National securities exchanges and associations, such as the NYSE and NASDAQ, must adopt rules prohibiting the listing of the securities of companies that do not implement an incentive compensation recoupment policy. When a listed issuer prepares an accounting restatement as a result of its material noncompliance with any financial reporting requirement, the issuer must recover all incentive-based compensation (including stock options) paid to current or former executives during the three years preceding the date on which the restatement is required. There is no requirement that the restatement be triggered by the misconduct of the issuer or any employee. The amount of compensation recoverable will be the excess of what was actually paid to the executive over the amount that would have been paid under the accounting restatement. Issuers must also disclose their clawback policies. The Reform Act does not specify an implementation date for the clawback rules. Further, it does not expressly exclude foreign private issuers from this provision, although later rule-making may provide for such an exception.

Domestic issuers must provide shareholders with the right to cast a non-binding advisory vote approving the issuer's executive compensation as it is disclosed in the issuer's proxy statement. Unlike certain prior proposals calling for an annual vote, the Reform Act requires a vote to occur at least once every three years. All shareholder meetings occurring on or after 21 January 2011 must provide shareholders with a say-on-pay vote. In the first instance, shareholders must be given the opportunity to vote on both the say-on-pay resolution and a separate resolution to determine whether the issuer's say-on-pay vote will be held every one, two or three years. Thereafter, shareholders must be given the opportunity to re-determine the frequency of the say-on-pay vote at least once every six years.

Proxy statements and consent solicitations filed by domestic issuers in connection with mergers, acquisitions, and major asset sales are required to describe in clear and simple form, any arrangements with any named executive officers of the issuer or the acquiring company concerning compensation (whether present, deferred or contingent) that is related to the transaction. Companies will also be required to disclose the aggregate amount of compensation that will be paid or may become payable to these executives (together with the conditions to payment) as a result of the transaction. The proxy statement also must provide shareholders the opportunity to cast a separate non-binding vote to approve these payments unless the arrangements have been previously subject to a say-on-pay vote. This requirement applies only to US issuers and not to foreign private issuers. This provision applies to transaction-related meetings occurring on and after 21 January 2011.

The Reform Act requires the Securities and Exchange Commission (SEC) to direct the national securities exchanges and associations to prohibit the listing of securities of any issuer whose compensation committee is not comprised exclusively of independent directors. Rather than setting independence standards, the Reform Act tasks listing authorities with defining independence. In formulating this definition, listing authorities are to consider:

The compensation committee independence requirements do not apply to certain issuers, including "controlled companies" (that is, companies where more than 50% of the voting power is held by an individual, a group or another issuer) and foreign private issuers that provide annual disclosure explaining why they do not have an independent compensation committee.

The Reform Act provides that a compensation committee may, in its sole discretion, obtain advice of consultants, legal counsel and other advisers and must be directly responsible for the appointment, oversight and compensation of these advisers. Any committee that elects to retain a consultant, however, will not be compelled to follow the adviser's advice and must exercises its own judgment in fulfilling its duties and making compensation decisions. In selecting its advisers, compensation committees must take into account factors affecting independence.

The Reform Act directs the SEC to identify independence factors that are competitively neutral among categories of consultants, legal counsel and other advisers. Unlike prior proposed legislation, the Reform Act does not require that consultants be independent. Rather, in any proxy statement filed on or after 21 July 2011, issuers must disclose (in accordance with rules to be established by the SEC):

The Reform Act directs the SEC to require the following additional compensation-related proxy disclosure:

The Reform Act does not specify a deadline for the SEC's rule-making relating to additional disclosures.

For more information on the compensation provisions of the Reform Act , see:

Advisers will be prohibited from providing compensated advisory services to a government entity (which includes all US state and local (but not federal) government and government-sponsored agencies, instrumentalities, plans, programmes, pools of assets, and so on) for a period of two years after the adviser or any of its "covered associates" makes a "contribution" (after 14 March 2011) to an "official" of the government entity. This two-year ban is sufficiently punitive that it should operate to fundamentally change how advisory firms treat their own and their employees' political contributions.

Investment advisers will be limited, as of 13 September 2011, to dealing with "regulated persons" when hiring (or otherwise agreeing to pay, directly or indirectly) any unaffiliated third party, such as a placement agent, to solicit advisory business from a US state or local government entity on the adviser's behalf. This requirement represents a significant roll-back from the full prohibition that the SEC had proposed on using third party solicitors for this purpose.

