As most public companies are aware, Section 951 of the Dodd-Frank Act of 2010 requires all public companies subject to the SEC’s proxy rules to include in their annual meeting proxy statements at least once every three years a nonbinding resolution asking shareholders to approve the compensation of executives disclosed pursuant to Item 402 of Regulation S-K (a “say on pay,” or “SOP,” vote). At least once every six years, each public company must also include in its annual meeting proxy statement a nonbinding resolution asking shareholders to determine whether to have the say on pay vote every one, two or three years (a “say when on pay,” or “SWOP,” vote). As a result, each public company subject to the proxy rules, other than smaller reporting companies,2 is required to include in its 2011 annual meeting proxy statement for shareholder approval nonbinding SOP and SWOP resolutions.3 Although the statute does not require the SEC to adopt rules implementing these requirements, it raises a number of interpretive issues that the SEC has worked to resolve with rules that were adopted on January 25, 2011. The new rules become effective 60 days after they are published in the Federal Register, although the SEC has indicated as a transitional matter that issuers, in effect, may immediately avail themselves of certain provisions in the new rules, as discussed below. The following is a brief summary of these rules.

SOP Proposal. New Rule 14a-21 contains the requirements for the SOP proposal and makes clear that the resolution must cover the compensation of the named executive officers and not merely the issuer’s compensation policies and procedures. This position is consistent with the SEC’s position in Rule 14a-20 regarding say on pay proposals by bank holding companies with outstanding investments by the U.S Treasury under TARP. Although there is no specific form prescribed for the SOP resolution, an instruction added to the final rule provides a form of resolution that will be considered acceptable.

Rule 14a-21 also clarifies that the say on pay advisory vote does not cover director compensation or the specific disclosures required under Regulation S-K Item 402(s) regarding the relationship between compensation policies and risk management, unless included in the Compensation Discussion and Analysis (“CD&A”).

CD&A Change. A change to Item 402(b) of Regulation S-K requires disclosure in the CD&A regarding whether and how the issuer’s compensation policies and decisions have taken into account the results of the most recent SOP vote required by Dodd-Frank or TARP in determining compensation policies and decisions and, if so, how that consideration has affected compensation policies and decisions. A discussion of earlier votes would only be required if material. While not specifically required by the statute, the SEC, believes such disclosure will facilitate a better understanding of the issuer’s compensation decisions. For smaller reporting companies, which are not required to provide a CD&A this disclosure need only be addressed in other narrative accompanying the compensation disclosure to the extent it is material to an understanding of the compensation disclosures.

Effect of SOP Vote. It remains to be seen whether more than a few SOP proposals will be voted down. Bank holding companies that received TARP investments and others have included such proposals in their proxy statements during the past couple of years, and only a handful have been disapproved by shareholders. However, with the changes to uninstructed broker voting discussed elsewhere in this Alert, a higher percentage of these proposals could be disapproved in coming years, which will likely pressure those companies to reexamine their executive compensation policies and reduce executive pay in the short term in some cases. Anecdotal evidence suggests that institutional shareholders are likely to support most SOP proposals, but will use a screening process to focus on outliers where there is a disconnect between pay and performance.

SWOP Proposal and Vote. Rule 14a-21 and a change to Rule 14a-4 resolve the issue of how to frame the SWOP proposal by requiring issuers to include four choices on their proxy cards: (1) every year, (2) every two years, (3) every three years and (4) abstain. Prior to the effective date of the final rules, the SEC has indicated that it will not object if the SWOP proposal is framed in this manner. If an issuer’s proxy service provider’s system cannot accommodate four choices, the SEC will not object if the proxy card for the 2011 meeting includes the one-year, two-year and three-year choices, and provides no discretionary voting of proxy cards not indicating a choice.

An issuer’s board would be permitted (though not required) to make a recommendation, as is customary on other proposals, but the proxy statementmust be clear that shareholders are not voting to approve or disapprove the board’s recommendation. Anecdotal evidence suggests that institutional shareholder preferences on the frequency issue vary. Institutional Shareholder Services (“ISS”) and several other institutional shareholders have indicated their preference for an annual vote, while others appear to favor a triennial vote, at least in part due to the administrative burden of having to do an annual analysis of the executive compensation of each public company in which they have an interest.

Exception for TARP Issuers. Issuers that have outstanding obligations arising from financial assistance provided under TARP (such as certain bank holding companies) are exempt from Rule 14a-21 until the first annual meeting after their TARP obligations have been repaid, and should instead comply with their annual SOP obligations under Rule 14a-20. The SEC will not object if these issuers comply with this position prior to the new rules becoming effective.

