SEC Adopts Final Proxy Rule Regarding Say-On-Pay Vote for TARP Recipients

When Congress adopted the American Recovery and Reinvestment Act of 2009 (ARRA) in February of last year, it required that any entity that was a recipient of financial assistance under the Troubled Asset Relief Program—commonly known as TARP—have a separate shareholder vote to approve compensation of executives as disclosed in accordance with the compensation rules of the Securities and Exchange Commission.

In accordance with the ARRA requirements, the SEC has now adopted changes to its proxy rules, including a new Rule 14a-20, to address this say-on-pay vote requirement. The rule changes are effective 30 days after publication in the Federal Register.

These proxy rule changes are in addition to those which were adopted on December 16, 2009, and were applicable to all public companies.

ARRA Added Compensation and Corporate Governance Requirements to TARP

The Emergency Economic Stabilization Act of 2008 (EESA), adopted at the height of the financial crisis to create the TARP, was amended by the ARRA to add a number of additional TARP requirements relating to compensation and corporate governance.

Among these was the requirement that at any annual meeting or other shareholder meeting, the TARP recipient provide for a non-binding shareholder vote to approve executive compensation "as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables and any related material." The ARRA called for the SEC to adopt rules within one year of its enactment "required by this subsection."

To assist companies during the 2009 proxy season, the SEC issued in February 2009 guidance in the form of a compliance and disclosure interpretation (CDI) covering certain key questions arising under ARRA—including whether the ARRA applied to filings made by TARP recipients during that proxy season.

SEC Issues New Rules on ARRA Amendments

In January 2010, the SEC issued final rules relating to the say-on-pay vote requirement for TARP recipients. The new rules largely codify the SEC's February 2009 guidance with a few exceptions.

The highlights of Rule 14a-20 and related amendment to Item 20 of Schedule 14A include the following:

• It makes clear that the say-on-pay vote requirement doesn't apply to any shareholder meeting, but rather only to annual meetings or special meetings in lieu of an annual meeting at which proxies are solicited for the election of directors. This assures the vote need only occur once a year and that applicable SEC rules will call for related disclosure of executive compensation.
• It parrots the statutory requirement regarding the vote itself indicating that it is to "approve the compensation of executives, as disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, the compensation tables and any related material." For smaller reporting companies that do not have to include a compensation discussion and analysis in their proxy statements, the SEC added an explanatory note indicating the shareholder vote must be to approve executive compensation as disclosed pursuant to the scaled disclosure requirements of Item 402(m) through (q) of Regulation S-K.
• The only required disclosure related to the say-on-pay vote mandated by the rules is that the vote is being submitted to shareholders pursuant to the requirements of EESA and briefly explain the general effect of the vote "such as whether the vote is non-binding."

Importantly, the SEC also amended Rule 14a-6 to eliminate the obligation to file the proxy statement preliminarily with the SEC. This is a change from the February 2009 CDI and the proposed rule, and will be a welcome relief for those TARP recipients who are not otherwise conducting business at their annual meeting that would require them to file the proxy statement on a preliminary basis.

Consistent with the prescriptions of the EESA, the SEC noted in its adopting release that the required say-on-pay vote will not be construed to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation. SEC Rule 14a-8 will continue to apply to these shareholder proposals. Nor will the say-on-pay vote be construed as overruling a board decision or as creating or implying any additional fiduciary duty by a board of directors.