Dodd-Franks, The SEC and Executive Compensation

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.