Resources

Financial Reform and Executive Pay

July 16, 2010

On July 15, 2010, the House and Senate conferees reconciled their differences and approved the Restoring American Financial Stability Act of 2010 (RAFSA). The version being sent to the President for his signature is largely based on the Senate version. The passage of RAFSA merely presents a framework for financial reform. Many of the actual reforms will be implemented through regulations adopted by one or more of the affected agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the newly created Consumer Financial Protection Bureau (CFPB).

RAFSA covers a broad range of issues relating to the financial industry and public companies, including so-called systemic risk for the financial system, regulatory supervision, derivatives, hedge fund registration, consumer protection, credit rating agencies, corporate governance and executive compensation.

The following discussion is limited to Title IX of RAFSA relating to accountability and executive compensation issues, with the relevant sections noted. For a complete review of RAFSA provisions, please refer to Dykema's earlier alert available at www.dykema.com.

Shareholder Vote (Section 951) — RAFSA requires publicly traded companies to provide shareholder votes on executive compensation as set forth below, and requires SEC action on standards of independence of public company compensation committees and their advisors.

  • The so-called "say-on-pay" provisions apply to any publicly traded company, with additional requirements applicable to financial institutions.
  • At least once every three years, shareholders will vote to approve the compensation of executives as disclosed in a company's proxy materials.
  • At least once every six years, shareholders will vote to determine whether the vote on executive compensation will occur every one, two, or three years.
  • A vote on "golden parachutes" will be required when there is an acquisition, merger, consolidation, or proposed sale of a company.

The shareholder votes on executive compensation or on the frequency of such votes will not be binding on a company or its board of directors. The say-on-pay provisions reflect a continuing expansion in the role of the federal government in executive compensation matters.

Disclosure (Section 953) — RAFSA requires the SEC to issue rules requiring proxy statement disclosure by publicly held companies of the relationship between executive compensation actually paid and the financial performance of the company. Moreover, public companies for the first time will have to disclose (i) the median of the total annual compensation of all employees except the CEO, (ii) the total annual compensation of the CEO, and (iii) the ratio of (i) to (ii). For many public companies, this new rule will require collecting compensation information on domestic and international employees that may not ordinarily be collectively compiled.

Clawback Provisions (Section 954) — RAFSA requires the SEC to prohibit the listing of issuers on national securities exchanges that do not have compensation recovery policies. In addition, issuers must disclose such clawback policies for incentive compensation that is based on financial information required to be reported under the securities laws. If a company is required to restate its financial statements due to a material noncompliance with any financial reporting requirement, then any executive officer (current or former) would have to repay any excess compensation that the executive received during the three-year period preceding the date on which the company is required to prepare the restatement based on the erroneous data. The amount required to be repaid would be the excess of the incentive compensation received by an executive over what the executive would have received if the financial statements had been correctly stated.

In this regard, Section 304 of Sarbanes-Oxley provides a clawback provision that is applicable only to the CEO and CFO, and only if such misstatement is "a result of misconduct."

As is usually the case, the devil is in the details and the focus and lobbying have already begun at the regulatory levels. The effects of RAFSA will necessarily be staged since some of the provisions are effective immediately but many of the statutorily required changes will take months, if not years, to implement, particularly those imposed on the CFPB, which will only be up and running within six to twelve months of enactment. It then will be required to propose and finalize new regulations, which itself will take months.

In the ensuing months, there may be a period of uncertainty as the new regulatory entities are established and the regulations are proposed and debated. Publicly held companies and other related entities should review the new requirements and prepare for the changes. At the same time, ongoing compliance with existing regulations and supervisory requirements must, of course, continue. 


As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2010 Dykema Gossett PLLC.

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2018 Dykema Gossett PLLC.