Dodd-Frank, The SEC and Corporate Governance

The federal securities laws have traditionally focused largely on disclosure, leaving corporate governance to state law. Nevertheless, Dodd-Franks expands the Commission's role in corporate governance in three key areas. This is consistent with the impact of the legislation on the SEC's Enforcement program (here), rule making authority (here) and its expanded authority in the area of executive compensation (here).

Perhaps the most significant corporate governance provision is the new requirement that publicly traded non-bank financial companies and bank holding companies with total consolidated assets of $10 billion or more establish a risk committee. Under this provision, which is consistent with key goals of Dodd-Franks, the committee is required to have independent directors as specified in rules to be written within one year of enactment by the Federal Reserve. The committee is also required to have at least one risk management expert with the requisite expertise. The Federal Reserve is given authority under the Act to require publicly traded bank holding companies with less than $10 billion to institute such a committee.

A second provision concerns proxy access. Here, the SEC is given the authority to issue rules setting the standards and procedures for shareholders to use the proxy solicitation materials of the company to nominate director candidates. The Commission also has the authority under the Act to exempt companies from these procedures.

Finally, any issuer or reporting company that wishes to use the clearing exemption is required to have a board committee that reviews and approves the use of swaps. This provision becomes effective one year after the effective date of the Act.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.