On July 21, 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law. The Dodd-Frank Act focuses primarily on financial institutions; however, there are several provisions affecting non-financial institutions, some of which are self-executing and immediately effective, and others of which require implementation through rulemaking by the Securities and Exchange Commission (the “Commission”).
PROVISIONS EFFECTIVE IMMEDIATELY
Among the self-executing provisions of the Dodd-Frank Act are amendments to the definition of accredited investor, as found in the Securities Act of 1933, as amended ( the “Securities Act”), and the exemption of non-accelerated filers from Section 404(b) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).
Amendments to the Definition of Accredited Investor (§413)
Prior to enactment of the Dodd-Frank Act an individual was considered an accredited investor under both Rules 215 and 501(a)(5) of the Securities Act of 1933, as amended, (the “Securities Act”) if:
- in each of the two most recent years they had income in excess of $200,000, or in excess of $300,000 jointly with a spouse, and had a reasonable expectation of reaching that same income level in the current year; or
- they had a net worth, individually or jointly with a spouse, in excess of $1,000,000.
Section 413 also requires that the Commission undertake an initial review of the definition of accredited investor, as it applies to natural persons, to determine whether adjustments or modifications, excluding adjustments or modifications to the revised net worth standard, are appropriate. Thereafter, the Commission is required, at least once every four years, to review of the definition of accredited investor, as it applies to natural persons, in its entirety, to determine whether further adjustments or modifications are appropriate.
The Exemption of Non-Accelerated Filers from Sarbanes-Oxley Section 404(b) (§989G)
Section 989G of the Dodd-Frank Act adds a new section to Sarbanes-Oxley, Section 404(c), which permanently exempts non-accelerated filers from the Section 404(b) requirement that they obtain an auditors’ report on management’s assessment of the company’s effectiveness of internal control over financial reporting.
PROVISIONS REQUIRING IMPLEMENTATION
THROUGH REGULATORY RULEMAKING
There are several provisions of the Dodd-Frank Act affecting non-financial institutions that will require implementation through regulatory rulemaking. Included among these are the following sections effecting executive compensation and corporate governance:
Enhanced Voting Requirements
Executive Compensation (§951)
Beginning with the first annual or other shareholder meeting taking place on or after January 21, 2011, and at least once every three years thereafter, a company will have to provide its shareholders with an opportunity to vote to approve the compensation of those executive officers for whom it is required to make compensation discloses pursuant to the Commission’s proxy rules. At least once every six years, a company will also have to provide its shareholders with an opportunity to determine whether the vote to approve executive compensation should take place every year, every other year or every three years. The outcome of any shareholder vote to approve executive compensation would be non-binding on the company.
Golden Parachutes (§951)
For any proxy or consent solicitation for a shareholder meeting taking place on or after January 21, 2011, in which shareholders are asked to vote to approve a merger, acquisition or similar transaction, the shareholders must also be provided with an opportunity to vote to approve any agreements or understandings regarding compensation that may be paid to a named executive officer in relation to the transaction. The outcome of any shareholder vote to approve golden parachute compensation would also be non-binding on the company.
Possible Exemptions (§951)
The Dodd-Frank Act also provides that the Commission may exempt a company, or an entire class of companies, from these non-binding shareholder approval requirements, taking into consideration whether smaller issuers are disproportionately burdened by the requirements.
Enhanced Disclosure Requirements
Pay Versus Performance (§953)
The Commission will be adopting rules requiring a company to disclose, in any proxy or consent solicitation materials for its annual shareholders’ meeting, the relationship between its executives’ compensation and its financial performance.
Internal Pay Equity (§953)
The Commission will be adopting rules requiring a company to disclose the median annual compensation of all employees, except for the chief executive officer, the total annual compensation of the chief executive officer and the ratio of the median annual compensation of all employees to the total annual compensation of the chief executive officer.
Hedging by Employees and Directors (§955)
The Commission will be adopting rules requiring a company to disclose, in any proxy or consent solicitation materials for its annual shareholders’ meeting, whether its employees or directors, or any of their designees, are permitted to purchase hedging instruments to offset a decrease in the value of securities they hold or that have been granted to them as compensation.
Chairman and CEO Structures (§972)
By January 17, 2011 the Commission will be adopting rules requiring a company to disclose, in any proxy or consent solicitation materials for its annual shareholders’ meeting, why it has chosen either the same person or two different people to serve as chairman of its board of directors and chief executive officer.
Compensation Committees (§952)
For any proxy or consent solicitation for an annual shareholders’ meeting taking place on or after July 16, 2011, a company will have to disclose whether its compensation committee retained a compensation consultant, whether the consultant’s work raised any conflict of interest, and, if so, the nature of the conflict and how it is being addressed.
Enhanced Listing Requirements
Compensation Committees (§952)
By July 16, 2011 the Commission will be adopting rules directing national securities exchanges and national securities associations to prohibit the listing of a company that does not maintain an independent compensation committee with sole discretion in selecting compensation consultants, independent legal counsel and other advisors. The rules will provide for a reasonable cure period, may allow for the exemption of certain categories of companies, taking into consideration the potential impact that such rules may have on smaller issuers, and will not apply to certain foreign private issuers, controlled companies or limited partnerships, among other entities.
Compensation Clawbacks (§954)
The Commission will be adopting rules directing national securities exchanges and national securities associations to prohibit the listing of a company that does not implement a policy for:
- disclosing incentive-based compensation that is based on reported financial information; and
- recovering such compensation following a restatement based on material noncompliance with financial reporting requirements.
The policy must cover any current or former executive officer who received incentive-based compensation during the three-year period preceding a restatement and the amount of compensation recovered must be the excess of what was paid, including stock options, over what would have been paid based on the restatements. ■
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Vanessa J. Schoenthaler