On May 20, 2010, the Senate passed the Restoring American Financial Stability Act of 2010 (“RAFSA”). The legislation mandates major reforms of the United States financial regulatory system that are designed to prevent future financial crises, but it also includes significant changes to executive compensation and corporate governance rules for all public companies, including say-on-pay, compensation clawbacks, compensation committee and adviser independence, and majority voting for directors. RAFSA, along with a similar bill that was passed by the House of Representatives late last year, now goes to a House-Senate Conference Committee for reconciliation. The resulting compromise bill will be sent to the President for signature, perhaps as early as the July 4th recess. For our earlier summaries of related legislation, please refer to our December 18, 2009 Corporate and Securities Alert and ourAugust 5, 2009 Executive Compensation Alert.
Press accounts of the financial reform legislation have largely neglected its corporate governance and executive compensation provisions, although they will mandate major changes in how technology and life sciences companies conduct their affairs. Regulatory initiatives from the Securities and Exchange Commission that dovetail with these provisions, such as proxy access regulation, are also expected to have a major impact. As a result, it is important for public company directors, executives, counsel and advisers to familiarize themselves with the outlines of these reforms and begin to sort out the appropriate adjustments to current corporate practices.
Here is a summary of similarities and differences between the original House bill and RAFSA on the topics of executive compensation and corporate governance:
To see table click here.
We expect changes to RAFSA in the ordinary course of the legislative reconciliation process. While most of the legislative attention will be on changes to its major financial industry reform measures, the corporate governance and executive compensation elements are also liable to evolve. Generally, we believe the provisions of RAFSA will supersede the provisions of the original House bill. While it is possible that some major governance or compensation-related components of RAFSA will be eliminated (for example, possibly majority voting for directors), the bulk of these changes are likely to become standard requirements within a few months, and issuers are well advised to begin planning for change.