The NASPP Blog

Monthly Archives: January 2017

January 26, 2017

White Collar (Stock) Crimes

Over the years I’ve covered many forms of insider trading scenarios and associated consequences. Of particular fascination to me have been cases involving employees trading in their own company’s stock. Maybe it’s because there are obvious policies in place to prevent this that it seems more egregious, or maybe it’s the level of betrayal (an inside job). I often think I’ve seen it all, and then some new twist surfaces. In today’s blog I’ll cover a recent SEC enforcement action against a former Expedia employee.

You Will Get Caught

In the Expedia case, a former computer support technician secretly accessed senior executives’ emails for confidential information. Reuters reports that he pleaded guilty to one criminal count of securities fraud, agreed to pay back his former company the nearly $82,000 that it spent to investigate the computer intrusions, and settled with the SEC for close to $376,000 (“Ex-Expedia IT Employee Pleads Guilty to Insider Trading,” Nate Raymond, Dec. 5). According to the complaint filed by the SEC, the technician used the stolen information to trade Expedia securities in advance of seven Expedia earnings announcements and two Expedia agreement-related announcements, resulting in unlawful profits of nearly $350,000.

Insider trading enforcement actions provide important learning opportunities for companies who are engaged in an ongoing quest to educate employees and prevent these types of crimes. It seems to me that many of these acts of insider trading are ones born of circumstance opportunity (overhearing a conversation involving material, non-public information, for example, or, having access to certain information or functions through the nature of one’s job). It’s impossible to eliminate every single potential opportunity to cross paths with inside information – and many companies work to educate employees about not giving in to the temptation to share the information or use it for financial gain. I know I’ve touted the message “Don’t try it. You will get caught.”  Yet, some employees still try it, and they do get caught.

The former Expedia employee’s case raises the question – what can companies learn about further protecting access to vulnerable information from all angles? Or, is it not about better protecting the information, but further educating the employees about the realities of the consequences for insider trading? In recent years I’ve been impressed with the SEC’s advancements in technology, particularly in identifying trades that warrant further investigation. With all the progress in technology, insider trading is a low hanging fruit for the SEC. If you’re not talking to employees about some of the recent enforcement actions for insider trading and the mechanisms the SEC is using to track down these trades, now’s a good time to start. Case studies can be excellent teaching tools.

Why Do People Commit White Collar Crimes?

In the latest edition of The NASPP Advisor (“Insider Trading and Rule 10b5-1 Plans,” January/February 2017), we suggest that companies who are looking to refresh or redesign their programs for preventing insider trading read an interview of Harvard Business School professor Eugene Soltes in the December issue of Human Resource Executive (“Good Intentions, Bad Decisions,” pages 18–19). The professor recently wrote a book entitled Why They Do It—Inside the Mind of the White-Collar Criminal. In the interview, he shares some of his insights into how intelligent and ambitious executives can sometimes fall into traps that lead to criminal acts with “terrible consequences for their company, those around them, and themselves.” For example, executives are used to decisions and activities in business that can be gray or murky, so they need to know when their actions cross lines that lead to “serious consequences.” These insights may be useful for HR professionals who are working to discourage such mistakes among employees and executives.


January 24, 2017

ISS, Burn Rates, and Performance Awards

ISS 2017 Equity Compensation Plan FAQ notes that where companies want ISS to include performance awards in their burn rate when the awards are earned, ISS now requires specific disclosures with respect to the performance awards.

A Quick Primer on ISS, Burn Rates, and Performance Awards

ISS includes performance awards in a company’s burn rate when the awards are earned, if the company includes this information in the disclosures related to its stock plan. If this information isn’t disclosed, ISS includes the performance awards in the burn rate calculation when they are granted.

The problem with including the performance awards when they are granted is that ISS doesn’t reduce the burn rate for subsequent forfeitures (due to either termination of employment or failure to meet the performance goals). Consequently, it is generally preferable to have performance awards included in the burn rate when they are earned.  This will result in a more accurate (and possibly lower) burn rate, because only the shares that are actually earned and paid out will be included in the calculation.

What’s Changed?

In the past, ISS simply required companies to clearly and consistently disclose how many shares were granted and earned under performance awards, without defining what the disclosure should have looked like. In its 2017 Equity Compensation Plans FAQ, however, ISS has stipulated the following requirements for the disclosure:

  • Table format
  • Separate from the disclosure for time-based awards
  • Aggregate of all performance awards granted to all employees (providing the disclosure only for awards held by NEOs is insufficient)
  • Covering three years
  • Included every year going forward, even if the plan will not be acted on in a particular year
  • Included even if no performance awards were granted or earned in a particular year

ISS has also said that they generally won’t calculate the number of shares earned under performance awards, even if it would be possible for them to do this from information presented in narrative format.

The FAQs include a sample disclosure that looks remarkably like the old roll-forward tables companies used to include for all of their stock compensation under the original FAS 123.

Is This Legally Required?

The disclosure isn’t legally required or required under ASC 718. But if you want ISS to include your performance awards in your burn rate when they are earned, rather than when they are granted, the disclosure is necessary.

