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PLC Global Finance update for June 2010: United States
Practical Law UK Articles 5-502-6120 (Approx. 5 pages)
PLC Global Finance update for June 2010: United States
by Shearman & Sterling LLP
| Published on 23 Jun 2010 • USA (National/Federal) |
The United States update for June 2010 for the PLC Global Finance multi-jurisdictional monthly e-mail.
Financial institutions
House-Senate Conference begins reconciliation of financial regulatory reform bills
Bradley K. Sabel, Gregg Rozansky and Zachary Bodmer
The House-Senate conference committee meetings on US financial regulatory reform legislation commenced on 10 June 2010. The Representatives and Senators appointed to serve on the committee are tasked with reconciling differences between the Senate's "Restoring American Financial Stability Act of 2010" (Senate Bill) and the House's "Wall Street Reform and Consumer Protection Act of 2009" (House Bill) and arriving at a single piece of reform legislation in the form of a "conference report" which would need to be signed by a majority of Senate conferees and House conferees. (The Senate Bill was passed on 20 May 2010 and the House Bill was passed on 11 December 2009.)
The conference committee membership is composed of 12 Senators and 31 Representatives. The party breakdown of the members of the committee (Senators: 7 Democrats and 5 Republicans; Representatives: 20 Democrats and 11 Republicans) is reflective of the Democrats' majority in each of the Senate and House. The conference committee is being chaired by the Chairman of the House Financial Services Committee, Barney Frank (D-MA). Congressman Frank along with Senator Christopher Dodd (D-CT), as the chairmen of the Congressional committees with principal jurisdiction over the financial industry (that is, the House Financial Services Committee and the Senate Banking Committee, respectively), are expected to greatly influence the debate and reconciliation process.
The starting point for the House-Senate conference committee negotiations is the 1974-page "base text" (Base Text) unveiled on 11 June 2010. The Base Text closely resembles the Senate Bill with the addition of several provisions from the House Bill in areas relating to mortgage lending, the thrift charter, and access to financial services for low-income individuals, minorities and generally underserved communities. Particularly in view of this starting point, the final conference report is widely expected to more closely resemble the Senate Bill than the House Bill. Nonetheless, conferees may introduce amendments to the Base Text (which Congressman Frank, on behalf of the House conferees, already has) so long as the subject matter of the amendment is covered by either the Senate or House Bill.
The goal of Democratic leadership in Congress is to be able to complete the conference committee's work by 24 June and then to receive House and Senate approval of the conference report in time to send a final financial regulatory reform bill to the President's desk for his signature by Independence Day. Given the procedural rules of the Senate, the conference report would need to attract at least 60 out of 100 votes in the Senate. On the other hand, a simple majority is all that is required under House rules.
Focal points of debate during the House-Senate conference committee include:
- The "Volcker Rule".
- "Push-out" of bank derivatives business.
- Corporate governance issues.
- Debit card "interchange" fees.
The "Volcker Rule"
If enacted into US law, the "Volcker Rule" could potentially reshape the US financial services industry by redrawing existing boundaries on the types of investments and fund-related activities that US depository institution holding companies and non-US banks with US operations may conduct.
The Volcker Rule, as it is currently written into the Senate Bill (and the Base Text), would prohibit banking groups from conducting certain capital markets and derivatives activities including "proprietary trading" and "private fund" (that is, hedge fund and private equity fund) sponsorship or investment.
Many fundamental questions, however, remain regarding how the Volcker Rule would function in practice. Several of these questions are highlighted in Shearman & Sterling's memorandum entitled, Financial Regulatory Reform Update: The Volcker Rule Looms Large Over Asset Management and Fund Investment Activities of Financial Institutions.
"Push-out" of bank derivatives
A provision in the Senate Bill and the Base Text (the House Bill did not contain a comparable restriction) introduced by Senator Blanche Lincoln (D-AK) would effectively require banks to "push-out" a large component of their derivatives operations to a non-bank entity.
The requirement has touched off a passionate debate as it would have a profound impact on the banking industry.
Senator Lincoln has defended her proposal as a forward-looking approach designed to foster financial stability; but key regulators, including Sheila Bair, Chairman of the FDIC, and members of the Administration have argued that it could end up being counterproductive (for example, by interfering with current risk-management practices, and/or pushing derivatives activities to less regulated entities or off-shore).
Recently, it has been reported that Senator Lincoln is modifying her proposal to:
- Permit banks to use derivatives to hedge for interest rate risk.
