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Corporate Governance Provisions of the Financial Reform Bill

Client Advisory

July 19, 2010

On June 25, the House-Senate conference committee reached an agreement on financial reform legislation, now known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act is largely based on the bill that the Senate passed last May. The House gave its final approval to the Dodd-Frank Act on June 30, and the Senate gave its final approval on July 15. President Obama is expected to sign the Dodd-Frank Act into law. Among a broad spectrum of provisions aimed at reforming the U.S. financial system to reduce systemic risk, the bill contains various corporate governance and disclosure provisions which are described below. Those provisions that do not apply to foreign private issuers[1] are so noted.

Hedging Disclosure for Employees and Directors

U.S. companies must disclose whether employees and directors are allowed to hedge the value of any equity securities.

This provision does not apply to foreign private issuers.

Independence of Compensation Committee Members and Advisors

Listed companies must:

  • Have a compensation committee consisting of independent directors;
  • Authorize the compensation committee, in its sole discretion, to engage compensation consultants, legal counsel and other advisors;
  • Require the compensation committee to be directly responsible for the appointment, compensation and oversight of the work of such compensation consultants, legal counsel and other advisors; and
  • Disclose (i) whether a compensation consultant was retained, and (ii) whether the compensation consultant’s work raised any conflicts of interest (and if so, the nature of the conflict and how it is being addressed).

This provision does not apply to foreign private issuers that annually disclose their reasons for not having an independent compensation committee.

Pay and Performance Disclosure

U.S. companies must disclose the relationship between a company’s executive compensation actually paid and financial performance, taking into account any change in the value of the company’s shares, dividends and distributions.

This provision does not apply to foreign private issuers.

Internal Pay Equity Disclosure

U.S. companies must disclose:

  • the median annual total compensation of all employees, except the CEO;
  • the annual total compensation of the CEO; and
  • the ratio of the median employee annual total compensation to that of the CEO.

This provision does not apply to foreign private issuers. 

Compensation Structure Disclosure

The U.S. federal agencies responsible for depository institutions, broker-dealers, credit unions, investment advisers, Fannie Mae, and Freddie Mac must:

  • Require those institutions to disclose sufficient information about the structure of their incentive-based compensation schemes to permit regulators to determine whether those schemes: (i) provide excessive compensation to any executive, employee, director, or principal shareholder, or (ii) could lead to a material financial loss to the institution; and
  • Impose appropriate regulations to prohibit those institutions from using incentive-based compensation structures that encourage inappropriate risk-taking by the institution and (i) provide excessive compensation to any executive, employee, director, or principal shareholder, or (ii) could lead to a material financial loss to the institution.

Financial institutions that have less than $1 billion in assets are exempt from these provisions.

This provision applies to all U.S.-regulated depository institutions, broker-dealers, credit unions, and investment advisers, including similar non-U.S. financial institutions, to the extent that they are subject to the authority of the U.S. federal regulators responsible for those types of financial institutions. 

Shareholder Proxy Access

The SEC may require an issuer to grant shareholders access to the issuer’s proxy materials to nominate candidates for the issuer’s board of directors. 

The SEC may exempt issuers from any such requirement. When determining whether to grant an exemption, the SEC must consider whether shareholder proxy access disproportionately burdens small issuers.

This provision does not apply to foreign private issuers. 

Say on Pay

At least once every three years a U.S. company must provide its shareholders with a non-binding shareholder vote at an annual or special meeting of shareholders to approve the company’s executives’ compensation as disclosed under the SEC rules.

At least once every six years a U.S. company must provide its shareholders with a non-binding vote to determine whether the above vote regarding executive compensation should occur every year, every two years, or every three years.

This provision does not apply to foreign private issuers. 

Say on Golden Parachutes

A U.S. company’s proxy or consent solicitation materials for an acquisition, merger, consolidation, or proposed sale or disposition of all or substantially all of the company’s assets must:

  • disclose any agreements or understandings under which the company may pay compensation based on or related to that transaction to its named executive officers; and
  • provide shareholders with a non-binding vote to approve those agreements or understandings.

This provision does not apply to foreign private issuers.

Clawback

The SEC must require national securities exchanges and national securities associations to prohibit the listing of issuers that fail to disclose:

  • policies on incentive-based compensation that are based on publicly reported financial information; and
  • clawback policies enabling the recovery of incentive-based compensation from current or former executive officers following a restatement.

The trigger for clawback would be based on material noncompliance with any financial reporting requirements that led to the restatement during the three-year period preceding the date on which a company is required to prepare the restatement.

The amount to be clawed back is the amount in excess of what would have been paid under the restated results.

This provision applies to all companies listed by a national securities exchange or a national securities association, including foreign private issuers. 

Risk Committees Required

Systemically important publicly-traded nonbank financial companies and publicly-traded bank holding companies with total consolidated assets of $10 billion or more must have risk committees. The Board of Governors of the Federal Reserve System may require risk committees for smaller publicly-traded bank holding companies to the extent necessary or appropriate to promote sound risk management practices.

This provision applies to all U.S.-regulated nonbank financial companies and bank holding companies, including non-U.S. institutions, to the extent that they are subject to the authority of the Board of Governors of the Federal Reserve System. 

Chairman/CEO Structures

The SEC must require U.S. issuers to disclose in their annual proxy materials why they have chosen to have one person serve as both chairman of the board of directors and CEO or to have two different people serve in these roles.

This provision does not apply to foreign private issuers.

Voting by Broker-Dealers

Exchanges must prohibit their member broker-dealers from voting securities that they hold for a beneficial owner in connection with any board of directors election, executive compensation resolution, or other significant matter (as specified by the SEC) unless the beneficial owner has instructed the broker-dealer to vote the securities in accordance with the beneficial owner’s instructions. This will prohibit the common practice known as “broker discretionary voting,” under which broker-dealers vote securities that their customers did not vote in connection with certain routine matters, most notably uncontested board of directors elections. 

This provision applies to all companies listed on a national securities exchange, including foreign private issuers. 


Questions regarding this advisory should be addressed to Guy P. Lander (212-238-8619, lander@clm.com).


Endnote


[1] Under Rule 3b-4 under the U.S. Securities Exchange Act of 1934, a “foreign private issuer” is a non-U.S. company that either (a) has 50% or less of its outstanding voting securities held of record by U.S. residents, or (b) has more than 50% of its outstanding voting securities held by U.S. residents but does not have (i) a majority of its officers or directors who are U.S. citizens or residents, or (ii) more than 50% of its assets located in the U.S. or (iii) its business principally administered in the U.S.  



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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