PLC Global Finance update for July 2009: United States

Practical Law UK Articles 8-422-1131 (Approx. 8 pages)

PLC Global Finance update for July 2009: United States

by Shearman & Sterling LLP

Executive compensation and employee benefits

Executive compensation and governance-related reforms propose extensive changes to procedure and disclosure

Doreen E. Lilienfeld, Amy B. Gitlitz and Kenneth H. Hemler

In July 2009, the Securities and Exchange Commission (SEC), the Department of the Treasury (Treasury) and Congress released proposals that stand to change the landscape of executive compensation disclosure and practice. While many aspects of the proposals were long anticipated, the sheer volume of the changes, the breadth of the new requirements and the resulting disclosure will garner much attention over the coming months.

At its open meeting on 1 July 2009, the SEC approved proposed rules implementing "say-on-pay" for public companies that received financial assistance under the Troubled Assets Relief Program (TARP). These proposed rules implement the say-on-pay provisions of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009 (TARP Say-on-Pay Rules).

The TARP Say-on-Pay Rules require a registrant that has received or will receive financial assistance under TARP to hold a non-binding shareholder vote on executive compensation at meetings during which proxies are solicited for the election of directors. This separate shareholder vote would apply to the compensation discussion and analysis and tabular disclosures in the registrant's proxy statement.

On 1 July 2009, the SEC also proposed amendments to its executive compensation and corporate governance disclosure rules for all public companies. These amendments, which were finally set out in an SEC release issued on 10 July 2009, would require:

Discussions of the relationship between risk assessment and compensation programmes for employees generally (including non-executives).
Disclosure of the aggregate grant date fair value of equity awards in the summary compensation table and director compensation table.
Enhanced narrative disclosure of director qualifications, the registrant's leadership structure, and the board's role in risk management.
Disclosure of conflicts of interest involving compensation consultants.
Reporting shareholder vote results on Form 8-K within four business days after the meeting at which the vote is held.

On 16 July 2009, Treasury issued a press release indicating its support for draft legislation that would make say-on-pay mandatory for all US public companies, not just recipients of financial assistance under TARP. It accompanied the press release with draft legislation captioned the Investor Protection Act of 2009 (Investor Protection Act) that adds to the federal substantive law regulating pay. The Investor Protection Act:

Implements say-on-pay for all US public companies.
Mandates a separate vote on golden parachutes in the context of mergers or acquisitions, with "clear and simple" disclosure of the amounts executives will receive.
Establishes independence standards for compensation committee members, compensation consultants, outside counsel, and other compensation committee advisors.
Requires that compensation committees be given the authority and funding to hire independent compensation consultants, legal counsel, and other advisors when negotiating executive compensation packages.

Several proposed reforms targeted at executive compensation and corporate governance have also been circulated in Congress in recent months. On 17 July 2009, Representative Barney Frank, Chairman of the House Financial Services Committee, circulated a discussion draft of proposed legislation entitled the Corporate and Financial Institution Compensation Fairness Act of 2009 (Fairness Act). This incorporates the requirements of the Investor Protection Act, but also directs the SEC, the Federal Reserve, and other federal regulators to jointly prepare regulations requiring financial institutions to describe the structure of their incentive-based compensation arrangements. This requirement is intended to enable regulators to determine whether the compensation structure meets criteria that the agencies establish to reduce unreasonable incentives for executives and other employees to take undue risks that could have serious adverse effects on the institution.

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Financial institutions

Obama Administration proposes investment adviser legislation to US Congress

Nathan J. Greene and Steven R. Blau

On 15 July 2009, the Obama Administration continued its push to have its financial regulatory reform proposals enacted into law, submitting to Congress a six-page amendment to the US Investment Advisers Act of 1940 (Advisers Act). The proposed amendment, entitled the Private Investment Fund Advisers Registration Act of 2009 (Proposed Legislation), would, on its adoption, enact the Administration's proposed investment adviser reforms.

A principal effect of the Proposed Legislation would be to require advisers to private investment funds to register as investment advisers with the Securities and Exchange Commission (SEC). However, equally far reaching could be the Proposed Legislation's effect on other unregistered investment advisory businesses, especially those operated by non-US firms, and—depending on how it is used by the regulator in the future—the Proposed Legislation's grant of a broad interpretive and rule-making authority to the SEC.

