SEC has announced that it expects to issue proposed rules on say-on-pay during October 2010. This rulemaking is important for public companies because Dodd-Frank mandates that all proxy statements for the first annual shareholders meeting held after January 21, 2011 include a say-on-pay proposal.

The SEC has been soliciting public comment prior to issuing proposed rules. Comment letters received provide a window into issues the SEC is likely to address but not necessarily the outcome. Some of the themes noted from the comment letters and suggested outcomes which we support were:

No Preliminary Proxy. The SEC should exempt proxy statements containing say-on-pay votes from the requirement to file a preliminary proxy. The exemption should be broadly written so that even more narrow say-on-pay votes not required by Dodd-Frank should not require a preliminary proxy. A preliminary proxy would serve no useful purpose and currently proxy statements with executive compensation proposals do not require a preliminary proxy. (See American Bar Association (“ABA”); Compensia; Society of Corporate Secretaries (“SCS”))

Form of Resolution. Provide guidance on the form of resolution in the same manner as the TARP rule. The say-on-pay vote should be clearly based on the information in the Compensation Discussion and Analysis. (See Compensia)

Provide Guidance on What Disclosures Are Required. The SEC should make it clear that an issuer does not have an obligation to state what action is intended is a negative vote is received. (See ABA; Compensia)

Is the Required Vote on Frequency of Say-on Pay Binding or Nonbinding? Some believe the statute can be read both ways. Section 14A(c) of the Exchange Act (Section 951 of the Dodd-Frank Act) is clear the vote is non-binding. (See ABA)

Can the Board Select a Frequency of One, Two or Three Years? Or does Dodd-Frank require the three alternatives be submitted to shareholders? A better reasoned approach is management should be able to select an alternative and if that is not approved the default rule would require a one year vote. (See ABA; Center on Executive Compensation (“CEO”); Frederic W. Cook) Depending on where the SEC comes out on this one, other issues arise, such as how to determine what alternative passes if there are multiple alternatives. In addition, modifications to Rule 14a-4, which governs the form of proxy card may be required. Finally, vote tabulators such as transfer agents may not be able to handle novel voting requirements on short notice.

Follow the TARP Model. The model allows flexibility to discuss the text of the proposal and why shareholders should approve the resolution. It reduces an issuer’s uncertainty as to what is permitted. TARP recipients should be permitted to have a single vote satisfying both requirements. (See SCS; CEO).

Role of Proxy Advisory Firms. The one-size-fits-all approach to proxy advisory firms is problematic and the advisory firms frequently make mistakes when analyzing individual compensation plans. (See SCS)

No Shareholder Proposals on Frequency of Vote. The statute provides the opportunity for shareholders to provide input and further shareholder proposals would be disruptive. (See CEO)

Readers may find our growing inventory of say-on-pay resources helpful:

Preparing for Say-on-Pay

Example of a Say-on-Pay Vote

NYSE Rule on Broker Voting

NASDAQ Rule on Broker Non-Voting