This legal alert focuses on the executive compensation and corporate governance provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These provisions will dramatically affect public reporting companies and their relationships with shareholders. Many of the provisions are to be implemented by requiring the national securities exchanges and associations to modify listing standards to capture the requirements. The principal executive compensation and corporate governance changes are:

  • Say-on-pay. At least once every three years, beginning in 2011, a public reporting company’s proxy materials for its annual meeting must include a resolution seeking shareholder approval of the compensation paid to its named executive officers. This shareholder vote is nonbinding, but a "no" vote is likely to have an effect on a company's compensation programs. At least every six years, beginning in 2011, the company must submit a proposal to allow shareholders to determine if this say-on-pay vote will occur every one, two, or three years.

  • Golden Parachutes. The SEC is directed to promulgate regulations to require, in any applicable proxy or information statement seeking shareholder approval of an acquisition, merger, consolidation, or sale of substantially all assets, the company to seek separate shareholder approval of compensation packages with named executive officers that are to be paid as a result of the proposed transaction. If a say-on-pay resolution has not been previously presented for shareholder vote, the proxy materials must also contain a separate say-on-pay vote. This provision was part of the House bill that survived in the final Dodd-Frank Act.

The shareholder votes on say-on-pay and golden parachutes cannot be construed as overruling decisions made by the company or its board of directors; creating any change to, or creating additional, fiduciary duties of the board of directors; or restricting the ability of shareholders to make proposals about executive compensation for placement in the company's proxy materials. These provisions are effective for any proxy, consent, or shareholder authorization that occurs more than six months after the effective date of the Dodd-Frank Act. The U.S. Securities and Exchange Commission has the authority to exempt issuers from these requirements.

  • Compensation Committees. The national securities exchanges and national securities associations must amend their listing eligibility standards:

    • To implement independence standards for compensation committee members that are similar to those currently in effect for audit committee members (no compensation except for director-related fees, and no other affiliation with the company or its subsidiaries)

    • To require a compensation committee to consider independence criteria (to be adopted by the SEC based on the following factors) for compensation consultants, legal counsel, or other advisers:

      • The provision of other services to the company by the person that employs the compensation consultant, legal counsel, or other adviser
      • The amount of fees received from the company by the person that employs the compensation consultant, legal counsel, or other adviser, as a percentage of the total revenue of the employing person
      • The policies and procedures of the employing person that are designed to prevent conflicts of interest
      • Any business or personal relationship of the compensation consultant, legal counsel, or other adviser with a member of the compensation committee
      • Any stock of the company owned by the compensation consultant, legal counsel, or other adviser

      The compensation committee has the authority to retain a compensation consultant, legal counsel, or other adviser, and is responsible for the appointment, compensation, and oversight of such consultant, counsel, or other adviser at the expense of the company. The company will need to disclose in its proxy statement if there is any conflict of interest that occurs because of the retention of a compensation consultant and how such conflict is being addressed. The legislation does not address whether this retention authority relates only to consultants and advisers to the compensation committee or to those retained on behalf of the company.

      The national securities exchanges and associations must implement these listing standards within 360 days after the effective date of the Dodd-Frank Act, and proxy statement disclosure is required for any meeting occurring more than one year after such effective date. The SEC has the authority to exempt certain issuers from these provisions, and these provisions do not apply to "controlled companies."

      • No attestation report for smaller reporting companies. Only large accelerated filers and accelerated filers will need to provide an attestation report of their registered public accounting firm on the company’s internal controls over financial reporting. This removes an expensive component of the Sarbanes-Oxley Act that was about to become effective for smaller reporting companies.

      • Disclosure of pay vs. performance. In addition to the other executive compensation disclosures, each proxy statement will need to include disclosure about the relationship between the executive compensation actually paid to named executive officers and the financial performance of the company, taking into account any change in the value of the company's shares, or dividends or distributions made. This disclosure can be made graphically. Each company must also disclose the median annual total compensation of all employees, except the CEO; the annual total compensation of the CEO; and the ratio of those amounts.

      • Implementation of a clawback policy. National securities exchanges and associations must adopt listing standards to prohibit listing for any company that does not implement a clawback policy to recover incentive-based compensation paid to current or former executive officers based on erroneous financial data. The triggering event for the recovery is the need for restatement of the company's financial statements due to any material noncompliance with any financial reporting requirement under the securities laws; the recovery look-back period is three years; and the amount to be recovered is the excess incentive-based compensation (including stock options) of what would have been paid under the accounting restatement.

      • Disclosure of hedging activities. A company's proxy materials must disclose whether any directors or employees are permitted to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of the company's stock that is received as compensation or otherwise held by such person.

      • Special disclosure for financial institutions. Within nine months following the effective date of the Dodd-Frank Act, various federal regulators with authority over financial institutions must jointly prescribe regulations or guidelines to require financial institutions to disclose the structure of all incentive-based compensation arrangements sufficient to determine if any such compensation is excessive or could lead to material financial loss on the part of the financial institution. Such federal regulators are also charged with promulgating regulations to prohibit incentive pay practices that provide an employee, director, or principal shareholder with excessive compensation, fees, or benefits or that could lead to a material financial loss by the company. Financial institutions with assets of less than $1 billion are exempt from these requirements.

      • Shareholder access to proxy materials. The SEC is authorized to promulgate rules regarding placing a shareholder-submitted nominee in the company's proxy materials. The SEC has made rule proposals on this topic in the past, the last occurring in 2009.

      • CEO/Chair disclosure. All companies are required to disclose whether and, if so, why the CEO and Chair positions are held by the same person. The SEC issued disclosure regulations on this topic during 2009.

      Additional SEC guidance will be forthcoming as these provisions of the Dodd-Frank Act will be effective for 2011. We can help as you plan for these changes and assess how they will affect your business.

      Ballard Spahr's Financial Institutions Reform Task Force will continue to monitor the Dodd-Frank Act, and its members are available to assist clients as they prepare to address the new requirements. Please feel free to contact Justin P. Klein, 215.864.8606 or; or Mary J. Mullany, 215.864.8631 or

      Return to the Dodd-Frank Act Brings Sweeping Regulatory Changes alert.



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      This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.