SEC Proposes Rules to Implement Legislative Say-on-Pay Mandate

The SEC has proposed changes to the federal proxy rules implementing the Dodd Amendment in the stimulus legislation requiring that TARP recipients provide a separate shareholder advisory vote to approve the compensation of executives. The Dodd Amendment is codified in Section 111(e) of the Emergency Economic Stabilization Act (EESA). Under the proposal, this separate shareholder vote would be required when TARP recipients solicit proxies during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, and the solicitation relates to an annual meeting for which proxies will be solicited for the election of directors. Companies required to provide such a separate shareholder vote would also be required to disclose in their proxy statements the EESA requirement to provide such a vote, and to briefly explain the general effect of the vote, such as whether the vote is non-binding.

The Commission is not proposing to require companies to use any specific language or form of resolution. However, as stated in Section 111(e), the vote must be to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission, which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material. Thus, the Commission believes that a vote to approve a proposal on a different subject matter, such as a vote to approve only compensation policies and procedures, would not satisfy the requirements of Section 111(e) or proposed Rule 14a-20.

Likewise, a shareholder proposal asking the company to adopt a policy providing for periodic, non-binding shareholder votes on executive compensation in the future would not satisfy the requirement of Section 111(e) or proposed Rule 14a-20. Section 111(e) requires a vote to approve the compensation of executives. A vote to request a voting policy that would apply at future meetings would not satisfy either the statute or the proposed rule.

A proposed instruction to new Rule 14a-20 would clarify that smaller reporting companies would not be required to provide a compensation discussion and analysis in order to comply with the requirements of Rule 14a-20. The SEC does not believe that Section 111(e) changes the Commission’s rules for a smaller reporting company that is a TARP recipient under the EESA with respect to the compensation discussion and analysis disclosure. SEC compensation disclosure rules, as set forth in Item 402 of Regulation S-K, permit smaller reporting companies to provide scaled disclosure that does not include CD&A.

The Commission agrees with the view previously expressed by the Division of Corporation Finance that a separate shareholder vote on executive compensation is required only with respect to an annual meeting of shareholders for which proxies will be solicited for the election of directors or a special meeting in lieu of such annual meeting. Although Section 111(e) refers to an annual or other meeting of the shareholders, the subsection is titled “Annual Shareholder Approval of Executive Compensation.” Thus, proposed Rule 14a-20 is intended to result in TARP recipients conducting the required shareholder advisory vote annually in connection with the election of directors .

The SEC is proposing in a separate release to accelerate the filing schedule for reporting results of shareholder votes generally by moving the requirement from Forms 10-Q and 10-K to Form 8-K. If that proposal is adopted, it would apply to reporting results of the advisory vote required by Rule 14a-20. Thus, companies would be required to disclose on Form 8-K the results of a shareholder vote, and file that information within four business days after the end of the meeting at which the vote was held.