- Clarify that bank affiliates may engage in a derivatives business.
- Permit banks to offer derivatives in connection with a lending transaction or other traditional bank product.
- Provide for a two year implementation period.
Corporate governance and executive compensation issues
The Senate Bill and the Base Text would require listing exchanges to impose a majority vote standard in uncontested director elections and require a director to submit his or her resignation if less than a majority of the votes is received.
There is no similar provision in the House Bill.
If adopted, the majority vote standard will likely lead to a greater number of "withhold the vote" campaigns in uncontested director elections.
There has been significant industry resistance to mandatory majority voting standards and it is anticipated that this will be debated during the House-Senate conference meetings.
Debit card "interchange" fees
The Senate Bill and the Base Text would require the Federal Reserve to regulate the fees debit card issuers, such as Visa and MasterCard, charge retailers to process debit card purchases. (The House Bill contains no similar provisions.)
Under the Senate Bill, fees charged would have to be "reasonable" and proportional to actual costs incurred and, according to Senator Durbin (who introduced the measure), would prevent card networks such as Visa and MasterCard from penalising sellers for offering discounts to customers who pay by cash, cheque or debit card. Given the large amount of money at stake (for both retailers and the banking industry), this issue is expected to attract significant attention during the House-Senate conference meetings.
For more information on the topics discussed in this summary, see House-Senate Conference to Reconcile Financial Regulatory Reform Bills.
Executive compensation and employee benefits
Restoring American Financial Stability Act of 2010
Doreen E. Lilienfeld and Amy B. Gitlitz
On 20 May 2010, the US Senate passed the Restoring American Financial Stability Act of 2010 (Senate Bill). While the Senate Bill is primarily aimed at financial regulatory reform, it contains several compensation-related reforms that would apply to all US public companies.
In most respects the final Senate Bill closely resembles an earlier version of the legislation cleared through the Senate Banking Committee on 15 March 2010.
The Senate Bill also incorporates many elements of the Wall Street Reform and Consumer Protection Act of 2009 passed by the House of Representatives on 11 December 2009 (House Bill).
Congress is currently working to reconcile the two bills and final legislation is expected in the near future (see House-Senate Conference begins reconciliation of financial regulatory reform bills).
The following is a summary of the terms of the Senate Bill and comparisons to the House Bill.
Clawback policies
Perhaps the most significant of the executive compensation provisions in the Senate Bill is the requirement that companies implement a "clawback" policy. The Senate Bill would require listing exchanges to mandate that issuers implement a policy enabling recovery of incentive-based compensation (including stock options) paid to current or former executives during the three years preceding an accounting restatement due to material non-compliance of the issuer with any financial reporting requirement under securities laws.
There is no parallel provision in the House Bill.
Say-on-pay
Like the House Bill, the Senate Bill requires the SEC to set rules mandating that annual proxy statements include a separate resolution providing shareholders with the right to a non-binding vote approving executive compensation, commonly referred to as "say-on-pay". The Senate Bill also provides that only votes cast by beneficial owners of a security or by members given specific voting instructions by the beneficial owner will be included in the vote tally. While the House Bill would also require a vote with respect to golden parachutes in any proxy relating to a corporate merger or acquisition transaction, the Senate Bill eliminates this requirement.
Compensation consultant independence
Both the Senate Bill and the House Bill require that all compensation consultants and advisors to the compensation committee of any issuer meet independence standards established by the US Securities and Exchange Commission (SEC). Current SEC rules govern only the disclosure relating to compensation consultant independence.
Compensation committee independence
Similar to the House Bill, the Senate Bill would require that each member of the compensation committee be independent from the company. The House Bill includes specified independence standards while the Senate Bill merely references issues that should be considered in making an independence determination.
Proxy disclosure
The Senate Bill would direct the SEC to require additional compensation-related disclosure in annual proxy regarding:
- The relationship between compensation actually paid and the financial performance of the issuer, taking into account any change in the stock value and dividends paid. Issuers could, but would not be required, to include a graph illustrating the relationship.
- Whether employees (not only executive officers) or directors are permitted to hedge against decreases in the value of the company stock granted as compensation.
- Internal pay equity: specifically, issuers would be required to disclose the median total compensation of all employees (other than the CEO), the annual total compensation of the CEO, and the ratio of these two amounts.
There are no comparable proxy disclosure provisions in the House Bill, and disclosure along these lines currently is extremely rare.