The NASPP Blog

December 8, 2016

The Supreme Court Weighs in on Insider Trading

After nearly two decades of silence on insider trading matters, the Supreme Court ruled on a case this week (Salman v. United States) that has restored the government with some of the power in prosecuting insider trading that had been curtailed by lower court rulings over the past couple of years.

Getting Back to the Way it Was

Two years ago, government prosecutors – riding a successful wave of recent insider trading prosecutions – were stopped in their tracks when the Second U.S. Circuit Court of Appeals, in the case U.S. v. Newman, overturned two “key” insider trading convictions, dealing a blow to the Justice Department and the SEC. At the time, the Wall Street Journal summarized the situation as follows: “…a federal appeals court overturned two insider-trading convictions and ruled it isn’t always illegal to buy or sell stocks using inside information.” The ruling raised the bar for prosecutors on a crime that is already hard to prove, and ended up limiting the types of insider trading cases the government could pursue. I covered this in two prior blog posts: “The Supreme Court and Insider Trading” (August 6, 2015) and “Insider Trading Isn’t Illegal?” (April 2, 2015).

The aftermath of the Newman decision included confusion around what really constitutes insider trading. Federal prosecutors were forced to drop several high profile cases literally mid-stream. Ever since, it seems the government’s aggressive approach to prosecuting insider trading cases has somewhat waned – probably due in part to having their hands tied.

Fast forward to today, and the government has regained some, but not all, power in the quest to enforce consequences for insider trading. In a Wall Street Journal article on the topic, “The Supreme Court Hardens Stance on Insider Trading” (December 7, 2016), authors Aruna Viswanatha and Brent Kendall report that while the ruling appears to have avoided some of the issues around insider trading (such as tips to acquaintances), it has clarified the question of whether tipping a relative about inside information is considered insider trading when no benefit is received by the tipster.

“…the ruling gives prosecutors more ammunition to file charges even in cases where they can’t show that the tipster received something of value for passing the information.”

A significant part of the high court’s ruling is the justices’ conclusion that showing a tipster and trader to be related are all that is needed to bring an insider trading case.

In the WSJ article, Viswanatha and Kendall summarize the case that brought about the Supreme Court’s opinion as follows:

“The opinion Tuesday written by Justice Samuel Alito upheld the prosecution of a Chicago man convicted of trading on inside tips from a relative, with the justices concluding that proving a tipster and trader were related was enough to bring a case.

In that case, defendant Bassam Salman admitted he had traded on information obtained from his brother-in-law who worked as an investment banker at Citigroup Inc. Mr. Salman was convicted in 2013 and sentenced to three years in prison.

Prosecutors said Mr. Salman and an associate generated more than $1.5 million in profits by trading on tips about coming acquisitions of biomedical companies involving Citigroup clients. Mr. Salman had contended that because there was no compensation or other personal benefit exchanged for the tip, he couldn’t be prosecuted.

Part of Mr. Salman’s defense rested on the 2014 case, known as U.S. v. Newman, issued by a New York-based federal appeals court, which declared the government needed to show that the tipster received a benefit. The Supreme Court declined to consider an appeal.

In upholding Mr. Salman’s conviction, Justice Alito’s ruling narrowed a portion of the Newman case. “Giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds,” Justice Alito wrote.”

With this latest development in the legalities of insider trading, it’s time to review your insider trading policy language and further educate employees. Tipping shouldn’t be occurring in the first place, but over the years we’ve seen it happen. There have been several cases involving relatives (see The NASPP Blog “Husbands and Wives Insider Trading,” (April 4, 2013)), and it’s important for employees to know that even if they don’t intend to receive any benefit from passing along the tip to a relative, the action of doing so is considered insider trading.


December 6, 2016

Shareholder Challenging 16(b) Status of Share Withholding

Just when you thought it was safe to withhold shares to cover taxes, a shareholder has started issuing demand letters to companies claiming that share withholding is a nonexempt sale for purposes of Section 16b.


