Earlier today, the staff of the SEC’s Division of Corporation Finance (Staff) released three Compliance and Disclosure Interpretations (CD&Is) in question and answer format relating to the say-on-pay provision of the American Recovery and Reinvestment Act of 2009 (ARRA),and then supplemented those CD&Is today with two additional interpretations.  

ARRA was approved by Congress earlier this month, and signed into law by the President on February 17, 2009. Section 7001 of ARRA amends the Emergency Economic Stimulus Act of 2008 (EESA) to impose more stringent limitations on executive compensation paid by, and new restrictions on executive compensation-related practices of, recipients of financial assistance under TARP. In particular, ARRA amends Section 111 of EESA to create a new paragraph (e) that provides:

“(e) (1) ANNUAL SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION.—Any proxy or consent or authorization for an annual or other meeting of the shareholders of any TARP recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding shall permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material). (2) NONBINDING VOTE.—A shareholder vote described in paragraph (1) shall not be binding on the board of directors of a TARP recipient, and may not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board, nor shall such vote be construed to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.

(3) DEADLINE FOR RULEMAKING.—Not later than 1 year after the date of enactment of the American Recovery and Reinvestment Act of 2009, the Commission shall issue any final rules and regulations required by this subsection.”  

This provision immediately raised a number of interpretive questions, including:  

  1. Is the shareholder vote requirement immediately effective, or effective only after the SEC adopts final rules, or effective only after Treasury adopts “appropriate standards for executive compensation and corporate governance”?
  2. Does the requirement to “permit” a say-on-pay vote mean an issuer must always include an advisory vote or only if it receives a request from a shareholder?
  3. Does a say-on-pay ballot proposal require the filing of a preliminary proxy statement?  

On February 18, 2009, the American Bankers Association wrote a letter to the Secretary of the Treasury requesting clarification regarding the effective date of the executive compensation provisions contained in the AARA. Although Treasury has not responded publicly to the ABA’s letter, Senator Christopher Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs – and chief proponent of the provision – wrote a letter to SEC Chairman Mary Schapiro, stating his belief that these provisions were effective as of February 17, 2009, and therefore apply to preliminary or definitive proxy statements (other than definitive proxy statements which relate to preliminary proxy statements filed on or before February 17, 2009) filed with the SEC after February 17, 2009.

In response to inquiries, the Staff issued the new CD&Is, stating they were following the views expressed in Senator Dodd’s letter, and providing more specific guidance:

  • A separate shareholder vote on executive compensation is not required for any meeting other than the annual meeting of shareholders for which proxies will be solicited for the election of directors or a special meeting lieu of such a meeting.
  • A smaller reporting company that is subject to the say-on-pay provisions need not provide compensation discussion and analysis disclosure unless otherwise required under the securities laws.
  • A company that is seeking to comply with the say-on-pay provisions by including its own proposal to have shareholders approve executive compensation must file a preliminary proxy statement.
  • A company facing special circumstances necessitating expedition of the mandatory Rule 14a-6(a) ten-day review period, should contact the Assistant Director in charge of the office that reviews the Company’s filings.
  • The statute does not condition the requirement for a vote on the receipt of a shareholder proposal on approving executive compensation.
  • A shareholder proposal on "say on pay" that only asks the company to adopt a policy providing for annual shareholder votes on executive compensation in the future would not satisfy the requirements of the statute. The statute instead requires an actual, non-binding vote by the shareholders to approve executive compensation.

The staff did not provide any guidance as to the interaction of the provision's caveat that it does not "restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation," and the provision of 14a-8(i)(10) which permits the exclusion of proposals that "the company has already substantially implemented." For example, it is currently unclear whether or not a company which had previously received a shareholder proposal on say-on-pay, and was prepared to include it in this year's proxy, may now exclude the shareholder proposal as a result of the inclusion of their own say-on-pay proposal under the new law. While guidance was initially released on Tuesday, further guidance was added today. The staff of the Division of Corporation Finance may continue to update the page with futher guidance as it becomes available.