August 2011
Authors:
One Year Later: Where Are the Dodd-Frank
Executive Compensation Rules?
James E. Earle
jim.earle@klgates.com
+1.704.331.7530
K&L Gates includes lawyers practicing out
of 37 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was
enacted a little over a year ago. While the Act’s primary purpose is to broadly reform
the regulation of the financial services industry, within the massive text of the Act lurk
new requirements that will impact executive compensation and corporate governance
practices at most public companies, not just banks. For an overview of the Act’s new
executive compensation and corporate governance provisions, see our Alert entitled
“New Executive Compensation and Governance Requirements in Financial Reform
Legislation.”
In most cases, the new executive compensation and corporate governance provisions
under the Act do not become effective until the appropriate regulatory agencies adopt
rules. While the SEC adopted and finalized rules for say-on-pay early in 2011, most of
the other provisions are still in limbo. Several of the more controversial provisions do
not yet have proposed rules, while others have proposed rules but extended windows
until final rules are expected. The chart below summarizes the current rule-making
status for these provisions following the first anniversary of enactment. The chart is
color-coded as follows:
Green:
Final rules adopted and in effect
Yellow:
Initial rules proposed but not yet finalized
Red:
No rules yet proposed, or enforceability of rules in question
Financial Services Reform Alert
Provision
*
Act §
Brief Description
Rule-Making Status
Location of Rules
Say-on-Pay
(Green)
951(a)
Non-binding shareholder vote
on executive compensation as
disclosed in the annual proxy
statement
- Currently in effect
- SEC final rules published on
Jan. 25, 2011
- Final rules at:
http://www.sec.go
v/rules/final/2011/
33-9178.pdf
Say-onFrequency
(Green)
951(a)
Non-binding shareholder vote
on the frequency for the sayon-pay vote; choices are one,
two or three year cycles; must
provide say-on-frequency vote
at least once every six years
- Same as for Say-on-Pay
- Same as for Sayon-Pay
Say-on-Golden
Parachutes
(Green)
951(b)
Non-binding shareholder vote
on compensation to target
company executives in certain
M&A transactions
- Same as for Say-on-Pay
- Same as for Sayon-Pay
Compensation
Committee
Independence
(Yellow)
952
Heightened standards for
“independence” of
compensation committee
members
- SEC proposed rules
published on March 30,
2011
- To be finalized Aug.-Dec.
2011
- Proposed rules at:
http://www.sec.go
v/news/press/2011
/2011-78.htm
Compensation
Consultant and
Adviser
Independence
(Yellow)
952
Mandates factors to be
considered regarding
independence of compensation
consultants and other advisers
to the compensation
committee; does not mandate
use of independent advisers
- Same as for Compensation
Committee Independence
- Same as for
Compensation
Committee
Independence
Executive
Compensation
Disclosures
(Red)
953
Requires “clear disclosures” in
annual proxy statement of
linkage between pay and
performance; also requires
disclosure of ratio of CEO pay
to median employee pay
- Not effective until rules
finalized
- Proposed rules to be
published Aug.-Dec. 2011
- To be finalized Jan.-June
2012
- None proposed
Compensation
Recovery
(Clawbacks)
(Red)
954
Requires policy on recovery of
certain incentive awards to
current and former executive
officers that were based on
financial information later
restated
- Not effective until rules
finalized
- Proposed rules to be
published Aug.-Dec. 2011
- To be finalized Jan.-June
2012
- None proposed
Hedging
Policies
(Red)
955
Requires disclosure as to
whether directors or
employees of the company are
permitted to hedge against
stock price drops with respect
to equity compensation awards
- Not effective until rules
finalized
- Proposed rules to be
published Aug.-Dec. 2011
- To be finalized Jan.-June
2012
- None proposed
*
Note: SEC rule-making schedule based on updates published on July 29, 2011. For latest calendar, see “Upcoming Activity” at
http://www.sec.gov/spotlight/dodd-frank.shtml.
August 2011
2
Financial Services Reform Alert
Provision
Act §
Brief Description
Rule-Making Status
Location of Rules
Excessive
Compensation at
Covered
Financial
Institutions
(Yellow)
956
Prohibits “excessive
compensation” or other
incentive arrangements that
could encourage
“inappropriate risks” at certain
“covered financial institutions”
- Not effective until rules
finalized
- Proposed rules published
jointly by the SEC and
various banking agencies on
**
March 30, 2011
- Proposed rules at:
http://www.sec.go
v/rules/proposed/2
011/34-64140.pdf
- To be finalized Jan.-June
2012
Broker
Non-Votes
(Green)
957
Prohibits discretionary voting
by brokers on shares they do
not beneficially own on (i)
election of directors, (ii)
executive compensation, and
(iii) any other “significant
matter” as determined by the
SEC
- NYSE listing rules adopted
Sept. 9, 2010, including
clarification that this applies
to shareholder votes under
§951
- No current schedule for rules
to determine “other
significant matters”
- NYSE listing rules
at:
http://www.sec.go
v/rules/sro/nyse/20
10/34-62874.pdf
Proxy Access
(Red)
971
Authorizes (but does not
require) the SEC to adopt rules
allowing shareholders to
nominate candidates for
directors, using the company’s
proxy statement
- SEC adopted rules on Aug.
25, 2010, but stayed the
rules pending resolution of
related litigation
- On July 22, 2011, the U.S.
Court of Appeals for the
D.C. Circuit struck down the
SEC rules for failure to have
fully considered the
economic impact
- The SEC also implemented,
then stayed, rules regarding
shareholder proposals on
proxy access, which were
not the subject of the
litigation; it is unclear how
the SEC will proceed with
these rules in light of the
court ruling
- Court opinion at:
http://www.cadc.u
scourts.gov/interne
t/opinions.nsf/89B
E4D084BA5EBD
A852578D5004FB
BBE/$file/101305-1320103.pdf
CEO/Chairman
Leadership
Structures
(Green)
972
Annual proxy statement
disclosures regarding choice of
leadership structure (e.g.,
single CEO/Chairman v.
separate people in those roles)
- SEC proxy statement
disclosure rules currently
mandate discussion
regarding choice of
leadership structure;
additional SEC rulemaking
does not seem likely
- See Item 407(h) of
Regulation S-K
**
For a summary of the proposed rules under Section 956 of the Act, see our Alert entitled “Federal Regulators Propose Rule
Addressing Incentive-Based Compensation Arrangements for Financial Firms.”
August 2011
3
Financial Services Reform Alert
August 2011
4