Two important developments have recently taken place in the U.S. legislature. The first relates to a proposed exemption from the internal control rules under section 404 of the Sarbanes-Oxley Act of 2002, and the second relates to shareholder voting on executive compensation.
Senate Defeats Internal Controls Exemption for Smaller Reporting Companies
The U.S. Senate recently voted against a proposed amendment to the internal control requirements of section 404. The amendment would have made compliance with section 404 voluntary for Exchange Act reporting companies with a market capitalization of less than $700 million.
Section 404 has been criticized for reducing the competitiveness of U.S. capital markets through excessive regulation that is overly costly for public companies, particularly smaller companies, to comply with. However, supporters of section 404, who favor maintaining the status quo, argued that many public companies have already been complying with the internal control rules for several years and the SEC and Public Company Accounting Oversight Board are continuing to take steps to reduce the burden of section 404 through rulemaking and informal guidance.
U.S. Shareholders May Get "Say on Pay" in 2009
Shareholders of U.S. companies may soon be entitled to an advisory vote on executive compensation at annual meetings, a right popularly referred to as shareholders having a "say on pay." The Shareholder Vote on Executive Compensation Act has passed the House of Representatives. Before becoming law, it must be voted on by the Senate and signed by the President. The bill would require public companies to give shareholders non-binding advisory votes on (a) the annual compensation awarded to executive officers and (b) any new "golden parachute" awards that were negotiated in conjunction with a change of control of the company.
If adopted in its current form, the bill would be effective for the 2009 proxy season, although some companies have already voluntarily adopted say-on-pay policies. The legislation does not apply to foreign private issuers, including Canadian MJDS companies, because they are exempt from the U.S. proxy rules.
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