Wall Street Reform Act Passes in the House Includes Say on Pay and Compensation Committee Independence for All U.S. Public Companies, and Other Compensation Provisions for Financial Institutions

December 14, 2009

On December 11, 2009, the Wall Street Reform and Consumer Protection Act of 2009 passed in the House 223 to 202.*  Title II of the bill, entitled the Corporate and Financial Institution Compensation Fairness Act, adopts say on pay and say on golden parachutes for all public companies, as well as other compensation-related provisions.


Title II is substantially the same as the act with the same name passed by the House in July 2009 (frequently called the “Frank Bill”) and is in part based on the compensation-related legislative proposals released earlier that month by the Treasury Department. Title II also contains similar provisions to those contained in the Restoring American Financial Stability Act of 2009 introduced in November 2009 by Senator Dodd.**


If Title II is enacted in its current form, it would provide for the following:


Annual Say on Pay.  At any annual meeting of shareholders (or special meeting in lieu thereof) occurring after six months after the SEC’s issuance of final implementing rules, companies must provide shareholders with an annual non-binding vote to approve the compensation of executives as disclosed pursuant to the SEC rules.


Say on Golden Parachutes.  At any meeting of shareholders where shareholders are asked to approve an M&A transaction that occurs after six months after the SEC’s issuance of final implementing rules, companies must provide shareholders with a non-binding vote to approve payments to any named executive officer in connection with such M&A transaction.


Compensation Committee Independence and Disclosure of Committee Advisors.  Listed companies must have compensation committees consisting of independent directors, meaning that members may not receive any consulting, advisory or other non-director compensatory fee from the issuer.  The compensation committee has the authority to engage consultants and advisors, for which the committee will be directly responsible.  All such advisors must be independent, as defined by the SEC.  Companies are required to disclose whether the compensation committee retained a consultant.


Compensation at Financial Institutions.  Covered financial institutions with assets of at least $1 billion must disclose to the appropriate Federal regulator the structures of all incentive-based compensation arrangements, so that regulators can determine whether structures are aligned with sound risk management and do not have serious adverse effects on economic conditions or financial stability.  Any incentive-based payment arrangements that regulators determine encourage inappropriate risks would be prohibited.


While both the likelihood of the passage of the bill (including Title II) and the subsequent timing of implementation is unclear, the fact that the provisions are repetitious of provisions found in other legislation currently under consideration by Congress indicates that these are areas of Congressional focus and potential enactment.


* Full copies of the bill are not yet available, and this summary was prepared on the basis of the best available information.

** See the Davis Polk client newsflash entitled Treasury Seeks Legislation to Enact Say on Pay and Compensation Committees Changes for All U.S. Public Companies, dated July 20, 2009, and the Davis Polk client memorandum entitled Dodd Bill Would Affect Corporate Governance and Executive Compensation Processes for All US Public Companies, dated November 17, 2009.


If you have questions regarding this newsflash, please call either of the lawyers listed below or your regular Davis Polk contact.

Kyoko Takahashi Lin212 450 4706
William M. Kelly 650 752 2003
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