March 27, 2009
Authored by: Bryan Cave Leighton Paisner
We have just received some insight into two of the more unclear issues presented when the EESA was amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”): Executive Compensation Compliance Certification and the Say-on-Pay Proposal. As we’ve indicated repeatedly since ARRA was passed, many of its provisions are unclear and present trouble to institutions that have received TARP Capital or are contemplating taking TARP Capital.
Executive Compensation Compliance Certification:
Treasury has confirmed that to us that the Interim Final Rule issued in January is not effective. The Treasury believes that ARRA supersedes the provisions of this Interim Final Rule because the Rule was not actually published prior to the passage of the ARRA, and when the ARRA was passed, Treasury withdrew the Rule from publication. Thus, Treasury is waiting, much like the rest of us, for new a rule to be issued.
Nonetheless, the Treasury has not taken a definitive position regarding the effectiveness of the Interim Final Rule issued in October.
Treasury’s position is significant because it addresses a problem that ARRA created, which can be summarized as follows: Before the amendment to the EESA by ARRA, the certification requirement was provided in Section 111(b)(2)(A) of the EESA, and Interim Final Rules issued by the Treasury addressed the certification requirement. Namely, the Interim Final Rules, published pursuant to the EESA, provided that to comply with Section 111(b)(2)(A) of the EESA, an institution that received TARP funds would have to certify to compliance with the executive compensation requirements to an appropriate regulatory agency. However, because of ARRA, the Interim Final Rules (1) no longer refers to the appropriate section regarding certification of compliance, and (2) no longer accurately states the executive compensation limitations to which an institution must certify compliance. Therefore, an institution could not simultaneously comply with the Interim Final Rules and with the statute as amended by ARRA.
As Treasury considers the January Interim Final Rule null and void and has not taken a definitive positions regarding the October Interim Final Rule, institutions that have received TARP Capital funds should be assured that until a new rule or other guidance is issued, they need only focus on the text of ARRA. Indeed, Treasury has communicated to us that until new regulations are issued, institutions should use their good faith efforts to interpret and comply with the ARRA.
Say-On-Pay Proposal for Private Companies:
As with the executive compensation certification, one of the law firms serving as counsel to Treasury has confirmed that although neither the SEC nor the Treasury has taken a position regarding say-on-pay proposals for private companies, the law firm’s own interpretation is that all TARP recipients, including private-company recipients, should include this proposal.
ARRA contains a provision that requires all TARP recipients to include in their annual proxies a separate shareholder vote “to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the [SEC].” The reference to the SEC may imply that private companies that do not report to the SEC were not required to include this proposal.
The interpretation provided by the Treasury’s counsel matches our interpretation: private-company TARP Capital recipients should provide a “say on pay.”