On June 30, 2010, the House of Representatives approved the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”). The Dodd-Frank Act was passed by the House following negotiations between Senate and House conference members to reconcile differences between the previous Senate and House reform bills. The Senate is expected to take action on the Dodd-Frank Act when it reconvenes in mid-July. While the bulk of the Dodd-Frank Act regulates financial institutions and their products, it also includes the corporate governance and executive compensation provisions discussed below. In addition, the Dodd-Frank Act amends Section 404 of the Sarbanes-Oxley Act of 2002 to exempt public companies that are not “large accelerated filers” or “accelerated filers” from compliance with the internal control over financial reporting auditor attestation requirements.
The corporate governance and executive compensation provisions in the Dodd-Frank Act include:
Mandatory Proxy Access: The SEC would have the authority to adopt rules requiring companies that are subject to the SEC’s proxy rules to include shareholder nominees for the board in the company’s proxy statement on terms determined by the SEC. The Dodd-Frank Act does not include any ownership or holding period requirements advanced by Senate conferees during the Senate-House negotiations.
Say on Pay: At least once every three years, companies would be required to have an advisory vote on executive compensation. In a change from the Senate bill, shareholders would also have the right to determine whether to have a say on pay vote every one, two or three years.
Vote on Golden Parachutes: In a change from the Senate bill, companies would be required to have an advisory vote on golden parachutes relating to a merger, acquisition or other change of control.
Compensation Committee Independence: Compensation committee members of listed companies would be required to satisfy heightened independence standards established by the national securities exchanges, including standards related to consulting, advisory or other fees to the issuer. In addition, the SEC would be required to adopt rules ensuring that any compensation consultant, legal counsel, or other advisor to the compensation committee was “independent” (as defined by the SEC).
Mandatory Majority Voting: Unlike the Senate bill, the Dodd-Frank Act does not require companies to adopt a majority voting standard in uncontested elections.
Enhanced Proxy Disclosure: Companies would be required to include proxy disclosure of the relationship between executive compensation and financial performance, taking into account any change in the value of stock and dividends and any distributions, which may, but is not required to, include a pictorial comparison. Companies would also be required to disclose the median compensation of employees other than the CEO and the ratio between the CEO’s compensation and the median compensation of all other employees.
Disclosure of Separation of Chairman and CEO: Companies would be required to disclose in their annual proxy statements the reasons they have chosen to either have a single CEO and chairman, or why they have separated the CEO and chairman positions. SEC rules currently require this disclosure and it is unclear what additional disclosure would be required by the Dodd-Frank Act.
Broker Discretionary Voting: Brokers would be prohibited from exercising discretionary authority to vote in connection with the election of directors, executive compensation (including say-on-pay), or any other significant matter as determined by the SEC.
Clawback Policy: Companies would need to develop and implement a clawback policy that would require recovery of all incentive-based compensation from all executive officers (both current and former) in the event of a financial restatement, for the three-year period preceding the restatement in excess of what they would have been paid under the restatement. This clawback provision strengthens Sarbanes-Oxley by requiring clawback even if no one engaged in misconduct.
Beneficial Ownership: Section 13(d) would be amended to include beneficial ownership of security-based swaps. In addition, the SEC would have the ability to reduce the time period for filing an initial Schedule 13D and Section 16 form.
Employee Hedging: Companies would be required to disclose whether their employees are permitted to engage in hedging activities that are designed to hedge or offset market declines affecting compensatory equity awards.
Regulation D: The SEC would be required to adopt rules to disqualify certain “bad actors,” including persons who have violated securities laws, from eligibility to use the Rule 506 exemption. The standards for determining “accredited investors” would be increased to income of $200,000 for individuals, $300,000 for a couple or net worth of $1 million.