Key provisions of the Proposed Legislation include:

Elimination of "private adviser" and other registration exemptions. The Proposed Legislation amends the Advisers Act to eliminate entirely the "private adviser" exemption (widely relied on by advisers to fewer than 15 clients).
The Proposed Legislation also establishes that the "intrastate adviser" exemption and the exemption for certain registered commodity trading advisors should not be available to any firm that acts as an investment adviser to a "private fund" (the term is defined by the legislation).
The effect of the changes as they relate to the private fund industry would not be limited to advisers to hedge funds and would also apply to advisers to venture capital funds and private equity funds (among others). The Proposed Legislation does not require private funds themselves to register with the SEC under the US Investment Company Act of 1940, as amended.
Effect on certain non-US investment advisers. The Proposed Legislation would retain only a narrow registration exemption for non-US investment advisers. An adviser will not qualify for the exemption if they:
- have any place of business in the US;
- have had 15 or more US clients within the last 12 months; or
- have had assets under management for US clients worth more than US$25 million.
It is not clear whether these counting clients and AUM thresholds will be measured on a "look-through" basis so as to count investors in private funds. However, if so, the Proposed Legislation could require SEC registration of non-US firms solely because they have US investors in non-US funds they manage.
Private investment fund reporting. The Proposed Legislation grants the SEC the authority to require any registered investment adviser to maintain records regarding the "private funds" it advises and submit reports to the SEC, as is necessary or appropriate in the public interest. The SEC also could require the registered adviser to provide such reports to a fund's investors, prospective investors, creditors, and counterparties.
Because the scope of reporting would be left to the regulator, this is a potentially sweeping grant of authority.
Expanded SEC interpretive authority. The Proposed Legislation would expand the SEC's interpretive authority, including giving it the authority to ascribe a different meaning to any term used in different sections of the Advisers Act. The Proposed Legislation specifically grants the SEC authority to ascribe different meanings to the term "client".
The provision is probably partly a response to Goldstein v SEC (Goldstein), the decision of a US Court of Appeals striking down the SEC's previous attempt to impose registration requirements on hedge fund advisers. The Goldstein court reasoned that the SEC prior hedge fund rulemaking wrongly would have ascribed different meanings to the term "client". The Proposed Legislation's broad grant of interpretive authority to the regulator indicates, however, that far more is at stake here than the mere overturning of Goldstein.

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Obama Administration proposes US financial regulatory reform

Bradley K. Sabel and Steven R. Blau

On 17 June 2009, the Department of the Treasury released a broad financial reform plan (Plan) that recommends changes that would have a significant impact on the US financial industry and international participants in US financial markets. The Plan seeks to close perceived gaps, weaknesses, and overlaps in the current US financial services regulatory system.

The Plan is an 88 page document with multiple proposals; the following is a brief summary of some of its more significant recommendations.

Federal Reserve as systemic risk regulator

The Plan recommends the creation of a US systemic risk regulator and assigns the task to the Board of Governors of the Federal Reserve System (Federal Reserve).

The Federal Reserve would have the authority to supervise and enact regulations for all financial firms that could pose a threat to financial stability, even—unlike under the Federal Reserve's current authority—firms that do not control a bank. Such firms would be designated "Tier 1 Financial Holding Companies" (Tier 1 FHCs).

The Plan also recommends the creation of a Financial Services Oversight Council, which would be composed of the major US financial regulators. The Council would be charged with advising the Federal Reserve in its role as systemic risk regulator and facilitating inter-agency co-ordination to reduce system risk. Under the Proposed Legislation, however, the Council would merely be an advisory body.

Other banking reforms

The Plan would end exemptions that currently allow companies controlling certain kinds of depository institutions to avoid registration as a bank holding company and the non-banking activity prohibitions that come with the designation.

Today, companies controlling a FDIC-insured thrift, industrial loan company, credit card bank, trust company, or grand-fathered depository institution, do not need to register as bank holding companies. The recommendation could force several important industrial companies to give up their commercial lending subsidiaries.

The Plan would also end the federal thrift charter and merge the Office of Thrift Supervision and the Office of the Comptroller of the Currency to create the National Bank Supervisor.

Implications for investment advisers

The Plan recommends that advisers to hedge funds and other private pools of capital (including private equity and venture capital funds) whose assets under management exceed some "modest threshold" be subject to the investment adviser registration and regulation requirements under the US Investment Advisers Act of 1940, as amended (Advisers Act). Contrary to press reports, the Plan does not recommend that private investment funds themselves be subject to direct registration or regulation under the US Investment Company Act of 1940, as amended. However, the Plan does use its SEC investment adviser registration requirement as a means to impose certain requirements on private investment funds advised by such advisers.

Implications for broker-dealers

The Plan recommends that the SEC hold broker-dealers to a fiduciary duty standard when they provide investment advice to retail investors. Currently, investment advisers are held to a fiduciary standard (meaning that the adviser must place client interests ahead of its own interests), whereas broker-dealers are subject to regulation of their advisory services principally on the basis of the suitability and professional standards of that advice.

Greater regulation of OTC derivatives

The Plan does not propose banning any particular product (for example, credit default swaps), but instead recommends requiring that all "standardised" over-the-counter (OTC) derivatives be cleared through regulated central counterparties.

In addition, all OTC derivatives dealers and all other firms that create large exposures to counterparties would be subject to a robust regime of prudential supervision.

Consumer Financial Protection Agency

The Plan recommends the creation of the Consumer Financial Protection Agency (CFPA), an independent agency with broad authority over any financial product or service used by consumers.

