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This week, the Treasury Department and the IRS rushed out guidance and rulemaking on the executive compensation provisions included in the Emergency Economic Stabilization Act. The guidance comes out as Treasury seeks to implement the $250 billion Capital Purchase Program (CPP), as well as other programs under the Troubled Asset Relief Program (TARP). The new rules and guidance are included in:

– A Treasury interim final rule release for participants in the CPP.

– An IRS notice regarding the Section 162(m) and 280G provisions of the EESA.

– A Treasury notice describing golden parachute restrictions applicable to institutions participating in the Troubled Asset Auction Program (TAAP).

– A Treasury notice describing (much tougher) golden parachute restrictions applicable to institutions participating in the Programs for Systematically Significant Failed Institutions (PSSFI).

For an excellent summary of the rulemaking and guidance, see Mark Borges’ Proxy Disclosure blog and Mike Melbinger’s Compensation blog, both on CompensationStandards.com.

These provisions are only applicable to a relatively narrow group of financial institutions. While this NY Times article notes some doubt about the real impact of the provisions on executive pay at financial institutions – much less on other companies – I think that it is starting to feel like we are at a broader tipping point with the recognition of some pay excesses in this federal legislation. Now it is up to all boards to take the public and shareholder anger to heart when making compensation decisions. This will certainly be a topic that we will discuss in more detail at next week’s “3rd Annual Proxy Disclosure Conference” & “5th Annual Executive Compensation Conference.” Don’t miss them!

Accounting Guidance: It Keeps on Flowing

The accounting guidance for fair value and other financial meltdown issues continues to flow at a rapid pace:

1. Last Friday, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP amends FAS 157 by incorporating “an example to illustrate key considerations in determining the fair value of a financial asset” in an inactive market. FSP No. 157-3 is effective upon issuance, and should be applied to prior periods for which financial statements have not been issued – including in upcoming third quarter 10-Qs. The FSP notes that the guidance included in the Statement is consistent with the guidance provided by the SEC’s Office of Chief Accountant and the FASB Staff in last month’s press release. The FSP’s example illustrates how a company can determine the fair value of an investment in a collateralized debt obligation security that is no longer quoted in an active market, emphasizing that approaches other than the market value may be appropriate for determining fair value.

2. On Tuesday, under intense political pressure, the IASB amended IAS 39, Financial Instruments: Recognition and Measurement. The amendment, which is effective immediately and to be applied retrospectively to July 1, 2008, will permit financial instruments that had been measured at fair value through profit or loss to be reclassified to a different accounting basis (to, i.e., held-to-maturity). The restrictions on reclassification had been in place to stop companies from gaming the system by, e.g., marking to market in the good times and then ceasing to mark to market in the bad times. The IASB shift may tilt the playing field in favor of international standards, because, under US GAAP, reclassifications among trading, available for sale and held-to-maturity are only permitted (under FAS 115) in rare circumstances. So much for “convergence” when the going gets tough.

3. Also on Tuesday, SEC Chief Accountant Conrad Hewitt sent a letter to FASB Chairman Robert Herz on interpretive issues arising in how to assess declines in fair value for perpetual preferred securities under the existing other-than-temporary impairment model in FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In the letter, Hewitt states that for perpetual preferred securities, which are treated like equity securities under FAS 115, the Staff (in consultation with the FASB Staff), “would not object to an issuer, for impairment tests in filings subsequent to the date of this letter, applying an impairment model (including an anticipated recovery period) similar to a debt security. OCA would not object to this treatment provided there has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash flows from holding the investment or a downgrade of the rating of the security below investment grade) until this matter can be addressed further by the FASB.” The Staff expects sufficient disclosure about the impairment analysis, so that investors can understand all of the information considered in determining that the impairment is other than temporary and what was considered in determining that there was no evidence of credit deterioration in the perpetual preferred securities.

Short Sale Disclosure (Only to the SEC) Now In Place

Yesterday the SEC adopted an interim final temporary rule requiring specified institutional investment managers to file information on Form SH concerning their short sales and positions of Section 13(f) securities, other than options. The rule is effective on October 18 and will continue in place until August 1, 2009.

The disclosures about short positions will not be available to the public, only to the SEC. The SEC stated that Form SH “will provide useful information to the staff to analyze the effects of our rulemakings relating to short sales and in evaluating whether our current rules are working as intended, particularly in times of financial stress in our markets. The reports will supply the Commission with important information about the size and changes in short sales of particular issuers by particular investors. That information will be available to the Commission to consider when questions about the propriety of certain short selling occur.”

– Dave Lynn