On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This legislation is primarily focused on bank reform — regulation and resolution of financial companies that pose systemic risk, banking regulatory reform, regulation of derivatives, and consumer financial protection. However, the Act also makes significant changes to corporate governance and executive compensation rules for public companies in all industries. In this client alert we summarize these new requirements, their effective dates, and early impacts on companies in the technology, life sciences and clean tech industries.
Dodd-Frank Act Provisions |
Executive Compensation Say-on-PayAt least once every three years, public company shareholders must have a separate nonbinding vote on the Company's executive compensation, as disclosed in the proxy statement. At least once every six years, the shareholders must vote to determine whether the say-on-pay vote should occur every one, two or three years. Institutional investment managers must report, at least annually, their actions on say-on-pay votes. The SEC is empowered to exempt small issuers from this provision of the Act. Effective Date: Effective for annual shareholder meetings starting January 2011. Impact:
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Golden Parachute Say-on-PayShareholders must have a separate say-on-pay vote on the compensation paid to executives in connection with a change in control transaction (i.e., "golden parachute" compensation) if that compensation has not previously been subject to a shareholder say-on-pay vote. Even if no vote is required, acquisition proxy statements must include disclosure of golden parachute compensation arrangements. Institutional investment managers must report, at least annually, their actions on golden parachute sayon- pay votes. The SEC is empowered to exempt small issuers from this provision of the Act. Effective Date: Effective for shareholder meetings starting January 2011. Impact:
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Broker VotingNational securities exchanges must adopt rules prohibiting brokers from voting shares of which they are not the beneficial owner with respect to election of directors, executive compensation (including say-on-pay votes) or any other "significant matter" unless specifically instructed by the beneficial owner with respect to such vote. Effective Date: As soon as national securities exchanges (e.g., NYSE) revise their rules as directed (probably 2011). Impact:
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Compensation Committee IndependenceThe SEC and stock exchanges must require listed companies to have a Compensation Committee composed solely of independent directors. The SEC will promulgate rules about how to determine independence, including consideration of the following factors:
The SEC is empowered to exempt small issuers from this provision of the Act. Effective Date: SEC to issue rules within 360 days of enactment (July 2011). Impact:
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Compensation Committee AdvisersThe Company must provide funding and authority for the Compensation Committee to obtain the advice of independent compensation consultants, independent counsel and other advisers, at the discretion of the committee. In selecting advisers, the Compensation Committee must consider factors affecting adviser independence. The SEC will promulgate rules about these independence factors, which are to be competitively neutral. Independence factors will include:
The Company's proxy statement must disclose whether the Compensation Committee engaged a compensation consultant, any conflicts of interest that arose, and how any such conflicts were addressed. Effective Date: The Act requires the SEC to issue rules within 360 days of enactment. Impact:
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Additional Proxy DisclosuresCompany must disclose, in its annual proxy statement, the relationship between compensation actually paid to executives and the financial performance of the Company. Executive compensation disclosure generally must include the ratio of the CEO's total compensation to the median total compensation of all other employees. Effective Date: The SEC is required to issue rules, but no deadline is specified. Impact: "
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Recovery of Erroneously Awarded Compensation (Clawback)Company must disclose incentive-based compensation policies that are based on reported financial information. SEC and exchanges must require listed companies to have a policy that requires repayment ("clawback") of incentive compensation (including stock options) that was paid to current or former Company executives over the three-year period prior to any restatement due to material noncompliance with financial reporting requirements. Effective Date: SEC to issue rules, but no deadline is specified. Impact:
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Employee and Director HedgingPublic companies must disclose whether any employee or director is permitted to purchase financial instruments that are designed to hedge or offset a decrease in market value of the Company's securities. Effective Date: SEC to issue rules but no deadline is specified. Impact:
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Additional Reporting Obligations for Financial InstitutionsCertain financial institutions must disclose to appropriate federal regulators the details of incentive-based compensation arrangements, and limit incentives that could encourage inappropriate risks. |
Leadership StructureCompany must disclose, in its annual proxy statement, why the same individual serves as chairman of the board and chief executive officer, or why different individuals serve in those capacities. Effective Date: SEC to issue rules by within 180 days of enactment (January 2011). Impact:
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Proxy AccessThe SEC is specifically authorized to prescribe rules and regulations that contemplate shareholder access to the proxy. Effective Date: Immediate. Impact:
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.