Effect on Rule 14a-8 Shareholder Proposals. Because SOP and SWOP votes are now mandated by statute, the SEC has added an instruction to Rule 14a-8(i)(10) to provide relief to issuers receiving shareholder proposals relating to say on pay. The instruction allows an issuer to treat a shareholder proposal as “substantially implemented” under paragraph (i)(10) and to exclude the proposal from its proxy statement if the proposal relates to the approval of executive compensation as disclosed pursuant to S-K Item 402 or the frequency of such a vote and the issuer has adopted a policy on SWOP votes that is consistent with the choice of the majority of the votes cast by shareholders on the most recent SWOP proposal.Where none of the three choices received a majority of the votes cast, the instruction would not apply. Also, where the scope of a shareholder proposal is different than the say on pay proposal required under Rule 14a-21, such as focusing on only one aspect of compensation, the SEC staff will consider requests to exclude such shareholder proposals on a case-by-case basis.

Disclosure Regarding the Vote. New Item 24 of Schedule 14A would require proxy disclosure that the SOP and SWOP proposals are being provided as required by Section 14A of the Exchange Act, as well as disclosure as to the general effect of the vote, including that it is nonbinding and, when applicable, the current frequency of SOP votes and when the next SOP vote will occur. In addition, the recent Form 8-K Item 5.07 requirement to disclose the results of shareholder meetings within four business days has been further revised to require specific disclosure of the results of the voting on all four of the SWOP choices, and to require disclosure by subsequent amendment to the Form 8-K of the issuer’s decision on how often to have the SOP vote in light of the results of the SWOP vote. The Form 8-K amendment will be due within 150 days after the end of the shareholdermeeting and in no event later than 60 days prior to the deadline under Rule 14a-8 for shareholder proposals to be included in the next annual meeting proxy statement.

Even though the resolutions are nonbinding, issuers that ignore a vote against the SOP or SWOP resolutions do so at their own peril. Ignoring the wishes of the shareholders could lead to a recommendation by proxy advisors like ISS to vote against directors in the next election, and could even lead to disgruntled shareholders making shareholder proposals, withholding votes from or voting against directors in the next election, and even proposing an alternate slate of directors.

Preliminary Proxy Filing Relief. Finally, a change to Rule 14a-6 provides that inclusion of the required SOP and SWOP proposals, and any other shareholder advisory vote proposal on compensation, in a proxy statement will not necessitate the filing of a preliminary proxy statement with the SEC. This change provides relief to issuers, so that proxy preparation schedules need not be accelerated to account for potential SEC review prior to mailing. The SEC has indicated that, pending the effective date of the new rules, it will not object if issuers in effect treat the exemption for these proposals as if it has been adopted.


  • Issuers should consider obtaining feedback from their major shareholders and reexamining proxy advisor voting guidelines regarding executive compensation policies and practices, to make sure policies and practices align with shareholder expectations and to improve the chances of a favorable vote. However, if engaging in discussions with shareholders in advance of a shareholder meeting, issuers will need to avoid conduct that could be considered proxy solicitation. As a result, during this time frame, issuers should simply be listening to shareholder comments and should refrain from any defense of their compensation practices other than in compliance with the proxy rules.
  • Issuers should review the structure of their Compensation Discussion and Analysito make sure it makes the best cases possible for a link between pay and performance, as this will likely be an important factor for shareholders in determining whether to approve the SOP proposal. Issuers should consider developing quantitative analyses that can be included in the CD&As to demonstrate the link and support the issuers’ assertions. Also, many commentators are suggesting the inclusion of an executive summary to help make their cases, as readers are unlikely to read the entire CD&As.
  • Issuers should have the board consider the frequency of the SOP vote and should include the board’s recommendation in the proxy statement, as it will provide guidance to shareholders and should permit management to vote proxies not specifying a choice for the board’s recommendation. Nearly all of the proxies filed to date include a board recommendation. A majority of these recommendations are for a triennial vote, with most of the rest recommending an annual vote. There are valid reasons for both of these choices, so issuers and their boards should consider carefully what is best for them and their shareholders.
  • After the final rules are adopted, issuers should consider whether to include in their proxy statements the expanded “golden parachute” disclosure required by Reg. S-K Item 402(t). Doing so will deem the “say on parachute pay” vote to have been included in the annual meeting SOP proposal, allowing the issuer potentially to avoid a separate vote in the event of a later change in control transaction. Published surveys suggest, however, that most issuers are not planning to combine the parachute pay and annual meeting say on pay votes in 2011. This is probably because parachute arrangements are often modified just prior to a change in control transaction, which would likely necessitate a separate say on parachute pay vote in connection with the change in control. Also, issuers that include the additional parachute disclosure in their annual meeting proxy statements could be viewed by the market as signaling that they are contemplating a sale.