– Barbara

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January 18, 2017

Amending Share Withholding Provisions

As most of my readers know, the FASB has amended ASC 718 to expand the exception to liability treatment that applies to shares withheld to cover taxes to include withholding up to the maximum individual tax rate. This has led many companies to consider changing their tax withholding practices for stock compensation.

Plan Amendment Likely Necessary

As noted in my blog entry “Getting Ready for the New Share Withholding” (May 5, 2016), companies that are interested in taking advantage of the expanded exception face an obstacle in that virtually all stock plans include a prohibition on using shares to cover taxes in excess of the minimally required statutory withholding. Where companies want to allow shares to be withheld for tax payments in excess of this amount, the plan must first be amended to allow this.

Shareholder Approval Not Necessary

In the aforementioned blog entry, I had noted that it wasn’t clear if shareholder approval would be required for the plan amendment, particularly if the shares withheld will be recycled back into the plan. I have good news on this question: both the NYSE and Nasdaq have amended their shareholder approval FAQs to clarify that this amendment does not require shareholder approval, even if the shares will be recycled.

Here are the updated FAQs:

  • NYSE (Question C-1, pg 5)
  • Nasdaq (ID number 1269, it should be the last question on the second page. Or do a keyword search for the word “withholding” and the relevant FAQ should come right up.)

For a while, there was still a question as to whether the NYSE required shareholder approval when shares withheld from restricted stock awards would be recycled. In late December, John Roe of ISS arranged for the two of us to meet with John Carey, the ‎Senior Director at NYSE Regulation, to get clarification on this. Just prior to our meeting, the NYSE updated their FAQs to clarify that shareholder approval is not required even in the case of share withholding for restricted stock awards, even when the shares will be recycled.

ISS Still Not a Fan of Share Recycling

It should come as no surprise that, where the withheld shares will be recycled, ISS isn’t a fan of amendments to allow shares to be withheld for excess tax payments. Now that it’s clear shareholder approval isn’t required for the amendment, this likely isn’t a significant concern for most companies, unless they are submitting their plan for shareholder approval for some other reason. It isn’t a deal-breaker, but it could enter into ISS’s qualitative assessment of the plan. This would particularly be an issue if ISS’s recommendation is tied to more than the plan’s EPSC score.

Not a Modification for Accounting Purposes

There also has been some question as to whether the amendment would be considered a modification for accounting purposes if applied to outstanding awards.  Based on the FASB’s recent exposure draft to amend the definition of a modification under ASC 718 (see “ASC 718 Gets Even Simpler,” November 22, 2016), the FASB doesn’t seem to think modification accounting is necessary. The comment period on the exposure draft ended on January 6.  There was little opposition to the FASB’s position: only 14 comment letters were received, one letter clearly opposed the change, 12 supported the change, and one was “not opposed” but not enthusiastic. Given that response, hopefully the FASB will finalize the proposed update quickly so that this question is settled.

– Barbara


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January 11, 2017

Form 3922 Gets an Upgrade

Here we are again at the start of another season of Section 6039 filings. Nothing much has changed with respect to Section 6039 filings in recent years, so imagine my surprise when I learned that the IRS had updated Form 3922.

Form 3922 Grows Up

As it turns out, the only update to the form is that it has been turned into a fill-in form. If you are planning on submitting paper filings, this allows the form to be filled in using Adobe Acrobat, so you don’t have to scare up a typewriter or practice your handwriting. I haven’t owned a typewriter since college and even I can’t read my handwriting, so I am a big fan of fill-in forms.

Unfortunately, this is just about the least helpful improvement to the forms that the IRS could make. Form 3922 is for ESPP transactions. ESPPs tend to be offered by publicly held companies with well over 250 employees.  Chance are, if a company has to file Form 3922, the company has more than 250 returns to file (less than 250 ESPP participants is probably a pretty dismal participation rate for most ESPP sponsors) and the returns have to be filed electronically. The fill-in feature doesn’t impact the electronic filing procedures; it is only helpful for paper filings.

It would have been more helpful if the IRS had made Form 3921 a fill-in form. Given the declining interest in ISOs (only around 10% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey grant ISOs), companies are more likely to be filing this form on paper.  The IRS notes, however, that it selected Form 3922 to be made into a fill-in form because they receive so few filings of it on paper. I guess the IRS’s goal was to appear helpful but not actually be helpful. Your tax dollars at work.

A Fill-In Form Isn’t As Helpful As You Think, Anyway

As it turns out, having a fill-in form may not be that helpful, anyway. I was thinking you could fill in the form, save it, and then email it to the IRS but it doesn’t seem like this is the case.  No, even if you fill it in using Adobe Acrobat, you still have to print it out and mail it to the IRS. And the requirements for printing the form out still include phrases like “optical character recognition A font,” “non-reflective carbon-based ink,” and “principally bleached chemical wood pulp.” I think this means that you have to print the form on white paper, using black ink that isn’t too shiny, and using the standard fonts in the fill-in form. But I’m not entirely sure.

What About Form 3921?

