection practices, as well as evaluating fair and responsible lending practices across a broad range of financial products.

Proposed rulesPay ratio rule proposal9

On 18 September 2013, the SEC voted 3-2 to propose amendments that would require public companies to calculate and disclose the median annual compensation of all of their employees (excluding the principal executive officer), the annual compensation of the principal executive officer and the ratio of these two amounts.10 Emerging growth companies,11 smaller reporting companies,12 foreign private issuers and certain other filers would not have to provide the proposed disclosures. The comment period closed on 2 December 2013.

This provision generated considerable controversy when the law was enacted, and the SEC received more than 20,000 comment letters even before the proposal was issued. To attempt to address some of the concerns expressed in these letters, the proposal does not prescribe a “one-size-fits-all” approach. Instead, it would allow each company to consider its facts and circumstances in determining the appropriate approach when calculating the median compensation of its employees.

10 The SEC’s pay ratio disclosure rule proposal, required by Section 953(b) of the Dodd-Frank Act, is available at http://www.sec.gov/rules/proposed/2013/33-9452.pdf.11 An emerging growth company (EGC) is generally defined by Section 101 of the JOBS Act as an issuer that had total annual gross revenues of less than $1 billion during its most

recently completed fiscal year. See “Implementing the JOBS Act,” EY (SCORE No. CC0363) for more information about the definition of an EGC.12 A smaller reporting company is an issuer — excluding investment companies, asset-backed issuers and majority-owned subsidiaries whose parents are not smaller reporting

companies — that meets the following criteria: (1) for an SEC reporting company, has less than $75 million of worldwide public float as of the last business day of its most recently completed second fiscal quarter; (2) for an issuer filing its IPO of common equity, has less than $75 million of worldwide public float (calculated within 30 days of its filing using the estimated IPO price and the aggregate number of shares held by non-affiliates and the number of shares being offered); and (3) for an issuer with no publicly traded equity and hence no public float, has annual revenues of less than $50 million in its most recently completed fiscal year for which audited financial statements are available.

Under the proposal, when determining the median compensation, a company would be allowed to first identify its median employee by using any “consistently applied compensation measure.” This would allow a company to use compensation information that is readily available in its records (e.g., salary, wages and tips reported on Form W-2 to the Internal Revenue Service). The proposal also would allow a company to identify the median employee by using its entire employee population or by using a statistical sample of that population. In making the determination, a company must include all employees, even those outside the US as well as part-time and seasonal employees employed at its fiscal year-end.

5 | Dodd-Frank Act: key points for companies beyond the financial services sector | 2013 update

Once a registrant determines its median employee, it would have to calculate total annual compensation for that employee in a manner consistent with the way executive compensation disclosures are determined. The proposal would allow for the use of some estimates and exclusions in the calculation (e.g., estimated change in actuarial present value of the median employee’s defined pension benefit under a multi-employer plan).

The proposed rule would require a company to disclose its pay ratio for its first fiscal year beginning on or after the effective date of the rule, which has not yet been set. For example, if the rule were to be finalized and effective in 2014, a calendar-year registrant would have to calculate its pay ratio for the first time for 2015. The pay ratio would be disclosed in the registrant’s 2015 Form 10-K or in its proxy or information statement for the 2016 annual shareholders meeting.

Observations: While a final rule is unlikely to be effective for the 2014 or 2015 proxy seasons, affected issuers with large, decentralized payroll and human resource information systems should begin considering how to most effectively and efficiently aggregate compensation information and identify what statistical sampling methods may be appropriate. SEC staff and other commentators have acknowledged the difficulty companies with large global workforces may face in aggregating their payroll data; however, excluding foreign employees from the calculation of the ratio would (in the SEC’s view) require a legislative change. Though the use of statistical sampling may reduce the amount of employee compensation information required to be compiled, for issuers with

multiple business units and that operate in multiple jurisdictions, determining an appropriate sampling methodology could be challenging.

The proposal provides issuers with significant flexibility in determining the ratio, though many (including the SEC in its release) note that this disclosure may not be meaningful for purposes of comparison across peers due to differences in methodology and in organization structures.

