The Dodd-Frank Bill gives the Securities and Exchange Commission (SEC) the authority to issue rules requiring a company to permit its shareholders to use the company's proxy solicitation materials to nominate an individual for membership to the board of directors, also known as "proxy access." The Bill leaves all decisions regarding proxy access with the SEC, which had proposed proxy access rules in May 2009.

The SEC's proposed rules included minimum ownership requirements ranging from 1% to 5% of shares (based on the size of a company) and a one-year holding period that would need to be met for a shareholder to use proxy access. In October 2009, the SEC, having received numerous comment letters and facing questions regarding its authority to adopt proxy access rules, decided not to adopt the rules to be effective for 2010.

However, the SEC is likely to revisit its proposed proxy access rules, having been provided with explicit authority to issue such rules by Congress through the provisions of the Dodd-Frank Bill.

US public companies should stay apprised of the status of the SEC's actions regarding proxy access.

The Dodd-Frank Bill directs the SEC to issue rules within 180 days of its enactment requiring all public companies to disclose in their annual proxy statements the reasons why the company has the same or different persons serving as chairman of the board of directors and chief executive officer (CEO). The current SEC rules already require that companies with no split between the chairman and CEO positions disclose why they determined that the leadership structure is appropriate, therefore, the Bill should not create additional disclosure requirements for such companies. However, companies with different persons serving in the chairman and CEO positions will need to be prepared to disclose the reasons for their structure in their next proxy statements.

The Dodd-Frank Bill amends Section 6(b) of the Securities Exchange Act of 1934 (Exchange Act) to require all national securities exchanges to adopt rules prohibiting a broker from voting a security on behalf of the beneficial owner of the security in a shareholder vote, unless the beneficial owner has provided the broker with voting instructions. The prohibition on such broker discretionary voting applies to a "shareholder vote," which the amendment defines as a vote with respect to the election of a director, executive compensation, or any other significant matter, as determined by the SEC. National securities exchanges are also permitted to prohibit broker discretionary voting on any other matters. Companies will want to monitor whether the SEC or the securities exchanges decide to institute further restrictions on broker discretionary voting pursuant to the authority provided by the Bill.

The Dodd-Frank Bill amends Section 14 of the Exchange Act to mandate that the SEC issue rules requiring companies to disclose in their annual proxy statements whether any employee or director of the company is permitted to purchase financial instruments that are designed to hedge or offset any decrease in the value of the company's equity securities received as part of compensation or held, directly or indirectly, by the employee or director. While the Bill mandates the SEC to issue such rules, it does not specify a deadline by which the rules must be issued. However, since the additional disclosure is likely to be required for proxy statements filed in 2011, companies should begin to evaluate their hedging policies and determine procedures and practices that may be necessary to obtain information regarding employee and director hedging.

The Dodd-Frank Bill requires publicly traded non-bank financial companies and certain publicly traded bank holding companies to establish risk committees. The risk committee is required to have responsibility for the oversight of the enterprise-wide risk management policies of the company and include a specified number of independent directors and at least one risk management expert with experience in identifying, assessing and managing risk exposures of large, complex companies. The new requirement will go into effect no later than two years and three months after the enactment of the Bill. While the risk committee requirement does not apply to most public companies, it is likely to have an effect on corporate governance practices regarding risk.

While originally proposed in the US Senate's financial reform bill, a provision requiring a director in an uncontested election to receive a majority of votes in order to be elected was ultimately not included in the final Dodd-Frank Bill following the meetings of the House-Senate conference committee. Although it was not included in the Bill, companies should continue to assess whether adopting majority voting may be appropriate since it is likely to remain an issue of importance for both regulatory agencies and shareholders.

Although strengthening corporate governance of public companies is not the main purpose of the Dodd-Frank Bill and the provisions relating to corporate governance may not have been unexpected in light of recent trends, companies should re-evaluate their policies and procedures as necessary to comply with the Bill and future governmental rules and regulations.

The funding relief provisions under the Act are intended as a temporary measure to assist plan sponsors in improving a defined benefit plan's funded status under the PPA. The provisions are not intended to replace or waive a plan sponsor's obligation to fully fund a plan in accordance with the PPA and other applicable laws. Funding relief is available whether a plan is providing ongoing benefit accruals to plan participants or is "frozen" (that is, no longer provides future benefit accruals to participants).

Electing relief. Under the Act, a plan sponsor must affirmatively elect funding relief. At the heart of the election is the plan sponsor's decision to extend a plan's amortisation period by electing one of the two amortisation schedules discussed below. A plan sponsor may elect funding relief for up to two plan years during the 2008-2011 period. While there is no requirement that funding relief be elected for consecutive plan years, plan sponsors must use the same amortisation schedule for both years. A plan sponsor is required to notify plan participants and the Pension Benefit Guaranty Corporation of the election.

Amortisation schedule. A plan sponsor may elect to extend a plan's amortisation period from the seven-year period required under the PPA to either nine years or 15 years. Once elected, the amortisation schedule may not be changed. If the nine-year schedule is elected, the plan sponsor would only be required to make interest payments during the first two years of the amortisation period and the balance of the funding shortfall would be amortised in annual instalments over the remaining seven years. If the 15-year schedule is elected, the shortfall amount would be amortised in annual instalments over the entire period.

Increase in amortisation payments. The Act requires a plan sponsor to make additional contributions to the annual instalments under the amortisation schedule if it makes certain "extraordinary" payments. The amount of the additional contributions would be based on the excess of:

The additional contribution, together with the instalments due under the amortisation schedule, would not be more than the amount that the plan sponsor would have paid had it not elected funding relief.

Under the PPA, if a defined benefit plan's funding percentage is below 60%, it generally must cease future benefit accruals for all plan participants. The Act provides temporary relief from this restriction by providing that a plan may determine its funding status based on the greater of the plan's funding status for the current plan year or the funded status of the plan for the plan year beginning on or after 1 October 2007 and before 1 October 2008. This relief is available regardless of whether funding relief is elected.

In addition, the same relief is available for PPA restrictions prohibiting a defined benefit plan that is funded below 60% from paying benefits under a Social Security Level Income Option that would otherwise be available under the plan. The Act does not, however, extend this relief to a lump sum payment option.

For more information on relief available under the Act, see Shearman & Sterling publication, Plan Sponsors Have Opportunity for Relief from Pension Funding and Benefit Restrictions.