House Floor Colloquy Sheds Light on Frank Amendment to Corporate Governance Legislation

A colloquy on the House floor between Financial Services Chair Barney Frank and Rep. Tom Price illuminated a provision inserted on the floor by the Chair into the Corporate and Financial Institution Compensation Fairness Act (HR 3269). Passed by the House on July 31, 2009, the legislation mandates shareholder advisory votes on executive compensation as part of the overall reform of financial regulation and requires independent board compensation committees and independent compensation consultants.

During the mark-up of the legislation, the committee approved an amendment by Rep. Tom Price (R-GA) providing that compensation approved by a majority say-on-pay vote is not subject to clawback, except as provided by contract or due to fraud to the extent provided by federal law. But, the House adopted a floor amendment offered by Rep. Frank that struck out language prohibiting clawbacks of executive compensation approved by shareholders and inserted language providing that no regulation shall be allowed to require the recovery of incentive-based compensation under compensation arrangements in effect on the date of enactment, provided such compensation agreements are for a period of no more than 24 months; and nothing in the Act shall prevent or limit the recovery of incentive-based compensation under any other applicable law.

On the House floor, Rep. Frank said that the Price Amendment was legitimately concerned with the possibility of a callback; that is, a requirement that people give back bonuses they had already received. That would be arbitrary, said Rep. Frank. Congress hopes that there will be rules adopted that will set those rules in place, and compensation should not be subjected unreasonably to arbitrary retroactive decisions.

But at the time the committee adopted the Price Amendment, Mr. Frank said that he was not aware of an SEC decision that said that where someone had received the compensation and it subsequently turned out that the transaction was not profitable, although it appeared to be, that a return of the money that was given because of the profitability might be appropriate. Mr. Frank was probably referring to the SEC enforcement action in SEC v. Jenkins, (AAER No. 3025, DC Ariz), in which the SEC asked a federal judge to order a former company CEO to reimburse the company and its shareholders more than $4 million that he received in bonuses and stock sale profits while the company was committing accounting fraud. This is the first SEC action seeking reimbursement under Section 304 of Sarbanes-Oxley from an individual who is not alleged to have otherwise violated the securities laws. Section 304 deprives corporate executives of money that they earned while their companies were misleading investors.

According to Mr. Frank, the language of his amendment reflects that. It does not overturn that SEC decision. It does give some protection against arbitrary return. The amendment that was offered in committee in good faith, to try to make certain that there weren't any changes that could be made retroactively to compensation packages and incentive pay, was very specific.

In a colloquy with Mr. Frank, Rep. Price said that his amendment was designed to make certain that there were not any changes that could be made retroactively to compensation packages and incentive pay. It said that no compensation of any executive having been approved by a majority of the shareholders may be subject to any callback, which is the retroactivity, unless it was part of the contract or unless there had been fraud committed.

According to Rep. Price, the Frank Amendment language that no regulation shall require the recovery of incentive-based compensation under compensation arrangements in effect as of the date of enactment means that the SEC will be able to dictate pay to publicly held companies that did not take federal tax money. Rep. Price considers this a huge step in the wrong direction because the legislation now puts the SEC into the agreements for compensation for executives in publicly traded companies.

In reply, Rep. Frank said that the word "require" is ambiguous in the context of the amendment. The word should have been "permit"' rather than "require." That is, Congress means to say that you could not require the individual to give it back. Congress wants to "restrain the SEC or anybody else from an inappropriate one." When the amendment says "require," reiterated Mr. Frank, it means that you could not require the individual to give it back.

In speaking of the amendment, Rep Brad Miller (D-NC) said that Congress does not think that a regulator or regulation should require the recovery of incentive-based pay where the existing contract doesn't require it. Congress should not change existing contracts retroactively, said Rep. Miller, but also does not need to undermine the existing law that may provide for that.

According to Rep. Miller, a member of the Financial Services Committee, the SEC is now trying to recover money that was paid supposedly because transactions were profitable when, in fact, they weren't because of the accounting. Congress does not want to reward accounting irregularities, he emphasized, adding that, going forward, regulators may well decide that an effective constraint on imprudent risk-taking is to require longer horizons for incentive-based pay. That is the purpose of this amendment. It is what this amendment actually accomplishes.

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