The Interim Final Rules regarding Executive Compensation for TARP recipients provide a number of corporate governance standards for Compensation Committees. While these standards currently only apply to financial institutions that have outstanding TARP investments, many of the standards are likely to be considered best practices for the compensation committees of all companies.
TARP recipients generally are required to have a compensation committee consisting solely of independent directors (with independence determined by reference to the federal securities laws). (Private TARP recipients who received a TARP investment of less than $25 million are not required to have a compensation committee, in which case the full Board of Directors is required to take the actions detailed below).
As part of the American Recovery and Relief Act of 2009 (a.k.a. the stimulus bill), Congress also adopted the Employ American Workers Act. Under the Employ American Workers Act, TARP recipients are subject to additional requirements if they seek to make a new hire of a foreign national to work under an H-1B petition. While this requirement is unlikely to affect most community bank recipients, it is an important restriction to keep in mind, especially for institutions with an international or ethnic-group focus.
The requirements of the Employ American Workers Act took effect on February 17, 2009, and remain effective until the earlier of: (a) redemption of any TARP investment (exclusive of any outstanding warrants); and (b) February 17, 2011.
Any TARP recipient seeking to hire an H-1B worker is required to make the following attestations to the U.S. Department of Labor:
- it has taken good faith steps to recruit U.S. workers using industry-wide standards and offering compensation that is at least as great as those offered to the H-1B nonimmigrant;
- it has offered the job to any U.S. worker who applies and is equally or better qualified for the job that is intended for the H-1B nonimmigrant;
- it has not “displaced” any U.S. worker employed within the period beginning 90 days prior to the filing of the H-1B petition and ending 90 days after its filing. A U.S. worker is displaced if the worker is laid off from a job that is essentially the equivalent of the job for which an H-1B nonimmigrant is sought; and
- it will not place an H-1B worker to work for another employer unless it has inquired whether the other employer has displaced or will displace a U.S. worker within 90 days before or after the placement of the H-1B worker.
We have recently had the opportunity to ask officials with the Treasury Department several questions regarding the new interim final executive compensation rules for TARP recipients. While answers weren’t available for every questions, the Treasury is aware of some of the open issues associated with the regulations and appears to be diligently at work to address those questions.
The Treasury was quick to admit a technical glitch with regard to the definition of “most highly compensated employees.” The definitions currently exclude senior executive officers from a determination of the most highly compensated employees. Accordingly, a technical reading of the regulations would, for example, apply the bonus restrictions for TARP recipients of less than $25 million to the most highly compensated employee who is not an executive officer, creating the absurd result that the CEO could receive a bonus, while the sixth highest paid employee could not. The Treasury has confirmed that this reading of the regulation, while technically correct, was not intended. A technical correction is forthcoming, but the Treasury would expect TARP recipients not to pay any bonus to the most highly paid employee (whether or not they are also a senior executive officer) and will not object to bonus payments to the sixth most highly paid employee.
The Treasury has also confirmed that it does not intend for private companies (those without securities registered with the SEC) to be required to comply with the say-on-pay provisions. The framework for the Treasury’s thoughts appear to be general deferral to the SEC, but with the understanding that the SEC generally does not have regulatory oversight of the proxies of private institutions. Given the uncertainty in the regulations, further clarification or guidance may be forthcoming.
As part of the Interim Final Rule issued on June 10, 2009, there a couple of items of immediate concern that participating institutions should be aware of: a prohibition on tax gross-ups and the required reporting of certain perquisites. Both of these requirements are not found in the statute, but rather represent additional restrictions imposed by the Treasury Department.
Subject to a limited exception for foreign-tax equalization payments, institutions that have received TARP funds generally will not be permitted to pay any tax gross-ups to any senior executive officer or any of the next twenty most highly compensated employees. Accordingly, institutions receiving TARP capital will not be able to provide a tax gross-up to compensate executives for the taxes related to non-cash compensation, including company cars or non-qualified deferred compensation plans. The regulation also prohibits agreeing to make the gross-up payment in the future, after the institution has repaid its obligations under TARP.
Each participating financial institution will annually have to report to the Treasury and the institution’s primary regulator any perquisites whose total value exceeds $25,000 for any employee who is subject to a bonus limitation. The bonus limitations, and thus the perquisite reporting requirement, apply on a sliding scale as follows:
1. For institutions receiving less than $25 million, only the most highly compensated employee cannot receive a bonus.
2. For institutions receiving $25 million but less than $250 million, the five most highly compensated employees cannot receive a bonus.
3. For institutions receiving $250 million but less than $500 million, the senior executive officers and the ten next most highly compensated employees cannot receive a bonus.
4. For institutions receiving $500 million or more, the senior executive officers and the twenty next most highly compensated employees cannot receive a bonus.
On June 10, 2009, the Treasury announced an Interim Final Rule on the executive compensation standards for recipients of TARP funds. The Interim Final Rule supersedes all prior rules and guidance on executive compensation limitations.