Yep, I say “shareholder” because apparently it’s just one guy and he’s representing himself, he’s not even engaging the services of the plaintiffs’ bar.

What the Heck?

But wait, you say, that’s ridiculous.  Share withholding is exempt from Section 16(b) pursuant to Rule 16b-3(e), which covers dispositions back to the issuer that are approved in advance by the board or compensation committee (and approval of the grant agreement allowing said disposition counts as approval of the disposition).

You are correct, but the shareholder is claiming that Rule 16b-3(e) applies only if shares are withheld automatically. His claim is that if the insider could pay the taxes in some other way (e.g., cash), the transaction isn’t exempt.

Is My Company Going to Hear from this Guy?

Only if the share withholding transaction can be matched against a nonexempt purchase that occurs within six months before or after it. A nonexempt sale by itself is nothing to be alarmed about; the sale has to be matched against a nonexempt purchase to trigger profits recovery.

Also, since the shareholder’s argument hinges on the share withholding transaction being at the election of the insider, if you don’t allow insiders a choice in how to pay their taxes (and the shareholder can figure this out), you may not hear from him.

What Does Alan Dye Say?

I’m not sure lawyers ever use the term “ridiculous” but Alan doesn’t believe the shareholder’s position has merit. From his blog “Shareholder Challenging Availability of Rule 16b-3(e) to Exempt Elective Exercise of Tax Withholding Right” (August 23, 2016):

“For what it’s worth, Peter Romeo and I disagree strongly with the shareholder’s position, as do the attorneys I’ve spoken with who are responding to similar demand letters.”

Alan also notes that the shareholder has just issued demand letters, he hasn’t filed any complaints yet. But Alan says that he has been litigious in other Section 16(b) contexts.

What Should We Do?

If you allow insiders to use share withholding to cover their taxes on either awards or stock options, you should make sure your in-house legal team is aware of this, so they can decide how to proceed.

In addition, at the time shares are withheld to cover taxes, it is a good idea to check (or have whoever is responsible for Section 16 filings check) for nonexempt purchases by insiders in the past six months. Even though you might still allow the insiders to go ahead with the share withholding, it will be helpful to know ahead of time that the transaction might attract a demand letter, so your legal team can be prepared for it.

– Barbara

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December 5, 2016

NASPP Chapter Meetings

Here’s what’s happening at your local NASPP chapter this week:

AustinThe chapter hosts its Holiday Happy Hour, featuring cocktails and nibbles at The Dogwood at Rock Rose. (Tuesday, December 6, 3:30 PM)

Chicago: Don Nemerov of FGMK presents “Are Private Equity Practices the Next Step for Public Company Executive Compensation?” (Tuesday, December 6, 7:30 AM)

San Diego: The chapter hosts is annual holiday social and networking event at Rough Draft Brewing Company. (Tuesday, December 6, 3:00 PM)

Boston: Emily Cervino of Fidelity presents “Turning Up the Heat with Hot Topics in Equity Compensation.” (Wednesday, December 7, 8:30 AM)

Philadelphia: The chapter hosts a presentation titled “Legal Hot Topics in Equity Compensation for 2017.” (Wednesday, December 7, 3:30 PM)

Silicon Valley: Robert Purser of PwC and Jillian Forusz of Adobe Systems present “FASB Simplification of Stock Compensation and Early Adopters Insight.” (Wednesday, December 7, 11:00 AM)

Phoenix: The chapter hosts its annual holiday reception and networking event at Tapas Papa Frita. (Thursday, December 8, 4:00 PM)


December 1, 2016

A (Not So) Secret Recipe for Catchy Communications

It’s hard to believe December is already upon us. Aside from being a time of the year that is filled with holidays and way too much dessert, it’s also the season when we begin to prepare the communications we’ll be sending to our stock plan participants about year-end things like tax withholding and reporting. In today’s blog, I offer up 5 things you can implement now to make this year’s communications stand out.