The CFPA would assume all responsibilities for banking institutions' consumer regulatory compliance, regardless of whether the institution is state or federally chartered. The CFPA would have primary enforcement authority for any federal consumer protection law with respect to any person subject to the CFPA’s jurisdiction, except with respect to products and services regulated by the SEC or the Commodity Futures Trading Commission.

The Plan also recommends that the CFPA be authorised to define standards for "plain vanilla" financial products, and to require that all providers and intermediaries offer plain vanilla products prominently alongside their other product offerings.

Restructuring and insolvency

Bar Date Order in the Lehman Brothers chapter 11 cases

Michael H. Torkin, Solomon J. Noh and Tanya R. Sheridan

Overview

The Bankruptcy Court in the Lehman Brothers chapter 11 cases entered a bar date order (Bar Date Order) on 2 July 2009, establishing 22 September 2009 at 5:00 p.m. prevailing Eastern Time (Bar Date) as the deadline by which all claims against the Lehman chapter 11 debtors (Lehman Debtors) must be filed (with an exception of proofs of claim relating to certain "Lehman Program Securities" (see below).

Any creditor whose claim is not actually received by Epiq Bankruptcy Solutions, LLC, the noticing and claims agent for the Lehman Debtors, or the Bankruptcy Court on or before the Bar Date will, among other things, be forever barred from asserting such claim against the Lehman Debtors.

The Bankruptcy Court also approved a special proof of claim form, which is attached to the Bar Date Order and available at www.lehman-docket.com.

The Bar Date Order provides that the Lehman Debtors will mail to creditors these proof of claim forms, each of which will have a unique ID number that should be used by creditors when filing proofs of claim.

In addition, the Bar Date Order establishes special procedures with regard to claims based on:

Derivative contracts.
Guarantees.
Guarantees of derivative contracts.

In summary, these procedures require that the holders of such claims both:

Submit a proof of claim as set out above.
Complete a questionnaire on an online database established by the Lehman Debtors (http://www.lehman-claims.com) (copies of the relevant questionnaires are included as Exhibits C and D to the Bar Date Order) by 22 October 2009 at 5:00 p.m. prevailing Eastern Time.

These questionnaires require holders of such claims to provide (by electronic upload rather than on paper) certain detailed supporting documentation for each claim. Any creditor who files a proof of claim but fails to complete the applicable questionnaire(s) will, among other things, be forever barred from asserting such claim against the Lehman Debtors.

This article is a summary of the Bar Date Order and interested parties should review the Bar Date Order (available at www.lehman-docket.com) in its entirety to ensure full compliance with its terms.

Claims based on derivative contracts

The definition of derivative contract now includes any contract that is a "swap agreement" or "forward contract" as defined under the Bankruptcy Code, but excludes "commodities contracts" and "securities contracts". Certain securities transactions (including repurchase agreements in respect of securities or loans) and exchange-traded futures and options are also excluded from the definition of derivative contract.

Further, any notes, bonds, or other securities issued by the Lehman Debtors or their affiliates are expressly excluded from the definition of derivative contract.

The Bar Date Order allows a claimant to submit one derivative questionnaire per proof of claim based on amounts owed pursuant to a master agreement. (Where there is no master agreement in place, a separate proof of claim must be submitted for each derivative contract.)

The information and supporting documentation required by the derivative questionnaire is extensive and includes:

Documentation of the relevant transactions, such as copies of master agreements and schedules to them.
Credit support agreements, netting agreements, guarantees and other agreements (other than confirmations) evidencing the transactions.
A copy of the termination notice, including evidence supporting delivery of such termination notice.
A copy of the valuation statement identifying collateral posted in connection with the transactions and any set-offs against other transactions reflected in the claim.
Certain individual trade level detail in Microsoft Excel format and the valuation methodology in support of the claim, including the date and identity (institution) of any quotations received related to transactions.

Claimants should refer to the derivative questionnaire for a complete list of the documents and information required by it.

Claims based on guarantees

The guarantee questionnaire is more straightforward than the derivative questionnaire. Claimants are required to upload the specific promise, representation or agreement under which the guarantee claim arises.

Claimants who do not have such a document in their possession must upload a written explanation of the guarantee in reasonable detail.

For guarantees of derivative contracts, claimants must complete both questionnaires, but are not required to re-upload supporting documents on the guarantee questionnaire that have already been provided for the derivative questionnaire.

Lehman Program Securities

The Bar Date Order contains procedures for submitting claims based on securities of the Lehman Debtors or any of the Lehman Debtors' affiliates outside the US that are listed on the Lehman Programs Securities list on the website www.lehman-docket.com (Lehman Programs Securities).

Proofs of claim in respect of claims based on Lehman Programs Securities must be filed by 2 November 2009 at 5:00 p.m. prevailing Eastern Time.

Holders of Lehman Program Securities guaranteed by a Lehman Debtor are not required to complete the guarantee questionnaire, but are required to submit a separate proof of claim with respect to the guarantee against such Lehman Debtor.

PLC Global Finance update for July 2009: United States | Practical Law