doddfrankkeypoints_jj0006_december2013

Dodd-Frank Act
Key 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.
T

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1
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.
2
Companies 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

Introduction
The 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
developments
Volcker 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 payments
In 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 rules
Pay 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.

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 minerals
In 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.

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 advisers
In 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-pay
In 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.

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.

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 program
The 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).

Upcoming rule-
making
Enhanced 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.

Congressional
activity
Legislative 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.

Contacts
Public 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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