  1. Simplify. That one word alone is probably all I need to say. It’s like wading through a cluttered home or office. When there is too much clutter in communications (clutter = non-essential information), the participant may not know which details deserve their focus. Once you’ve got your communication drafted, review it again and again. I challenge you to see if you can reduce the size by at least 25%.
  2. Use a catchy title. You may have created the best message in the world, but if the title or email subject is a snooze, then it may not even make it onto the participant’s radar. A great communication deserves a great title. This one you can do in just a few minutes – look at all those communications you’re refreshing and see if the title/subject deserves a refresh, too.
  3. Go mobile friendly. If you aren’t already preparing communications that are mobile friendly and quickly digestible, consider doing so. See if your company already invests in an email service that you may be able to use for sending emails using mobile friendly templates. Millennials make up over a third of the workplace these days, and if you’ve got them in your demographic you’ll need to ensure your communications are accessible from a smartphone and able to be quickly consumed. And, let’s face it – millennials aren’t the only ones with smartphones – the need for information to be accessed while mobile extends across multiple workforce generations.
  4. White space is your friend. It used to be that white space on a page looked b-o-r-i-n-g. There was a tendency to fill up that space with all sorts of information – even if it wasn’t critical information. Avoid the urge to drown out the core message by overuse of graphics, words, or colors. Think of your communication as the masterpiece and your background as the frame. Review your communications to see if you’ve been guilty of overdoing graphics, call outs or colors. These elements all have their places – but if they are overdone they will simply clutter the page and overshadow the important points of the message.
  5. Use stories or creative elements to give life to a concept. It’s really tempting to copy and paste plan language into our communications. While that sometimes may be necessary, and certainly sharing plan terms may be an integral part of a communication, it’s also important to elevate the tone of the communication to one that is not so heavy in nature. If the scope of the message involves explaining a concept that has lots of fine details (e.g. the mechanics of tax reporting), see if you can bring it to life using case scenarios or stories. Some of the most popular presentations I’ve seen have been ones that promise to deliver a “case study” approach. Participants seem to resonate much more with a message or set of instructions when they can connect to a scenario.


The bottom line is that communications don’t have to plain, boring, or feel like an old routine. Additionally, if you are a person who has a creative gene, crafting the message and its delivery process can serve as an outlet for innovation. As always, I’d love to see your communications that have incorporated some of these ideas.




November 29, 2016

ISS Targets Dividends on Unvested Awards

The practice of paying dividends (or dividend equivalents, in the case of units) on unvested awards has been declining since we first started tracking it in 2007. No one likes the practice, other than companies and the employees who benefit from it. Investors certainly aren’t a fan, FASB imposes some onerous accounting requirements on it, and even the IRS has taken issue with the practice. Now, ISS’s 2017 Equity Plan Scorecard deducts points for this.

What’s the Big Deal?

The main criticism of paying dividends on unvested awards is philosophical: if dividends are paid out before an award vests, employees have arguably received compensation they aren’t entitled to. And, if the awards are subsequently forfeited, no one makes the employees pay back the dividends; they are allowed to keep the dividends on shares that they ultimately didn’t earn.  Here are a few of the consequences of this practice:

  • Implicates the dreaded two-class method of reporting earnings-per-share, something few people, if any, even understand (I’ll admit it—I am not one of the few) (see “Applying the Two-Class EPS Method to Share-Based Payments,” by KPMG)
  • When the awards are forfeited, any dividends paid prior to vesting that aren’t also forfeited are treated as compensation expense (normally, dividends do not increase the expense associated with an award)
  • If paid on performance awards, the dividends cannot be considered performance-based compensation for purposes of Section 162(m) unless they are subject to vesting contingent on performance goals (see “IRS Clarifies Treatment of Dividends Under Section 162(m)“)

ISS Gets into the Game

One of ISS’s changes to its 2017 Corporate Governance Policy is to add paying dividends on unvested awards to the Plan Features pillar of its Equity Plan Scorecard. Plans will receive full points for this test only if they prohibit paying dividends prior to vesting for all awards offered under the plan. If the plan is silent or includes the prohibition for some awards but not others, the plan receives no points for this test.

