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Employee Stock Ownership Plans: Another Tool for Family-Owned Banks

Today’s economy presents numerous challenges to community bank profitability—compressed net interest margins, increased regulation, and management teams fatigued by the crisis. In response to these obstacles, many boards of directors are exploring new ways to reduce expenses, retain qualified management teams, and offer opportunities for liquidity to current shareholders short of a sale or merger of the institution.

For many family-owned banks, their deep roots in the community and a desire to see their banks thrive under continued family ownership into future generations can cause these challenges to be felt even more acutely. In particular, recruiting and retaining the “next generation” of management can be difficult. Cash compensation is often not competitive with the compensatory packages offered by publicly-traded institutions, and equity awards for management officials are unattractive given the limited liquidity of the underlying stock. All the while, these institutions should ensure that their owners have reasonable assurances of liquidity as needs arise or as investment preferences change. In combination, these challenges can often overwhelm a family-owned bank’s desire to remain independent.

Depending on the condition of the institution, implementing an employee stock ownership plan, or ESOP, may help a board address many of these challenges. While the ESOP is first a means of extending stock ownership to the institution’s employees, an ESOP can have other applications for family-owned banks.

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Stealth FAQ Updates from Treasury and the FDIC

Over the last several months, we have become aware of a number of changes to various regulator’s frequently asked questions.  These changes are frequently made without any public announcement, and, in some cases, without any notation that the FAQ’s have been modified at all.  Frequently, banks are made only made aware of the change when they (a) aren’t aware of the initial FAQ, and (b) subsequently ask the question and are directed to the FAQ.

On November 1, 2011, the FDIC updated its Frequently Asked Questions regarding the “High-Rate Area” exception to the market rate caps for less than well-capitalized institutions.  Previously, institutions relying on a “high-rate area” designation had to re-apply every calendar year to maintain the designation.  However, late in 2011, the FDIC determined that institutions that had received a high-rate determination from the FDIC would no longer be required to submit an annual high-rate determination request.  Instead, the high-rate area designation will automatically renew until and unless the FDIC notifies the institution that it is no longer operating in a high-rate area.  In light of continued historically low interest rates, the current national rate caps have not proven to generally be difficult for banks to comply with, but this modification (if it isn’t changed again) could provide welcome relief if/when rates rise.

On February 16, 2011, the Treasury updated its Frequently Asked Questions regarding the Capital Purchase Program changes under the American Recovery and Reinvestment Act of 2009.  Without acknowledging any change to the FAQ, Treasury reduced the minimum repurchase amount to the greater of (i) 5% of the issue price of the preferred and (ii) $100,000.00 in principal amount.  Previously, Treasury required institutions seeking to repurchase their TARP investment to repurchase at least 25% of the principal investment.

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Financial Services Update – April 1, 2011

Government Shutdown Looms

With the current temporary funding resolution set to expire April 8, House and Senate Appropriations committees worked toward crafting a six-month compromise bill, setting annual spending at $1.055 trillion, $28 billion more than the House-passed level but still a $33 billion cut from the original spending measure. However, House Republicans remain splintered over whether a shutdown would be good politically, or whether they should compromise with Democrats in order to move on to larger future battles such as next year’s budget and the debt ceiling increase. Meanwhile, Democrats also remain divided over whether to allow a shutdown to happen or acquiesce to Republican cuts. Whether a compromise can be reached to avoid a shutdown will be known next week.

Unemployment Rate Drops to 8.8%

On Friday, the Department of Labor announced that the unemployment rate dipped to 8.8% in March from 8.9% in February. Nonfarm payrolls gained 216,000, with private-sector employment rising by 230,000. Payroll employment stood at 130.7 million in March. There were gains of 199,000 jobs in services and 17,000 jobs in manufacturing in March. Government employment fell by 14,000 and 9,000 jobs were lost in education. Nearly half of the unemployed have been out of work for 27 weeks or more. Private-sector wages fell 2 cents an hour to $19.30.

Ally Financial Files for IPO

On Thursday, Ally Financial, the former finance arm of General Motors, filed for an initial public offering that would allow the federal government to begin selling off its 73.8 percent stake.  Ally said in its registration statement with the Securities and Exchange Commission (SEC) that it was seeking to raise $100 million.  Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley are the lead underwriters.  The company did not give an estimated date or share price for the offering.  The Treasury Department, which invested more than $17 billion in Ally, did not say how much of its stake it intended to sell.  In addition to common shares, the Treasury Department owns $5.9 billion in convertible preferred stock.  Earlier this month, the Treasury Department began unwinding its holdings in Ally, selling $2.7 billion in trust preferred securities.

