CCH Financial Reform News Center

Agencies Issue Final Guidance on Incentive Compensation

This story appeared in Bank Digest.

The federal bank and thrift regulators have adopted new guidance that is intended to ensure that incentive compensation arrangements at financial organizations take into account risk and are consistent with safe and sound practices. The guidance applies not only to top-level managers, but also to other employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group. The agencies noted that they have already have completed a first round of in-depth analysis of incentive compensation practices at large, complex banking organizations as part of a “horizontal review” and have given the results to the institutions to address areas that require immediate attention. The regulators plan another round of such reviews to look at compensation for employees in certain business lines, such as mortgage originators. The reviews also will look at areas where deficiencies were found at many firms, such as determining which employees can affect risk, what risks are involved and whether the companies' plans are effective.

House and Senate Conferees Reaching Consensus on Corporate Governance Provisions

This story appeared in Jim Hamilton's World of Securities Regulation.

House and Senate conferees have completed a great deal of agreement on the corporate governance provisions of the financial reform legislation, There will be a requirement for a non-binding shareholder advisory vote on executive compensation in the final legislation. But the Senate rejected a shareholder advisory vote for golden parachutes, as was in the House version.

Regulators Find Deficient Incentive Compensation Practices at Many Firms

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

Many financial firms have been “deficient” in ensuring that their incentive compensation practices are risk appropriate, and will face additional reviews to ensure that revised practices do not undermine the safety and soundness of the firm or create undue risks to the financial system as a whole, banking regulators said June 21, 2010.

Among their findings were that many firms need better ways to identify which employees can expose banking organizations to material risk. Firms have also been using deferral arrangements to adjust for risk, but are using a “one-size-fits-all” approach, regulators noted. Other firms were found not to have adequate mechanisms to evaluate whether established practices were successful in balancing risk.

Financial Reform Base Conference Bill Carves Out Exemptions from Mandate of Independent Compensation Committees

This story appeared in Jim Hamilton's World of Securities Regulation.

The baseline conference bill contains the Senate corporate governance provisions. But the provision mandating independent compensation committees contains substantive differences in the baseline conference bill from the bill that passed the Senate last month. In a major corporate governance improvement, the legislation does mandates independent board compensation committees. The SEC must adopt rules requiring for exchange listing that compensation committees include only independent directors. This provision is designed to strengthen their independence from the executives they are rewarding or punishing. In determining the independence of compensation committee members, SEC rules must require exchanges to consider the source of compensation and any affiliation with the company or any of its subsidiaries.

Schapiro Discusses Initiatives to Protect Investors

This story appeared in SEC Today.

Chair Mary Schapiro last week spoke at the CEO quarterly meeting of the Business Roundtable about the SEC’s efforts to protect investors in the aftermath of the financial crisis. There are signs of an economic recovery, she said, but it is critical to take the steps necessary to prevent another crisis of this depth and duration. The SEC’s role is to be an effective market regulator, to protect investors and to encourage capital formation and investment, she said.

Schapiro said the SEC’s efforts to rebuild the economy are made up of many small initiatives, the value of which may not always be immediately obvious. When financial reform is completed, not everyone will be satisfied, but Schapiro believes that, upon reflection, those efforts will be seen as a productive period of effective regulation.

Reconsideration of GM Executive Compensation Ruling Denied

This story appeared in Bank Digest.

The Special Master for TARP Executive Compensation has denied a request by General Motors to reconsider an April 16, 2010, determination regarding 2010 compensation for certain GM executive officers and highly compensated employees. GM had argued, in its reconsideration request, that a pending earnings report was relevant new information that was not previously considered and that it should be permitted to grant restricted stock units for the 2010 calendar year before the year has ended based on performance to-date and subject to continued performance for the remainder of 2010. In denying the reconsideration request, the Special Master noted that the pending earnings report did not present the type of new information that would support reconsideration. In addition, the earnings report did not contain a “material error” that must be remedied under the Treasury Department’s TARP compensation and corporate governance regulations.

Senate Bill Contains Key Corporate Governance Provision on Director Majority Voting

This story appeared in Jim Hamilton's World of Securities Regulation.

As the House and Senate financial reform bills head to conference, there are some strong corporate governance provisions found only in the Senate bill that could find their way into the conference bill and the signed legislation. One key provision is on majority voting. Most public companies currently elect directors using the plurality standard, by which shareowners may vote for, but not against, a nominee. If shareowners oppose a particular nominee, they may only withhold their votes. As a consequence, a nominee only needs one “for” vote to be elected and unseating a director is virtually impossible. Plurality voting in uncontested situations can result in “rubber stamp” elections. Majority voting is designed to ensure that shareowners’ votes count and make directors more accountable to shareowners.

Treasury Names Appointee to Ally Board

This story appeared in Bank Digest.

The Treasury Department has exercised its right to appoint the first of two directors to the Ally Financial Inc. (Ally) board of directors, naming Marjorie Magner. Formerly GMAC Financial Services Inc., Ally is a recipient of funds under the Obama Administration's Automotive Industry Financing Program. As a result of investments made in December 2009, the Treasury's equity ownership in Ally increased from 35 percent to 56.3 percent, through which the Treasury acquired the right to appoint two additional directors to the Ally board of directors. The second appointment is expected soon.

Whitehouse Amendment to Senate Reform Bill Would Mandate Independent Compensation Consultants

This story appeared in Jim Hamilton's World of Securities Regulation.

An amendment (SA 3773) to the Senate financial reform bill offered by Senator Sheldon Whitehouse would mandate that any compensation consultant, legal counsel, or other adviser to a company’s compensation committee must be independent. The SEC must adopt rules defining the term independent for these purposes. The Whitehouse Amendment would conform the Senate legislation to comparable provisions in the House financial reform legislation providing that compensation consultants, counsel and other advisers hired by the compensation committee must satisfy independence criteria established by the SEC.

Industry Groups Oppose Senate Reform Bill's Corporate Governance Provisions

This story appeared in Jim Hamilton's World of Securities Regulation.

In a letter to the US Senate, industry groups including the Chamber of Commerce and the Business Roundtable said that provisions in the Restoring American Financial Stability Act such as mandating a shareholder right to proxy access and an advisory vote on executive compensation and requiring majority voting in uncontested director elections would federalize corporate law, thereby creating a “one-size-fits all” approach to the resolution of these issues. The measure’s corporate governance provisions would also impose an unwarranted burden on mid-sized and smaller companies, marginalize the state corporate law expertise that has been developed over decades and is better suited to address these issues, and undermine ongoing reforms undertaken by the State of Delaware and the “Model Business Corporation Act,” which impacts 30 states.