It is permissible for dividends to accrue on awards prior to vesting, so long as the dividends are still subject to forfeiture in the event that the underlying award is forfeited.

The Data

This handy interactive infographic shows how payment of dividends on unvested awards has declined since 2007 (click on the years to see the data change):

Create bar charts

Perhaps one day, paying dividends on unvested awards will go the way of reloads and pyramid exercises: mythic transactions rarely, if ever, seen in the wild.

– Barbara

* Data referenced in this blog, including the infographic, are from the Domestic Stock Plan Design Survey (years 2007, 2010, 2103, and 2016), co-sponsored by the NASPP and Deloitte Consulting LLP.

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November 28, 2016

NASPP Chapter Meetings

Here’s what’s happening at your local NASPP chapter this week:

Atlanta, KS/MO, Philadelphia, Nashville: The chapters host a joint webcast featuring Kerri McKenna and Robert Purser from PwC along with Thomas Swindle from UBS presenting “FASB Simplification of Stock Compensation Accounting and Early Adopters Insights.” (Wednesday, November 30, 3:00 PM Eastern)

Twin Cities: The chapter hosts a double-session featuring Jason Jones and Chris Ansley from EY presenting “Changes to Statutory Withholding under ASU 2016-09 – Practical Considerations” and ” Issues to Consider with Equity Plans during Corporate Transactions.” (Thursday, December 1, 7:30 AM)


November 22, 2016

ASC 718 Gets Even Simpler

It will come as no surprise to any of you that accounting for modifications under ASC 718 is complicated.  In the aftermath of the issuance of ASU 2016-09, the FASB has received a number of questions about whether amending a stock plan or award to allow shares to be withheld for more than the minimum statutorily required tax payment would trigger modification accounting under ASC 718. It probably seems crazy to you that we even have to consider this question and I guess it also seemed that way to the FASB, because they’ve issued an exposure draft to amend ASC 718 to clarify that this sort of change isn’t a modification.

ASC 718 currently says that any change whatsoever to an award is considered an modification and goes on to define four types of modifications: probable-to-probable, probable-to-improbable, improbable-to-probable, and improbable-to-improbable. The accounting treatment varies based on which type of modification you are dealing with and for some types of modifications, a new valuation of the award is required even if the value of the award isn’t changed as a result of the modification. Hence, the concern about the amendments relating to share withholding, even though these amendments arguably don’t materially increase the value of an award to the award holder.

So the FASB has proposed an amendment to ASC 718 that would clarify that not every change to the terms and conditions of an award requires modification treatment. Instead, a change to the terms and conditions of an award would require modification treatment only if at least one of the following conditions is met:

  • The fair value of the award is changed as a result of the amendment. For purposes of determining if there is a change in fair value, the fair value of the award immediately following the amendment would be compared to the fair value immediately beforehand (rather than to the grant date fair value). Generally, there would be no change in fair value if the amendment does not impact any of the inputs necessary to determine the award fair value.
  • The amendment modifies the vesting conditions of the award.
  • The amendment causes the classification of the award to change (from equity to liability or vice versa).

Amending a plan or award to allow additional shares to be withhold for taxes would not meet any of the about conditions (provided the share withholding is still limited to the maximum individual tax rate in the applicable jurisdiction) and, thus, under the proposed amendment, there would be no question that this is a modification. Even without the proposed amendment to ASC 718, I believe that many practitioners would not treat this as a modification.

Comments may be submitted on the exposure draft until January 6, 2017.  The update would be applied prospectively only, thus the accounting treatment for any prior modifications of awards would not change.  The exposure draft does not specify an effective date.

