On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act impacts a broad range of financial rules and regulations, including the following applicable to public companies:
- Internal controls attestation
- Executive compensation
- Proxy voting and access
- Beneficial ownership reporting
- Credit rating agency exemptions from Regulation FD and Securities Act “securitization” provisions
- Private placements
Internal Controls Attestation Rules
Congress has made permanent the exception from internal control attestation requirements for non-accelerated filers, previously scheduled to expire this year. Accordingly, companies that that are not accelerated filers (generally, companies with public float less than $75 million at fiscal year end) will not be subject to annual auditor internal control attestation requirements imposed by section 404(b) of the Sarbanes-Oxley Act. In addition, Congress has directed the General Accounting Office, within nine months, to conduct a study on how to lessen the burden imposed by the internal control attestation requirements on issuers with market caps between $75-250 million, as well as a study of the effects of the exemption regarding non-accelerated filers, to determine, among other things, whether companies not required to provide internal control attestations have higher rates of financial restatements than companies required to obtain the attestation.
Say on pay. Congress has adopted a “say on pay” regime requiring public companies, in their annual proxy solicitation materials, to submit to stockholders, at least every three years, a non-binding vote on executive compensation, and, at least every six years, on how often to have the vote on compensation. Similarly, proxy materials for mergers and acquisitions must include disclosure of “golden parachutes” triggered by the transaction and a non-binding vote on the payments (if not previously approved). These new “say on pay” rules apply to proxy materials for shareholder meetings occurring after January 21, 2011. In addition, institutional investment managers will be required to publicly report their votes on these matters.
Compensation committees, consultants. The SEC is required, within one year, to adopt rules directing stock exchanges (including the NYSE, NASDAQ and AMEX) to require that each listed company:
- have a compensation committee comprised exclusively of independent directors;
- authorize the compensation committee to engage compensation consultants, legal counsel, and other advisers; and
- pay the fees of these advisers.
In appointing its advisers, a compensation committee will be required to determine that its advisers are independent, in accordance with SEC rules to be promulgated.
Compensation claw-back. The SEC will also be required to adopt rules directing stock exchanges to require that listed companies:
- claw back cash and non-cash incentive-based compensation given in respect of reported financial information that is subsequently required to be restated due to material noncompliance with securities laws; and
- disclose their policies on incentive-based compensation based on reported financial information.
Compensation and hedging disclosure. The SEC is required to amend its proxy rules to require disclosure in annual meeting proxy material of:
- the relationship between a company’s executive compensation and financial performance, taking into account any change in the value of the company’s shares, dividends, and distributions;
- the median annual total compensation of all employees, except the CEO, and the annual compensation of the CEO;
- the ratio of the median employee annual total compensation to that of the CEO; and
- whether employees and directors are allowed to hedge against declines in value of any equity securities granted as compensation or otherwise held.
Proxy Voting and Access
Effective immediately, brokers will not be able to exercise discretionary voting with respect to the election of directors, executive compensation, or any other significant matter, as determined by the SEC. In addition, the SEC “may,” but is not required to, issue rules permitting shareholders to use issuer proxy solicitation materials to nominate director candidates. The Dodd-Frank Act requires companies to disclose, as SEC rules already require, why the offices of chairman of the board and CEO are held by one individual or separately by two individuals.
Beneficial Ownership Reporting
Sections 13 and 16 of the Exchange Act are amended to allow the SEC to prescribe a shorter period (currently 10 days) for reporting acquisition of beneficial ownership of 5% or 10% of a class of registered securities or becoming an officer or director of a public company. In addition, the definition of “beneficial ownership” may be expanded to include the purchase or sale of a security-based swap.
Elimination of Credit Rating Agency Exemptions
Regulation FD. Currently, material non-public information disclosed to credit rating agencies need not be made public under Regulation FD. The Dodd-Frank Act requires the SEC, within 90 days, to eliminate this exemption. Accordingly, credit rating agencies will not be able to rely on material non-public information in preparing their reports and ratings on public companies.
Debt ratings. The legislation rescinds the SEC rule that exempted debt ratings from the “expertization” provisions of the Securities Act. Such ratings can no longer be included in a prospectus without the consent of the issuing ratings agency, which the agencies have announced they will not give, at least until their potential liabilities under the Securities Act for the ratings are clarified. In response, the SEC has issued temporary relief from its ratings disclosure rules relating to asset-based debt.
Changes to Private Placement Rules
Accredited investor net worth test. Effective immediately, the value of a natural person’s primary residence is excluded from the accredited investor net worth test.
The natural person accredited investor minimum net worth is fixed at $1 million for the next four years, but the legislation also authorizes the SEC to adjust the income test before then. In four years, and every four years thereafter, the SEC is required to review all natural person accredited investor criteria and adjust them, if appropriate.
Bad actor disqualification. Within one year, the SEC is required to adopt rules disqualifying persons that have violated securities laws from participating in Rule 506 private offerings. The rules are to be substantially similar to prohibitions now applicable to Regulation A offerings.
Loeb & Loeb's Financial Reform Task Force monitors key issues surrounding approval of the Dodd-Frank Wall Street Reform and Consumer Protection Act that are relevant to a broad spectrum of firm clients in the financial services industry. The multidisciplinary Task Force is comprised of attorneys across core practice areas - including general corporate, private equity, securities, mergers and acquisitions, consumer protection and banking and finance - who are focused on analyzing the historic legislation and interpreting the significant business implications for financial institutions and commercial companies nationwide. For more information about the content of this alert, please feel free to contact any member of our Financial Services Team.
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