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Dodd-Frank Wall Street Reform and Consumer Protection Act

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Presentation on theme: "Dodd-Frank Wall Street Reform and Consumer Protection Act"— Presentation transcript:

1 Dodd-Frank Wall Street Reform and Consumer Protection Act

2 Executive Compensation and Corporate Governance Provisions of the Dodd–Frank Act (all public companies)

3 Executive Compensation and Corporate Governance Reform
The Dodd-Frank Act provides for the following reforms: Executive Compensation Say on Pay Recoupment/Clawback Policies Compensation Committee Independence Additional Compensation Proxy Disclosure Corporate Governance Mandatory Proxy Access Disclosure About Chairman and CEO Positions Broker Discretionary Voting Disclosure of Any Employee or Director Hedging SEC Management Improvements

4 Say on Pay Requires a separate, non-binding shareholder vote to approve the compensation of the named executive officers (i.e. “say-on-pay”) at least every 3 years. Requires, at least every 6 years, a shareholder vote on how frequently the non-binding “say-on-pay” vote will occur (every 1, 2 or 3 years). Required for annual meetings held on or after January 22, 2011.

5 Say on Golden Parachutes
Any proxy statement seeking approval of a change in control transaction must include: “clear and simple” disclosure of any agreements the acquirer has with any named executive officers of the subject company concerning any compensation that relates to the change in control transaction (“golden parachute” payments); and a separate non-binding shareholder vote to approve such “golden parachute” agreements, unless the agreements have already been subject to a vote pursuant to say-on-pay requirements. Required for meetings held on or after January 22, 2011.

6 Recoupment/Clawbacks
SEC required to issue rules requiring a company to recover incentive compensation from certain executives in the event of an accounting restatement due to a material non-compliance with financial reporting requirements. Company must recover any amounts in excess of what would have been paid under the restated financials. Applies to any current or former executive who received incentive compensation (including stock options) during the 3-year period preceding the date the company is required to prepare the restatement.

7 Compensation Committee Independence
SEC required to issue rules within 1 year requiring the NYSE and NASDAQ to establish independence standards for all members of the Compensation Committee. In determining independence for this purpose, the Dodd-Frank Act requires the securities exchanges to consider certain factors, including: the source of compensation for the director (such as any consulting, advisory or other compensatory fees paid by the company), and whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

8 Compensation Committee Independence (cont.)
The Compensation Committee in its sole discretion may engage compensation consultants, legal counsel or other advisers to the Compensation Committee. The Compensation Committee must be directly responsible for the appointment, compensation and oversight of compensation consultants. The Compensation Committee may select compensation consultants only after considering factors that might affect the independence of such advisers to be promulgated by the SEC. Company must disclose in its proxy statement if the Compensation Committee retained a compensation consultant and any conflict of interest issues. This will be required for 2012 proxy season.

9 Compensation Proxy Disclosure
Companies must include a discussion of the relationship between executive compensation and stock performance. Companies must also disclose: Median annual total compensation of all employees (other than the CEO); Annual total compensation of the CEO; and The ratio of the two amounts. Not currently expected to be in effect for 2011 proxy season.

10 Mandatory Proxy Access
The Dodd-Frank Act expressly authorizes the SEC to issue rules granting shareholders access to company’s proxy statement to nominate directors. Senate provision requiring 5% ownership and a 2-year holding period was removed from the final Dodd-Frank Act; SEC to determine details of access. SEC expected to take action soon, for rules to be in effect for 2011 proxy season.

11 Chairman and CEO Position Disclosure
SEC required to issue rules requiring disclosure in a company’s proxy statement of its reasons for having the same person or different individuals serving as Chairman and CEO. Current rules require disclosure of board leadership structure, including whether Chairman and CEO positions are combined or separated, and why the company believes its structure is appropriate. SEC required to issue rules by January 17, 2011.

