The DoddThe Dodd-Frank Act:Frank Act: New Curbs on The Street?€¦ · 20/08/2010 · Dodd‐Frank General Some call Overview the Corporate Governance changes in Dodd‐Frank “modest.”

The Dodd-Frank Act:The Dodd Frank Act: New Curbs on The Street?

© 2010 Winston & Strawn LLP

The Dodd-Frank Act:The Dodd Frank Act: New Curbs on The Street?

Dodd Frank Act Session IV: ExecutiveDodd‐Frank Act Session IV: Executive Compensation and Corporate Governance

Brought to you by Winston & Strawn’s Corporate and Employee Benefits and Executive Compensation Practice Groups

© 2010 Winston & Strawn LLP

Today’s PresentersToday s Presenters

Christine EdwardsCorporateChicago

CEdwards@winston com

Marvin MillerCorporateNew York

MMiller@winston com

Michael MelbingerEmployee Benefits and Executive

CompensationChicago

James JunewiczCorporateChicagoNew York

[email protected] [email protected]

[email protected]@winston.com

© 2010 Winston & Strawn LLP 3

The Winston & Strawn Dodd‐Frank Webinars July 9 – General Overview, Financial Stability, Orderly y , y, y

Liquidation Authority, “Improvements” to Bank Regulation, and Bureau of Consumer Financial ProtectionProtection

July 21 – Regulation of Markets and Market Participants: Derivatives, Securities, Hedge Funds,

d d k lInvestment Advisers, and Broker‐Dealers August 6 – The New Enforcement Environment;

International Regulatory PerspectivesInternational Regulatory Perspectives August 20 – Executive Compensation and Corporate

Governance


Washington, D.C. UpdateWashington, D.C. Update

FRB: Mortgage Regulations FRB: Mortgage Regulations

FDIC Developments

U S Treasury: Mortgage Finance U.S. Treasury: Mortgage Finance


Corporate Governance Implications of Dodd‐FrankGeneral Overview Some call the Corporate Governance changes in p gDodd‐Frank “modest.”

Others believe Dodd‐Frank will produce major new b d f f lboard practices, at a minimum, for financial services companies.

But the TARP experience was that many changes But the TARP experience was that many changes imposed on financial institutions were either broadened to apply to all public companies by legislation or regulations or became adopted best practices in mid‐ to larger‐cap public companies of all types


all types.

Corporate Governance Implications of Dodd‐Frank ‐F th F d li ti f B d P tiFurther Federalization of Board Practices

Dodd‐Frank is federal legislation that impacts corporate governance—an issue historically governed at the state level.

Sarbanes‐Oxley established federal certification yguidelines and other responsibilities for public company audit committees.

Dodd‐Frank empowers the SEC to pass regulations Dodd Frank empowers the SEC to pass regulations impacting board governance and responsibilities.

Dodd‐Frank empowers the new Financial Stability Oversight Council to recommend prudential supervisionOversight Council to recommend prudential supervision standards which Nonbank Financial Companies supervised by the FRB, and large interconnected BHCs, would implement


would implement.

Corporate Governance Implications of Dodd‐F k A C i f N R ibili iFrank Act: Categories of New Responsibilities

Categories of new responsibilities for Public Categories of new responsibilities for Public Company and Financial Institution Boards of Directors: Board Oversight: board governance reviews should consider new, higher, conflicting, or changing standards

Board Oversight of Management: heightened due to change Board Oversight of Management: heightened due to change environment and new regulatory climate

New Committees: to be established

Existing Committees: heightened duties

Shareholder and Investor Constituencies: review communication protocol


communication protocol

Corporate Governance Implications of Dodd‐Frank: Board Oversight Board Oversight Board Oversight

Traditionally board oversight has envisioned that management will “conduct” and the board will “oversee.”

Oversight dictated by the level of information necessary for boards and committees to be able to make informed decisions.

Dodd‐Frank provides numerous instances where boards and committees will be required to review more aggressively management initiatives with new policies practices andmanagement initiatives with new policies, practices, and risks associated with them.


Corporate Governance Implications of Dodd‐Frank: Board Oversight—Potential Conflicts

Dodd‐Frank corporate governance implications are Dodd Frank corporate governance implications are not exclusively housed in the governance sections of the bill [sections 951‐957 and 971‐972]

For example, bank and bank holding company directors must approve management‐developed “living wills” [section 165(d)] Directors will have to review the separate contingent resolution plans for the holding company and the bankresolution plans for the holding company and the bank.