Diversity On 23 October 2013, the SEC, along with the CFPB, Federal Reserve Board, Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency issued a proposed interagency policy statement seeking comment on joint standards for assessing the diversity policies and practices of the institutions they regulate as required by Dodd-Frank.13 The comment period closes on 24 December 2013. The proposed standards cover four major areas:

• Institutional commitment to diversity

• Workforce profile and employment practices

• Business practices and procurement and supplier diversity

• Transparency of organizational diversity and inclusion

13 Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 342(b)(2)(C).14 Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 342(b)(4) states that “nothing in section 342(b)(2)(C) may be construed to mandate any requirement on or

otherwise affect the lending policies and practices of any regulated entity, or to require any specific action based on the findings of the assessment.”15 Conflict minerals are defined as cassiterite, columbite-tantalite, gold and wolframite or their derivatives (limited to tin, tantalum and tungsten), and other minerals or derivatives

that the US Secretary of State names in the future. These minerals are used in items such as mobile telephones, computers, video game consoles, digital cameras, jet engine components, jewelry, electronic equipment and electrical, heating and welding applications.

16 Dodd-Frank Section 1502 defines the covered countries as the Democratic Republic of the Congo (DRC), the Central African Republic, South Sudan, Angola, the Republic of the Congo, Zambia, Tanzania, Burundi, Rwanda and Uganda.

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As stated in the proposal and Act, the standards are not intended to mandate any specific requirements or require any action to be taken based on the findings from the agencies’ assessments.14

The agencies have proposed a self-assessment approach and call for voluntary disclosure of the assessment results through display of diversity information on an institution’s public website. The agencies stated that they are seeking to facilitate “greater awareness and transparency of the diversity policies and practices of regulated entities” and “provide the public a greater ability to assess diversity policies and practices of regulated entities.” The proposal would cover an institution’s diversity policies and practices as well as policies and practices with regard to the procurement of goods and services (supplier diversity).

Observations: In many ways, the proposal has been drafted to minimize costs while meeting the requirements of the Act. For example, the proposal calls for self-assessments by the institutions rather than assessments or other examinations by the regulators. However, in some specific areas, the proposed standards may go beyond current practices and could pose implementation challenges. For example, the proposed transparency provisions require public disclosure of an institution’s “forecasts of potential employment and procurement opportunities.” In addition, the proposal includes standards on institutions’ diversity policies and practices relating to suppliers of business goods and services, which potentially expands the scope of this rule beyond financial institutions.

Implementation of previously released rules Conflict mineralsIn August 2012, the SEC approved final rules requiring issuers to disclose the use of conflict minerals15 in their products and whether those minerals originated from the Democratic Republic of the Congo or any of nine16 adjoining countries (i.e., covered countries).17 The rules require a company to provide the disclosure to be filed with the SEC on a new form (Form SD) along with an audited conflict minerals report as an exhibit in most cases. Filings are made on a calendar year basis regardless of the company’s fiscal year and due on 31 May. Calendar year 2013 will be the first reporting year.18

Registrants have raised a number of questions with SEC staff on the conflict mineral rules. In response, the SEC Division of Corporation Finance issued a set of frequently asked questions (FAQs) on 30 May 2013.19 The 12 FAQs relate to the rule’s scope, what is considered a “product” and the timing and disclosure requirements of Form SD. The SEC staff has said that it is still addressing other questions, which could result in the issuance of additional FAQs or other guidance.

Audits of conflict minerals reports must be conducted in accordance with Government Auditing Standards (known as the “Yellow Book”) as issued by the GAO for attestation engagements or performance audits. These two options allow registrants some flexibility in choosing service providers to perform these audits (i.e., licensed CPA firms to perform attestation engagements or non-CPAs to perform performance audits). The American Institute of Certified Public Accountants (AICPA) has issued questions and answers that help explain to registrants and auditors the difference between the GAO’s attestation and performance standards as well as independence considerations for independent private sector audits of conflict minerals reports.20

17 To the Point, Final conflict minerals rule addresses many stakeholder concerns, EY, August 2012 (SCORE No. CC0353).18 For more information, see Conflict Minerals: what you need to know about the new disclosure and reporting requirements and how Ernst & Young can help, EY, 2012 (SCORE No.

FQ0043), available at http://www.ey.com/Publication/vwLUAssets/Conflict_minerals/$FILE/Conflict_Minerals_US.pdf.19 The SEC staff’s FAQs on conflict minerals are available at http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm.20 The AICPA’s questions and answers are available at http://www.aicpa.org/interestareas/frc/pages/aicpaconflictmineralsresources.aspx.