12 Broker Discretionary Voting
Directs the NYSE and NASDAQ to prohibit discretionary voting in connection with the election of directors, executive compensation (e.g., “say on pay” and “say on golden parachute” votes) or any other significant matter (as determined by SEC). Discretionary voting has already been eliminated from director elections.

13 Executive Compensation
No Timeframe Provided SEC Must Implement Rules Requiring the Following Executive Compensation Disclosures: Two new executive compensation disclosures: (i) pay for performance disclosure and (ii) internal pay equity disclosure. Clawbacks: Prohibit listing of a company that does not implement a policy providing (i) for disclosure of the company’s policy on incentive-based compensation that is based on financial information and (ii) that the company will recover from a company’s current or former executive officers who received incentive-based compensation in the three-year period preceding a restatement. Disclosure of Hedging by Insiders: Require companies to disclose whether employees and directors are allowed to hedge the value of any equity securities. Nine Months (Apr. 21, 2011) Incentive-Based Compensation Requires Federal financial regulators to jointly prescribe regulations to: (i) require “covered financial institutions” to report the structures of all incentive-based compensation arrangements and (ii) prohibit incentive-based payment arrangements that encourage inappropriate risks by providing employees, directors or principal shareholders with excessive compensation or that could lead to material financial loss to the covered financial institution. One Year (Jul. 21, 2011) Independence of Comp. Committees The SEC must issue rules directing national exchanges to require listed companies to have independent compensation committees within one year after enactment of DFA. DFA outlines factors to be considered. Apr. 21, 2011 Jul. 21, 2010 Jan. 21, 2011 Jul. 21, 2011 Effective Immediately (Jul. 21, 2010) Broker Discretionary Voting Listing exchanges must prohibit broker discretionary voting in connection with the election of directors, executive compensation, or any other significant matter, as determined by the SEC. Six Months (Jan. 21, 2011) Say on Pay Must provide shareholders with a non-binding vote on executive compensation at least once every three years. Must provide shareholders with a non-binding vote at least once every six years to determine the frequency of the say on pay vote. Say on Golden Parachutes Must provide shareholders with a non-binding vote on named executive officer golden parachute arrangements where shareholders are asked to approve an M&A transaction. One Year (Jul. 21, 2011) Retaining Comp. Consultants/Other Advisors General: Compensation committees must have authority to retain or obtain the advice of an advisor. Independence of Advisors: Compensation committees must consider factors affecting independence when retaining an advisor. Disclosure: In any proxy for an annual meeting occurring more than one year after enactment of the Act, compensation committees must disclose: (i) whether a compensation consultant was retained and (ii) whether the work of the compensation consultant presented a conflict of interest.

14 Disclosure of Employee and Director Hedging
The SEC must issue a rule requiring companies to disclose whether their employees or directors are permitted to purchase financial instruments designed to hedge against any decreases in the market value of the company’s stock. The Dodd-Frank Act is silent as to when this will be required.

15 Implementation Timelines and Further Actions

16 Changes to SEC Management
SEC required to submit annual report and certification that assess the effectiveness of the SEC’s internal supervisory controls and its procedures used to perform examinations, investigations and reviews of filings. U.S. Comptroller General is required to submit: A triennial report evaluating SEC personnel management; An annual report assessing the SEC’s internal control structure and procedures for financial reporting; and A triennial report on the SEC’s oversight of FINRA. SEC Divisions of Trading and Markets and Investment Management provided with staff of examiners to perform compliance inspections and examinations.

17 Changes to SEC Management (cont.)
SEC Inspector General required to establish hotline for SEC employee confidential suggestions regarding waste, misconduct or mismanagement. SEC required to employ a consultant to review the internal operations, structure, funding and need for comprehensive reform of the SEC and its relationship with self-regulatory organizations. U.S. Comptroller General required to perform study on the turnover of Staff that work for financial institutions regulated by the SEC and determine whether post-employment restrictions are necessary.

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