Yesterday, the House Financial Services Committee held a markup session on H.R. 3269, the “Corporate and Financial Institution Compensation Fairness Act of 2009.” H.R. 3269, similiar to legislation recently delivered to Congress by the Obama Administration , is aimed at preventing executive compensation practices that support “excessive risk at the expense of their companies, shareholders, employees, and ultimately the American taxpayer.” Among other things, H.R. 3269 would (i) give shareholders of all public companies a nonbinding, advisory “say on pay” for top executives and stricter independence requirements for compensation committee members; (ii) require federal regulators to proscribe inappropriate or imprudently risky compensation practices as part of solvency regulation of all financial institutions; and (iii) require financial institution firms to disclose any compensation structures that include incentive-based elements. The bill was approved in a 40-28 vote and is expected to go to the House floor as early as Friday. Committee Chairman, Barney Frank (D-MA) stated that H.R. 3269 “is the first step towards comprehensive financial regulatory reform.” He further stated, “[I] look forward to having this bill on the House floor soon, and I also look forward to changing the status quo.” In expressing his opposition to the legislation, Representative Spencer Bachus (R-AL), stated, “[w]e have not had one hearing on how to address those risky compensation schemes.” He suggested reviewing whether the plans adopted by regulatory banking agencies have been working before passing legislation that affects “every business and every corporation in America.” He went on to say that, “[a]t the minimum, we need a hearing asking the regulators how they would implement what is very broad and vague standards contained in this bill.”
In part, H.R. 3269 was amended in the following ways:
- Adds a provision that would allow the SEC to exempt certain categories of issuers from the say-on-pay requirements where appropriate, taking into account, among other considerations, the potential impact on smaller reporting issuers.
- Clarifies that the compensation committee independence standards apply only to public companies with a registered class of equity securities, not to companies that have only an issue of publicly registered debt.
- Requires that the independence standards for compensation consultants to be promulgated by the SEC are “competitively neutral among categories of consultants and preserve the ability of compensation committees to retain the services of members of any such category.”
- Deletes a provision that requires an issuer’s annual disclosure of whether it used an independent compensation consultant to include an explanation of why it chose not to use a consultant.
- Specifically provides that financial companies that do not have incentive-based payment arrangements are not required to make disclosures regarding incentive-based payment arrangements.
- Narrows the scope of the regulators’ authority to prohibit compensation structures by rule to allow such prohibitions only of incentive-based payment arrangements (as opposed to any compensation structures or incentive-based payment arrangements) of covered financial institutions.
- Requires at least annual reporting of annual say-on-pay and golden parachutes votes by all institutional investors, unless such votes are otherwise required to be reported publicly by SEC rule.
- Exempts financial institutions with less than $1 billion in assets from the incentive-based pay provisions.
- Requires the GAO to study the correlation between compensation structure and excessive risk-taking and report to Congress within one year of enactment. Factors to be considered include compensation structures used by companies from 2000-2008, and a comparison of companies that failed, or nearly failed but for government assistance, and companies that remained viable through the market turmoil of 2007-2008.
- Provides that compensation approved by a majority say-on-pay vote is not subject to clawback, except as provided by contract or due to fraud to the extent provided by federal law.
- Adds Fannie Mae and Freddie Mac to the list of financial institutions subject to the incentive-based pay provisions and adds the Federal Housing Finance Agency as a financial regulator with rulemaking authority for such provisions.