CEP Legal & Regulatory Compliance 3 — Questions and Answers
Question 1: Under the SEC's Regulation S-K Item 402, which equity awards must be disclosed in the Summary Compensation Table?
- Only awards granted during the fiscal year
- The grant date fair value of stock and option awards granted during the fiscal year (Correct answer)
- The intrinsic value of all outstanding awards at year-end
- Only awards that vested during the fiscal year
Correct answer: The grant date fair value of stock and option awards granted during the fiscal year
Item 402 requires reporting the aggregate grant date fair value of stock and option awards (computed per ASC 718) granted during the fiscal year in the Summary Compensation Table.
Question 2: ERISA Section 404(c) protects fiduciaries from liability for participant investment decisions when which condition is met?
- The plan offers at least three diversified investment options
- Participants are given complete investment authority with adequate information and at least three choices (Correct answer)
- The plan sponsor approves all investment selections quarterly
- Participants receive annual statements of their account balances
Correct answer: Participants are given complete investment authority with adequate information and at least three choices
ERISA 404(c) relief requires that participants exercise independent control over assets, receive sufficient investment information, and have at least three diversified investment alternatives.
Question 3: What is the purpose of a Rule 144 holding period for restricted securities received through equity compensation?
- To satisfy vesting requirements set by the compensation committee
- To establish a minimum period before unregistered securities can be resold publicly without registration (Correct answer)
- To comply with Section 16 reporting obligations
- To meet IRC Section 422 statutory option requirements
Correct answer: To establish a minimum period before unregistered securities can be resold publicly without registration
Rule 144's holding period (six months for reporting companies, one year for non-reporting) must be satisfied before restricted securities can be publicly resold without registration.
Question 4: Which SEC rule provides a safe harbor from short-swing profit liability under Section 16(b) for tax-withholding transactions in connection with equity awards?
- Rule 10b5-1
- Rule 16b-3(e) (Correct answer)
- Rule 144
- Rule 10b-18
Correct answer: Rule 16b-3(e)
Rule 16b-3(e) exempts from Section 16(b) liability dispositions of equity securities to the issuer in connection with tax withholding obligations arising from equity compensation awards.
Question 5: Under ASC 718, the expense for a stock option award with graded vesting can be recognized using which two acceptable methods?
- Straight-line and accelerated methods (Correct answer)
- Sum-of-the-years-digits and declining balance methods
- FIFO and LIFO methods
- Cash basis and accrual basis methods
Correct answer: Straight-line and accelerated methods
ASC 718 permits companies to recognize expense for graded-vesting awards using either the straight-line method over the total vesting period or the accelerated (tranche-by-tranche) method.
Question 6: Proxy advisory firms such as ISS evaluate equity compensation plans using an 'Equity Plan Scorecard' that weighs factors in which three main categories?
- Grant practices, plan features, and dilution/burn rate (Correct answer)
- Executive pay, board composition, and audit quality
- Share repurchases, dividends, and capital allocation
- ESG metrics, diversity, and executive severance
Correct answer: Grant practices, plan features, and dilution/burn rate
ISS's Equity Plan Scorecard evaluates plans across three pillars: plan cost (SVT/dilution), plan features (problematic provisions), and grant practices (burn rate, CEO pay equity).
Question 7: Which Internal Revenue Code section governs the tax treatment of nonqualified deferred compensation plans, imposing a 20% additional tax on violations?
- IRC Section 83
- IRC Section 409A (Correct answer)
- IRC Section 422
- IRC Section 162(m)
Correct answer: IRC Section 409A
IRC Section 409A governs nonqualified deferred compensation and imposes a 20% additional tax plus interest charges when plan requirements for deferral elections or distribution timing are violated.
CEP Legal & Regulatory Compliance 3
Under the SEC's Regulation S-K Item 402, which equity awards must be disclosed in the Summary Compensation Table?