Question

Describe what kind of compensation is permissible for an independent director based on the SEC and Dodd-Frank Act guidelines.

State the difference between an insider and a control person for purposes of liability under the Securities Act of 1933, including how they are different. State whether all insiders are control persons, and whether all control persons are insiders. Provide examples of when they are the same and when they are different.

Answer 1

* The Act requires the SEC to promulgate rules that require companies to disclose policies for incentive-based compensation.

*The Act requires that, not less than every three years, publicly-traded companies must hold non-binding shareholder votes on executive compensation

*The Act requires boards of directors of companies to create "independent compensation committees" composed of members of the board of directors who are defined as independent based on rules to be promulgated by the SEC.

*Companies are required to make disclosures concerning the relationship between executive compensation "actually paid and the financial performance" of a company.

Insider is officers, directors or stockholders, who possess stock that directly or indirectly results in beneficial ownership of more than 10% of the company’s common stock or other equity class.

control person is a member of an organization or an employee of a company who has significant sway in the decision making process. Because a control person can alter the actions of a company, he or she must disclose any transactions involving company stock in order to reduce the possibility of a conflict of interest.

Section 16 requires insiders of a covered company to file Forms 3, 4, and 5 electronically. The SEC requires Form 3, which is an initial statement of beneficial ownership, if there is an initial public offering of equity or debt securities, or if a person becomes a director, officer, or a holder of at least 10% of a company’s equities.

New directors, new officers, and new significant shareholders must file Form 3 within 10 days of acquiring such investment assets. If there is a material change in the holdings of a company's insiders, they must file Form 4 with the SEC. Furthermore, Section 16 requires insiders who conduct equity transactions during the year, to file Form 5 if the transactions were not already reported on Form 4.