President Signs Dodd-Frank Act
July 26, 2010
On July 21, 2010, the President signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (“Dodd-Frank”). We previously discussed the corporate governance and executive compensation provisions of the bill in the July 12, 2010 issue of the Securities & Financial News to Note Bulletin. The following is a summary of the required rulemakings by the SEC and the effective dates of these provisions.
Mandatory Proxy Access: Effective immediately, the SEC has the authority (but is not required) to adopt rules requiring companies to include shareholder nominees for the board in its proxy statement on terms determined by the SEC. The SEC proposed proxy access rules in 2009 and SEC Chairman Mary Schapiro has stated that she expects to adopt final rules that would be effective for the 2011 proxy season.
Say on Pay: At least once every three years, companies are required to have an advisory vote on executive compensation. Companies must comply with this requirement beginning with their first annual or other meeting occurring more than six months after enactment of Dodd-Frank, or January 21, 2011. Therefore the say on pay provisions will be applicable for the 2011 proxy season. No SEC rulemaking is required. The proxy materials for the initial meeting must include both the say on pay resolution and the resolution to determine whether to have the say on pay vote every one, two or three years.
Vote on Golden Parachutes: Companies are required to have an advisory vote on golden parachutes relating to a merger, acquisition or other change of control. Companies must comply with this requirement beginning with their first annual or other meeting occurring after January 21, 2010. The SEC is required to adopt rules describing the disclosure that is required in proxy statements regarding the vote, although Dodd-Frank does not specify a timeframe for adoption of these rules.
Compensation Committee Independence: Within 360 days of enactment of Dodd-Frank, the SEC is required to issue rules requiring exchanges to prohibit the listing of a company’s equity securities if its board does not have a compensation committee that meets the heightened independence standards included in Dodd-Frank, including standards related to consulting, advisory or other fees to the issuer. In addition, the SEC would be required to adopt rules ensuring that any compensation consultant, legal counsel, or other advisor to the compensation committee was “independent” (as defined by the SEC).
Enhanced Executive Compensation Proxy Disclosure: Dodd-Frank directs the SEC to issue rules requiring disclosure of the relationship between executive compensation and financial performance. The rules will also require companies to disclose the median compensation of employees other than the CEO, the annual total compensation of the CEO and the ratio between the CEO’s compensation and the median compensation of all other employees. Dodd-Frank does not specify a timeframe for the SEC to adopt these rules.
Disclosure of Separation of Chairman and CEO: Within six months of enactment of Dodd-Frank, the SEC must issue rules mandating that companies disclose in their annual proxy statements the reasons they have chosen to either have a single CEO and chairman, or why they have separated the CEO and chairman positions. SEC rules currently require this disclosure and it is unclear what additional disclosure rules will be issued.
Broker Discretionary Voting: Dodd-Frank requires national securities exchanges to amend their rules to prohibit members of the exchange (i.e., brokers) from exercising discretionary authority to vote in connection with the election of directors, executive compensation (including say on pay), or any other significant matter as determined by the SEC. Dodd-Frank does not specify a timeframe for the exchanges to adopt these rules.
Clawback Policy: Dodd-Frank directs the SEC to require national securities exchanges to prohibit the listing of any security of a company that does not develop and implement a clawback policy that would require recovery of all incentive-based compensation from all executive officers (both current and former) in the event of a financial restatement, for the three-year period preceding the restatement in excess of what they would have been paid under the restatement. This clawback provision strengthens Sarbanes-Oxley by requiring clawback even if no one engaged in misconduct. Dodd-Frank does not specify a timeframe for this provision.
Beneficial Ownership: The SEC, after consultation with other regulators, may (but is not required to) issue rules that would include security-based swaps in determining beneficial ownership under Section 13(d). In addition, the SEC would have the ability to issue rules reducing the time period for filing an initial Schedule 13D and Section 16 form.
Employee Hedging: The SEC is required to issue rules mandating that companies disclose whether their employees are permitted to engage in hedging activities that are designed to hedge or offset market declines affecting compensatory equity awards. Dodd-Frank does not specify a timeframe for this provision.
Regulation D: Effective immediately, natural persons are no longer able to include the value of their primary residence in determining whether they meet the $1 million net worth accredited investor test under Rule 506. In addition, within one year from enactment of Dodd-Frank, the SEC is required to adopt rules to disqualify certain “bad actors,” including persons who have violated securities laws, from eligibility to use the Rule 506 exemption.
404 Exemption for Smaller Companies: Effective immediately, Dodd-Frank amends Section 404 of the Sarbanes-Oxley Act of 2002 to exempt public companies that are not “large accelerated filers” or “accelerated filers” from compliance with the internal control over financial reporting auditor attestation requirements.
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf
For more information, contact:
Kara L. MacCullough
305.789.7548
kara.maccullough@hklaw.com
Laurie L. Green
954.468.7808
laurie.green@hklaw.com
Related Practices