By Cydney Posner

As you've probably heard, Senator Dodd has proposed a bill for comprehensive reform of the financial system called the ‘‘Restoring American Financial Stability Act of 2009.''  For those of you who don't want to spend your weekend reading all 1136 pages of the bill, a summary of the discussion draft is available via this link.  The bill attempts to end the problem of institutions that are "too big to fail," provides for a consumer financial protection agency, creates a single federal bank regulator with enhanced resolution authority, addresses systemic risks posed by derivatives, requires hedge fund advisor registration (with an exception for VC funds), establishes new controls for rating agencies (including allowing private rights of action against ratings agencies for a knowing or reckless failure to investigate or to obtain analysis from an independent source), mandates some reforms at the SEC and attempts to reduce risks related to securitizations by requiring sellers to retain at least a 10% interest. The legislation would also permit a private right of action for aiding and abetting (effectively overturning Central Bank of Denver) and add (or reinforce some already proposed) new requirements in connection with executive compensation and corporate governance.

Title IX, Subtitle E covers "accountability" and executive compensation and would require the following (some of which would be accomplished through exchange listing requirements):

  • Nonbinding shareholder vote on golden parachute policies
  • Annual nonbinding say on pay
  • Independent compensation committees, with the definition of independent to take into account the director's source of compensation and affiliate status
  • Independent compensation consultants and legal counsel to the compensation committee, with "independence" as defined by the SEC 
  • Compensation committee to have authority to retain, compensate and oversee consultants, independent legal counsel and other advisors
  • Proxy disclosure of whether the committee retained consultants and, if so, whether there were conflicts of interest and how they were resolved
  • Proxy disclosure of information showing the relationship between executive comp and financial performance of the issuer, including a five-year graph comparing comp and financial performance or return to investors
  • Clawback policy with a three-year lookback for incentive-based comp awarded to any current or former executive officer, to be triggered in the event of a required restatement due to material noncompliance with a financial reporting requirement (i.e., applicable to the amounts in excess of what would have been received in the absence of the error)
  • Proxy disclosure of whether employees are permitted to hedge employer securities

Title IX, Subtitle G covers corporate governance matters and would require the following:

  • Exchange listing standards to require majority voting for directors in uncontested elections and director resignations in the event of receipt of less than a majority: if Board accepts, it must set and make public a date for effectiveness; if Board, by unanimous vote, does not accept, then within 30 days, it must make public the reasons that it chose not to accept the resignation and explain why that decision was in the best interests of the company and its shareholders
  • Proxy access for shareholder nominations to the Board
  • Proxy disclosure explaining the reasons why the company has chosen either a CEO/Board chair or a non-executive chair
  • Exchange listing standards  to prohibit staggered boards in the absence of shareholder approval or ratification

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