The Obama Administration’s regulatory reform agenda has been moving forward. Recently, the SEC proposed changes to proxy disclosure and solicitation requirements and the Treasury issued its Interim Final Rule consolidating restrictions for TARP fund recipients. Last week I mentioned that all companies should be keeping an eye on the TARP fund recipient requirements, as the government is likely to push at least part of these requirements to all companies.

Well, last Thursday, the Treasury issued proposed legislation, the Investor Protection Act of 2009, which requires a non-binding shareholder vote on executive compensation as well as provides for truly independent compensation committees.

Say on Pay

Separate Vote on Executive Compensation

For proxies or shareholder meetings on or after December 15, 2009, the proposed legislation requires that a separate, non-binding shareholder vote be cast to approve the executive compensation as it is disclosed in the proxy statement.

Shareholder Approval of Golden Parachute Payments

The Treasury’s proposal also includes a requirement that any proxy or solicitation material on corporate transactions (acquisitions, mergers, etc.) include in tabular format any executive compensation relating to the corporate transaction, including the aggregate total of that compensation. Additionally, it calls for a separate, non-binding shareholder vote on executive compensation relating to the corporate transaction.

Independence of Compensation Committees

Criteria and Consequences

Under the proposal, compensation committee members must remain truly independent, other than their involvement in the company as non-employee directors (with potential exemptions for smaller reporting issuers). To be considered independent, members of the compensation committee may not accept any fees from the company for any activity other than their involvement in the board of directors, compensation committee, or other board committee. The SEC will direct national securities exchanges to include these enhanced independence criteria in listing requirements and may direct exchanges to prohibit the listing of the securities of companies found to not be in compliance.

Compensation Consultants and Independent Legal Counsel

The Treasury feels that the involvement of compensation consultants puts compensation committees at a disadvantage, encouraging them to approve excessive compensation for CEOs and other executives. To help level the playing field, the proposed legislation requires that compensation committees be permitted (and provided funding) by the companies to retain their own compensation consultants. These independent consultants would report only to the compensation committee rather than to the company.

Additionally, compensation committees must be permitted (and provided funding) by companies to retain independent legal counsel or other advisors at the discretion of the compensation committees.

Disclosure

In the spirit of greater transparency, the proposed regulations will require companies to disclose whether or not their compensation committees retained a compensation consultant. If a compensation committee chooses not to retain the services of a compensation consultant, the justification for that decision must be disclosed.

17th Annual NASPP Conference Resources

Don’t forget that registration for this year’s NASPP Conference includes the 6th Annual Executive Compensation Conference at no additional cost. If you are looking for more guidance on how these pieces of legislation will impact the next proxy season, then don’t miss the the 4th Annual Proxy Disclosure Conference!

This proposal will almost certainly mean that stock plan administrators will find themselves working more closely with compensation consultants. Don’t miss our Conference session “Wagging the Dog: Stock Plan Administrator Meets Compensation Consultant” for ideas on how to be proactive on your involvement in compensation decisions!

-Rachel