The Dodd-Frank regulatory reform bill, which recently passed the House, includes a number of executive compensation reforms. The executive compensation provisions in the bill include reforms to both SEC-reporting company disclosure and financial institution specific disclosure.
The Dodd-Frank reform bill expounds on current TARP say-on-pay requirements and makes them generally applicable to SEC-reporting companies. Under the reform bill, not less than once every three years, SEC registrants must include in annual meeting proxy statements a shareholder resolution on the compensation of executive officers. In addition, not less than once every six years, SEC registrants must have a shareholder vote to determine the frequency of a vote on executive compensation by shareholders, which may occur, as determined by shareholders, every one, two or three years.
Under the bill, SEC registrants must disclose golden parachute agreements in a proxy statement where shareholders are asked to approve an acquisition, merger, consolidation or proposed sale of substantially all of the assets. The aggregate total compensation that may be paid in such transaction, pursuant to a golden parachute agreement, must be included in this disclosure and be submitted for shareholder approval in a separate resolution.
Similar to the TARP say-on-pay requirements, the say-on-pay and golden parachute resolutions applicable to all SEC-reporting companies are not binding on SEC registrants or directors. Institutional investors, however, will be required to disclose annually how they voted on such disclosures. Although the bill does not explicitly exclude certain registrants from these requirements, the bill gives the SEC the authority to exempt certain registrants and encourages the SEC to take into consideration whether these requirements “disproportionately burden small issuers.”
On July 1, 2009, the SEC proposed a rule to implement the “Say-on-Pay” provisions contained in the TARP executive compensation restrictions.
The proposal would add a new Exchange Act Rule 14a-20, which would require TARP recipient to provide a separate shareholder vote to approve the compensation of their executives, as disclosed under Item 402 of Regulation S-K, in their proxy solicitations for an annual meeting at which directors are to be elected. In addition, a TARP recipient would be required to explain the general effect of the vote, such as whether the vote is non-binding.
The SEC is not dictating the specific language, form of resolution, or proxy disclosure that a TARP recipient must use to provide shareholders with a “Say-on-Pay.” However, footnote 14 to the Proposing Release contains an important caveat:
“However, as stated in Section 111(e)(1) of the EESA, the vote must be to approve “the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material).” We believe that a vote to approve a proposal on a different subject matter, such as a vote to approve only compensation policies and procedures, would not satisfy the requirements of Section 111(e)(1) of the EESA or proposed Rule 14a-20.”
The proposed rule also (i) continues to require that TARP recipients submit a preliminary proxy statement for potential SEC review; and (ii) confirms that TARP recipients that qualify as smaller reporting companies under the SEC disclosure framework may rely on the smaller reporting company disclosure requirements, and are therefore not required to provide a Compensation Discussion & Analysis.
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…)