Registrants have raised a number of questions with SEC staff on the conflict mineral rules. In response, the SEC Division of Corporation Finance issued a set of frequently asked questions (FAQs) on 30 May 2013.

7 | Dodd-Frank Act: key points for companies beyond the financial services sector | 2013 update

In September 2013, a law firm petitioned the SEC for alternative conflict minerals disclosure.21 The firm proposed a one-year deferral for registrants that are not yet able to comply with the conflict minerals rules (or a two-year deferral for affected registrants with foreign operations), provided they disclose their compliance actions to-date in periodic filings. It is uncertain what action, if any, the SEC will take in response to this petition.

Similar to the SEC’s resource extraction rule discussed above, the conflict minerals rule has faced a legal challenge, although with a different initial outcome. The National Association of Manufacturers, US Chamber of Commerce and Business Roundtable filed suit soon after the SEC adopted the final rules, claiming the SEC overstepped its authority. Though the lawsuit was dismissed by the federal district court in the District of Columbia on all counts on 23 July 2013, the plaintiffs have appealed.22

Observations: As companies move forward to implement the conflict mineral requirements, they are finding it difficult to identify which products contain columbite-tantalite, cassiterite, gold or wolframite. The information needed to determine covered products is often not centralized and is stored on numerous systems. Companies are instead trying to identify and contact those suppliers whose components are most likely to contain conflict minerals and seek their direct assistance in determining the countries of origin. Companies that have not started are advised to begin the process of setting up a program that follows the due diligence guidelines as set forth by the Organisation for Economic Co-operation and Development (OECD) and begin the process of contacting suppliers to support their efforts.

Independent compensation committee and compensation advisersIn January 2013, the SEC approved New York Stock Exchange LLC (NYSE)23 and NASDAQ Stock Market LLC (NASDAQ)24 rule changes related to their listing standards for compensation committees. The changes were prompted by the SEC’s June 2012 rule-making to implement Section 952 of the Dodd-Frank Act25 that addressed compensation committee independence and the retention and independence of compensation consultants.26 Both the NYSE and NASDAQ rules address the independence of compensation committee members; the compensation committee’s authority to retain and compensate compensation consultants, legal counsel and other compensation advisers; and the responsibility of the compensation committee to consider independence factors before selecting such advisers.

Since 1 July 2013, companies have had to comply with portions of the new NASDAQ and NYSE listing standards. The last portion of these standards that will be effective in 2014 pertains to compensation committees’ independence.

Although similar, the two exchanges’ listing standards have different effective dates and slightly different requirements. The NYSE and NASDAQ rule changes relating to the use of compensation advisers were effective on 1 July 2013, but companies will have until the earlier of (1) the company’s first annual meeting after 15 January 2014 or (2) 31 October 2014 to comply with the new standards for compensation committee director independence.

21 SEC, http://www.sec.gov/rules/petitions/2013/petn4-664.pdf.22 National Association of Manufacturers v. SEC, District of Columbia Circuit, No. 13-5252.23 SEC approval notice available at http://www.sec.gov/rules/sro/nyse/2013/34-68635.pdf.24 SEC approval notice available at http://www.sec.gov/rules/sro/nasdaq/2013/34-68640.pdf.

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The NASDAQ rule changes relating to the responsibilities and authority of the compensation committee were effective on 1 July 2013. NASDAQ-listed companies that do not have a formal compensation committee or compensation committee charter have until the earlier of (1) the company’s first annual meeting after 15 January 2014 or (2) 31 October 2014 to form a committee and adopt a charter. However, these companies’ independent directors who act in the capacity of a compensation committee must have already been given the same responsibilities and authority through board resolution or other corporate action by 1 July 2013. Certain categories of issuers will be allowed to phase in compliance with the rule changes under both the NYSE and NASDAQ listing standards.

Observations: While the NYSE and NASDAQ rules do not prohibit a compensation committee from hiring a compensation consultant or other adviser who is not independent, companies will need to keep in mind the related proxy statement disclosure requirements on conflicts of interest involving compensation consultants. SEC rule-making, along with exchange-listing standards, continues to play a role in heightening the importance and attention investors, other stakeholders and management are placing on corporate compensation committees. Similar to the focus placed on audit committees following passage of the Sarbanes-Oxley Act, companies should continue to develop appropriate guidelines and procedures to enable their compensation committees to comply and operate proficiently.