As each institution has its own stakeholders and distinct responsibilities, directors will need to sort through potential


conflicts in the plans.

Corporate Governance Implications of Dodd‐Frank: Board Oversight—Potential Conflicts

Bank Contingency Plan: focus on depositors, the FDIC g y p ,fund, the safety and soundness of the bank with the holding company serving as the “source of strength”Bank Holding Company Contingency Plan: focus on Bank Holding Company Contingency Plan: focus on adequate capitalization, public shareholders/debt holders, as well as serving as source of strength to the b d b ksubsidiary bank

Query: The plans are developed for the bank regulators. But what happens—when the bank becomes seriouslyBut what happens when the bank becomes seriously under collateralized—to the rights of shareholders of the holding company versus the depositors of the bank?


Corporate Governance Implications of Dodd‐Frank: Board Oversight Standards Board Oversight Standards: How HIGH is high?

Standards address whether boards are being aggressive and active enough in oversight of management and understanding their responsibilities

New requirements are intended to address concerns New requirements are intended to address concerns Leadership: SEC rules require companies to disclose why they have combined

or separated the roles of Chairman and CEO Executive compensation versus financial performance ("pay versus

performance") [section 953(a), amending section 14 of the Securities performance ) [section 953(a), amending section 4 of the SecuritiesExchange Act of 1934 (15 U.S.C. 78n)]

"Say on Pay" rules will become reality [section 951, amending the Securities and Exchange Act of 1934 (15 U.S.C. 78a et seq.)]

Broker discretionary voting eliminated for election of directors, compensation, and other material matters [section 957, amending section 6(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78f(b))]

Proxy Access: SEC will soon issue rules permitting shareholders to use the company's proxy solicitation materials to nominate director candidates [section 971(a) amending section 14(a) of the Securities Exchange Act of


[section 971(a), amending section 14(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(a))]

Corporate Governance Implications of Dodd‐Frank: Board Oversight of Management

Board Oversight of Managementg g New requirements will increase the frequency and detail of management reporting to the board and board committees

How should boards request information from management in an How should boards request information from management in an environment of unprecedented change?

Heightened scrutiny: Focus on the director question, “What does this mean?”does this mean?

Business implications Regulatory/legal/risk implications Investor/Shareholder implications Investor/Shareholder implications Is this being driven by compensation factors or long‐term value to the company?

Independent Counsel/Advisors to Boards—likely to increase


Independent Counsel/Advisors to Boards—likely to increase

Corporate Governance Implications of Dodd‐Frank: New and Existing Board Committees

NEW Risk Committees of Public Companies [section 165(i)]

Risk Committees: must be established by publicly traded bank holding companies with assets of $10 billion or more or systemically important publicly traded nonbank financial companies

Oversee enterprise‐wide risk management practices

Identify, evaluate, and manage risk exposures of these large, complex firms

FRB has authority to require establishment of risk committees for publicly traded BHCs of less than $10b if needed to promote sound risk‐management practices

Make‐up of Committee—independence standards; includes one independent risk management expert—to be established by FRB rules

Other public company boards may want to review formally their risk‐management review processes to ensure they are adequate


Corporate Governance Implications of Dodd‐Frank: New and Existing Committees

Existing committees with new responsibilities: Existing committees with new responsibilities: Compensation: risk in executive compensation plans, review of committee member independence, pay and performance

id i l b k h d i h l fconsiderations, clawbacks, hedging the value of employee/executive/director stock ownership, etc.

Nominating and Governance: consider make‐up of board; g p ;how diversity of members is derived; proxy access considerations for director candidates; chairman and CEO rolesroles

Audit: expanded risk management if no separate risk committee, greater care regarding risks for restatement


Corporate Governance Implications of Dodd‐Frank: Communications with Shareholders and Investors

Transparency: How do company disclosures answer Transparency: How do company disclosures answer shareholder and investor questions, and do the answers address the need for increased transparency of public companies and their boards? Why do you organize the board and its duties this way?

Why do you compensate management and employees this way? What does that say about pay equity of the company?

How do you oversee the business of the company?y p y

What is the risk‐appetite of the board?


