Wednesday, August 5, 2009

House Approves Bill to Regulate Compensation Policies

On July 31, 2009, the U.S. House of Representatives adopted Bill H.R. 3269 entitled the Corporate and Financial Institution Compensation Fairness Act of 2009 (the "Bill"), which, if passed into law, may restrict the income policies of certain financial institutions. The Bill covers U.S. financial institutions with at least $1 billion in assets under management, including investment advisors, banks, broker-dealers and other financial institutions. Covered financial institutions will be required to disclose to the regulators any compensation structures that include incentive-based allocation arrangements, such as carried interest and performance fees, in order to allow the regulators to assess such structures against risk management standards. Regulators will also be able to bar the compensation structures of a specific financial institution if they are deemed to encourage "inappropriate risks".

The Bill also contains "say on pay" rules for public companies, giving their shareholders the right to cast an annual advisory vote on executive compensation. Shareholders would also have the right to cast an advisory vote on golden parachute compensation in the event of a merger, consolidation, sale or acquisition of the company. In addition, the Bill would require all public companies to have compensation committees comprised of independent directors. Consultants to the compensation committee would also be required to meet SEC standards for independence.

The Bill needs to be signed off by the U.S. Senate and President Obama before it becomes law.

Link to House press release