Friday, January 09, 2009

Frank TARP Reform Bill Emphasizes Executive Compensation Reform

House Financial Services Committee Chair Barney Frank (D-MA) has introduced a bill to reform the Troubled Assets Relief Program (TARP) provisions of the Emergency Economic Stabilization Act of 2008 The TARP Reform and Accountability Act, HR 384, would strengthen accountability, close loopholes, increase transparency, and require Treasury to take significant steps on foreclosure mitigation. It further requires that Treasury act promptly to permit the smaller community financial institutions that have been shut out so far to participate on the same terms as the large institutions that have already received funds

With regard to corporate governance and executive compensation provisions, all types of funding would get the same treatment. For any new receipt of TARP funds, the bill applies the most stringent non-tax executive compensation restrictions from EESA across the board. For example, the measure requires Treasury to prohibit incentives that encourage excessive risks and provides for claw-back of compensation received based on materially inaccurate statements. It also prohibits all golden parachute payments for the duration of the investment. The bill also removes the de minimus exception under which institutions smaller than $300 million in assets had not been subject to the golden parachute limitations in auction purchases of troubled assets.
The Act also authorizes Treasury to apply these expanded executive compensation provisions retroactively to existing recipients of direct assistance. Existing tax-related executive compensation provisions under EESA Section 302 are not modified in the draft bill
A broader corporate governance provision would allow Treasury to have an observer at board or board committee meetings of recipient institutions.
Finally, the measure clarifies Treasury’s authority to provide support to issuers of municipal securities, including through the direct purchase of municipal securities or the provision of credit enhancements in connection with any Federal Reserve facility to finance the purchase of municipal securities.