Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Dodd-Frank Act looks like it will affect compensation and benefits law in three main areas:

  • Executive and incentive compensation, including new disclosure and corporate governance requirements.
  • Use of stable value funds, hedging arrangements and swaps in retirement plans.
  • Regulation of vendors servicing retirement and other plans.

A few initial thoughts related to compensation are noted below. We will be posting additional analysis as we become better acquainted with this law. And be sure to follow and monitor our twitter account—@leonardnews—for our latest updates.

What you should know now

Mandatory “Say-on-Pay” and “Golden Parachute” Vote. Section 951 of the Act requires the proxy statement for a meeting of shareholders to include, at least once every three years, a separate non-binding resolution to approve the compensation of executives. In addition, not less than every six years, a proxy statement must include a separate resolution to determine whether such vote must occur every one, two or three years.

Separately, at any meeting where shareholders are asked to approve an acquisition, merger, consolidation, proposed sale or other disposition of substantially all assets, the proxy statement must include a non-binding resolution on any agreements or understandings the issuer has with its named executive officers concerning any type of compensation that may become payable to the executive officers in connection with the transaction. The vote is not required if the agreements have been previously approved in another non-binding say-on-pay vote.

These provisions apply to shareholder meetings occurring more than six months after the date of enactment of the Act. It is important to note that these provisions, unlike many others, are not dependent upon any SEC rule making and are automatically effective.

In the past, say-on-pay votes may have been regarded by public companies as mere formalities or easily obtained forms of shareholder approval, since brokers have typically voted shares in favor of management, assuring passage of the proposal in most cases. That cannot occur in the future as broker voting on say-on-pay is eliminated by the Dodd-Frank Act.

Public companies outside of the financial institution industry need to monitor the rule-making process to determine if a preliminary proxy will need to be filed for the say-on-pay vote. Currently, Rule 14a-6 requires a preliminary proxy to be filed with the SEC for a say-on-pay vote, as the rule only carves out say-on-pay votes from the requirement to file a preliminary proxy for certain financial institutions pursuant to Section 111(e)(1) of the Emergency Economic Stabilization Act of 2008.

Independence of Compensation Committees. Section 952 of the Act contains extensive provisions regarding compensation committees, including:

  • Requiring national securities exchanges to prohibit the listing of issuers that have compensation committees which are not independent.
  • Requiring the SEC to identify factors that affect the independence of compensation consultants, legal advisors or other advisors to the compensation committee.
  • Requiring the SEC to adopt disclosure rules regarding whether the issuer retained a compensation consultant, whether the work of the compensation consultant raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.
  • Providing the compensation committee explicit authority to retain a compensation consultant, legal counsel and other advisors.

Executive Compensation Disclosures. Section 953 of the Act requires the SEC to adopt rules that require additional disclosures with respect to executive compensation in the following areas:

  • The relation of executive compensation actually paid and the financial performance of the issuer.
  • The median annual compensation of all employees of the issuer excluding the chief executive officer.
  • The annual total compensation of the chief executive officer.
  • The ratio of chief executive officer compensation to the median annual compensation of all employees of the issuer excluding the chief executive officer.

The text of Section 953 of the Act is ambiguous and the SEC could interpret it to require disclosures other than those set forth above.

Compensation Clawbacks. Section 954 of the Act requires national securities exchanges to adopt rules as directed by the SEC. Those rules will require issuers to develop and implement a policy providing:

  • For disclosure of an issuer’s policy on incentive compensation that is based on financial information required to be reported under securities laws.
  • That, if an accounting restatement is prepared, the issuer will recover any excess incentive-based compensation from any current or former executive officer who received such incentive-based compensation in the three preceding years.

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