Corporate Governance Implications of Dodd‐Frank:Communications with Shareholders and Investors

Public company boards should be aware of SEC's new Office of Investor Advocate.

Key focus will be on whether the policies, rules and enforcement actions of the SEC are appropriately oriented to investor protection.

Public company boards should be aware of changes to rating agency methods and compliance.

Public company boards should review communications with Public company boards should review communications with key investor constituencies.

Likely increase in investor activism.Shareholder constituencies will include concerns of retail investors Shareholder constituencies will include concerns of retail investors.

Possibility of SEC‐approved proxy access heightens these issues. Board should engage in pre‐planning for contingency of what to do if

company is not successful on "Say on Pay" vote


company is not successful on Say on Pay vote.

Dodd‐Frank Wall Street Reform and Consumer Protection Act


Dodd‐Frank Wall Street Reform and Consumer Protection ActPresident Obama signed on July 21, 2010.President Obama signed on July 21, 2010.

“Title IX—Investor Protections and Improvements to the Regulation of Securities”g Subtitle E, “Accountability and Executive Compensation”

Subtitle G, “Strengthening Corporate Governance”


The Dodd‐Frank ActThe Dodd Frank Act

Became effective on July 21, 2010. Became effective on July 21, 2010.

Most provisions are not self‐executing: Require SEC to modify its requirements for maintaining an q y q geffective registration under the Securities Exchange Act of 1934 (the “Exchange Act”) and/or

Require the national securities exchanges to modify their Require the national securities exchanges to modify their listing standards.

Expect the SEC to act quickly to promulgate these xpect the S C to act quickly to promulgate theserules so that all provisions are effective for calendar‐year companies' 2011 proxy season.



1. Compensation Committee Member Independence2. Independence of Compensation Consultant, Legal Counsel and

Other Advisers 3. Policy on Recovery of Erroneously Awarded Compensation

l f d b l d4. Disclosure of Hedging by Employees and Directors5. Disclosure of Pay Versus Performance6. Pay Ratio Disclosure 7. Disclosure Regarding Chairman and CEO Structures8. “Say on Pay”9. Shareholder Approval of Golden Parachute Compensation10. Elimination of Discretionary Voting by Brokers on Executive

Compensation Proposals11. Enhanced Disclosure and Reporting of Compensation

Arrangements


Arrangements


New provisions apply to all publicly traded New provisions apply to all publicly traded companies (except for item 11, which only applies to covered financial institutions)


1. Compensation Committee Member Independence Section 952 of Dodd‐Frank adds a new Section 10C to the Exchange

A t hi h i th SEC t l t l th t di t thAct, which requires the SEC to promulgate rules that direct the NYSE, NASDAQ, and other national securities exchanges and associations to prohibit the listing of any equity security of a company that does not have an independent compensation p y p pcommittee.

In determining the definition of the term “independence,” the national securities exchanges and associations must consider l t f t t b d t i d d bli h d b th SECrelevant factors, to be determined and published by the SEC,

including: A. The source of compensation of a member of the company's board of

directors, including any consulting, advisory, or other compensatory fee paid by the company to such member; and

B. Whether a member of the company's board is affiliated with the company, or a subsidiary or affiliate of the company.

Dodd‐Frank requires the SEC to promulgate these new


q p gindependence rules not later than July 16, 2011.

Compensation Committee Member Independence The SEC's rules must provide a procedure for a listed

company to cure any "independence” defects before it is de‐listed.

The new Compensation Committee Member pindependence requirement will not apply to a controlled company, a limited partnership, an open‐ended management investment company that is registered g p y gunder the Investment Company Act of 1940, a foreign private issuer that provides annual disclosures to shareholders of the reasons that the foreign private issuer does not have an independent compensation committee, or a company that is in bankruptcy proceedings.


2. Independence of Compensation Consultants, Legal Counsel, and Other Advisers

New Exchange Act Section 10C, added by Dodd‐Frank Act Section 952, also adds a subsection (b), “Independence of Compensation Consultants and Other Compensation Committee Advisers,” which provides hthat: The compensation committee may only select a compensation

consultant, legal counsel, or other adviser after taking into consideration factors identified by the SEC (see below);consideration factors identified by the SEC (see below);

The Committee, in its sole discretion, may retain and obtain the advice of independent legal counsel and other advisers;

The company must provide for appropriate funding, as The company must provide for appropriate funding, asdetermined by the compensation committee, for payment of reasonable compensation to independent legal counsel or any other adviser.


