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

SEC Chair Mary Schapiro testified before the Senate Committee on Banking, Housing, and Urban Affairs on September 30, 2010. In so doing she gave more clues on the SEC’s regulatory priorities under the Dodd-Frank Act and timing for rulemaking actions.

 OTC Derivatives.  Title VII of the Dodd-Frank Act provides a comprehensive framework for the regulation of the OTC derivatives market.  The SEC expects to propose and adopt Title VII rules in a series of actions, beginning in October and proceeding over the next few months.

 Clearance and Settlement.  The SEC staff is working closely with the Federal Reserve Board and the CFTC to develop, as required by Title VIII of the Dodd-Frank Act, a new framework to supervise systemically important financial market utilities, including clearing agencies registered with the SEC.  The SEC expects to propose its first set of Title VIII rules in December.

 Private Fund Adviser Registration and Reporting.   By July 2011, all large hedge fund advisers and private equity fund advisers will be required to register with the SEC.  Under the Dodd-Frank Act, venture capital advisers and private fund advisers with less than $150 million in assets under management in the United States will be exempt from the new registration requirements, although the Dodd-Frank Act does provide for recordkeeping and reporting by these advisers.   In addition, family offices will not be subject to registration. In order to implement the exemptions, the SEC must propose and adopt rules. The staff is planning to propose rules on all of these matters between October and December of this year.

 Ms. Schapiro also discussed the collection of systemic risk information from private fund advisers as required by Title IV of the Act.  However, she did not make any commitments as to when rules would be proposed.

 Corporate Governance and Executive Compensation Reforms.  Section 951 of the Act requires a shareholder advisory “say-on-pay” vote on executive compensation at least once every 3 years and a separate advisory vote at least once every 6 years on whether the say-on-pay resolution will be presented for shareholder approval every one, two, or three years. In addition, in any proxy statement asking shareholders to approve a merger or similar transaction, the Dodd-Frank Act requires disclosure about, and a shareholder advisory vote to approve, compensation related to the transaction, unless the arrangements were already subject to the periodic say-on-pay vote.  Ms. Schapiro anticipates that the SEC will propose rules designed to implement these provisions in the next few weeks.

 By April 2011, the SEC is required to adopt — jointly with other financial regulators — incentive-based compensation regulations or guidelines that apply to covered financial institutions, including broker-dealers and investment advisers, with assets of $1 billion or more.  To meet the April 2011 adoption deadline, Ms. Schapiro anticipates that the staff will submit proposed rules to the SEC for consideration as soon as December.

 The Dodd-Frank Act also requires the SEC to write rules mandating new listing standards relating to the independence of compensation committees and establishing new disclosure requirements and conflict of interest standards that boards must observe when retaining compensation consultants.  Under the Dodd-Frank Act, these rules must be adopted by the SEC within 360 days from the date of enactment of the Dodd-Frank Act, and the SEC anticipates that the staff will submit proposed rules for the SEC’s consideration by year end.

 The Dodd-Frank Act requires the SEC to amend its executive compensation disclosure rules to require public companies to disclose information showing the relationship between executive compensation actually paid and the financial performance of the company, as well as information about the total annual compensation of the chief executive officer, the median annual total compensation of all other employees, and the ratio of these two amounts.  Rule amendments also are mandated that will require public companies to disclose in their annual meeting proxy materials whether any employee or director is permitted to purchase financial instruments designed to hedge any decrease in market value of equity securities granted as part of their compensation.  Finally, the Dodd-Frank Act requires the SEC to adopt rules mandating changes to listing standards requiring companies to implement and disclose “clawback” policies for recovering from current and former executive officers incentive-based compensation paid during any three-year period preceding a material accounting restatement.   The SEC currently anticipates that the staff will submit proposed rules for the SEC’s consideration by the middle of next year.

 We have previously summarized SEC rule making time lines here and here.

 Check frequently for updates on the Dodd-Frank Act.