Investment advisers will be prohibited from soliciting or arranging contributions or payments to certain elected officials, candidates for public office, or political parties of a state or locality for which the adviser provides or is seeking to provide advisory services. This prohibition would restrict an adviser from, for example, "bundling" de minimis contributions of its covered associates.

SEC-registered investment advisers will be subject to extensive new record-keeping obligations related to these types of political activities. New required records include:

There are a number of exceptions to the rules:

In response to the new rules, advisers will inevitably need to build-out their compliance procedures (for example, employee and pre-hire questionnaires regarding political contribution activity, contribution pre-clearance procedures, suitability analysis with respect to third-party solicitors). It should also be noted that because the rules prohibit actions taken indirectly that would, if done directly, violate any of the prohibitions listed above, the SEC has reserved wide latitude to invoke these rules against advisers that attempt to creatively circumvent them (for example, directing contributions through family members).

For more information, see Shearman & Sterling memorandum, SEC Adopts Rules Targeting “Pay to Play” Practices by Investment Advisers.

For more information on these as well as other areas addressed by the Act, see Shearman & Sterling memorandum, Landmark Financial Regulatory Reform Legislation Passed by U.S. Congress.

For more information on specific topics, see:

In its recent decision in IUE-CWA v. Visteon Corp. (In re Visteon Corp.), No. 10-1944, (3d Cir. July 13, 2010) (Visteon), the US Court of Appeals for the Third Circuit ruled that a debtor whose retiree benefits plans provide for the unilateral right by the debtor to terminate such plans at any time will nevertheless be required to comply with section 1114 of the Bankruptcy Code to terminate them post-petition.

Section 1114 provides, among other things, that before any modification to a retiree benefits plan can be made, the debtor and the retirees' authorised representative must "confer in good faith in attempting to reach mutually satisfactory modifications of such retiree benefits" (11 U.S.C. § 1114(f)(2)).

The Third Circuit applied the so-called "plain meaning rule" to conclude that section 1114 is unambiguous and "clearly applies to any and all retiree benefits," notwithstanding any contractual language to the contrary (In re Visteon Corp., at *8). The decision is directly at odds with In re Delphi Corp., No. 05-44481, (Bankr. S.D.N.Y. Mar. 10, 2009) as well as the Second Circuit's decision in In re Chateaugay Corp., 945 F.2d 1205 (2d Cir. 1991), and could have strategic implications for distressed companies that have significant retiree benefits obligations.

In reaching its conclusion, the Third Circuit relied on three significant factors:

After reviewing the legislative history of section 1114, the court concluded that its reading of the statute was not "demonstrably at odds with the intention of its drafters" nor "so bizarre that Congress could not have intended it" (In re Visteon Corp., at *18).

The court's decision in Visteon highlights the Third Circuit's tendency toward strict statutory construction of the Bankruptcy Code, even where the results may be at odds with the parties' pre-bankruptcy expectations and contractual rights.

The Visteon decision follows the Third Circuit's recent decision in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), in which it narrowly construed section 1129(b)(2)(A) of the Bankruptcy Code, resulting in a significant curtailment of secured creditors' rights. In that case, the Third Circuit determined that section 1129(b)(2)(A) of the Bankruptcy Code permits a debtor to sell a secured creditor's collateral without allowing the creditor to credit bid its claim so long as the debtor's plan provides the creditor with the "indubitable equivalent" value of its collateral (In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010) at 301). The creditor-friendly Visteon decision and the debtor-friendly Philadelphia Newspapers decision demonstrate the Third Circuit's conviction that the appropriate role of the court is to apply the Bankruptcy Code as written (in the absence of any clear ambiguity or mistake), and not make inferences that go beyond the statutory language.

When considering their bankruptcy options, distressed companies with significant employee retirement benefit obligations should be aware of the impact of the Visteon decision. The decision may affect their choice of venue for the bankruptcy filing (assuming Delaware is among their options).

Moreover, given that section 1114(l) precludes a debtor from modifying medical benefits attributable to the 180-day period immediately preceding the filing of a bankruptcy petition "unless the court finds that the balance of the equities clearly favors such modification," such companies need to consider whether it is in their best interest to terminate their retiree medical plans more than 180 days prior to filing for Chapter 11.

However, such advanced termination is not always feasible given the protracted timetable involved and the potential signal that a termination might send to the marketplace at a time when the company is not under the protections of Chapter 11.

Ultimately, the impact of Visteon goes well beyond these benefits-related considerations. Companies that are weighing Delaware as an option for their bankruptcy filing would be well served to assess the major issues confronting them based on the assumption that the Third Circuit will narrowly construe the provisions of the Bankruptcy Code.