Treasury Announces Long-Awaited Executive Compensation and Corporate Governance Standards for TARP Recipients

June 12, 2009

On June 10, 2009, the U.S. Treasury Department announced a new interim final rule implementing the executive compensation and corporate governance standards under the American Recovery and Reinvestment Act of 2009 (ARRA).

The ARRA standards apply to financial institutions and other entities that receive federal assistance under the Troubled Asset Relief Program (TARP). The new interim final rule clarifies that entities that do not engage in “direct” financial transactions with Treasury — including participants in the Federal Reserve’s TALF program or mortgage servicers who receive incentives under the Home Affordable Modification Program — generally are not covered. However, entities that partner with Treasury under the Treasury’s announced Public Private Investment Program (and majority stakeholders in such entities) may be covered.

The new interim final rule will be effective upon publication in the Federal Register, which is expected to occur on Monday, June 15. The new interim rule clarifies that the executive compensation and corporate governance standards described in the rule generally do not apply until the final rule is formally published in the Federal Register. The only exception is the “say on pay” shareholder resolution, which became effective on February 17, 2009 (the date ARRA was enacted).

In addition to implementing the ARRA standards, the new interim final rule consolidates and supersedes all prior executive-compensation-related guidance issued by Treasury, including the initial executive compensation rules issued under the Emergency Economic Stabilization Act in October 2008, as well as the executive compensation guidelines announced by Treasury in February 2009. The new interim final rule also confirms that the amendments to the October 2008 rules announced by Treasury in the waning days of the Bush administration have been formally withdrawn and will never take effect.

The new interim final rule provides detailed guidelines for implementation of the various restrictions added by ARRA, including the prohibitions against bonus payments to senior executive officers and other highly compensated employees (other than certain bonuses paid in the form of restricted stock), golden parachute payments (which have been expanded to include “single-trigger” change in control payments), and compensation plans that incentivize excessive or unnecessary risk taking or encourage the manipulation of earnings. Some of the new requirements will require swift action, such as the requirement that each TARP recipient adopt a policy on luxury or excessive expenditures and publish the policy on its website within 90 days.

The final rule also contains several new executive-compensation-related restrictions that were not part of ARRA and not previously announced by Treasury in any prior guidance, including:

  • New perquisite disclosure requirements (all perquisites in excess of $25,000 to an employee subject to the bonus restriction must be identified and justified to Treasury and the TARP recipient’s primary federal regulator)
  • New compensation consultant disclosure requirements (any engagement of a compensation consultant by the TARP recipient, its board or compensation committee and a description of the consultant’s services during the past 3 years, specifically including any “benchmarking,” must be disclosed to Treasury and the TARP recipient’s primary federal regulator)
  • New prohibition on tax gross-ups payable to any SEOs or any of the next twenty most highly compensated employees of the TARP recipient
  • Establishment of a “Special Master” to review and approve compensation programs for the senior executive officers and next 100 most highly compensated employees at firms having received “exceptional” TARP assistance, and to opine on the compensation programs of other TARP recipients at the request of such firms or his own initiative

On the same day on which Treasury announced the new interim final rule, Secretary of Treasury Timothy Geitner and SEC Chairwoman Mary Schapiro also announced an administration proposal for new legislation and regulations that would affect executive compensation programs at all publicly traded companies, not just TARP recipients.

In addition, various pieces of executive-compensation-related legislation — including a bill passed by the House of Representatives in March that would prohibit any TARP recipient from paying any compensation deemed unreasonable or excessive and bills introduced in the Senate in May that would require a supermajority of shareholders to approve, and prohibit companies from deducting, any compensation deemed excessive — remain pending before Congress.

We will continue to keep you up to date with the rapid developments and shifting landscape in executive compensation. For additional information, please contact the authors or any member of the McGuireWoods LLP Employee Benefits Practice, Securities and Business Practice, or a member of McGuireWoods Consulting.