On June 10, 2009, U.S. Department of the Treasury announced Interim Final Rules setting forth standards for compensation and corporate governance (the "TARP Final Rules") applicable to participants in the Troubled Asset Relief Program ("TARP") under the Emergency Recovery and Reinvestment Act of 2008, and the American Recovery and Reinvestment Act of 2009. The TARP Final Rules provide executive compensation standards for all (i) entities receiving TARP assistance, (ii) entities that own 50 percent of a TARP recipient entity, and (iii) entities that are 50 percent owned by a TARP recipient ( "TARP Entities"). The TARP Final Rules became effective upon publication in the Federal Register, which occurred June 15, 2009, and supersede the prior rules and guidance regarding executive compensation standards and corporate governance practices for TARP Entities.
All TARP Entities will need to take action to ensure compliance with the TARP Final Rules, the most significant of which are briefly described below:
Limits on Bonus Compensation for Certain Executives and Highly Compensated Employees
TARP Entities are prohibited from accruing or paying any bonuses, retention awards (including new hire/"make-whole" awards) or incentive compensation (including stock options) paid to their Senior Executive Officers ("SEOs")* and certain other most highly compensated employees, except the following: (i) payments of "Long-Term Restricted Stock," including restricted stock units, subject to prescribed vesting criteria included in the TARP Final Rules and having a value of no more than one-third of the employee's total compensation, and (ii) bonus payments required to be paid pursuant to an employment agreement as of Feb. 11, 2009. This payment limitation does not apply to any bonuses accrued or paid prior to the date the TARP Final Rules are published in the Federal Register. The number of highly compensated employees and SEOs subject to bonus-payment limits will differ depending on the amount of TARP assistance received (e.g., entities receiving more than $500 million in TARP funds will have bonus limits applied to SEOs and the next 20 most highly compensated employees).
Prohibition of "Golden Parachute" and Tax "Gross-Up" Payments
"Golden parachute" payments are prohibited to SEOs and the other five most highly compensated employees. Golden parachute payments include payments paid as a result of the employee's departure for any reason from the TARP Entity, and payments made on account of the TARP Entity's "change in control." There is no longer an exception for any amount of golden parachute payment, as was included in the prior rules.
Tax "gross-up" payments (i.e., reimbursement for taxes paid by employees as a result of "golden parachute" payments and other compensation) are prohibited to SEOs and the next 20 most highly compensated employees.
Additional Obligations – Luxury Expenditures, Disclosure and Compliance Regime
TARP Entities are also required to adopt, file and post a luxury expenditure policy, disclose the payment of perquisites exceeding $25,000 for any employee subject to bonus restriction, disclose information about their use of compensation consultants, and include a non-binding "say-on-pay" shareholder vote in their annual meeting proxy statements. In addition, the TARP Final Rules establish a compliance reporting regime, which includes a requirement that the compensation committee meet twice a year to review the entity's compensation policies for unnecessary risk, and to annually disclose its findings.
The TARP Final Rules establish a "Special Master" to approve the payments and/or compensation structures of the SEO and next 100 most highly compensated employees of companies that have received "exceptional financial assistance." The Special Master may also provide opinions regarding payments or compensation structures to employees of other TARP Entities.
The obligation to comply with the TARP Final Rules continues until the TARP Entity has repurchased its preferred stock from Treasury and does not apply during the time when Treasury only holds a warrant to purchase the TARP Entity's common stock.