US shareholders get say on pay at financial institutions – in exchange for more investor disclosure.
The US House of Representatives has passed Congressman Barney Frank’s bill to “amend the Securities Exchange Act of 1934 to provide shareholders with an advisory vote on executive compensation and to prevent perverse incentives in the compensation practices of financial institutions.” If brought into law, the Act would impose significant regulatory constraints on the executive pay arrangements of “covered financial institutions” (CFIs). CFIs would include banks, credit unions, registered broker-dealers, investment advisors, Fannie Mae, Freddie Mac, and other financial institutions identified by regulators. An institution with assets of less than $1 billion would be exempt.
The Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) comprises five major elements:
- Advisory Shareholder Vote: An annual non-binding advisory vote by shareholders on executive compensation at public companies, as well as advisory votes on compensation packages that include golden parachutes. The bill gives the Securities and Exchange Commission (SEC) the power to exempt categories of public companies from these requirements, notably smaller public companies.
- Disclosure of Say-on-Pay Votes: The bill now includes a provision that would require certain institutional
investment managers to report at least annually on how they voted in annual and golden parachute say-on-pay votes. The requirement would apply to institutional investment managers subject to Section 13(f) of the Exchange Act, which includes those with investment discretion over accounts holding listed equity securities with an aggregate fair market value of at least $100 million. - Independent Compensation Committees: Committees will be required to be made up of independent directors, who do not “accept any consulting, advisory, or other compensatory fee from the issuer”, except in their capacity as members of the committee. Furthermore, compensation consultants and other committee advisors must satisfy criteria of independence to be established by the SEC.
- Financial Institutions, Compensation & Risk: All financial institutions with more than $1 billion in assets will be required to disclose to Federal regulators the structure of all incentive-based compensation packages, so that regulators may determine whether the structure “is aligned with sound risk management, (and) is structured to account for the time horizon of risks.” Federal regulators will prohibit any incentive-based payment arrangement that “could threaten the safety and soundness of covered financial institutions, or could have serious adverse effects on economic conditions or financial stability.”
- Government Study of Pay & Risk: The bill requires that the Government Accountability Office (GAO) conduct a study analyzing the correlation between executive compensation structure and excessive risk-taking
The legislation is not yet law and must pass to the Senate. The Securities and Exchange Commission will then be required to issue final rules within six months of the date of enactment. The pay vote requirement would apply to all shareholder meetings held more than six months after final rules are released. Assuming the bill is not enacted until after the Summer break, and bearing in mind that the SEC offers a 60-day comment period before finalizing rules, most companies will not be offering advisory pay votes until 2011.
Commenting on the passing of the bill, Scott Fenn of ProxyGovernance said: “the requirement for investors to disclose their voting records would represent the most significant development in proxy voting disclosure since 2003 when mutual funds were first required to disclose their specific votes, a rule that met stiff resistance from the mutual fund industry at the time.”
Not everyone is embracing the propsals with open arms, however, as this recent article from Forbes illustrates.