House Passes TARP Reform Bill Emphasizing Oversight and Executive Compensation Reform

The House passed a bill to reform the Troubled Assets Relief Program (TARP) provisions of the Emergency Economic Stabilization Act of 2008. The vote was 260-166. 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. The measure requires detailed reports from recipients of TARP funds and ensures that those funds un-thaw credit. It provides even stronger limits on executive compensation. 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.

The Act also requires the Treasury to incorporate within the TARP assistance agreement how the funds are to be used and the benchmarks an institution must meet in using such funds. It also requires federal banking regulators to examine annually the use of TARP funds made by the deposit institutions. Also, the measure prohibits the use of TARP funds by a TARP-assisted institution for mergers or acquisitions unless such a transaction will reduce risk to the taxpayer or could have been consummated without such 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.

The measure also 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.

A floor amendment to the bill requires the Federal Reserve Board to disclose the details of its program to purchase illiquid mortgage-backed securities from troubled financial institution. The Fed hired four investment firms to manage the program. According Rep. Patrick Murphy, sponsor of the amendment, the Fed has refused to release details about how they chose the four firms and who will manage the purchases. They have refused to share how much those firms are getting paid. And it is still unclear what steps have been taken to ensure strict conflict of interest provisions are put in place so that these four firms are not given an unfair market advantage because of their role in the mortgage backed securities program.

Thus, the Murphy amendment would require the Fed to disclose the process by which it selected the investment managers and the details of the contracts reached with these four investment managers, including price. The bill would also force the Fed to disclose the steps that each investment manager has taken to ensure that the program is free of conflicts of interest or an unfair advantage.

A Manager's Amendment added Section 107 to the Act creating an Office of Minority and Women Inclusion, which will be responsible for ensuring the inclusion and utilization of minority and women-owned businesses. These businesses will include financial institutions, investment banking firms, mortgage banking firms, broker-dealers, and accountants. This office will also be responsible for diversity in the management, employment, and business activities of the TARP, including the management of mortgage and securities portfolios, making of equity investments, and the sale and servicing of mortgage loans.

Section 107 also calls for the Secretary of the Treasury to report to Congress in 180 days detailed information describing the actions taken by the Office of Minority and Women Inclusion, which will include a statement of the total amounts provided under TARP to small, minority, and women-owned businesses. The Manager's Amendment in Section 404 also has clarifying language ensuring that the Secretary has authority to support the availability of small business loans and loans to minority and disadvantaged businesses. This will be critical to ensuring that small and minority businesses have access to loans, financing, and purchase of asset-backed securities directly through the Treasury Department or the Federal Reserve.