August 3, 2009

House Passes “Say-on-Pay” Bill (Again): The Recap

On Friday, the House passed H.R. 3269 “Corporate and Financial Institution Compensation Fairness Act of 2009,” which is Rep. Barney Frank’s latest version of a say-on-pay bill, mostly along partisan politics lines by a vote of 237-185. This follows the marked-up version of the bill that the House Financial Services Committee passed on Tuesday. There are notable differences between what the House passed and the language that the Obama Administration (through the Treasury Department) recommended in June.

Two years ago, the House passed a different say-on-pay bill by a vote of 269 to 134 (afterwards, then-Sen. Obama floated the same bill in the Senate but it never went anywhere). The Senate is not expected to consider similar legislation until sometime after the August recess – and it’s expected that there will be a tougher battle in the Senate over the bill’s terms.

Here is a final version of the bill. And here is the House Financial Service Committee’s marked-up version of the bill (with the only reported major change being the clawback reversal noted below) – and here is that Committee’s report.

Below are key provisions of the bill’s three major components, with commentary gleaned from a variety of sources:

1. Say-on-Pay: Section 2

Likely Not Applicable to ’10 Proxy Season – Effective date for this Section is six months after SEC adopts rules implementing this Section; and the SEC is directed to adopt rules within six months of enactment of the bill into law. The upshot is that say-on-pay is not likely to be applied to the ’10 proxy season, but perhaps could be effective later in 2010. Treasury’s recommendation was to adopt something before the ’10 proxy season.

FPIs Excepted – No Triennial Alternative – Requires annual non-binding vote on disclosure of executive compensation arrangements and “golden parachutes”; mark-up clarified that neither applies to foreign private issuers. Note that the idea of a triennial vote (ie. Carpenters Union’s alternative) was considered during the mark-up but defeated.

SEC Might Exempt Small Businesses – Gives authority to the SEC to exempt certain types of companies from say-on-pay; SEC might use this to exempt smaller businesses. Treasury recommendation didn’t address this topic.

Investment Managers Report How They Vote – Requires certain types of investment managers to report annually how they voted on say-on-pay at the companies for which they own at least $100 million of their equity at some point during the preceding 12 months. Treasury recommendation didn’t include this likely-to-be controversial item.

No Tabular Format for Golden Parachute Disclosures – For say-on-pay on golden parachutes, tabular format eliminated during mark-up; and mark-up clarified that golden parachutes previously approved by shareholders must be disclosed, but need not be voted upon again. I can’t figure out why tabular disclosures were dropped – in my opinion, dropping it was not a good idea.

Clawbacks Still Possible Even If Shareholders Approve Compensation – The mark-up had produced an amendment that would have prohibited clawbacks of compensation arrangements that had approved by shareholders – the only amendment made to the marked-up bill on Friday was striking this new provision. So under the bill approved by the House, clawbacks are still possible even if the compensation disclosure has been approved by shareholders.

2. Compensation Committee Independence: Section 3

Even Longer Effective Date – The exchanges (as directed by the SEC) wouldn’t be required to adopt listing standards to implement this Section until 9 months after the bill was enacted.

Compensation Committees Must Be Independent – The thrust of this section is to have independent compensation committees (although mark-up eliminated requirement that comp committee members not be “affiliated persons”). Some of the more controversial aspects of the Treasury’s recommendations were reined in by the House bill, as noted below.

SEC Might Exempt Small Businesses – Gives authority to the SEC to exempt certain types of companies from this Section; SEC might use this to exempt smaller businesses. Treasury recommendation didn’t address this topic.

No Need to Disclose Why Didn’t Hire Compensation Consultant – During the mark-up, the requirement to provide potentially embarrassing disclosure regarding why a compensation committee didn’t hire a consultant was struck. However, companies would be required to provide funding for compensation consultants (as well as lawyers) if the compensation committee wanted to hire one.

Compensation Consultants Must Be Independent – The SEC must adopt independence standards for compensation consultants. The mark-up clarifies that these standards must be competitively neutral.

Lawyers Need Not Be Independent – During the mark-up, the requirement for the compensation committee’s counsel to meet independence standards was eliminated.

SEC’s Study – Within two years, the SEC must provide a study regarding the impact of its new independence standards to Congress.

3. Regulation of Compensation at Large Financial Institutions: Section 4

This Section would regulate pay at large financial institutions – those with more than $1 billion in assets – particularly their incentive-based pay packages. It would require federal regulators to prohibit “certain compensation” structures at large financial institutions if they could have a “serious adverse effect on financial stability.” It would also require federal regulators to adopt rules requiring these institutions to disclose their incentive-based pay plans for executives and employees – and then the regulators would determine if the pay packages are “aligned with sound risk management.”

This is quite a controversial Section (eg. the issue of whether the government can abrogate a private contract) – and it was not part of the Treasury’s recommendations. I would be surprised to see this Section survive the Senate, even with all the public anger over Wall Street bonuses. This recent Bloomberg article notes skepticism over this Section expressed by the Obama Administration and some Senators.

There is a hodge-podge of other provisions in the bill. One example is a GAO study of the correlation between compensation structure and excessive risk-taking. Note that the foregoing recap is subject to the caveat that we haven’t yet seen the final bill as adopted.

A First: Shareholders Approve American Railcar’s Reincorporation to North Dakota

The stockholders have spoken at American Railcar. As I blogged a while back, Carl Icahn owns a majority stake in this company and management proposed the reincorporation to North Dakota. According to this Form 8-K recently filed by the company, it’s now a North Dakota corporation governed by the North Dakota Publicly Traded Corporations Act.

In comparison, a similar reincorporation proposal at Biogen didn’t fare too well with that company’s shareholders (as I blogged last month, about a dozen companies received shareholder proposals seeking reincorporation to North Dakota – so these proposals were not management-driven like American Railcar’s). According to this Form 8-K, Biogen shareholders cast 23 million votes “for” and 213 million “against” the reincorporation proposal. So Biogen remains a Delaware corporation. Thanks to Keith Bishop for giving me a “heads up” on these…

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