Dodd-Frank Act Brings Far-Reaching Reforms in Governance

July 15th, 2010

On July 15, 2010, Congress passed the Wall Street Reform and Consumer Protection Act (also known as the Dodd-Frank Act). This law represents the most sweeping reform of the banking industry since the 1930s. Its objective is to promote US financial stability. Its provisions are designed to improve the level of accountability and transparency in the financial system, protect American taxpayers from the cost of bailouts, and protect consumers from abusive financial services practices.

The reforms established by this law will have the most direct effects on companies in the financial services industry, but they will also affect directors and shareholders of US public companies (domestic registrants) in other industries subject to regulations to be established by the SEC. Here are a few highlights of the changes to come in corporate governance:

  • The SEC is now officially authorized to set rules that will allow shareholders to nominate directors for inclusion in their company’s proxy materials.
  • Smaller public companies will be exempted from the requirements for auditor attestation of internal control reporting under Section 404(b) of the Sarbanes-Oxley Act. The Act also directs the SEC to study ways to ease the 404(b) burden on companies with market capitalizations between $75 and $250 million.
  • Public companies will be required to have a non-binding “say-on-pay” vote at least once every three years, more often if the shareholders so elect. But smaller companies may be exempted under rules to be issued by the SEC.
  • Rules similar to the say-on-pay rules will cover golden parachutes for named executive officers. A say-on-pay vote will be required in conjunction with transactions on which a company seeks shareholder approval, including a merger, acquisition, or proposed sale of all or substantially all of the company’s assets.
  • National securities exchanges will further restrict discretionary broker voting. This means brokers won’t be able to vote in any contested elections of board members or on any executive compensation matters, unless they have specific instructions from the beneficial owners.
  • Institutional investors will be required to disclose their say-on-pay and say-on-golden parachute voting records at least annually unless otherwise directed by the SEC.
  • Independence requirements will apply to compensation committees of boards of directors, and these committees will be permitted to hire and oversee the work of attorneys, compensation consultants and other advisors.
  • All US public companies will need to make disclosures about pay-for-performance and comparisons of executive pay with pay for other employees. For example, companies will need to disclose the CEO’s annual compensation, the median annual compensation of all employees other than the CEO, and a ratio comparing the two compensation levels.
  • Companies will be required to develop and implement policies for disclosures and clawbacks of executive compensation for years when earnings were restated.
  • Boards of directors of certain companies will be required to establish risk committees. This requirement applies to non-bank financial companies supervised by the Federal Reserve and bank holding companies with assets of $10 billion or more.
  • All US public companies will be required to disclose in proxy materials whether any employee or director of the company is permitted to purchase financial instruments designed to hedge any decrease in the market value of the company’s equity securities that are granted as compensation or otherwise held by the employee or director. Examples of hedging instruments include prepaid variable forward contracts, equity swaps, collars and exchange funds
  • Covered financial institutions will need to make disclosures to appropriate regulators about the structures of their incentive-based compensation arrangements. The objective is to gauge whether the arrangements provide the recipients with excessive compensation, fees, or benefits that could lead to material financial loss for the company. This requirement applies to bank holding companies, registered broker-dealers, insured credit unions, investment advisors and other to-be-designated financial institutions.

The full text of the conference report is available here.

The Center for Financial and Accounting Literacy will report on other aspects of this important new law in its blog on Financial and Accounting Insights and on its website at www.fincenter.org.

Entry Filed under: Governance

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