On October 18, 2010, the Securities and Exchange Commission (SEC) proposed new rules and amendments to existing rules to implement “Say on Pay” and “Golden Parachute” votes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The proposing release, available at www.sec.gov/rules/proposed/2010/33-9153.pdf, requests public comments on numerous aspects of the proposed rules on or before November 18, 2010.

The proposed rules would:

  1.  Add a new Rule 14a-21(a) that:
  • Requires a Say on Pay vote at least once every three years.
  • Applies to a proxy statement that contains executive compensation information required by Regulation S-K Item 402 (402 Disclosure).
  • Provides that shareholders will vote to approve the compensation as described in the 402 Disclosure, including Compensation Discussion and Analysis (CDA) for the principal executive officer, principal financial officer and other named executive officers (NEOs) as a group (not officer by officer).
  • Does not prescribe the form of vote or resolution, although the SEC suggests language to the effect of a vote “to approve the compensation of executives, as disclosed pursuant to [Item 402 of Regulation S-K].”1
  1. Add a new Rule 14a-21(b) and other rule amendments that:
  • Require a vote on the frequency of Say on Pay votes (Frequency Votes), at least every six years.
  • Allow shareholders to choose a frequency of one, two or three years.
  • Require a Frequency Vote in the first proxy statement to contain a Say on Pay vote.
  • Revise Rule 14a-4 to provide that the form of proxy must provide four choices for a Frequency Vote - one, two, three years and abstain.2
  • Revise Rule 14a-8 to permit the exclusion of shareholder proposals on a Frequency Vote if the issuer adopted a Say on Pay vote frequency policy consistent with the plurality choice of the most recent Frequency Vote per Rule 14a-21(b).
  1. Add a new Item 24 to Schedule 14A that requires the issuer to disclose the effect of a Say on Pay and Frequency Vote (advisory and non-binding per Dodd- Frank).
  2. Revise Item 402(b) of Regulation S-K to require that the CDA address whether and how the issuer’s compensation policies and decisions take into account Say on Pay votes (not mandated by Dodd-Frank).
  3. Amend Forms 10-K and 10-Q to require disclosure of issuer’s choice of frequency for its Say on Pay votes.
  4. Amend Rule 14a-6 to provide that Say on Pay and Frequency Votes do not require filing of a preliminary proxy statement.
  5. Clarify that TARP mandated Say on Pay votes would satisfy the Rule 14a-21(a) Say on Pay vote until the issuer is no longer subject to TARP mandates (repaid its TARP funds).
  6. Amend Regulation 14A, Schedule 14A and Item 402 of Regulation S-K, in connection with a shareholder vote on a merger or similar transactions (M&A Deal)3 to:
  • Add a new Item 402(t) to Regulation S-K that requires disclosure regarding golden parachute arrangements based on or related to the M&A Deal (Deal Related Parachutes).
  • Require disclosure with respect to each NEO of the buyer and the target, all Deal Related Parachutes between such NEO and the buyer or the target. This would include Deal Related Parachutes between the buyer and its NEOs, the buyer and target’s NEOs, the target and the target’s NEOs (and conceivably but unlikely, between the target and the buyer’s NEOs).
  • Require that Deal Related Parachutes are to be disclosed in specified tabular format with narrative detail.
  • Add a new Rule 14a-21(c) that would require a separate non-binding shareholder vote on the Deal Related Parachutes between the soliciting target company and its NEO’s (vote is narrower than the required disclosure).
  • Provide an exemption from such vote if the exact same Deal Related Parachutes were previously subject to a shareholder vote (otherwise any changes must be voted on with appropriate disclosure of the changes from the previously approved Deal Related Parachutes).

Effectiveness and Transition Matters

Dodd-Frank requires initial Say on Pay and Frequency Votes be included in proxy statements for the first annual meeting occurring on or after January 21, 2011, regardless of whether the SEC adopts its proposed rules in time. Deal Related Parachute votes are not required until the rules become effective. The SEC has stated that pending effectiveness of its rules, it will not object to forms of proxies that provide the four choices necessary for Frequency Votes4 or to the failure to file a preliminary proxy statement containing a Say on Pay vote and Frequency Vote if a preliminary proxy is not otherwise required. Because the statute is triggered by the date of the meeting, proxy materials filed prior to January 21, 2011, will need to provide for the mandated votes if they relate to a meeting on or after January 21, 2011.