Dodd Letter to SEC Details Effective Dates of Say on Pay and Compliance Certification

In a letter to SEC Chair Mary Schapiro, Senate Banking Committee Chair Christopher Dodd explained the shareholder advisory vote provisions for TARP recipients in the American Recovery and Reinvestment Act of 2009. He also discussed the requirement that chief executive and financial officers provide a certification of compliance with the new corporate governance standards contained in the Act. Moreover, although the Act gives the SEC up to one year to adopt regulations implementing say on pay, Senator Dodd urged the Commission to provide such guidance as soon as possible. He said that firms required to comply with the new executive compensation and corporate standards would benefit from prompt and clear guidance from the SEC staff on how to comply with the Act’s requirements. It was the Dodd Amendment to the stimulus legislation that inserted the provisions in the Act.

The Act provides that, during the period in which any obligation arising from TARP assistance remains outstanding, any proxy for an annual or other meeting of the shareholders of any TARP company must permit a separate non-binding shareholder vote to approve the compensation of executives, as disclosed pursuant to SEC rules, which disclosure must include the compensation discussion and analysis, the compensation tables, and any related material.

In his letter to the Commission, Senator Dodd said that this provision of the law became effective on February 17, 2009. In his view, the say on pay provision would not apply to preliminary, or the related definitive proxy statement even if filed after February 17, or definitive proxy statements filed with the SEC on or before February 17, but would apply to proxies filed after that date.

The law is intended to require a yearly vote by shareholders, reiterated the chair, and such vote can be held either at the annual shareholder meeting at which directors are elected or at a special or other meeting which is held in lieu of the annual meeting. He also emphasized that nothing in the shareholder advisory vote provisions of the Act changes the substantive executive compensation disclosure requirements under SEC rules. Further, although the SEC will determine if it will need to amend its rules to address the provisions of the Act, any such determination will not affect the effective date of the provision.

The Act also provides that the TARP company CEO and CFO must provide a written certification of compliance by the company with the mandated executive compensation and corporate governance standards. These standards include restrictions on bonuses, independent compensation committees, and prohibitions on golden parachutes. In the case of a TARP company whose securities are publicly traded, the certification must be provided to the SEC, together with annual filings required under the securities laws. For nonpublic companies, the certification must be filed with the Treasury.

Senator Dodd said that, since the certification requirement relates to compliance with executive compensation and corporate governance standards that are yet to be set by Treasury, this requirement is not yet effective. Thus, CEOs and CFOs will not be required to certify as to their company’s compliance with such standards until they have been established.