Say-on-payIn 2011, the SEC issued rules to implement the Act’s say-on-pay (SOP) provisions, which required companies to provide shareholders with an advisory vote on executive compensation. More than 2,700 companies submitted proposals to a shareholder vote in 2011, the first year most companies were required to do so. Starting in 2013, smaller companies also were required to submit SOP proposals, and numerous first-time SOP proposals came up for shareholder votes.

In this third year of SOP proposals, companies have had overall success in securing investor support for their pay programs with the proportion of companies receiving more than 90% support rising by almost four percentage points. Investor support for these proposals has generally been high — with average support at a little over 91% for companies in the Russell 3000 index.27 Proactive outreach to

25 SEC Final Rule on Listing Standards for Compensation Committee; available at: http://www.sec.gov/rules/final/2012/33-9330.pdf. Controlled companies and smaller reporting companies are exempted from the new compensation committee listing standards.

26 18 September 2013 press release, http://www.sec.gov/News/Speech/Detail/Speech/1370540026835#.UnwViEEjK4g.27 Data is from EY’s corporate governance database and covers companies in the Russell 3000 unless otherwise noted. Current year data is as of 30 September 2013.

Previous year data is full-year. Vote results are calculated based on votes cast for and against the proposal.

SEC rule-making, along with exchange- listing standards, continues to play a role in heightening the importance and attention investors, other stakeholders and management are placing on corporate compensation committees.

investors, enhanced disclosures in proxy statements and changes to pay practices in response to shareholder feedback all helped to secure high overall support. At the same time, a few companies have been unable to secure investor support. For companies holding annual meetings through 30 September 2013, the SOP proposals of 49 Russell 3000 companies received less than 50% support. This compares to 57 companies for the same period in 2012.

9 | Dodd-Frank Act: key points for companies beyond the financial services sector | 2013 update

Fig. 1: History of management-sponsored SOP proposals

Voluntary SOP votes Mandatory SOP votes

Summary data 2007 2008 2009 2010 2011 2012 2013

Total SOP proposals voted — 5 185 208 2,740 2,265 2,111

Proposals with <50% support (number)

— — — 3 40 57 49

Proposals with <50% support (%) — — — 1.4% 1.5% 2.5% 2.3%

Dodd-Frank also requires a shareholder vote on whether companies should submit their SOP proposals to shareholders on an annual, biennial or triennial basis. To date, company recommendations on SOP frequency have been divided between annual and triennial votes. In contrast, investors have generally voted for — and proxy advisory firms have recommended in favor of — annual votes. Annual SOP frequency was approved at 70% or more of all companies in each of the past three years. In 2013, companies with biennial frequencies held their second SOP votes and companies with triennial frequencies will see their second SOP votes in 2014.

Fig. 2: Management recommendations on SOP frequency proposals

2011 2012 2013

Annual 56% 70% 44%

Biennial 2% 2% 2%

Triennial 40% 28% 54%

None 2% N/A N/A

Vote outcomes on SOP frequency proposals

2011 2012 2013

Annual 81% 77% 70%

Biennial 1% 1% 2%

Triennial 18% 22% 28%

28 Once the CFTC approves MAT (made available to trade) designation — expected in early/mid 2014 — it will be mandatory to execute swaps that meet the defined criteria (generally those that must be cleared) through a SEF. Designation of MAT is a commission action pursuant to CFTC rules and must be approved for each product submitted by SEFs.

29 CFTC, “Exemptive Order Regarding Compliance With Certain Swap Regulations,” Federal Register, 22 July 2013, http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-17467a.pdf.

To date, company recommendations on SOP frequency have been divided between annual and triennial votes. In contrast, investors have generally voted for — and proxy advisory firms have recommended in favor of — annual votes.

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Observations: While management may recommend biennial or triennial SOP frequency votes in proxy filings, shareholders have not always agreed. As shown in Figure 2, a significant portion of shareholders at these companies instead have voted that pay votes occur annually.