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Financial Services Update – March 4, 2011

February Unemployment Falls to 8.9%

On Friday, the Department of Labor reported that the nation added 192,000 jobs in February, up from a gain of 63,000 in January. The unemployment rate was down to 8.9 percent, falling below 9 percent for the first time in nearly two years. Altogether, 13.7 million people are unemployed and actively looking.  A broader measure of unemployment, which includes people working part-time because they could not find full-time jobs and those so discouraged that they have given up searching, was listed at 15.9 percent in February, down from 16.1 percent in January.

Congress Passes Stopgap Funding Measure

This week the House and Senate passed a continuing resolution funding the government until March 18, thereby avoiding a government shutdown and cutting $4 billion from current fiscal year spending. House Majority Leader Eric Cantor (R-VA) said Thursday that House Republicans plan to keep cutting spending at a rate of $2 billion a week, through two-week spending bills, until the Senate makes clear its position on a budget for the rest of FY 2011. House Republicans last month passed a bill to finish out the fiscal year, cutting $61 billion from 2010 levels. However, President Obama has issued a veto threat on that bill, saying House Republicans’ cuts are unacceptable. Senate Democrats have said that the non-spending “policy” provisions of the House Republicans’ bill regarding the environment and healthcare will also have to be struck before an agreement can be reached.

SEC Votes to Restrict Bonuses

On Thursday, the Securities and Exchange Commission voted to pass new restrictions on bonuses at large brokers and investment advisers, including hedge funds. The new restrictions are nearly identical to rules proposed by the Federal Deposit Insurance Corp. (FDIC) last month that apply to the banks that the FDIC oversees. The Dodd-Frank Wall Street Reform Act, which mandates the bonus rules, requires seven federal banking regulators to write the rules jointly. The SEC’s proposal will require brokers and advisers with more than $1 billion in assets to disclose the bonus arrangements of their executives, directors and lower-rung employees to the SEC annually. The proposal will also require firms with at least $50 billion in assets to hold half of the bonuses of top executives and heads of business units for three years. Any bonuses would have to be adjusted for losses at the firm after the pay was awarded. A 45-day public comment period follows Wednesday’s vote. A second vote by the commission is required before the proposal can be made final.

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Financial Services Update – February 11, 2011

Administration Unveils Housing Reform Plan

On Friday, Treasury Secretary Tim Geithner announced the Obama Administration’s recommendations to phase out Fannie Mae and Freddie Mac and to set minimum down-payments for buyers. The proposal includes a mandatory 10 percent down payment for home buyers and three options for Fannie and Freddie to be wound down but stopped short of recommending outright privatization or closure. However, critics were quick to point out that there are no specific timelines for action in the proposal, and regardless of Geithner’s recommendations, ultimately it will be up to Congress to enact legislation on the issue.

Kevin Warsh to Leave Fed

On Thursday, Federal Reserve Board Governor Kevin Warsh announced that he is stepping down from his position at the end of March. President Obama will now have the opportunity to replace Warsh, a Bush appointee, with his own nominee. President Obama currently has another nominee, Peter Diamond, pending before the Senate for confirmation. Once President Obama has filled these two vacant slots, he will have named six of the seven currently sitting Fed Governors.

Senate Banking Committee Sets First Dodd-Frank Hearing

On Friday, the Senate Banking Committee announced it will hold its first hearing of the 112th Congress on the Dodd Frank Wall Street Reform Act on February 17. The hearing will focus on the Administration’s progress report six-months after the bill’s passage. Witnesses will include Fed Chair Ben Bernanke, FDIC Chair Sheila Bair, SEC Chair Mary Schapiro, CFTC Chair Gary Gensler and Acting Comptroller John Walsh.

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Financial Services Update

Financial Services Update

October 11, 2010

Authored by: Matt Jessee

September Jobs Numbers Released

On Friday, the Department of Labor reported that the economy added 64,000 jobs but lost a net of 95,000 nonfarm jobs in September, the result of a 159,000 decline in government jobs. Of the loss in government jobs, 77,000 were temporary Census Bureau employees, 76,000 were in local governments, and 7,000 in state governments. The Bureau of Labor Statistics also released preliminary revisions to the model used to estimate job changes from month to month, indicating that the recovery has been even weaker than initially reported. The Bureau says it expects to revise down the level of employment in March 2010 by 366,000 jobs, which means jobs gains had been about 30,000 weaker each month over the 12-month period that began in March 2009.

