Financial Markets Rescue Package Q&A: Company Restrictions (3 of 10)

The federal government's Troubled Asset Relief Program (TARP)—created by the Emergency Economic Stabilization Act of 2008 (EESA) signed into law by President Bush on October 3, 2008—gives the U.S. Department of the Treasury authority to purchase "troubled assets" from financial institutions. The Faegre & Benson TARP Task Force has developed answers to some frequently asked questions about which institutions qualify to participate in the program and how the program is expected to work. 

What are the restrictions on companies that participate in the program?

Q: What are the restrictions to which a seller subjects itself on executive compensation and corporate governance?

A: The EESA sets executive compensation and corporate governance standards that apply to every seller, but which vary depending on the method of sale. The standards survive for the duration of the period that the government holds a debt or equity position in the financial institution.

For direct purchases, the Treasury Secretary must require that the seller meet "appropriate standards for executive compensation and corporate governance." Those standards include limits on compensation that "exclude incentives for senior executive officers to take unnecessary and excessive risks that threaten the value of the financial institution," a provision for recovery of any bonus or incentive compensation paid to a senior executive officer based on financial statements that are proven to be materially inaccurate, and a prohibition on any golden parachute payment to a senior executive officer. Senior executive officers are defined as the top five highly paid executives of a public company whose compensation is required to be disclosed under securities laws, or non-public company counterparts. (§ 111(b).)

For auction purchases, if the aggregate sales from an institution total more than $300,000,000 (including direct purchases), the Secretary shall prohibit new employment contracts with senior executive officers that include a golden parachute in the case of involuntary termination, bankruptcy, insolvency, or receivership. The Secretary is required to issue guidelines to carry out this section, but there is no similar requirement for the direct purchase section. (§ 111(c).)

For any institution that sells more than $300,000,000 in assets in the TARP, the EESA also eliminates the company's ability to deduct compensation paid to executives over $500,000, whether the compensation is immediate or deferred. (§ 302(a).) The EESA also treats certain severance payments by participating institutions as golden parachute payments. This will restrict the ability of the participating institutions to deduct these amounts and will require the executive receiving such amounts to pay an additional 20% excise tax. (§ 302(b).)

In addition, for any institution that sells assets, the Treasury Secretary is required to determine whether the public disclosure requirements for off-balance sheet transactions, derivatives instruments, contingent liabilities, and similar sources of potential exposure are adequate for that institution and, if not, to recommend additional disclosure requirements to the relevant regulators. (§114(b).)