The American Recovery and Reinvestment Act of 2009 (the "Act") rewrites Section 111 of the Emergency Economic Stabilization Act of 2008 (the "EESA") and imposes several new or revised restrictions on the compensation arrangements of all financial institutions that have received or that will receive funds under the Troubled Asset Relief Program (the "TARP"). The Act grants the U.S. Department of the Treasury ("Treasury") broad authority to establish "appropriate standards" for the executive compensation programs and corporate governance of all TARP recipients and sets forth certain executive compensation restrictions and corporate governance standards. Because the Act requires Treasury and the SEC to issue implementing rules and guidance, it is uncertain whether the provisions of the Act described below are immediately effective. Moreover, many of the key terms and phrases used in the Act are not defined. Therefore, we expect that Treasury and the SEC will initiate rulemaking or other guidance interpreting several of the Act's provisions. Until then, it will be unclear exactly how many of the Act's requirements must be implemented immediately, but they should be considered now in order to avoid non-compliance. Interestingly, the Act allows TARP recipients to repay their TARP assistance early. Upon repayment, the financial institution will no longer be subject to any of these compensation restrictions and corporate governance standards.
The Act requires TARP recipients to implement the following executive compensation restrictions and corporate governance standards during the period when any TARP obligation is outstanding:
- Clawbacks of certain incentive compensation and bonuses for Senior Executive Officers ("SEOs")1 and the next 20 most highly compensated employees if the payment is based on financial statements that are later found to be materially inaccurate, regardless of fault.
- A prohibition on golden parachute payments, which are payments for departure based on any reason, except for services performed or accrued benefits, to any SEO or any of the next five most highly compensated employees.
- A prohibition on paying or accruing bonuses, retention awards and incentive compensation, except for restricted stock that does not fully vest during the period when any TARP obligation remains outstanding and which has a value not in excess of one-third of the total annual compensation of the employee receiving the stock. The number of employees affected by this prohibition is based upon a sliding scale dependent upon the amount of TARP funds received.
- Each TARP Recipient must permit a non-binding "say-on-pay" shareholder vote to approve the compensation of its executives.
- A restriction on incentive compensation that encourages executives to take "unnecessary and excessive risks that threaten the value" of the financial institution and a prohibition on any compensation plan that would "encourage manipulation of the reported earnings" of the financial institution.
- A requirement that the Compensation Committee meet semi-annually to evaluate the risks posed to the institution by its employee compensation programs and a requirement that CEOs and CFOs provide annual certifications of compliance with Section 111 of the EESA.
A requirement that the board of directors adopt a company-wide policy regarding luxury expenditures, including aviation services, office and facility renovations, entertainment and events.
In addition, the Act requires Treasury to retroactively review the compensation arrangements of the SEOs and the next 20 most highly compensated employees of all TARP recipients that were in place prior to the enactment of the Act to determine if the payments were consistent with the TARP or are not "otherwise contrary to the public interest". If Treasury determines that the payments were not made in accordance with its rules, it can require reimbursement of the compensation to the government.