New EU Regulations on Bankers’ Bonuses

On Thursday, the Committee of European Banking Supervisors (CEBS), which is made up of the twenty-seven member states of the European Union’s banking regulators, met in London to vote on proposed regulations on bank employees’ compensation. The preliminary rules released on Friday indicate that up to 60 percent of top bankers’ bonuses would be required to be deferred for a minimum of three years and as long as five years. However, the rules remain unclear on the precise duration of retention requirements. The preliminary rules will now be the subject of a month-long consultation process, with the final rules due to come into effect in January 2011. Other key new rules will be a requirement that banks and national regulators jointly impose a maximum multiple of salary that can be paid as a bonus to bankers. On the issue of deferral, the insistence that half of upfront pay be paid in shares, rather than cash, overrides an existing rule in the UK, where the Financial Services Authority regulations currently insist that total bonuses be share-based. The preliminary rules also clarify that deferral periods should typically extend over three years but must in any case be no shorter than one year. The rules also clarify that bankers will be barred from hedging the “claw-back” provision on deferred bonuses. The new rules will apply to EU banks’ operations globally, but only to the European arms of non-EU banks.

DOJ Settles with Visa and Mastercard

On Wednesday, the U.S. Department of Justice announced that Visa and MasterCard have agreed to a settlement concerning the Department’s antitrust civil suit. According to the terms of the settlement, Visa and MasterCard have deleted rules in their contracts that prevented merchants using their cards from encouraging customers to use other card brands carrying lower merchant inter-change fees. The settlement would allow retailers to offer rebates or discounts to consumers who agree to use their preferred method of payment. American Express, who was the third party to the Department’s civil suit, declined to settle and is still fighting the lawsuit.

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Financial Services Update

Financial Services Update

July 23, 2010

Authored by: Matt Jessee

Financial Regulatory Reform Bill Becomes Law 

On Wednesday, President Obama signed into law the Dodd-Frank Wall Street Reform Act at a ceremony at the Ronald Reagan Building. Speculation and controversy surrounded which bank CEOs were to be invited. Among those invited were Citigroup CEO Vikram Pandit, Morgan Stanley CEO James Gorman, Bank of America CEO Brian Moynihan, and UBS Americas CEO Robert Wolf. However, those not invited included among others JPMorganChase CEO James Dimon or Goldman Sachs CEO Lloyd Blankfein.

Issa Questions SEC Over Goldman Settlement Timing 

Last Friday, House Reform and Government Oversight Committee Ranking Member Darrell Issa (R-CA) sent a letter to SEC Chairman Mary Schapiro requesting an inquiry into the timing of the agency’s $550 million settlement with Goldman Sachs. On Thursday, SEC Inspector General David Kotz responded to Issa and confirmed that the Commission would open a formal inquiry and investigate communication between the SEC and Goldman employees. 

The President Signs into Law Unemployment Benefits Extension 

On Thursday, President Obama signed into law legislation passed by the House on Thursday and the Senate on Wednesday that would restore unemployment benefits to an estimated 2 million Americans without jobs. The $34 billion measure was the subject of a fierce partisan battle in Congress over whether the cost should be offset with spending cuts or tax increases to avoid enlarging the federal deficit. The vote in the House was 272 to 152, with 31 Republicans joining 241 Democrats in supporting the measure. The final vote in the Senate was 59-39. Among other issues, the bill also extends through 2012 a number of business tax credits and changes multi-employer pension funding requirements. 

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Financial Services Update

Financial Services Update

July 9, 2010

Authored by: Matt Jessee

 Financial Regulatory Reform Bill

Congress was not in session this week due to the Fourth of July district work period. However, the House and Senate return to session next week, and the Senate will likely begin debate on the Dodd-Frank Wall Street Reform and Consumer Protection Act Conference Report. With commitments by Senators Maria Cantwell (D-WA) and Susan Collins (R-ME) to support the bill, Democratic leaders remain two votes shy of the sixty they need to move the bill forward – assuming the Senator chosen to replace the late Senator Robert Byrd (D-WV) also is a “yes” vote. Consequently, Democratic leaders are now focused on getting the three Republicans who supported the original Wall Street reform bill that passed the Senate in May to commit to supporting the Conference Report. Senator Scott Brown (R-MA) officially remains uncommitted even after Democrats took the unusual step of reopening the House-Senate conference committee to remove a $19 billion bank fee he opposed. On Monday, Brown was quoted by a local reporter saying, “I’m going to be making a decision soon, but I’m liking what I see.” Senator Olympia Snowe (R-ME) also indicated last week that she approves of the elimination of the bank fee and is now leaning toward supporting the bill. The third Republican, Senator Charles Grassley (R-IA), remains uncommitted.

