Dodd-Frank Part VI: Exec Comp Changes

This is the last post before my conclusory entry on the new Dodd-Frank Wall Street Reform and Consumer Protection Act (one reader said we should call it “Donk,” but I’m just not feeling that one), which was signed into law by Pres. Obama on July 22. Here we cover some of the changes in the area of executive compensation. There are other pretty important parts of the bill we did not get a chance to cover here, mostly because they have little impact on the small and middle market world in which I assume the vast majority of you blogees live or on those who follow the law. Here’s a few just so you can’t say I didn’t mention them!

• There’s going to be a new Office of Credit Ratings to keep an eye on, you guessed it, credit rating agencies.
• They have now also pushed the “bad actor” exemption (I guess it’s no longer PC to say “bad boy” as they used to) all across Regulation D (it previously did not apply in a Reg D 506 offering which most of us utilize). If you are a bad actor (ie conviction of a securities related crime, bar from being in the securities business, have an order against you saying you committed fraud or deception), you cannot use Reg D to make an offering.
• There’s now going to be big time oversight of the over-the-counter derivatives market. Not too many swaps and derivatives trading in smaller public companies.
• The “Volcker rule” has been adopted, prohibiting banks and certain others from being involved in proprietary trading or investing in more than 3% of a hedge or private equity funds (but they can be underwriters and market makers). This is probably a good thing. It will be interesting to see how the Bank of Goldman reacts to this. It doesn’t kick in for well over a year however.
• There’s going to be a new Consumer Financial Protection Bureau to oversee anyone offering consumer financial services including mortgages, student loans and credit cards.

OK? Happy? Tell your friends. Seriously, now back to executive compensation. We’ve heard a lot about “say-on-pay,” though the final version is somewhat watered down. If you’re doing a proxy statement and it has to include disclosure about compensation, you have to have a separate, but non-binding, vote of shareholders to approve the compensation or not. The Act makes clear that the vote doesn’t change anyone’s fiduciary duties and the board does not have to react or respond to the vote. The shareholders also are permitted to vote to only be allowed their say on pay once every two or three years instead of every year. Also, the Act directs the stock exchanges to adopt rules requiring any compensation committee to be completely independent of management, however, it still will not require companies to have compensation committees.

Here’s another one I like. Public companies will have to put in their annual proxies how their executive comp relates to the company’s financial performance. Guys, we are so out of line with the rest of the world in executive compensation. I’m a strong believer in giving “the talent” whatever is fair, but I’m also a strong believer in tying compensation to getting the job done. If everyone does it, then you won’t lose talent who say hey, I can get big bucks for not performing somewhere else.

OK, summarizing everything in the next and last.

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