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Tag Archives: ARRA

April 2, 2009

Economic Stimulus Legislation for 2009

Financial institutions that have been participating in the Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP) since its creation under the Emergency Economic Stabilization Act of 2008 (EESA)–which I blogged about back in November–find themselves subject to tighter rules in 2009. We’ve recently seen new rules from the Treasury along with the finalization of the American Recovery and Reinvestment Act of 2009 (ARRA). In this entry, I will break down the top changes from 2009 legislation to-date.

First, there have been two new statements from the U.S. Department of the Treasury:

The first, on January 16, 2008, expands the executive compensation standards of the CPP to additionally require the participating company CEO to:

  • provide annual certification that the participating company has complied with the executive compensation standards of the CPP; and

  • certify, within 120 days of the closing date of the Securities Purchase Agreement, that the senior executives’ incentive compensation arrangements do not encourage unnecessary and excessive risks that could threaten the value of the financial institution.

It also requires the company to keep records to substantiate these certifications for at least six years following each certification and provide these records to the TARP Chief Compliance Officer upon request.

The second statement from the Treasury came on February 4, 2009. In this statement, the Treasury distinguishes between banks participating in any generally available capital access program (like the CPP) and banks needing “exceptional assistance.” Companies that receive exceptional assistance (like AIG) will be required to:

  • limit senior executives to $500,000 in total annual compensation other than restricted stock that may not fully vest until the government has been repaid with interest;

  • fully disclose the company’s executive compensation structure and strategy and institute a “say on pay” shareholder resolution;

  • ban golden parachute payments for the top 10 senior executives; and

  • adopt a policy banning “luxury expenditures”.

Those participating in generally available programs:

  • have the same limit to total comensation for senior executives, but allows for that limit to be waived by shareholder vote and with a full public disclosure;

  • require clawback provisions for bonuses paid to top executives who are found to have engaged in deceptive practices;

  • ban golden parachutes for senior executives that are greater than the value of one year’s compensation (previously, payments of no greater than three years’ compensation were permitted); and

  • adopt a policy banning “luxury expenditures”.

Then, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 was signed into legislation.

The ARRA standards apply not only to institutions that participate in the TARP going forward, but also retroactively to those who are currently receiving TARP funds. In addition to the provisions of EESA and the recent Treasury rules, the ARRA includes the following additional requirements:

  • The Treasury Secretary must review all compensation and bonuses paid to the top 25 highest paid individuals to confirm that such payments were neither inconsistent with the executive compensation provisions of the ARRA nor contrary to public interest.

  • The ARRA limits bonus, retention, and incentive pay for covered employees to the form of restricted stock that does not exceed 1/3 of the individual’s annual compensation and may not fully vest until after the TARP funds have been repaid. The number of employees covered by this limit depends on the amount of TARP funds received by the company.

  • Participating companies must establish a Board Compensation Committee of independent directors tasked with reviewing employee compensation plans.

  • The annual certification required by the February 4th Treasury Rule must be included in the company’s annual filing with the SEC.

  • The claw-back provisions originally under the TARP are expanded under the ARRA to include the top 25 highest paid individuals, requiring the recoupment of any incentive awards that were based on materially inaccurate financial statements or erroneous performance metrics.

However, the ARRA does provide a way for currently participating institutions to exit the TARP. Companies may, with permission from the Treasury Secretary, repay the funds and no longer be subject to the executive compensation standards.

In light of these new rules and the new Act, we have updated our EESA portal. The new and updated Economic Stabilization Legislation portal includes the legislation from the original Emergency Economic Recovery Act of 2008, the new Treasury rules for TARP, and the American Recovery and Reinvestment Act of 2009. Additionally, you will find many helpful memos from top professionals to clarify the latest rules. All of this new legislation is part of the government’s Financial Stability Plan. We have yet to see what the impact will ultimately be to all companies, not just financial institutions or banks participating in the TARP.

-Rachel

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