SEC Amends Proxy Rules to Implement Dodd Amendment Say-on-Pay Mandate for TARP Companies

The SEC has amended the federal proxy rules to implement the requirement in Section 111(e)(1) of the Emergency Economic Stabilization Act (EESA) that TARP recipients provide a separate shareholder advisory vote to approve the compensation of executives. Release No. 34-61335. Under the amendments, this separate shareholder vote will 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. The say-on-pay mandate for TARP recipients was added to EESA by the Dodd Amendment to the stimulus legislation.

Companies required to provide such a separate shareholder vote will 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. The SEC also amended the proxy rules so that TARP recipients are not required to file a preliminary proxy statement as a consequence of providing the required vote on executive compensation.

The SEC is not requiring TARP companies to use any specific language or form of resolution. Thus, TARP recipients will have some flexibility in how they present the required vote.

The Dodd Amendment to the American Recovery and Reinvestment Act of 2009 provides that, during the period in which any obligation arising from TARP assistance remains outstanding, any proxy or consent or authorization 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).

The SEC does not believe that the provision in the Dodd Amendment requiring CD&A disclosure changes the Commission’s rules for a smaller reporting company that is a TARP recipient under EESA with respect to the compensation discussion and analysis (“CD&A”) 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 shareholder advisory vote may not be construed as overruling a decision by the company’s board or as creating any additional fiduciary duty of the board. Similarly, the advisory vote cannot be construed to restrict shareholders from making proposals for inclusion in proxy materials related to executive compensation. The SEC reiterated in the adopting release that Rule 14a-8 will continue to apply to shareholder proposals that relate to executive compensation.

On December 16, 2009, the SEC amended the proxy disclosure requirements. Release No. 33-9089. As part of this rulemaking, the SEC accelerating the reporting of shareholder vote results by moving the reporting requirement from the Exchange Act periodic reports to Form 8-K. These amendments will apply to reporting results of the shareholder advisory vote on executive pay. The SEC believes that this will address the concerns of commenters who stressed the importance of timely reporting of the shareholder vote on executive compensation.

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