December 17, 2009
The America Reinvestment and Recovery Act of 2009 (ARRA or the stimulus bill) was signed into law on February 17, 2009 and contained expansive new restrictions on executive compensation for financial institutions and other companies participating in the federal government’s Troubled Asset Relief Program (TARP). (See our stimulus bill update.) Following the enactment of ARRA, the U.S. Treasury Department announced on June 10, 2009 a new interim final rule (TARP Regulations) implementing the executive compensation and corporate governance standards set forth in ARRA. (See our TARP Regulations update.) The TARP Regulations consolidated and superseded all prior executive-compensation related guidance issued by the Treasury and became effective on June 15th.
As discussed in greater detail in our previous updates, the TARP Regulations provide detailed guidelines for the implementation of the various executive compensation restrictions added by ARRA. These restrictions include prohibitions against bonus payments to senior executive officers and other highly compensated employees (with certain exceptions for long-term restricted stock awards), golden parachute payments derived from an executive’s termination of employment or a change in control of the TARP recipient, and compensation plans that create incentives for executives to take excessive or unnecessary risks or encourage the manipulation of company earnings figures.
On December 4th, the Treasury released a set of correcting amendments to the TARP Regulations that address the following ambiguities in the original regulations.
Definition of “Most Highly Compensated Employee”
Various TARP restrictions apply to two groups of employees: senior executive officers (SEOs) and “most highly compensated employees”. The TARP Regulations originally defined a most highly compensated employee as an employee of a TARP recipient, other than an SEO, whose compensation was amongst the highest paid of the TARP recipient. The exclusion of senior executive officers from the definition created ambiguities as to whether an executive who was an SEO of a TARP recipient that received less than $250 million in assistance would be subject to the bonus payment restrictions. The bonus payment restrictions for these TARP recipients apply to either the most highly compensated employee of the TARP recipient (for those recipients that received less than $25 million in assistance) or the five most highly compensated employees of the TARP recipient (for those recipients that received at least $25 million but less than $250 million in assistance). In contrast, the applicable bonus payment restrictions for TARP recipients who received greater assistance applied to both senior executive officers and up to the next 20 most highly compensated employees.
The corrections provide that, for purposes of any TARP rule that applies only to the most highly compensated employees (such as the bonus payment restrictions referenced above), the determination of which employees are considered amongst the most highly compensated employees of a TARP recipient is made without regard to whether an employee is an SEO. Conversely, if a provision is applicable to both SEOs and a certain number of most highly compensated employees, the SEOs are excluded for purposes of determining the most highly compensated employees that are also subject to the provision, since SEOs are already subject to the provision.
The Treasury has also clarified how long the TARP Regulations apply to the responsibilities of a TARP recipient’s compensation committee (e.g., evaluating compensation plans to eliminate incentives to take unnecessary and excessive risks, discussing potential long-term and short-term risks with senior risk officers, etc.). In the case of a TARP recipient that has had an obligation to the Federal government arising from financial assistance provided under TARP (i.e., a company that received TARP funds), and no further assistance under TARP, these compensation committee responsibilities remain in place for as long as the TARP obligation to the Federal government remains outstanding. For TARP recipients that never had an obligation to the Federal government arising from TARP financial assistance (e.g., a company that only participated in the insurance of troubled assets program), these compensation committee responsibilities apply through the last day of the TARP recipient’s fiscal year including the TARP sunset date (December 31, 2009; however TARP may be extended until October 3, 2010 upon Treasury certification to Congress).
‘Say on Pay’ Shareholder Votes
The TARP Regulations require certain TARP recipients to permit a non-binding shareholder vote on executive compensation in their annual proxy materials. The Treasury corrections clarify that this ‘say on pay’ shareholder vote requirement and the obligation to comply with applicable Securities Exchange Commission (SEC) rules regarding such votes only apply to the extent that the TARP recipient is subject to SEC requirements. Therefore, a TARP recipient that is not subject to those rules, because, for example, the TARP recipient is not required to register any securities with the SEC, is not required to permit a shareholder ‘say on pay’ vote.
The Treasury has also indicated that TARP recipients are not required to submit the list of their senior executive officers and 20 most highly compensated employees with the required annual certifications. Publicly held TARP recipients must submit the annual certifications to the Treasury and file the certification as an exhibit to its annual report on Form 10-K. Privately held TARP recipients should submit the annual certification to the Treasury and their primary regulatory agency.
Finally, the Treasury has corrected various typographical errors in the model annual certifications that accompanied the original regulations. TARP recipients should refer to these corrected model certifications.
If you have any questions concerning the TARP executive compensation restrictions or the corrective guidance released by the Treasury, please contact the authors or any member of the McGuireWoods Executive Compensation practice.