Independence of Compensation Consultants,

Does not require a compensation committee to hire its own independent compensation consultant legal counsel or other advisers However it

Legal Counsel, and Other Advisers

compensation consultant, legal counsel, or other advisers. However, it seems to require the compensation committee to consider the possibility.

Requires the SEC to identify factors that affect the independence of legal counsel to a compensation committee, but specifies that these factors h ll l d lshall include at least: The provision of other services to the company by the firm that employs the

compensation consultant, legal counsel, or other adviser; The amount of fees received from the company by the firm that employs the

compensation consultant legal counsel or other adviser as a percentage of the totalcompensation consultant, legal counsel, or other adviser, as a percentage of the total revenue of that firm;

The policies and procedures of the firm that employs the compensation consultant, legal counsel, or other adviser, which are designed to prevent conflicts of interest;

Any business or personal relationship of the compensation consultant, legal counsel, or y p p p , g ,other adviser with a member of the compensation committee; and

Any stock of the company owned by the compensation consultant, legal counsel, or other adviser.


Independence of Compensation Consultants, Legal Counsel, and Other Advisers

Beginning with the proxy statement for the annual meeting occurring on or after July 16, 2011, Dodd‐Frank requires disclosure of whether the compensation committee retained or obtained the advice of an d d l d h h hindependent compensation consultant and whether the

consultant's work raised any conflict of interest issues (and, if so, the nature of the conflict and how the

fli t i b i dd d) b t di l thconflict is being addressed), but no disclosure on those issues with respect to legal counsel or other advisers.

Companies and compensation committee should plan on discussing these issues in the 2011 proxy statement to address shareholders' now‐heightened disclosure expectations.


Independence of Compensation Consultants, Legal Counsel, and Other Advisers

Exchange Act Section 10C states that it should not Exchange Act Section 10C states that it should not be construed (i) to require the compensation committee to implement or act consistently with the advice or recommendations of the compensation consultant; or (ii) to affect the ability or obligation of

ti itt t i ita compensation committee to exercise its own judgment in fulfillment of the duties of the compensation committeecompensation committee.


3. Policy on Recovery of Erroneously Awarded Compensation – Clawback Section 954 of Dodd‐Frank adds new Section 10D, Section 954 of Dodd Frank adds new Section 10D, entitled “Recovery of Erroneously Awarded Compensation Policy,” to the Exchange Act.

Requires SEC to direct the national securities exchanges to prohibit the listing of any security of an issuer that does not develop and implement a clawback policy.


Policy on Recovery of Erroneously Awarded Compensation – Clawback The policy must provide that,

“In the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting p f y f p grequirement under the securities laws, the issuer will recover from any current or former executive officer of the issuer who received incentive‐based compensation p(including stock options awarded as compensation) during the 3‐year period preceding the date on which the issuer is required to prepare an accounting restatement, based on the erroneous data, in excess of what would have been paid to the executive officer under the accounting restatement.”


Policy on Recovery of Erroneously Awarded Compensation – Clawback Individuals Covered: A company's compensation Individuals Covered: A company s compensation clawback policy must apply at least to the individuals who are subject to Section 16 of the Exchange Act and individuals who formerly were Section 16 officers.

Compensation Covered: All annual and long‐term incentive compensation plans and arrangements, and stock options Whether the SEC attempts toand stock options. Whether the SEC attempts to extend the policy requirements to stock‐based awards other than options remains to be seen.


awards other than options remains to be seen.

Policy on Recovery of Erroneously Awarded Compensation – Clawback Clawback Period: The clawback policy must provide Clawback Period: The clawback policy must provide for a potential recovery period of three years, measured from the date the company is “required to prepare the accounting restatement.”

In comparison, SOX Section 304 requires a look‐back period of 12 months.

TARP clawback requirements apply to any payment d d h d h h f lmade during the period that the financial institution

is a TARP participant.


Policy on Recovery of Erroneously Awarded Compensation – Clawback Triggering Event: In the event that the company is

required to restate its financial statements as the result of material noncompliance with applicable accounting principles and the original financial statements resulted

fin an erroneous payment to a current or former executive officer.

The policy must apply regardless of whether (i) the p y pp y g ( )noncompliance was accidental or intentional, and (ii) the executive was at fault (unlike SOX 304).

