Incoming SEC Oversight Chair Will Focus on Executive Compensation and Hedge Funds

With the Democrats having retaken control of the House of Representatives, Rep. Barney Frank is poised to become chairman of the House Financial Services Committee in the 110th Congress. From his record as the committee’s Ranking Member, it is expected that Rep. Frank will focus on executive compensation and hedge fund issues. He is also a strong advocate for the proper implementation of the Fair Fund provisions of the Sarbanes-Oxley Act.

Rep. Frank introduced a bill that would allow shareholders to approve their company’s executive compensation. The Protection Against Executive Compensation Abuse Act, HR 4291, would also allow for a company policy for recapturing any form of incentive compensation, such as when the company pays bonuses or grants stock options to executives for meeting performance targets only to later learn that these numbers were inaccurate and must be restated. Similarly, the bill would require that shareholders separately approve any additional ``golden parachute’’ compensation for top executives that coincides with the sale or purchase of substantial company assets. This provision is designed to empower shareholders to protect themselves from senior management’s natural conflict of interest when negotiating an agreement to buy or sell a company while simultaneously negotiating a personal compensation package.

Finally, the bill would require that companies include on their websites clear and simple disclosures on the company’s compensation filings made to the SEC. Rather than forcing shareholders to regularly monitor and decipher what Rep. Frank called the SEC’s ``arcane’’ EDGAR database, shareholders could get this information right on the company’s website.

Rep. Frank is also interested in hedge fund regulation. He was instrumental in getting the House to pass a bill directing the President’s Working Group on Financial Markets to conduct a study and report to Congress on the hedge fund industry. The Hedge Fund Study Act, HR 6079, has the support of House leaders and represents an effort by Congress to learn more about both the risks and benefits of hedge funds in light of their explosive growth. The bill has been received in the Senate and, in order to become law, would have to be passed by the Senate during the upcoming lame duck session of Congress.

One topic that must be analyzed in the study is the growth of pension funds that invest in hedge funds. Noting his concern about the interface between pension funds and hedge funds, Rep. Frank vowed to deal with the issue further next year.

Separately, Rep. Frank has introduced legislation, HR 5712, to authorize the registration and monitoring of hedge funds, effectively reversing a recent federal appeals court decision declaring arbitrary an SEC rule requiring hedge funds to register with the SEC if they had more than fourteen clients and managed a specific amount of assets. The bill would give the SEC clear authority to require registration and monitoring. The Investment Advisers Act exempts from registration investment advisers with fewer than fifteen clients. In Goldstein v. SEC, the appeals panel rejected the SEC’s suggestion of counting the investors in the hedge fund as clients of the fund’s adviser in order to get over the fourteen client limit. Specifically, Frank’s bill would authorize the SEC to interpret the term “client” to require the registration of advisers to funds that have more than 15 investors.
Rep. Frank has also shown great interest in the proper implementation of the Fair Fund provisions of Sarbanes-Oxley, which provided a new tool to help the SEC to return lost money to investors harmed by corporate wrongdoing. Rep. Frank released a report by the Government Accountability Office (GAO) that reviewed the efforts of the SEC and the CFTC to track and manage the collection and distribution of civil fines and ill-gotten gains from corporate wrongdoers. While the GAO report determined that the SEC has made progress in more effectively managing its collection of penalties and disgorgement funds and that it has successfully used the Fair Fund to collect money to help investors harmed by corporate misdeeds, the agency has encountered difficulties in expeditiously returning these funds to investors.
The incoming oversight chair called on the SEC to continue to focus on improving its administration of the Fair Fund and asked the Commission to identify additional legislative reforms needed to improve the implementation of the Fair Fund. He believes that the SEC needs to find ways to turn the Fair Fund into a more effective mechanism for returning funds to wronged investors, given the limitations of the law and the difficulties of identifying those injured by securities fraud. If the SEC needs additional statutory reforms to protect innocent investors, Frank stands ready to consider such changes.