When I first saw that Form 3922 is now fill-in-able, I assumed, perhaps naively, that a fill-in Form 3921, which would truly be useful, would be available any day. But that was back in September and still no update to Form 3921. Upon reflection, especially given the IRS’s statement about why this honor was bestowed upon Form 3922, I think I may have been overly optimistic.

More Information about Section 6039 Filings

For more information on Section 6039 Filings, check out the NASPP Alert “Reminder: ISO and ESPP Information Returns and Statements.”

Thanks to Diana Woods of Fenwick & West for bringing the updated form to my attention.

– Barbara

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January 5, 2017

And the Winner is…

Happy New Year! It’s that time of the (new) year again where we offer up congrats for our annual Question of the Week contest. 


Question of the Week Winner!

The winner is of our 2016 Question of the Week contest is (drum roll!): DMekwunye (who, by the way, placed 2nd in our 2015 contest and has landed in the top 3 scorers for at least three years in a row now). For those of you who are asking “What’s the Question of the Week Contest?“, it’s a weekly quiz challenge designed for stock plan professionals to test their know-how in a variety of areas, while competing against their peers. Hone your equity compensation knowledge while having fun at the same time! There’s a new question each week, and a correct answer earns points.

And the Winners Are…

A big congrats to screen name alias DMekwunye for coming out on top of our 2016 contest. Since she uses her real name as her screen name and she’s been one of our most dedicated Question of the Week competitors for years, I’m going to reveal her full name – De Anna Mekwunye of Wind River Systems. Congrats De Anna!

The screen names of the top 5 scorers for the 2016 contest are:

  • 1st – DMekwunye (420 points)
  • 2nd – mamaandmore (410 points – tie with Sunny Days)
  • 2nd – Sunny Days (410 points – tie with mamaandmore)
  • 4th – All About Equity (390 points)
  • 5th – SMKS (380 points)


What’s in a Name?

Your play is tracked by your screen name – so you can be as anonymous or transparent in your game playing as you like. It’s become an annual tradition for me to highlight some of the fun, intriguing and perplexing screen names each year. In 2016, once again it seems nothing was off limits, from the range of “equity” and “stock” possibilities (Equity for Dummies, Stock Plan Warrior, Equity Gamer, StockFiddler, CEP III 2003 & 2011) to the mythical (unicorn6872) to the humble (Will Give It A Go, Guessing) to those who tell it like it is (Ace1, Sure, winningduck, TestMe, Lucky13). Finally there were a few that would probably require a happy hour and some time to explain (Jane Jetson, bagelbert, Amateur Lurker, woohoo, and PeabodyMarble).

Work Hard, Play Hard

We’ve just reset scores and this week’s challenge starts a whole new contest, so this is the perfect time for NASPP members to sign up, create your screen alias and jump into the Question of the Week Contest. We leave all of January’s questions active for the entire month, so you have plenty of time to complete the first quizzes of the new game.

I wish all of you an incredible 2017!


January 4, 2017

Yet Another EDGAR Security Protocol

The SEC has announced an update to the process used to generate a new EDGAR passphrase. In anticipation of this, now would be a good time to make sure your email address is correct (and the email addresses for all of your Section 16 insiders) in the EDGAR system.

What Is a Passphrase and How Is It Different from a Password or a Password Modification Authorization Code (PMAC)?

The EDGAR system has a ridiculous number of password-type codes assigned to each individual user.  You probably only need one password to access your bank account, but EDGAR assigns four password-type codes to each user.  And, even with that shockingly complex security protocol, it’s still possible to submit fake EDGAR filings.

Your passphrase is used to generate a completely new set of EDGAR codes (CCC, password, and PMAC). You do this when you are first assigned a CIK (because you won’t have any of the other codes yet). It’s also the only way to generate a new password if you’ve forgotten yours.

What Is the New Process?

The problem with having to use your passphrase to generate a new password (and CCC) is that if you’ve forgotten your password, you’ve probably also forgotten your passphrase. In which case, you have to request a new passphrase before you can generate a new password.

Previously, to generate a new passphrase, you completed the online request form and submitted a new notarized Form ID to the SEC (for a more detailed, somewhat humorous explanation of this, see “My EDGAR Nightmare“).  Now, you’ll also have to provide an “electronic security token” with your request.  The electronic security token will be emailed to you by EDGAR at the time you make the request to change your passphrase. This is why it is important to make sure your email address is correct; if the EDGAR system doesn’t have your correct email address, you won’t get the email with your electronic security token and you’ll have to go through some sort of manual review to get your passphrase updated, which could take more than two days (and I’m sure you all understand the significance of process that takes longer than two days in the EDGAR context).

What Exactly Is an Electronic Security Token?

Got me. Since EDGAR is emailing it to you, my guess is that it is some sort of code that you enter into the EDGAR website, but it could also be a link in the email that you have to click.

Will Form ID Still Be Required to Change a Passphrase?

No idea on this either. The announcement from the SEC did not include a lot of information.

When Is the New Process Going Into Effect?

The SEC announcement, which was issued on December 12, says “soon.” When dealing with the government, “soon” often is later than you might expect but I still wouldn’t wait to make sure your and your insiders’ email addresses are correct.

Thanks to Tami Bohm of Radian Group for reminding me to blog about this.

– Barbara

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