Under the new Treasury rules, compensation of top executives in the financial industry will be tightly monitored.

On February 4, 2009, the U.S. Department of the Treasury released further rules regarding restrictions on compensation for executives of entities that are receiving government assistance during the current financial crisis. For more information see http://www.treasury.gov/press/releases/tg15.htm. With the release of this new set of rules, there are now three sets of rules on executive compensation restrictions, each applying to an entity depending on the type of assistance such entity is receiving from the government. The three categories are entities participating in already announced programs, such as the Capital Purchase Program (CPP) and Term Asset-Backed Securities Loan Facility (TALF); entities participating in "future generally available access programs"; and entities receiving "exceptional assistance." The following provides a brief overview of each set of rules.

Participating in Already Announced Programs

Entities that are already participating in announced programs, such as the CPP or TALF, must follow the basic rules outlined in the Emergency Economic Stabilization Act of 2008 (EESA).  For information on the rules applicable to entities participating in already announced programs, please see McDermott On the Subject "U.S. Treasury Provides Interim Guidance on Executive Compensation Provisions in Emergency Economic Stabilization Act." This publication reviews the guidance released by the Treasury in October 2008.

The Treasury clarified its October Interim Final Rule on January 16, 2009. In addition to providing an amendment and two clarifications to the October Interim Final Rule, the Treasury’s latest guidance also provides reporting and recordkeeping requirements regarding executive compensation. For instance, the chief executive officer must certify within 135 days of the end of the entity’s fiscal year that the entity and its compensation committee have complied with the executive compensation standards under the Troubled Asset Relief Program (TARP). The chief executive officer also must certify within 120 days of the date the agreement is signed between the entity and the Treasury that the executive compensation arrangements have been reviewed for SEOs, and such arrangements do not encourage unnecessary and excessive risks that could threaten the financial health of the entity. The entity must keep records of the above certifications for a minimum of six years and provide such records to the TARP chief compliance officer upon request.

Future Generally Available Access Programs

The Treasury released further restrictions on February 4, 2009. These new restrictions only apply to new programs and will not apply retroactively to existing investments or to programs already announced, such as the CPP and the TALF. The following is an overview of the restrictions.

SEOs will be limited to $500,000 in total annual compensation (not including restricted stock). An entity may waive this requirement by disclosing the compensation paid to SEOs and, if requested, a non-binding "say on pay" resolution that entitles shareholders the right to vote on the amount of compensation paid to such SEOs. Further, an entity must disclose the reasons that compensation arrangements do not encourage excessive and unnecessary risk-taking.

An entity must implement provisions that require a clawback of bonuses for the top 25 executives who engage in deceptive practices. If an executive has knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate the executive’s own incentive pay, the entity must require full re-payment of the bonus paid to such executive.

If one of the top five executives severs from employment, a golden parachute payment will be limited to one year’s compensation, as opposed to the three years under the current CPP.

Finally, under the new restrictions, an entity must adopt policies relating to the approval of luxury expenditures in the areas of aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events.

Proposed guidance on the above provisions will be released by the Treasury in the near future.

Exceptional Assistance

Entities that receive "exceptional assistance" are those that have specific negotiated agreements with the Treasury, and they must follow the basic rules outlined in EESA referenced above and the following new restrictions.

SEOs will be limited to $500,000 in total annual compensation (not including restricted stock and other similar long term incentive arrangements). If an SEO is paid in the form of restricted stock or a similar long-term incentive arrangement, generally the SEO may only cash in the restricted stock if all debt has been repaid to the government. All executive compensation structures and strategies must be fully disclosed and subject to a "say on pay" non-binding shareholder resolution.

An entity must implement provisions that require a clawback of bonuses for the top 25 executives who engage in deceptive practices. If an executive has knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate the executive’s own incentive pay, the entity must require full re-payment of the bonus paid to such executive.

The top 10 executives are not eligible to receive a golden parachute payment upon a severance from employment. In addition, the next 25 executives (above the top 10 executives) are prohibited from receiving a golden parachute payment in excess of one year’s compensation upon a severance from employment.

Finally, an entity must adopt policies relating to the approval of luxury expenditures in the areas of aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events.

In addition to the above new restrictions, the Treasury made a plea to all entities to begin a review of how to prevent executive compensation arrangements from endangering the financial health of an entity. This plea was based on the suggestion that current compensation arrangements could have contributed to the economic crisis. The Treasury encouraged entities to review the compensation arrangements and determine how to promote long-term value creation for the entity and its shareholders.