On July 28, the House of Representatives Financial Services Committee approved legislation that would give shareholders of publicly traded companies a non-binding advisory vote on the compensation of such companies’ named executive officers at annual meetings of shareholders to elect directors. Additionally, the legislation would require, in connection with a merger or acquisition of the issuer, a separate non-binding stockholder vote on “golden parachute” payments provided to executives in connection with such merger or acquisition. Issuers would be required to include and clearly disclose in tabular form in their soliciting materials the exact amounts senior executive officers would receive (whether present, deferred or contingent) if the merger or acquisition is completed. In its current form, the legislation would permit the Securities and Exchange Commission to exempt certain categories of companies, including smaller reporting companies, from such “say on pay” requirements. The draft legislation also provides that institutional investors must annually disclose their “say on pay” votes and that compensation approved by a majority vote of shareholders would not be subject to any clawback, except as provided by contract or due to fraud. (Note that this provision may conflict with the clawback provisions of Section 304 of the Sarbanes-Oxley Act of 2002 which do not require fraud, only a restatement “due to the material noncompliance of the issuer as a result of misconduct.”)
The legislation would also place stringent new requirements on the compensation committees of publicly traded companies. Compensation committee members would be prohibited from accepting any consulting, advisory or other compensatory fee from the company. Compensation committees would additionally be authorized to engage outside advisors, with such committees having the direct responsibility for the appointment, compensation and oversight of such advisors. Such advisors would be required to meet standards of independence established by the SEC.
Finally, the draft legislation would require certain “covered financial institutions” (which would include registered broker-dealers, investment advisors, as well as depository institutions and credit unions, in each case with $1 billion or more in assets) to disclose to the appropriate federal regulator their incentive-based compensation arrangements for a determination of whether such incentive-based compensation arrangements are aligned with sound risk management, are structured to account for the time horizon of risks and meet such other criteria as the regulators may deem appropriate to reduce unreasonable incentives for officers and employees to take “undue risks.” Regulators reviewing such incentive-based compensation arrangements would have authority to prohibit such incentive-based plans at covered financial institutions. According to published reports, the full House may consider this legislation today.