Companies must disclose their policy on incentive‐based Companies must disclose their policy on incentive basedcompensation that is based on erroneous financial information, presumably in the proxy statement, if not before then.


4. Disclosure of Hedging by Employees and Directors Dodd‐Frank Section 955 adds a new subsection 14(j) to the

Exchange Act, “Disclosure of Hedging by Employees and Directors.”

Requires the SEC to require companies to disclose in their Requires the SEC to require companies to disclose in their annual proxy statement whether the company permits any employee or director (or any designee of such employee or director) to purchase financial instruments (including prepaiddirector) to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of equity securities (1) granteddecrease in the market value of equity securities (1) granted to the employee or director by the company as part of the compensation; or (2) held, directly or indirectly, by the employee or director


employee or director.

5. Disclosure of Pay Versus Performance5. Disclosure of Pay Versus Performance

Dodd‐Frank Section 953(a) adds a new 14(i) to the Exchange Act, “Disclosure of Pay Versus Performance.”

Requires each public company to disclose in its annual proxy statement “information that shows the p y frelationship between executive compensation actually paid and the financial performance of the issuer.”

The company's “financial performance” must take into The company s financial performance must take into account any change in the value of the company's stock and dividends or other distributions.

Presumably this is to be calculated in the same manner Presumably, this is to be calculated in the same manner as the Performance Graph required in the proxy statement, based on cumulative total shareholder return


return.

Disclosure of Pay Versus PerformanceDisclosure of Pay Versus Performance

Open questions that the SEC will need to answer in Open questions that the SEC will need to answer in its rulemaking include: The definition of the new term “compensation actually paid.” Does this include gains actually recognized in the year on equity awards from prior years? Does it include a bonus actually paid in the year but attributable to a prior year?y p y p y

Whether this disclosure applies to the compensation of the named executive officers only, all of those in the Section 16 group or some other groupgroup, or some other group.

Whether this new disclosure requirement applies to the same five‐year period as the existing Performance Graph


and, if so, how to show fluctuating annual bonuses.

Disclosure of Pay Versus PerformanceDisclosure of Pay Versus Performance

The Act allows, but does not require, this disclosure The Act allows, but does not require, this disclosure to include a graphic representation of the information required to be disclosed. Presumably, this would be an enhancement to the Performance Graph.

Section 953 directs the SEC to adopt rules implementing this disclosure requirement, but does not give it a deadline for doing sonot give it a deadline for doing so.


6. Pay Ratio Disclosure6. Pay Ratio Disclosure

Section 953(b) “Executive Compensation Disclosures” requires the SEC to amend the proxy statement disclosure rules to require each public company to disclose:A. The median of the annual total compensation of all employees of p p y

the company, except the chief executive officer (including employees outside the U.S.);

B. The annual total compensation of the chief executive officer (or any i l t iti ) f th dequivalent position) of the company; and

C. The ratio of the amount described in (A) to the amount described in (B).

F f thi di l th t l l t For purposes of this disclosure, the company must calculate the annual compensation using the rules for Total Annual Compensation figure in the Summary Compensation Table.


7. Disclosures Regarding Chairman and CEO Structure Section 972 of Dodd‐Frank adds new Section 14B Section 972 of Dodd Frank adds new Section 14B “Corporate Governance” to the Exchange Act, which requires the SEC to issue rules that require the company to disclose in its annual proxy statement the reasons why it has chosen the same or different

t h i f th b d fpersons to serve as chairman of the board of directors and chief executive officer (or in equivalent positions) of the companypositions) of the company.


8. Say on Pay8. Say on Pay

Section 951 of Dodd‐Frank adds a new Section 14A to the Exchange Act, entitled “Shareholder Approval of Executive Compensation.”

Not less frequently than once every 3 years, a company's Not less frequently than once every 3 years, a company s annual proxy statement must include a separate resolution subject to shareholder vote to approve the compensation of executives, as disclosed in the company's CD&A, theexecutives, as disclosed in the company s CD&A, the compensation tables, and any related material.

Also requires that, not less frequently than once every 6 years the proxy statement must include a separateyears, the proxy statement must include a separate resolution subject to a non‐binding shareholder vote to determine whether votes on the resolutions required under the preceding sentence will occur every 1 2 or 3 years


the preceding sentence will occur every 1, 2, or 3 years.

