May 14, 2009

Obama is On the Move: Executive Compensation, Derivatives

Facing pressure by Congress and others who are impatient to see action (e.g. recent introduction of the “Authorizing the Regulation of Swaps Act” in the Senate), the Treasury Department outlined plans yesterday to regulate derivatives. Under these plans, the Commodity Futures Modernization Act of 2000 would be rolled back. The plans are detailed in this letter by Treasury Secretary Geithner to Congress and in this Treasury Department statement.

This action followed remarks by President Obama that he intends to rein in pay practices at all financial institutions, not just those receiving TARP money. It’s unclear yet what form these restrictions would take, although a few alternatives are posited in this WSJ article.

In this WSJ video, Joann Lublin does a great job explaining the futile consequences of past efforts by the government to rein in pay. Takes the words right out of my mouth…

SEIU Pushes for Clawbacks of Excessive Pay

Recently, the SEIU Master Trust – the pension funds managed on behalf of the SEIU – sent letters to the boards at 29 major financial services companies, demanding that they investigate more than $5 billion in compensation to their NEOs that may have been tied to derivatives and other instruments that are now worthless. The SEIU argues that if the payments – including cash and equity – are shown to be based on false economic metrics, they may be subject to clawbacks. They further demand that the boards overhaul their executive compensation practices so that the NEOs don’t reap bonuses and other incentivized pay regardless of corporate performance. A list of the 29 companies is at the bottom of this press release.

In this podcast, Mike Barry of Grant & Eisenhofer and Stephen Abrecht of the SEIU explain this movement to seek clawback of excessive pay, including:

– How did the SEIU choose the targeted 29 companies?
– What legal theories are being used to seek recovery of excessive pay?
– What did the letters request? Do they seek responses from the boards of the companies?

Recently, the Council of Institutional Investors revised its governance policies regarding clawbacks to make it broader, asking companies to recapture compensation in circumstances beyond fraud. That’s all well and good, but it’s just as important for boards to adopt clawbacks with “teeth” (we outlined exactly how to do this in our Winter ’08 issue of Compensation Standards).

FINRA Proposes Changes to Conflicts of Interest Rules in Public Offerings

The SEC has finally published FINRA’s proposal to change its broker-dealer conflict of interest rules in public offerings of securities by a broker/dealer or an affiliate of a broker/dealer. FINRA has been seeking to change Rule 2720 since 2007. We have posted memos regarding the proposal in our “Underwriting Arrangements” Practice Area.

– Broc Romanek