In response to the financial crisis, the Basel Committee (an international supervisory group with members from 27 countries) undertook "Basel II" to raise and tighten minimum bank capital requirements under the existing international bank capital accord. The Basel Committee released a near final version of its amendments to Basel II, referred to as Basel III, in December 2010. The December release, "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems", set out a list of several requirements that capital instruments would need to meet in order to qualify as non-common or so-called Additional Tier 1 (generally speaking, perpetual preferred stock and debt instruments), and/or Tier 2 (mainly subordinated debt) capital.

On 13 January 2011, the Basel Committee issued a statement describing the further requirement addressed in this article, which the Basel Committee referred to as "minimum requirements to ensure loss absorbency at the point of non-viability" and characterised as a "final element" of Basel III. While the Committee did not use the specific term "contingent capital" to describe the requirement, the term has been attached to the proposal as its requires capital instruments to be automatically converted into equity or written down, when a predetermined "trigger event" occurs (for example; the hallmark characteristic of a "contingent capital" instrument).

Under the new "loss absorbency" requirement, all Additional Tier 1 and Tier 2 instruments would either need to:

Whether required by contract or national law, the instruments would have to be either written off or converted into common equity upon the occurrence of a "trigger event2. Basel III grants national supervisors with the exclusive authority to call a "trigger event" for these instruments (rather than, for example, a market- or capital-ratio-based trigger approach).

More specifically, a trigger event is the earlier decision by a home country regulator of the bank issuer of the capital instrument:

The Basel III "loss absorbency" requirement is specifically designed to ensure that holders of Additional Tier 1 and Tier 2 instruments would fully absorb losses before taxpayers in the event government assistance is provided to the issuing bank. In these cases, holders could either lose the entire value of their investment (for example, a write-off) or, alternatively, receive some amount of common stock of the bank or the bank's parent company (for example, a conversion and recapitalisation of the bank). Whether the instrument would be written off or converted into common stock would depend either upon the terms and conditions of the instrument and/or the applicable law of the home country of the bank. In cases where the holder receives common stock for the instrument, the stock must be issued prior to any public sector injection of capital in order to ensure that the government’s interests are not diluted by the conversion.

As noted above, the scheduled date for implementation of Basel III is 1 January 2013. In this regard, Basel III specifically requires:

As a practical matter, this means that Basel III requires existing "hybrid" instruments (preferred stock and debt) issued by internationally active banks to be phased out as regulatory capital over time by 2023, unless the terms/conditions of such instruments are modified as necessary in order to ensure their conformance with the "loss absorbency" requirement.

Basel member states, such as the US and the European Union, have pledged to apply the Basel III framework in their respective countries. Nonetheless, since Basel III is not legally binding in any jurisdiction, the precise manner in which the new standards will be applied in member states will be determined through future regional and national rulemaking. The fact that there is not yet an established market or proven legal framework for securities with the required "loss absorbency" feature, coupled with the fact that the new requirement leaves several issues open to national interpretation, suggests that there will almost certainly be regional variation in its adoption. For example, variations in the implementation of the requirement may reflect differing national and regional laws and attitudes towards:

The following aspects of the Basel III "loss absorbency" requirement appear particularly likely to be subject to some national/regional variation:

The Basel III "loss absorbency" requirement raises numerous complicated questions that will need to be addressed by Basel Committee members from both a practical and legal standpoint. For example, implications of the requirement will need to be evaluated from both a financial markets perspective and from the perspective of existing tax laws, accounting treatment, bankruptcy laws, corporate laws, and banking laws. As a consequence, it will almost certainly take some time and effort to create sufficient confidence in the legal treatment and marketability of Basel III-compliant Additional Tier 1 and Tier 2 instruments before any sizeable market in them will form.

The say-on-pay vote covers the compensation of the issuer's named executive officers as disclosed in the annual proxy statement. The final rules did not specify the format or wording for the proposal; however, the resolution must clearly indicate that the say-on-pay vote is to approve the compensation of executives, as disclosed pursuant to Item 402 of Regulation S-K. The final rules do provide an example of a compliant resolution. In addition, issuers must:

The final rules also did not specify the format or wording for the frequency vote, but do require issuers to:

If an issuer's board of directors includes a recommendation on the frequency of the vote, the proxy statement must clearly state that shareholders are voting to approve the actual frequency and not the board of directors' recommendation. The proposed rules specify a format for the proxy card with respect to the frequency vote.

Proposed new Item 402(t) to Regulation S-K specifies a tabular format for the golden parachute disclosure. The aggregate dollar values of the following elements of compensation separately must be quantified in the seven columns of the table:

Issuers may add additional columns or rows to the table to distinguish forms of compensation as long as the disclosure is not misleading. The disclosure is required with respect to all named executive officers in the most recent SEC filing, although issuers are permitted to add additional officers. The disclosure is required for all initial filings made on or after 25 April 2011.

The Item 402(t) table is to be accompanied by narrative and footnote disclosure describing:

This disclosure is required in proxy and consent solicitations, registration statements on Forms S-4 and F-4, going private transactions, third-party tender offers and similar transactions. If the target company is a foreign private issuer, no disclosure is required.

The golden parachute vote is only applicable for proxy and consent solicitations and not the additional transactions described above. Moreover, the vote is only required when the actual transaction is up for approval, as opposed to other proposals in connection with transaction (for example; an increase in the number of shares or a reverse stock split). The vote is required for all initial filings on and after 25 April 2011.

Compensation and arrangements are not subject to the golden parachute vote if they were subject to a prior general say-on-pay vote. In order to take advantage of this exemption, an issuer must have voluntarily included disclosure regarding the change-in-control arrangements in its annual meeting proxy statement in accordance with Item 402(t). In the event that compensation arrangements that were not subject to a prior say-on-pay vote were in place at the time of a transaction, issuers would need to segregate the required disclosure into two tables meeting the requirements of Item 402(t) showing the total amounts payable under all arrangements and just those amounts payable under new arrangements subject to the current vote. The final rules clarified that changes in compensation previously approved:

Subsequent changes in compensation due to the addition of a new named executive officer, additional equity grants and salary increases must be subject to the golden parachute vote.

Additional information regarding the final rules can be found here.