February 6, 2009
On February 4, 2009, the Treasury Department issued a new set of executive compensation guidelines for financial institutions and other companies participating in the Troubled Asset Relief Program (TARP). The guidelines impose substantial new restrictions on executive compensation programs for both senior and lower level executives of such institutions.
In general, the new requirements apply prospectively only although certain certification requirements will apply to institutions that are currently participating in TARP. The new guidelines leave many questions unanswered, including their effect on advance TARP guidance previously issued by Treasury in the final days of the Bush administration, which has neither been formally published nor withdrawn and remains subject to an Obama administration hold order.
Although the new Treasury guidelines are currently limited to financial institutions participating in TARP, they give effect to a number of proposals long sought by activist shareholder groups for publicly traded corporations of all types, and potentially implicate corporate governance best practices and trends even for companies that do not and never intend to participate in TARP. In addition, as discussed below, the new guidelines specifically call for certain regulatory reforms that would impact all public financial institutions, not just those participating in TARP programs.
New Certification Requirements for Existing and Future TARP Participants
The new guidelines require the chief executive officer of each financial institution or other company that has received or will receive any form of government assistance under TARP to certify in writing on an annual basis that the CEO’s company has strictly complied with all TARP-related executive compensation requirements. The guidelines do not explain to whom the certification must be made, the precise contents of the certification, the penalties for non-compliance or how the proposed CEO certification structure relates to the structure previously announced by Treasury in guidance currently subject to the Obama administration hold order.
The new guidelines also require the compensation committee of any financial
institution or other company receiving government assistance under TARP to
explain how their senior executive compensation arrangements do not encourage
excessive and unnecessary risk taking. The guidelines do not explain when, where
or to whom this explanation must be made, or how it differs from the existing
proxy certification requirement for compensation committees in the
original
TARP guidance released in October 2008.
New Executive Compensation Restrictions for Future TARP Participants
The guidelines impose new executive restrictions that will apply prospectively to future TARP participants or current TARP participants that take future government money under TARP. The restrictions depend on whether the financial institution or other company is receiving “exceptional financial recovery assistance” or is participating in a “generally available capital access program” instead. The guidelines do not precisely define the difference between the two categories, although they suggest the difference lies in whether a company requires more assistance than the assistance that is available under a widely available, standardized program, such as the Capital Purchase Program.
A. Requirements for “Exceptional” Financial Recovery Assistance Programs
The new executive compensation requirements for financial institutions and other companies receiving “exceptional financial recovery assistance” are as follows.
B. Requirements for “Generally Applicable” Capital Access Programs
The new executive compensation requirements for financial institutions and other companies participating in “generally applicable capital access programs” are generally the same as for companies receiving “exceptional” assistance, except that:
Treasury intends to issue future guidance subject to public comment on the new executive compensation requirements for companies participating in “generally applicable” capital access programs, but does not state a timeframe.
New Long-Term Regulatory Reform Proposals
In addition to the TARP-related requirements discussed above, Treasury has recommended that all financial institutions -- not just those receiving TARP funds -- be subjected to future regulatory requirements, including:
Stay-Tuned for More
These guidelines are likely the first wave in a range of further guidance from the Treasury Department on executive compensation restrictions. As noted above, additional guidance is already planned for companies participating in the “generally applicable” capital access program. In addition, there are a number of interpretative issues for companies that receive “exceptional financial recovery assistance.”
For additional information, please contact a member of the McGuireWoods Executive Compensation team.