The major elements of the Interim Final Rule include the following:
1. Clarification on the compensation limits to certain executives and highly compensated employees, including bonus payments, golden parachutes, and clawback provisions.
2. Appointment of a Special Master to review compensation plans of institutions receiving “exceptional” assistance.
3. Expansion of the analysis of risks posed by compensation plans for all employees, the luxury expenditures policies, and the “say-on-pay” requirement.
4. Addition of certain compensation and corporate governance standards including a prohibition on tax gross-ups, disclosure of perqs, and disclosure of the use of compensation consultants.
Treasury Secretary Timothy Geithner issued a statement to accompany the announcement. Geithner’s statement also provides summaries regarding the administration’s proposal to expand say-on-pay to all companies and the importance of independent compensation committees.
On March 31, 2009, the Government Accountability Office released its March 2009 report on TARP, as well as an accompanying statement. Highlights of the report include almost 2,000 applications still being processes for the TARP Capital Purchase Program, another breakdown of how Treasury is spending the TARP funds (including an apparent 45% reduction in TALF), and a little more guidance on the applicable executive compensation limits.
TARP Capital Recipients and Applications
As of March 27, 2009, 272 publicly held institutions, 248 privately held institutions and 12 community development financial institutions had received TARP Capital Purchase Program funding. Treasury was still in the process of reviewing approval recommendations for 1,190 qualified financial institutions, and more than 750 applicants were still being viewed by the federal bank regulators. More than 250 financial institutions have withdrawn applications, and no applications have been formally denied by Treasury.
We have just received some insight into two of the more unclear issues presented when the EESA was amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”): Executive Compensation Compliance Certification and the Say-on-Pay Proposal. As we’ve indicated repeatedly since ARRA was passed, many of its provisions are unclear and present trouble to institutions that have received TARP Capital or are contemplating taking TARP Capital.
Executive Compensation Compliance Certification:
Treasury has confirmed that to us that the Interim Final Rule issued in January is not effective. The Treasury believes that ARRA supersedes the provisions of this Interim Final Rule because the Rule was not actually published prior to the passage of the ARRA, and when the ARRA was passed, Treasury withdrew the Rule from publication. Thus, Treasury is waiting, much like the rest of us, for new a rule to be issued. (more…)
On February 26, 2009, the SEC updated its Compliance and Disclosure Interpretations on the American Recovery and Reinvestment Act to explicitly state that the SEC agrees with the views expressed in Senator Dodd’s letter to Chairman Schapiro. As a result, the SEC’s position is that all public companies that have received TARP Capital funds must offer shareholders a non-binding vote on executive compensation this year (unless a preliminary or definitive proxy was filed before February 17, 2009), and must submit a preliminary proxy for SEC review prior to mailing the proxy statement to its shareholders.
The revised SEC interpretations also make clear that the TARP recipients are required to provide the shareholder vote regardless of whether a shareholder has requested such a vote, and may not satisfy the requirement by simply asking shareholders to vote on a policy to hold such votes going forward.
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”), previously just called the economic stimulus bill. Both the complete legislation and the provisions directly related to executive compensation can now be found online. Furthermore, we have previously posted our summaries of the executive compensation provisions and the tax provisions most likely to impact community banks.
Below, we have summarized the new TARP Capital closing documents, Senator Dodd’s Letter on the Act, the effectiveness date for the provisions of the Act, the SEC’s guidance on the Act, and remaining open questions.
New TARP Capital Closing Documents
In light of the new executive compensation restrictions, the Treasury has modified the Waiver required to be signed in order to close TARP Capital investments, as well as added a side letter that addresses the modifications introduced by the Act.
The new Waiver (i) acts as a consent to all modifications required to comply with the TARP Capital restrictions; (ii) requires repayment to the company by employees of any payments made in violation of the TARP Capital restrictions; and (iii) expands the TARP Capital restrictions to include the Emergency Economic Stabilization Act, as amended (EESA), and all rules, regulations, guidance or other requirements issued under EESA, rather than just compliance with the regulations adopted by the Treasury on October 20, 2008. As noted below, the Waiver now must be signed by the company’s senior executive officers as well by any additional highly compensated employees “required by applicable rules or regulations.” We have uploaded a marked version of the Waiver showing the modifications.
Contrary to initial media reports, it currently appears that the majority, but not all, of the executive compensation restrictions for TARP recipients contained in the Senate version have survived the negotiations between the House and the Senate. According to published conference reports (which may be subject to further change until officially approved by the House and the Senate), the following restrictions on Executive Compensation are being included in the Economic Stimulus Legislation.
The new executive compensation restrictions are at last partially offset by an elimination of the three-year holding period before institutions can freely redeem the TARP Capital investment.
A summary of the final terms, as published in the conference reports, as well a note of certain changes from the Senate version, are included below.
Limits on Compensation
For so long as the Treasury holds preferred stock in an institution, the institution may not make a “golden parachute payment” of any amount to a senior executive officer or any of the next five most highly-compensated employees. A “golden parachute payment” is defined as any payment for departure from a company for any reason, except for payments for services performed or benefits accrued.