SEC Issues Amendments to Proxy Rules to Include Shareholder Proxy Vote on Executive Pay of TARP Recipients

The Securities and Exchange Commission (“SEC”, or “Commission”) has adopted amendments to the proxy rules under the Securities Exchange Act of 1934 to set forth certain requirements for U.S. registrants subject to Section 111(e) of the Emergency Economic Stabilization Act of 2008.

Section 111(e) of the Emergency Economic Stabilization Act of 2008 requires companies that have received financial assistance under the Troubled Asset Relief Program (‘‘TARP’’) to permit a separate shareholder advisory vote to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission, during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding. Through these amendments, the SEC intended to implement this requirement by specifying and clarifying it in the context of the Federal proxy rules.

The new rule will take effect on February 18, 2010.

The SEC explained that Section 111(e) of the EESA, as amended by Section 7001 of the American Recovery and Reinvestment Act of 2009 on February 17, 2009, requires any entity that is a recipient of financial assistance under the Troubled Asset Relief Program (‘‘TARP’’) to ‘‘permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material).’’

Companies that have received financial assistance under the TARP are required to provide this separate shareholder vote during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, the SEC added.

The shareholder vote required by Section 111(e) of the EESA is not binding on the board of directors of a TARP recipient, and such vote will not be construed as overruling a board decision or as creating or implying any additional fiduciary duty by the board. The vote also will not be construed to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.

In this regard, the SEC has adopted substantially as proposed new Rule 14a–20 under the Exchange Act to help implement Section 111(e) of the EESA. Under Rule 14a–20, registrants that are ‘‘TARP recipients’’  will be required to provide the separate shareholder vote to approve the compensation of executives, as required by Section 111(e)(1) of the EESA, in proxies solicited during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding. According to the SEC, Rule 14a–20 clarifies that the separate shareholder vote required by Section 111(e)(1) of the EESA will only be required on a proxy solicited for an annual (or special meeting in lieu of the annual) meeting of security holders for which proxies will be solicited for the election of directors.

The SEC also clarified that smaller reporting companies will not be required to provide a compensation discussion and analysis in order to comply with the requirements of Rule 14a–20.

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