Say on PaySay on Pay

A company's proxy statement for the first annual p y p ymeeting occurring after January 21, 2011, must include both the “Say on Pay” resolution and a separate resolution subject to shareholder vote to determineresolution subject to shareholder vote to determine whether future shareholder votes on the “Say on Pay” resolutions will occur every 1, 2, or 3 years.

l l Section 951 also requires every institutional investment manager subject to Exchange Act section 13(f) to report at least annually how it voted on any shareholder vote y yas to “Say on Pay” or golden parachute pay, unless such vote is otherwise required to be reported publicly by SEC rule


rule.

9. Shareholder Approval of Golden Parachute Compensation New Exchange Act Section 14A also provides for “Shareholder Approval of

'Golden Parachute' Compensation ” which requires in any proxy or'Golden Parachute' Compensation,” which requires in any proxy or consent solicitation material for a meeting of the shareholders at which shareholders are asked to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of the company the party soliciting the proxy or consent must disclose inthe company, the party soliciting the proxy or consent must disclose in the proxy or consent solicitation material, in accordance with regulations to be promulgated by the SEC, any agreements or understandings that the party soliciting the proxy or consent has with any named executive officers of the company (or of the acquiring company) concerning anyofficers of the company (or of the acquiring company) concerning any type of compensation (whether present, deferred, or contingent) that is based on or otherwise relates to the acquisition, merger, consolidation, sale, or other disposition of all or substantially all of the assets of the company and the aggregate total of all such compensation that may (andcompany and the aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of such executive officer.


Shareholder Approval of Golden Parachute Compensation This shareholder vote will not be binding on the company or

the company's Board and may not be construed as (1) overruling their decision, (2) creating or implying any addition or change to their fiduciary duties, or (3) restricting or limiting shareholders' ability to make proposals for inclusion in proxy materials related to executive compensation.

The proxy statement also must include a separate resolution The proxy statement also must include a separate resolution subject to shareholder vote to approve such agreements or understandings and compensation, as disclosed, unless shareholders already have approved such agreements orshareholders already have approved such agreements or understandings in a “Say on Pay” (under new Exchange Act, subsection 14A(a), described above).


Shareholder Approval of Golden Parachute Compensation Effective for any shareholders meeting that occurs Effective for any shareholders meeting that occurs after January 21, 2011.

Also requires every institutional investment manager q y gsubject to section 13(f) of the Exchange Act to report at least annually how it voted on any shareholder vote pursuant to “Say on Pay” generally and this provision, unless such vote is otherwise required to be reported publicly by rule orrequired to be reported publicly by rule or regulation of the Commission.


10. Elimination of Discretionary Voting by Brokers on Executive Compensation Matters

Section 957 of Dodd‐Frank amends Section 6(b) of Section 957 of Dodd Frank amends Section 6(b) of the Exchange Act to provide that national securities exchanges must prohibit brokers from voting shares they do not beneficially own in connection with: the election of directors,

executive compensation, and

any other significant matter, as determined by the SEC,

Unless the beneficial owner of the security has Unless the beneficial owner of the security has instructed the broker to vote the proxy.


Elimination of Discretionary VotingElimination of Discretionary Voting

The most immediate effect of this provision will be The most immediate effect of this provision will be the elimination of broker voting of uninstructed shares in the new votes required by Section 951 of Dodd‐Frank, including: The advisory vote on executive compensation (“Say on Pay”)Pay”),

The vote on the frequency of the advisory vote, and

The advisory vote on golden parachutes. y g p


11. Enhanced Disclosure and Reporting of Compensation Arrangements Section 956, Enhanced Compensation Structure Reporting,

only applies to financial institutions with assets of less than $1 billion.

Requires the Federal regulators to jointly prescribe Requires the Federal regulators to jointly prescribe regulations or guidelines by March 22, 2011, which require each covered financial institution to disclose to the appropriate federal regulator the structures of all incentive‐appropriate federal regulator the structures of all incentivebased compensation arrangements offered by the institution, sufficient to determine whether the compensation structure (A) provides an executive officer employee director or(A) provides an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or (B) could lead to material financial loss to the covered financial institution


material financial loss to the covered financial institution.

Enhanced Disclosure and Reporting of Compensation Arrangements The regulations must prohibit any such incentive‐ The regulations must prohibit any such incentivebased payment arrangement or features.

