The Restoring American Financial Stability Act of 2010 – Some Important Highlights
The U.S. Senate recently passed the Restoring American Financial Stability Act of 2010 (“RAFSA”). The Bill contains numerous provisions that would significantly impact all U.S. public companies (regardless of size), including corporate governance and executive compensation.
RAFSA is a significant piece of legislation both in scope and length (over 1,500 pages) focusing extensively on the much talked about overhaul of financial institution regulation in the United States. However, on a practical level, it is important for companies to know the key corporate governance, compensation and disclosure provisions of RAFSA, summarily described herein.
- Majority voting. Election of listed company directors in uncontested elections would require a majority of votes cast. Any director who receives less than a majority of votes cast must offer his/her resignation to the board of directors. The board must accept the resignation or unanimously reject the resignation as long as it provides a public explanation for its rejection within 30 days thereof. Contested elections would only require a plurality standard.
- Proxy access. RAFSA authorizes (but does not require) the SEC to promulgate rules permitting shareholders to include their own director nominees in an issuer’s proxy solicitation materials.
- “Say on pay” vote. Any proxy statement that must include compensation disclosure under SEC rules would be required to include an annual “say-on-pay” nonbinding shareholder vote to approve the disclosed compensation of the named executive officers.
- Claw-back Policy. National securities exchanges would need to adopt standards requiring listed issuers to maintain and disclose a “claw-back” policy whereby, in the event of an accounting restatement due to material non-compliance with financial reporting requirements, an issuer would be able to recover from any current or former executive any excess incentive-based compensation(including stock options awarded as compensation) paid during the three-year period preceding the restatement based on the erroneous data. The clawed back amount would equal the excess of what would have been paid under the restated results.
- Compensation committee and adviser independence. Independence standards for compensation committee members of issuers listed on a national securities exchange would be heightened based on consideration of specified factors, including consulting, advisory and other compensatory fees and affiliate status. In addition, the compensation committee would be required to consider independence before selecting consultants, counsel or other advisers and would be directly responsible for their appointment, compensation and oversight. Finally, issuers would be required to disclose the retention of consultants and any conflict of interest raised in such retention, as well as how such conflict was handled.
- Broker Non-Votes. Presently, brokers are allowed to vote with specific client instructions on the election of directors, the adoption of equity plans or shareholder proposals. Under RAFSA, however, national securities exchanges would be required to prohibit broker discretionary voting in connection with (1) the election of directors (consistent with current New York Stock Exchange rules), (2) executive compensation (which assumedly includes “say on pay” proposals) or (3) any other “significant matter,” as determined by the SEC.
The SEC’s Rule Making Role
Similar to the historical Sarbanes-Oxley Act of 2002, RAFSA delegates a significant amount of the desired rulemaking to the Securities and Exchange Commission, including rules that would prohibit the listing of any U.S. issuer that fails to adopt the RAFSA standards. In addition to other rules, RAFSA mandates the SEC to promulgate rules in connection with the following new disclosure requirements:
- Link between compensation and performance. Item 402 of Regulation S-K must be amended to require disclosure of the relationship between executive compensation and the issuer’s financial performance.
- Internal pay disparity. Issuers must disclose: (1) the median annual total compensation of all employees (other than the CEO); (2) the annual total compensation of the CEO; and (3) the ratio of the median employee annual total compensation to that of the CEO.
- Employee and director hedging. Issuers must disclose if directors and employees are allowed to purchase “hedging” financial instruments such as prepaid variable forward contracts, equity swaps, collars and exchange funds.
- CEO and chairman positions. Issuers’ proxy statements must disclose the reason such issuer separated or combined the positions of chairman and CEO (which is likely already being disclosed as companies already must disclose their leadership structures and the bases and rationales for such structures).
Furthermore, the SEC would have the authority to establish transition and cure periods for compliance with RAFSA requirements, as well as fully exempting companies from any RAFSA requirements based on the company’s size, market capitalization, number of shareholders or other criteria that the SEC deems appropriate, along with the ability.
Non-U.S. Issuers
It is important to note that RAFSA will certainly impact non-U.S. issuers in some ways and potentially in others as well. For instance, provisions related to broker voting, as well as amendments to the Securities Act private placement provisions and whistleblower protection will apply to non-U.S. issuers. In addition, unless certain exemptions or relief is ultimately provided (which at this point is unknown), those provisions effected via SEC rule promulgation and national exchange listing standards (i.e., compensation committee and adviser independence, claw-backs and majority voting) would, apply to non-U.S. companies with securities listed on U.S. stock exchanges.
As mentioned above, RAFSA contains many more rules, regulations and information that will affect the overall regulation of financial institutions that have not been discussed in this memorandum. Also as noted, much of the law depends on SEC rule enactment and RAFSA still requires reconciliation with the Wall Street Reform and Consumer Protection Act of 2009 (which passed the House back in December). Therefore, these rules are works in progress. However, at this point, companies should focus on the major changes discussed above which will have a certain impact on their corporate governance, compensation and disclosure practices. More updates will be provided as the picture of the regulatory landscape becomes more clear and final.
The information contained in this publication is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Craig Tzvi Gherman. The invitation to contact is not to be construed as a solicitation for legal work. Any new attorney/client relationship will be confirmed in writing.
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