Over-the-counter (OTC) swap requirements As end-users of OTC swaps, many companies continue to monitor related rule-making. Over the past several years, the OTC swaps markets have changed significantly with many of the key swaps and derivatives-related requirements of Dodd-Frank coming into force. As of 1 January 2013, swap dealers must be registered with and subject to significant CFTC and SEC rules regarding reporting of swaps transactions, among other things. Starting in March 2013, swaps based on simple interest rate and credit indices began to be subject to mandatory clearing on a phased implementation through September. As of now, all market participants must clear these swaps unless they qualify for an exception (i.e., end-users). External business conduct standards for swap dealer interactions

with clients became effective for US swap dealers as well. These requirements dictate specific disclosures to be made by swap dealers to customers as well as information and representations that swap dealers must obtain from customers. Trading through swap execution facilities (SEF) is also moving forward and will eventually become mandatory for swaps that meet the defined criteria (generally those that must be centrally cleared).28

Cross-border requirements for non-US swap dealers remain somewhat uncertain. In its July 2013 Final Cross-Border Guidance and Phase-in exemptive order,29 the CFTC outlined a new, more inclusive definition of “US person,” which will increase the population of swap participants subject to the US rules. At the same time, the exemptive order also outlined allowances for “substituted compliance” by non-US swap dealers with home country swap rules in cases where the CFTC determines that those rules are equivalent to US rules. The CFTC has not yet made any equivalence determinations, however, so absent further relief from the CFTC, all swap dealers must comply with US rules as of 21 December 2013.

11 | Dodd-Frank Act: key points for companies beyond the financial services sector | 2013 update

On 5 November 2013, the CFTC voted 3–1 to issue a new proposal for position limits in certain commodity products.30 The proposal follows a 2012 US District Court for the District of Columbia decision striking down the CFTC’s initial proposal on grounds that the Commission required a finding of necessity before establishing limits.

Observations: End-users should focus on swap dealers’ new external business conduct rules and their impact on hedging or other swap trading activity. Swap dealers now must obtain additional customer documentation to support their new requirements, and most have already been contacting clients to get this information and update their systems. Companies that cannot qualify for or will not use the end-user exemption from clearing must already clear any swaps that meet the mandatory criteria. These organizations also should review SEF execution requirements in preparation for process changes due to these new execution venues. Voice execution of trades through swap dealers may be more difficult and it may be beneficial to consider direct access to the SEF platforms for trade execution.

SEC whistleblower programThe number of tips, complaints and reports received by the SEC under its whistleblower program continues to rise, as does the size of awards. In fiscal year 2013, the SEC reported 3,238 whistleblower alerts were provided, an increase from fiscal year 2012, when 3,001 were received.31 Since its creation, the SEC has acknowledged that the whistleblower program helps the Commission identify fraud and other securities violations earlier than would otherwise occur. The SEC has granted awards to several whistleblowers since the program began; in October 2013, an award was issued for $14 million, the largest to date. When announcing the award, SEC Chair White noted that — as described on the whistleblower program web page32 — the program has enhanced SEC investigations by providing the Commission with “high quality, meaningful tips.”

Of note on the legal front, on 17 July 2013, the US Court of Appeals for the Fifth Circuit held in Asadi v. G.E. Energy (USA), L.L.C. that to be protected under Dodd-Frank’s whistleblower anti-retaliation provision, an individual must have provided information about a securities law violation to the SEC.33 The Court’s ruling

directly conflicts with the SEC’s regulations interpreting the Act, as well as multiple district court decisions that had held employees who make internal reports to company management are protected under Dodd-Frank even if they did not file a report with the SEC.34 Since Asadi was decided, federal district courts in California and Colorado have followed the Fifth Circuit’s lead and dismissed whistleblower anti-retaliation claims under the Dodd-Frank Act arising from only internal reporting of alleged fraud.35

Observations: Given the significance of recent awards, it is likely that more employees will become familiar with the SEC’s whistleblower program, particularly as the Asadi decision creates a disincentive to report internally rather than to the SEC. Companies continue to review and modify their existing internal escalation, internal reporting and whistleblower processes in order to adjust to the new environment.

30 Position Limits for Derivatives rule proposal, CFTC, http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister110513c.pdf.31 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program, SEC, http://www.sec.gov/about/offices/owb/annual-report-2013.pdf.32 SEC Office of the Whistleblower, http://www.sec.gov/whistleblower.33 720 F.3d 620 (5th Cir. 2013).34 See, e.g., Kramer v. Trans-Lux Corp., No. 3:11CV1424 (SRU), 2012 WL 4444820, at *4 (D.Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp, 2d 986, 994

n. 9 (M.D. Tenn. 2012); Egan v. Trading Screen, Inc., No. 10 Civ. 8202 (LBS), 2011 WL 1672066, at *4-5 (S.D.N.Y. May 4, 2011).