This provision would not require a financial p qinstitution that does not have an incentive‐based payment arrangement to make any disclosures, or the reporting of the actual compensation of particular individuals.


Action ItemsAction Items

Boards and compensation committees should pexpect that most of the Dodd‐Frank provisions will be effective for the 2011 proxy season.

b d d Companies, boards, and compensation committees need to act fast – although the actions they take may not need to be dramatic.may not need to be dramatic.

Companies and compensation committees should plan on discussing the issues introduced by Dodd‐Frank in their 2011 proxy statements to address shareholders' now‐heightened disclosure expectations


expectations.


Boards and compensation committees need to hear Boards and compensation committees need to hear a detailed presentation on the technical provisions of Dodd‐Frank. Other affected company parties should be present, including human resources, executive compensation, legal, and investor relations functions Each of these functions will beinvestor relations functions. Each of these functions will be affected by, and have an important role in responding to, Dodd‐Frank, and the response should be coordinated from the startthe start.



Boards and compensation committees should evaluate new policies and procedures and formulate a response to each of the provisions of Dodd‐Frank that apply to executive compensation.

Because the SEC (and stock exchange) rules may turn out different than we expect, the policies, procedures, and response of the Boards and compensation committee p pshould be flexible and principles‐based, rather than written in stone.

Even if the SEC does not promulgate rules in time for the ven if the S C does not promulgate rules in time for the2011 proxy statement, the compensation committee at least should consider disclosing that it has discussed and is working toward a response to these matters.


g p


For many Boards and compensation committees one of y pthe first subjects to be discussed should be the need for independent directors, legal counsel, and compensation consultants (although most have addressed the issue ofconsultants (although most have addressed the issue of independent directors and consultants).

Dodd‐Frank does not mandate that the Committee d d l l lretain independent legal counsel or compensation

consultants, but this certainly will become a best practice. p

The compensation committee at least should be able to disclose that it has discussed the independence issue.



Each compensation committee should review its Each compensation committee should review its compliance with the independence requirements of Dodd‐Frank.

The compensation committee and the company should consider adding clawback provisions to all future plans, awards, and agreements.


Whistleblower Rewards and ProtectionsWhistleblower Rewards and Protections

Rewards Previously, SEC could pay bounties to informant for insider trading violations Dodd‐Frank directs the SEC to pay awards to whistleblowers in any successful

enforcement proceeding resulting in the payment of “monetary sanctions” exceeding $1 million

Award would be between 10% and 30% of total monetary sanctions, defined as “monies, including penalties, disgorgement and interest”

Employees can make claims directly to SEC Applies only to “original information,” not known to SEC from another sourcepp y g , Similar award provisions for whistleblowers who provide information to the

Commodity Futures Trading Commission Could have profound governance implications, as employees may have

incentive to report issues first to SECp Companies should be aware that SEC complaints may increase substantially

due to significant financial incentives SEC must pass implementing rules by April 2011; will be interesting to see

how new rules address governance issues


g

Whistleblower Rewards and ProtectionsWhistleblower Rewards and Protections

Protections Protections Creates a new private action for reinstatement, two times back pay, and other relief for whistleblowers who suffer

li iretaliation

Action must be brought within 10 years of a violation

Expands coverage of existing Sarbanes‐Oxley whistleblower Expands coverage of existing Sarbanes Oxley whistleblower protections

Extends protections to employees of consolidated subsidiaries

I f li i i Increases statute of limitations

Grants right to a jury trial

Companies should review internal policies for responding to


p p p gwhistleblowers

Securities RatingsSecurities Ratings

Ratings by rating agencies have been key part of securities offering process, i l l i ABS d lparticularly in ABS deals

Previously, Securities Act Rule 436(g) carved out ratings from being part of a registration statement, sparing rating agencies from liability

Dodd‐Frank nullified Rule 436(g) and was effective immediately upon Dodd‐Frank nullified Rule 436(g) and was effective immediately upon enactment

Now ratings may not be used without the consent of the agency. Agencies that consent would face same Securities Act liability as accounting firms if their rating doesn’t accurately reflect a company’s true condition

As a result, rating agencies are not consenting to inclusion of ratings information in registration statements, and companies currently are not including them in new registration statements or incorporated documentsincluding them in new registration statements or incorporated documents

Rating agencies are now considering what they need by way of caveats and backup to consent to inclusion of ratings in registration statements

