On June 15, 2009, the Treasury Department published an interim final rule ("IFR") which provides guidance on executive compensation and corporate governance requirements for financial institutions that have participated in programs under the Troubled Asset Relief Program ("TARP"). Following are highlights of certain components of the IFR:
Limits on Bonus and Incentive Compensation
The IFR prohibits the payment of bonuses, incentive compensation and retention awards to senior executive officers and certain other highly compensated employees of TARP participants. The number of affected employees is determined based on the amount of TARP funds received. Certain awards of long-term restricted stock or stock units are permitted. Bonus payments do not include contributions to qualified retirement plans, benefits under broad-based benefit plans, certain commissions and routine expense reimbursements. TARP participants are also generally permitted to pay or accrue bonuses if an employee had a legally binding right to the bonus payment under a written employment contract and certain compensation plans in effect as of February 11, 2009.
Golden Parachute Prohibition
A TARP participant may not make any golden parachute or other severance payment to a senior executive officer or any of the next five most highly compensated employees. This prohibition specifically includes payments made in connection with a change-in-control event, except payments for services performed or benefits accrued. The IFR eliminates the safe harbor for golden parachute payments equal to three times the executive's base amount of compensation which was previously permitted under the contractual terms of the TARP funding. The acceleration of vesting due to a departure of an employee or change-in-control event is also considered a prohibited payment.
?"Clawback" for Bonuses
TARP participants must create a recovery (clawback) provision for any bonuses paid to its senior executive officers and the next 20 most highly compensated officers where the bonus was based upon materially inaccurate financial statements or other materially inaccurate performance criteria. TARP participants are required to exercise clawback rights unless they can demonstrate that it is unreasonable to do so.
Annual Disclosure of Perquisites in Excess of $25,000
A TARP participant must disclose annually to the Treasury and its primary regulator any perquisite provided to any employee subject to the bonus limitations where the total value of such perquisite exceeds $25,000. Such disclosure must describe the perquisite, the reasons for providing such perquisite and how such perquisite maximizes shareholder value.
Approval of Excessive or Luxury Expenditures
TARP participants must adopt a written policy on luxury or excessive expenditures. This policy must be posted on the participant's website and provided to the Treasury and its primary regulator before September 14, 2009. Any violations of the policy requires prompt internal reporting.
Disclosure of Engagement of Compensation Consultant
A TARP participant must disclose annually to the Treasury and its primary regulator whether a compensation consultant has been engaged by the financial institution, its Board of Directors or its compensation committee, and describe any services that such consultant has provided in the past three years.
Prohibition Against Tax Gross-Ups
The IFR prohibits payments of any tax gross-ups with respect to any compensation, other than payments under certain international tax equalization agreements, to the senior executive officer and the next 20 most highly compensated employees. This prohibition includes tax reimbursements for change-in-control payments and perquisites.
Reduced Executive Compensation Tax Deduction Limit
TARP participants continue to be required to limit their deductions of executive compensation for each of their five senior executive officers to $500,000 pursuant to Internal Revenue Code Section 162(m)(5).
Risk Analysis of All Employee Compensation
The IFR extends the required risk analysis of compensation to all employees of TARP participants, whereas previously the risk assessment covered only senior executive officers. The risk analysis was modified to avoid creating incentives for unnecessary risk-taking and to discourage the manipulation of earnings.
Compensation Committee Certifications
Before the later of 90 days after receiving TARP funds or September 14, 2009, most TARP participants must establish a compensation committee composed of independent members of the Board of Directors. The compensation committee must meet at least every six months with senior risk officers to evaluate and review senior executive officer and employee compensation plans. The compensation committee must certify annually that it has completed its review of the compensation plans and provide a narrative explanation of its analysis that a compensation plan does not encourage unnecessary risk-taking or manipulate earnings. These certifications must be provided within 120 days after the end of each fiscal year to a TARP participant's primary regulator or, for public companies, in its annual proxy statement filed with the Securities and Exchange Commission ("SEC").
CEO and CFO Certifications
The chief executive officer and chief financial officer of a TARP participant must certify compliance with the requirements of the IFR within 90 days after the end of each fiscal year. These certifications are provided to the Treasury and a participant's primary regulator or, for public companies, filed with the SEC on its Form 10-K. A knowing and willful false or fraudulent statement made in connection with the certification is punishable by fine, imprisonment or both. TARP participants must preserve for at least six years the appropriate documentation and records to substantiate each certification, with the first two years of records kept in an easily accessible place.
Say-on-Pay Shareholder Vote
TARP participants must permit a separate, non-binding shareholder vote to approve the compensation of executives pursuant to the rules and regulations of the SEC.
Office of Special Master
A new Office of Special Master for TARP Executive Compensation was created primarily to approve or reject any compensation plans of entities receiving exceptional assistance. However, all TARP participants may apply to the Special Master for an advisory opinion with respect to compensation payments and structures. Kenneth Feinberg was appointed as the Special Master.
Although the IFR became generally effective on June 15, 2009, the Treasury is requesting comments by August 14, 2009 which it will consider in developing final regulations. The IFR provides that bonus payment limits will not apply to bonuses, retention awards and incentive compensation paid or accrued prior to June 15, 2009 and enhanced golden parachute prohibitions will not apply to amounts paid prior to June 15, 2009.
Please note that many provisions of the IFR apply differently depending on whether a TARP participant is a public or private financial institution, the level of TARP funds received and the compensation paid to a participant's employees.