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Upcoming rule-makingEnhanced compensation disclosures and clawbacks Dodd-Frank mandates rule-making requiring disclosure of executive pay as compared to performance, specifically requiring a clear description in the annual proxy statement of the relationship between executive compensation and the company’s financial performance. It also requires the SEC to direct national securities exchanges and associations to put in place listing requirements for issuers to adopt and implement a clawback policy to recover incentive-based compensation from current or former executives during a three-year look-back period. The SEC staff has stated that its efforts to draft rules continue, but it has not indicated a specific timeline.36

Observations: Institutional investors and public companies are not waiting for SEC action on compensation clawback policies. Through the submission of shareholder proposals and direct engagement with companies, some investors are beginning to request the adoption of clawback policies as well as transparency around board decisions to recoup pay. Independent of those proposals, many large companies have moved forward to create new or amend existing clawback policies. About 90% of Fortune 100 companies have disclosed clawback policies — up from less than 18% in 2006.37

35 Banko v. Apple Inc., 2013 U.S. Dist. LEXIS 149686 (N.D. Cal. Sept. 26, 2013); Wagner v. Bank of Am. Corp., 2013 U.S. Dist. LEXIS 101297 (D. Colo. July 19, 2013).36 Remarks by Keith Higgins, Shelley Parratt and Karen Garnett at 45th Annual Institute on Securities Regulation; PLI Annual Securities Regulation (6 November 2013). 37 Clawback Policy Report, Equilar, 2013.

Institutional investors and public companies are not waiting for SEC action on compensation clawback policies.

13 | Dodd-Frank Act: key points for companies beyond the financial services sector | 2013 update

Congressional activityLegislative gridlock will likely continue into the new year. There is a chance that minor revisions to Dodd-Frank, for which there is bipartisan support, could be adopted in 2014 if there’s a willingness to act by Congressional leadership. For example, two technical corrections bills that provide derivatives end-users with regulatory relief passed the House with overwhelming bipartisan support in 2013. Both bills have broad bipartisan support in the Senate as well. However, even these minor corrections face an uphill battle. While potential legislative fixes for these and other issues will surface on occasion, supporters of the Act remain concerned that any change to the law could be an opportunity for opponents to reopen the legislation and push for more extensive reforms. In the meantime, Congressional opponents are expected to continue to pursue change through enhanced oversight and criticism of rule-making. Hearings on agency budgets subject to Congressional oversight, leadership confirmations and oversight of the various agencies have become platforms to debate reform of the law, tools that critics will likely continue to use as they scrutinize Dodd-Frank rule-makings in the coming year.

For now, expect Congress’ focus to remain on the regulators as they continue to issue final and proposed rules, continue to answer implementation-related questions and further pursue enforcement actions for violations. Unless the legislative landscape fundamentally changes following the November 2014 election, the status quo likely will continue for the near future.

What comes next? While Congress will continue debating individual sections of the Act and conducting oversight of relevant agencies, rule-making to implement the law will continue. The pace of rule-making will be tempered, however, by the regulators’ need to pre-empt legal challenges to rules based on inadequate cost-benefit analyses, among other complaints. To withstand judicial scrutiny, new Dodd-Frank rules will contain increasingly detailed information about, and more sophisticated analysis of, their costs and benefits.

It is important for public companies to actively participate in the rule-making process and continue to monitor the Act’s implementation.

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ContactsPublic Policy

Les Brorsen ............................ +1 202 327 5968 Americas Director, Office of Public Policy

Bridget Neill ........................... +1 202 327 6297 Director of Regulatory Policy

Assurance Professional Practice

Christopher Holmes ................ +1 202 327 8890 National Director of SEC Regulatory Matters

Financial Services

Donald Vangel ........................ +1 212 773 2129 Adviser, Financial Services Office

Corporate Governance Group

Allie Monaco Rutherford ......... +1 703 747 1729

Public Policy

Les Brorsen ............................ +1 202 327 5968 Americas Vice Chair, Public Policy, EY

Bridget Neill ........................... +1 202 327 6297 Director of Regulatory Policy, Ernst & Young LLP

Assurance Professional Practice

Christopher Holmes ................ +1 202 327 8890 National Director of SEC Regulatory Matters, Ernst & Young LLP

Financial Services

Donald Vangel ........................ +1 212 773 2129 Adviser, Financial Services Office, Ernst & Young LLP

Corporate Governance Group

Allie Monaco Rutherford ......... +1 703 747 1729 Ernst & Young LLP

Contacts

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