For more information, see the NASPP alert “FASB Proposes Amendments to Modification Accounting under ASC 718.”

– Barbara

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November 18, 2016

Post Election: Things to Watch Part 2

Last week, just a few days after election day, I blogged (“Post Election: Things to Watch Part 1,” November 11, 2016) about a couple of things to watch in the coming months post-election, namely possible changes to tax rates and the likely reintroduction of some variation of the Financial Choice Act. Since then, the blog-sphere has been electrified with commentary and comments on these topics, as well as a few new ones. Keep reading to find out how the conversation has evolved over the last week.

It turns out I am not alone in trying to figure out how a Trump presidency and Republican-dominated Congress will impact stock compensation. I’ve expanded our list of things to watch in 2017.

1. The Financial Choice Act is not just about repealing Dodd-Frank. In yesterday’s blog (“The Financial Choice Act: One Provision Could Destroy the SEC’s Rulemaking Abilities“), Broc Romanek points us to Section 631 of the Financial Choice Act, which seems to be designed to reduce the independence of the SEC’s (and other agencies’) rulemaking.

SEC. 631. CONGRESSIONAL REVIEW. If the agency classified a rule as “major,” according to specified criteria, the rule would require a joint resolution of Congress to go into effect, unless the President finds that an emergency requires that it be effective (for 90 days). Congress would also have the right to disapprove certain non-major rules.

Romanek says “Read that provision again. A joint Congressional resolution to adopt a “major” rule – and even some non-major ones! It’s goal appears to be neutering the so-called “independent” federal agencies that govern our financial institutions & markets. Talk about putting partisan politics into “independent” agencies. And here I was worried that having Congress involved in the SEC’s budget process was too much meddling with a federal agency!”

2. Tax changes could mean an increase in the value of equity compensation. A blog (“What a Trump Presidency and Tax Changes Could Mean for Stock Compensation” – November 14, 2016) explores the various tax rates that could change under Trump’s proposed tax plan. Tax rates to watch include the Federal rate on ordinary income, the additional Medicare tax introduced under Obamacare, the future of Alternative Minimum Tax, and how supplemental withholding rates play into the picture. What does not appear to be (currently) on the table are changes that would affect the capital gain rates. points out that:

“Given the enormous federal budget deficit, the likely need for 60 votes in the Senate to defeat a filibuster and pass a major tax overhaul, and Trump’s inexperience in the art of political compromise, there are no guarantees that these proposals will become law.”

Additionally, since it’s not highly likely that these tax proposals will come to fruition in time to take effect for the 2017 tax year, suggests that plan participants need not take a rushed approach to pulling in stock compensation transactions to 2016 (whew! hopefully that reduces the likelihood of a bunch of stock plan transactions over the holidays close to year-end).

“In the short term, with little risk of tax increases in 2017, there is no pressing tax-law reason to accelerate income into 2016. Even if you do predict that your tax rates are likely to drop or rise in the future, taxes should never be the only planning consideration for stock options and company stock at year-end. Instead, you may want to let investment objectives and personal financial needs, not tax considerations, drive your year-end planning.”

3. President-elect Trump is no stranger to stock compensation. Are you at all curious about whether or not Trump understands stock compensation? The staff at did an analysis of public filings to determine his past affiliations with stock plans. It turns out at least some of his companies have adopted stock plans, and he has personally been a recipient of stock options under at least one of those plans. For the complete analysis and commentary, check out “What a Trump Presidency and Tax Changes Could Mean for Stock Compensation” –, November 14, 2016).

If anything, 2017 promises to be a year of changes. When changes occurs, we often communicate about it by blog early on. To be notified about new information on topics such as these, be sure to subscribe to The NASPP Blog.


November 15, 2016

Tax-Related Changes for 2017

Lately, there’s been a lot of speculation about what a Trump presidency and a Republican Congress means for tax rates in 2017.  I got nothin’ on that. But what I do have for you today are some tax changes for 2017 that are already finalized.

