CCH Financial Reform News Center

Review of TARP Executive Compensation Prior Payments Concluded

This story appeared in Bank Digest.

The Special Master for TARP Executive Compensation, Kenneth R. Feinberg, announced the conclusion of his review of executive pay in late 2008 and early 2009. The Special Master looked at payments that taxpayer-assisted firms made to “Top 25” executives prior to Feb. 17, 2009, when the American Recovery and Reinvestment Act of 2009 introduced additional compensation and corporate governance standards for TARP recipients, and directed a review of their executive pay before that date. As part of his review, the Special Master proposed that firms adopt policies that provide compensation committees with special restructuring rights if a firm is determined to be in a “crisis situation” by its board of directors. Under this policy, the firm’s compensation committee would have the authority to restructure, reduce or cancel pending payments to  executives—and this authority would supersede any rights and entitlements executives have in normal circumstances.

Legislation Would Align Financial Accounting for Stock Options with Federal Tax Code

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

Bi-partisan legislation would align the GAAP treatment of stock options under FASB financial accounting standards with how options are treated under the Internal Revenue Code. FASB rules value stock options on their grant date, while and the Code values stock options on their exercise date, two numbers that rarely match. Bolstering the need for the legislation, data recently compiled by the IRS shows that corporations who issued stock options to their executives claimed 2008 stock option tax deductions that were collectively $52 billion larger than the expenses shown on the company books for options granted during the tax year covered by the returns.

Banks Alerted to Guidance on Sound Incentive Compensation

This story appeared in Bank Digest.

The Office of the Comptroller of the Currency has alerted banks to interagency guidance on sound incentive compensation policies and practices. The guidance is intended to assist banking organizations in designing and implementing incentive compensation arrangements that do not encourage imprudent risk-taking and that are consistent with the safety and soundness of the organization. The guidance became effective June 25, 2010.

Change to GM Compensation Structure Approved

This story appeared in Bank Digest.

The Special Master for TARP Executive Compensation has determined that compensation changes proposed by General Motors will not, by virtue of their structural design or the amounts potentially payable, result in payments inconsistent with the Public Interest Standard of the Treasury Department’s executive compensation rules. GM requested approval to alter the 2010 compensation structures for two of the Top 25 Employees by increasing the amount of stock salary and long-term restricted stock granted to these employees in light of the substantial additional responsibilities assumed by each employee.

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.

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.

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.

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.

TARP Executive Compensation Rulings Issued

This story appeared in Bank Digest.

The Special Master for Executive Compensation has issued his 2010 “Covered Employees 26-100” Compensation Determinations for companies subject to the compensation restriction of the Emergency Economic Stabilization Act of 2008: AIG. Chrysler, Chrysler Financial, General Motors and GMAC.