January 20, 2009
Authored by: Robert Klingler
In addition to a technical change to require move the required annual disclosure from the Compensation Discussion and Analysis section to the Compensation Committee Report, the interim final rule imposes additional certification and record keeping requirements. In order to comply, institutions will need to schedule a compensation committee meeting for the committee to review, with the institution’s senior risk officers, the incentive compensation arrangements with its senior executive officers.
Within 120 days of the closing date of TARP Capital Purchase, the principle executive officer of the financial institution is required to certify that the compensation committee of the financial institution has reviewed the senior executive officer incentive compensation arrangements with the senior risk officers of the financial institution to ensure that the senior executive officer incentive compensation arrangements do not encourage the senior executive officers to take unnecessary and excessive risks that could threaten the value of the financial institution.
In addition, within 135 days of the completion of each fiscal year during any part of which the financial institution participated in the TARP Capital Purchase program, the principle executive officer is required to certify to the Chief Compliance Officer of TARP that:
- the compensation committee has met at least once during the prior fiscal year with the senior risk officers to discuss and review the relationship between the risk management policies and practices of the institution and its senior executive officer incentive compensation arrangements;
- the compensation committee has certified to this review;
- the financial institution has required that senior executive officer bonus and incentive compensation be subject to recover or “clawback” by the financial institution if the payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
- the financial institution has instituted procedures to limit the deduction for remuneration for federal income tax purposes to $500,000 for each senior executive officer for the most recently completed fiscal year; and
- following the first fiscal year, the financial institution in fact has limited the deduction for remuneration for federal income tax purposes to $500,000 for each senior executive officer for the most recently completed fiscal year.
The financial institution is require to preserve appropriate documentation and records to substantiate each certification for no less than six years after the date of the certification.
The new FAQs address the timing of the determination of the institutions senior executive officers as well as the treatment of “smaller reporting companies.” Senior executive officers are generally determined based on total compensation for the immediate preceding year; however, for purposes of applying the $500,000 deduction limit, the senior executive officers shall be determined based on the current year compensation.
With regard to “smaller reporting companies,” the Treasury “clarifies” that a smaller reporting company must identify senior executive officers pursuant to the rules set forth in section 12 CFR Part 30.2 and the previous FAQ, noting that such a financial institution “must identify at least five” senior executive officers, even if only three senior executive officers are provided in the disclosure pursuant to section 402 of Regulation S-K. While 12 CFR Part 30.2 also refers back to section 402 of Regulation S-K, we would interpret this revised FAQ to provide that the senior executive officers for all institutions consist of the principle executive officer, the principle financial officer, and the three other most highly compensated executive officers. If a company has fewer that five executive officers, then the Treasury has shown a willingness to accept that there are fewer than five senior executive officers. Similarly, presumably the $100,000 minimum threshold for the three most highly compensated executive officers imposed by section 402 of Regulation S-K would apply.