On February 17, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law. The ARRA amends and entirely replaces the compensation provisions in Section 111 of the Emergency Economic Stabilization Act of 2008 (EESA) and applies to institutions that have already received financial assistance under the Troubled Asset Relief Program (TARP) as well as those who will participate in TARP in the future. The ARRA includes provisions for a non-binding shareholder vote on the compensation of executives as disclosed in a proxy statement, commonly known as a “Say-on-Pay” proposal, and the filing of a certificate signed by the CEO and CFO to the effect that the TARP recipient is in compliance with the compensation provisions of EESA, as amended.
The ARRA does not provide a stated effect date for the compensation provisions, but does state that the U.S. Treasury Department will promulgate regulations to implement the compensation provisions of the ARRA. However, on February 20, Senator Christopher Dodd, Chairman of the Committee on Banking, Housing and Urban Affairs, sent a letter to Mary Schapiro, Chairman of the Securities and Exchange Commission, stating that the provision requiring a non-binding shareholder vote on the compensation of executives would apply to preliminary and definitive proxy statements (other than definitive proxy statements which relate to preliminary proxy statements filed on or before February 17) filed after February 17 and requesting that the SEC provide further guidance for public company recipients of TARP funding. In response, on February 24, the SEC’s Division of Corporation Finance issued a Compliance and Disclosure Interpretation (CDI) which was further updated on February 26. The CDI includes the following:
- A separate shareholder vote on executive compensation is not required for any meeting other than the annual or special meeting of shareholders for which proxies will be solicited for the election of directors.
- Smaller reporting companies which are TARP recipients are not required to provide compensation discussion and analysis under Item 402 of Regulation S-K even though EESA Section 111(e), as amended, requires a shareholder vote on the compensation of executives, including matters such as the compensation discussion and analysis, the compensation tables, and any related material.
- A company that determines to comply with EESA Section 111(e)(1), as amended, by including its own proposal to have shareholders approve executive compensation will be required to file a preliminary proxy statement pursuant to Rule 14a-6(a) of the Securities Exchange Act of 1934. If the company faces special circumstances and would like to request acceleration of Rule 14a-6(a)'s 10-day review period, it is advised to contact the assistant director of the office that reviews the company's filings to discuss the special circumstances the company faces and how the 10-day review period could be accelerated.
- A separate shareholder vote on executive compensation is required regardless of whether a shareholder proposal on executive compensation is received, and the separate vote must be an “actual, non-binding vote” on the full range of executive compensation, not just on adopting a “Say-on-Pay” policy.
In his letter to the SEC, Senator Dodd also stated that because the certification requirement under EESA Section 111(b)(4) relates to compliance with executive compensation and corporate governance standards that have yet to be established by the Treasury, it is his view that the certification requirement is not yet effective and therefore CEOs and CFOs of TARP recipients will not be required to certify as to their company’s compliance with such standards that have yet to be established.
On February 26, Katten issued a Client Advisoryon the broader implications of the ARRA on executive compensation of TARP recipients.