Prior articles have reviewed the provisions of Dodd-Frank
which focus on SEC Enforcement (here) and rule making (here). Other
provisions of the Act impact the Commission's authority regarding executive
compensation. In part, these are discussed by Chairman Schapiro in her remarks
at the Center for Capital Markets Competitiveness on July 27, 2010, available here.
The provisions regarding executive compensation include:
- Listed companies must have an independent compensation
committee. The Act requires the SEC to issue rules directing national
securities exchanges and associations to require all member of a listed
company's compensation committee to be independent. While there are current
standards which address this question the new rules could be more stringent
than existing standards. (See generally Thomas O. Gorman, "Critical
Issues in the Sarbanes-Oxley Act: Audit Committee" (Sept. 2009) available
at the SECActions articles section here). The SEC rules must be issued
within one year of enactment.
- The SEC will also issue rules within one year of
enactment regarding the independence of any advisor or consultant to the
compensation committee. The committee, in its sole discretion, is authorized to
engage consultants, legal counsel and other necessary advisors in a manner
which is reminiscent of the authority given to the audit committee under The
Sarbanes-Oxley Act. The committee is responsible for the work of the
consultants.
- There are five additional key provisions regarding
compensation:
1) The Commission is required to write rules requiring
the disclosure of the relationship between executive compensation actually paid
and the performance of the company;
2) Other rules must be issued requiring the disclosure of
the median compensation (except that of the CEO), the annual total compensation
of the CEO and the ratio of the medial compensation to that of the CEO;
3) At least once every three years shareholders at a
meeting must be given the opportunity to have a non-binding vote on executive
compensation while every six years they can determine if the vote should be
every one, two or three years;
4) In any proxy or consent solicitation for the approval
of an M&A transaction, shareholders must be given a non-binding vote on
golden parachutes; and
5) The SEC must require listing exchanges to enforce
policies requiring the disclosure of incentive based compensation and clawback
policies.
The SEC is also required to write rules requiring
companies to disclose if directors and employees are permitted to hedge the
value of equity securities.
There are additional provisions regarding executive
compensation at financial institutions. Generally, they require that rules be
written regarding executive compensation based on arrangements which will not
encourage excessive risk taking. Federal regulators include the SEC, the
Federal Reserve, the OCC, the FDIC, the OTC, the National Credit Union
Administration Board and the Federal Housing Finance Agency.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.