New Filing Deadlines

Where nonemployee compensation is reported in box 7 of Form 1099-MISC, the deadline to file the form with the IRS has been accelerated to January 31 (previously the deadline was February 28, for paper filers, and March 31, for electronic filers). This will apply to Forms 1099-MISC issued to report compensation paid to outside directors, consultants, independent contractors, and other nonemployees.

Form 1099-MISC is also used to report income recognized on (i) stock plan transactions after an employee’s death, and (ii) transactions by an employee’s ex-spouse for stock awards transferred pursuant to divorce.  In each of these cases, however, the income is reported in box 3, rather than box 7. Consequently, a Form 1099-MISC for these transactions doesn’t need to be filed until the regular February 28/March 31 deadline. (Assuming, of course, no other income is reported in box 7 of the form. For instance, if an employee’s ex-spouse provided services to the company as a consultant in 2016 in addition to exercising a stock option transferred to him in their divorce settlement, and the income for the consulting fees is reported in box 7 along with the option gain in box 3, the Form 1099-MISC would have to be filed with the IRS by January 31. And if the employee died in 2016 and hadn’t updated her beneficiary designation so her RSUs were paid out to the ex-spouse in addition to the consulting fees and the option gain…well, you get the idea.)

The deadline to file Form W-2 with the Social Security Administration has also been accelerated to January 31.  These changes were part of the Protecting Americans from Tax Hikes Act and are intended to help prevent tax fraud. In the past, individual taxpayers received their copy of these forms before the IRS and could have even filed their tax return before the IRS received their Form W-2 or 1099-MISC. This could result in errors (inadvertent or intentional) that the IRS wasn’t able to catch until possibly as late as April, when the company filed these forms with the SSA/IRS. By then, a refund might have been issued to the taxpayer and the IRS was in the difficult position of trying to recover it. With the accelerated filing deadlines, the IRS will theoretically be able to catch these errors before refunds are issued.

The deadline for filing Forms 3921 and 3922 with the IRS is still February 28/March 31. Also, the deadline to distribute the employee copy of all of these forms is still January 31.


The cost-of-living adjustments for 2017 have also been announced. Here are the highlights that related to stock compensation:

  • The wage base for Social Security is increasing to $127,200 (up from $118,500 in 2016). The Social Security tax rate isn’t changing (that requires Congressional action), so if I’ve done the math right (something you should never take for granted—math just isn’t my gig), the maximum withholding for Social Security will be $7,886.40 in 2017.
  • No changes to the Medicare rates or the threshold at which the higher rate kicks in, at least for now. Changing either of these things also requires Congressional action; while it’s certainly possible that a repeal or amendment of Obamacare might result in changes to Medicare tax rates or thresholds in 2017, it’s unlikely that either will change before the new administration begins.
  • The level of annual compensation at which employees can be considered highly compensated for purposes of excluding them from participating in a Section 423 ESPP will remain $120,000.

More Information

For more information, see the NASPP Alert “Tax Changes in 2017.”

– Barbara

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November 14, 2016

NASPP Chapter Meetings

Here’s what’s happening at your local NASPP chapter this week:

ConnecticutLenka Haase of E*TRADE Financial presents “Year End Procedures—How Your Equity Vendor Can Help You!” (Tuesday, November 15, 10:00 AM)

Ohio: Daniel Dunn and Lenka Haase of E*TRADE Financial present “Year End Procedures—How Your Equity Vendor Can Help You!” (Wednesday, November 16, 9:00 AM)

Carolinas: Paul Bailey from Red Hat presents “ASC 718 in Motion: The FASB’s Amendments.” (Thursday, November 17, 11:30 AM)

NY/NJ: Stephen Giove of Shearman & Sterling and Christine Cognetti McCasland of Morgan Stanley present “Hot Topics for Public Companies.” (Thursday, November 17, 8:30 AM)