Dodd Reform Bill - Restoring American Financial Stability Act of 2010

On March 15th Senator Dodd unveiled the updated version of his reform bill.  Included here is a summary of the provisions related to compensation, which are largely unchanged from the November 2009 version of the bill.  Some of the changes from the prior version are indicated by [brackets].  As with the November version of the bill, most of the compensation-related provisions apply only to public companies.

SEC Registrants

Annual shareholder say-on-pay

  • Each proxy solicitation must include a non-binding separate resolution subject to shareholder vote to approve the compensation of executives;
  • [The requirement for a shareholder vote on golden parachutes has been removed from the bill.]

Compensation Committee independence

  • To be listed on a national exchange, the company's Committee members must meet independence standards (to be determined);
  • Advisors to the Committee must also meet independence criteria;
  • Committee must have the authority and reasonable funding to engage independent advisors;
  • Proxy or consent solicitation material for an annual meeting of shareholders must disclose whether the Committee engaged a compensation consultant and whether the Committee's work raised any conflict of interest (and if so, the nature of the conflict and the way it is being addressed).

Disclosure of pay vs performance

  • Proxy compensation disclosures must contain information that shows the relationship between executive compensation actually paid and the financial performance of the company, taking into account any change in the value of the shares of stock, dividends, and any distributions.
  • A graphic representation may be included [in the November version a 5-year graph was required, rather than optional].

Incentive compensation claw-back

  • The company must develop and implement a policy for recovery of incentive-based compensation from any current or former executive officer if the company is required to prepare an accounting restatement due to material noncompliance with financial reporting requirements;
  • Claw-back must at least be equal to the excess of what would have been paid under the accounting restatement;
  • [The language in the bill has changed from "Clawback" in the November version, to "Recovery of erroneously awarded compensation" in the March version.]

Employee and/or director hedging

  • The company must disclose in its annual proxy statement whether hedging strategies are permitted by employees and/or directors to offset any decrease in market value of equity grants/holdings [this provision of the November version of the bill only covered employees (not directors) and only included compensatory grants (not direct equity holdings)].

Holding companies of depository institutions:

Prohibition of excessive/high-risk compensation

  • The Bank Holding Company Act would be amended, requiring the Board of Governors to establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company that:  A) provides excessive compensation, fees, or benefits; or B) could lead to material financial loss to the bank holding company;
  • The Board's standards are to take into consideration the compensation standards described in section 39(c) of the Federal Deposit Insurance Act.

[NOTE: A provision in the November version of the bill that contemplated an imposition of higher capital levels on depository institutions with high-risk compensation arrangements has been removed in the current version.]