Companies may still disclose ratings orally, in a FWP, or in term sheets or


p y g ypress releases that comply with Securities Act Rule 134

Securities RatingsSecurities Ratings

SEC has said that Rule 436(g) still applies to ratings in pending registration statements and in previously filed ’34 Act reports

Regulation FD: Companies will no longer be able to provide material non‐public information to rating agencies unlessmaterial non public information to rating agencies unless confidentiality agreements are signed

New SEC rules on Regulation FD due 90 days after passage of Act

Companies should watch for SEC rules and review their policies

Dodd‐Frank directs SEC to eliminate rules relying on credit ratings within 12 months, e.g., Form S‐3 uses ratings to determine , g , geligibility

SEC is establishing Office of Credit Rating to regulate and review rating agencies


rating agencies

Proxy AccessProxy Access

Proxy access is a regulatory initiative that would give h h ld h h l d dshareholders the right to include director nominees in proxy statements distributed by the company

SEC has considered issue for years, using criteria such as the b f h h ld d th d ti f h ldi b inumber of shares held and the duration of holdings as a basis

for inclusion Critics have questioned the SEC’s authority to become so

in ol ed in the pro process hich historicall has been theinvolved in the proxy process, which historically has been the domain of state law

Dodd‐Frank expressly affirms the SEC’s rule‐making powerSEC d d l b f 2011 SEC expected to adopt rules before 2011 proxy season

Majority voting and de‐staggering of boards were not included in Dodd‐Frank


Internal Controls Reporting ForSmall Issuers Reduces regulation, unlike much of the rest of the Act Section 404(b) of Sarbanes‐Oxley requires management to prepare report on

internal controls and outside accounting firm to audit management’s report Long thought to be an onerous burden on small companies, implementation

deadline for smaller companies has been extended many timesdeadline for smaller companies has been extended many times Dodd‐Frank permanently exempts from Section 404(b) non‐accelerated filers

and smaller reporting companies with a public float of $75 million or less Smaller companies must still provide management’s assessment of internal p p g

controls, but no audit is required During three‐year period following enactment, the Government Accounting

Office will study issue to determine if small company exemption would pose an excessive risk to investorsan excessive risk to investors

Dodd‐Frank requires SEC to report by April 2011 on reducing Sarbanes‐Oxley compliance for companies whose market capitalization is between $75 million and $250 million and determine if reducing compliance burden would


g pincrease U.S. IPOs

Regulation DRegulation D

Regulation D provides safe harbor for private offerings to “ d d ”“accredited investors”

Previously, Regulation D provided that persons with net worth of more than $1 million, including value of primary

id lifi d dit d i tresidence, qualified as accredited investors Dodd‐Frank amended Regulation D to exclude value of

primary residence from $1 million net‐worth threshold; effecti e immediatel pon enactmenteffective immediately upon enactment

Companies using Reg D should be sure to revise investor questionnairesD dd F k A l di SEC dj $1 illi Dodd‐Frank Act also directs SEC to adjust $1 million net‐worth threshold for inflation

SEC directed to add “bad boy” provisions to Reg D eligibility


Voting By BrokersVoting By Brokers

Current rules allow brokers to vote shares on behalf of b f l h ld h h hbeneficial holders with respect to certain matters when the broker has not received voting instructions

Earlier this year, amendments to NYSE Rule 452 eliminated b k di ti ti i di t l ti ( t t dbroker discretionary voting in director elections (contested or not)

Dodd‐Frank further prohibits broker discretionary on e ec ti e compensation matters incl ding in connectionexecutive compensation matters, including in connection with new “Say on Pay” and “say on severance” advisory votes, and other “significant matters” as determined by SEC rulesrules


Questions?


Thank You.


Contact InformationContact Information

Christine EdwardsCorporateChicago(312) 558‐5571

James JunewiczCorporateChicagoNew York(312) 558 5571

[email protected] York(312) 558‐[email protected]

Marvin MillerCorporateNew York

Michael MelbingerEmployee Benefits & Executive Compensation

(212) 294‐[email protected]

pChicago(312) 558‐[email protected]


Documents

The DoddThe Dodd-Frank Act:Frank Act: New Curbs on The Street?€¦ · 20/08/2010 · Dodd‐Frank General Some call Overview the Corporate Governance changes in Dodd‐Frank “modest.”