EU Parliament Approves Bank Bonus Restrictions

On Wednesday, the European Union Parliament approved a bill that restricts bankers in the twenty-seven nation bloc from receiving more than 30 percent of their bonuses in cash beginning next year. The bill will also make bankers susceptible to losing a portion of their bonus if their bank’s performance erodes over the subsequent three years. Banks will further be required to either reduce salaries of their biggest earners or set aside more capital to compensate for the salaries. The legislation, which passed by a vote of 625-28, codifies a compromise reached last week between European governments and lawmakers. National finance ministers from the respective countries are expected to endorse the proposal next Tuesday, July 13, causing it to take effect January 1. The proposal is similar to the measure approved by the G-20 and is designed to affect banks with large operations in Europe such as Deutsche Bank, Barclays, and Goldman Sachs, including some hedge funds. Under the bill, seventy percent of a banker’s bonus would have to be deferred for up to three years and paid in a new class of security, known as “contingent capital,” that would decline in value if the bank’s financial performance deteriorates.

In June, the Federal Reserve outlined a series of its own bank compensation principles, and at a Congressional hearing last month, Federal Reserve Chairman Ben Bernanke promised to move on further compensation restrictions. Additionally, the Obama Administration’s Special Master for TARP Executive Compensation, Ken Feinberg, is preparing to release a report in the near future on the highest earners at 180 U.S. financial companies.

Matt Jessee, Policy Advisor

Kip Wainscott, Associate Attorney

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Executive Compensation Requirements in the Dodd-Frank Regulatory Reform Bill

The Dodd-Frank regulatory reform bill, which recently passed the House, includes a number of executive compensation reforms. The executive compensation provisions in the bill include reforms to both SEC-reporting company disclosure and financial institution specific disclosure.

Say on Pay

The Dodd-Frank reform bill expounds on current TARP say-on-pay requirements and makes them generally applicable to SEC-reporting companies. Under the reform bill, not less than once every three years, SEC registrants must include in annual meeting proxy statements a shareholder resolution on the compensation of executive officers. In addition, not less than once every six years, SEC registrants must have a shareholder vote to determine the frequency of a vote on executive compensation by shareholders, which may occur, as determined by shareholders, every one, two or three years.

Under the bill, SEC registrants must disclose golden parachute agreements in a proxy statement where shareholders are asked to approve an acquisition, merger, consolidation or proposed sale of substantially all of the assets. The aggregate total compensation that may be paid in such transaction, pursuant to a golden parachute agreement, must be included in this disclosure and be submitted for shareholder approval in a separate resolution.

Similar to the TARP say-on-pay requirements, the say-on-pay and golden parachute resolutions applicable to all SEC-reporting companies are not binding on SEC registrants or directors. Institutional investors, however, will be required to disclose annually how they voted on such disclosures. Although the bill does not explicitly exclude certain registrants from these requirements, the bill gives the SEC the authority to exempt certain registrants and encourages the SEC to take into consideration whether these requirements “disproportionately burden small issuers.”

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Financial Services Update – Issue 12

March Jobs Report Released

On Friday, the U.S. Department of Labor said in its March jobs report that non-farm payrolls rose by 162,000, the largest gain since March 2007. Despite the gains, economists were expecting payrolls to rise by as much as 200,000. The Census accounted for 48,000 of the employment boost. Another 40,000 of the increase came in other temporary jobs. The unemployment rate stayed at 9.7%, in line with economists’ expectations. The U.S. economy has lost nearly 8.5 million jobs since the recession began. With stock markets closed for Good Friday, the report’s full impact will be more apparent next week. Total government employment, which includes state and local jobs, rose by 39,000. Beyond government jobs, the report showed that manufacturing jobs continued to trend up, rising by 17,000, as well as jobs in the construction industry which added 15,000 jobs in March.

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