SEC Adopts Final Rules for Say on Pay

Funds & Advisers

On January 25th, the SEC adopted final rules concerning shareholder approval of executive compensation (say-on-pay) and golden parachute compensation. The rules implement section 951 of the Dodd-Frank Act, and require companies subject to federal proxy rules (including registered investment companies) to hold three types of advisory shareholder votes. The rules are designed to provide shareholders with a greater say on compensation matters at public companies.

  • Vote on executive compensation (say-on-pay)
    The rules specify that the say-on-pay vote must occur at least once every three calendar years and be disclosed in a company’s annual meeting proxy statement. In addition, companies must include in their Compensation Discussion and Analysis whether and how the company compensation policies consider or account for the results of the say-on-pay vote. The vote must be taken at the first annual shareholder meeting taking place on or after January 21, 2011.

  • Vote on the frequency of the say-on-pay vote
    Shareholders are able to vote on how often they want to vote on executive compensation. Although this vote must take place at least once every three years, shareholders may voice their desired frequency of the say-on-pay vote: every year, every other year, or once every three years. However, companies with outstanding TARP funds must hold an annual say-on-pay vote until the funds are repaid.

    Like the say-on-pay vote, the frequency vote is not a one-time occurrence. It is required at least once every six years, and a company must disclose on its Form 8-K how often it will conduct a say-on-pay vote. Again, the vote must be taken at the first annual shareholder meeting taking place on or after January 21, 2011.

  • Vote approving "golden parachute" compensation
    In addition to the say-on-pay vote, shareholders must be given an advisory vote on "golden parachute" packages, or compensation tied to the approval of a merger, acquisition or other disposition of company assets. Compensation packages tied to such transactions must be disclosed for the individuals soliciting the shareholder approval. In general, these individuals include each named officer of the acquiring company or the target company. The disclosures are required on the proxy statement and must include the total amount of compensation and the conditions that trigger the golden parachute. In addition, the disclosures must be presented in a narrative and tabular format.

    The golden parachute vote applies regardless of the nature of the transaction, including going-private and third-party tender offers. Compliance is required in all proxy statements initially filed on or after April 25, 2011.

All votes are truly advisory and not binding on board decision-making. Furthermore, the voting requirements are primarily intended for operating companies and have no practical impact on funds as issuers of securities. However, the say-on-pay votes are expected to impact the relationship between boards of directors and shareholders, particularly in behind-the-scenes discussions between directors and institutional shareholders. Also, a company that moves forward with compensation packages not approved by the say-on-pay vote may find itself under increased public scrutiny.

In a related move, the SEC proposed rules under which institutional investment managers must report how they voted securities with respect to the say on pay, say on frequency, and golden parachute proxy votes. Those votes, known as Section 14A votes, must be reported on Form N-PX. We will monitor these proposed rules and provide updates as appropriate.








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