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Key Dates in 2012:

• January 17, 2012: The CFTC's interim final rule regarding position limits for futures and swaps required under Title VII for the Dodd-Frank Act is effective.
• April 16, 2012: Extension for rule that exempted the central counterparties from the requirement to register as clearing agencies under Section 17A of the Exchange Act 6 solely to perform the functions of a clearing agency for certain credit default swap (‘‘CDS’’) transactions. Extension expires at the earlier of a new rule or April 16, 2012.
• July 16, 2012: Temporary relief from certain provisions of the Commodity Exchange Act (CEA) for some swaps. Expires the earlier of July 16 or the effective date of the final rules amending the CEA.
• July 21, 2012: Prohibition of federal assistance to swaps Entities; Removal of statutory references to and use of credit ratings; National bank lending limits will be revised to include any credit exposure to a person arising from a derivative transaction, a repurchase agreement, a reverse repurchase agreement, or a securities borrowing or lending transaction as extensions of credit subject to the lending limits.

The CFTC voted for the proposed rules 3-2. The two dissenting Commissioners, Jill Sommers and Scott O’Malia, had harsh words for the Commission, calling the proposed rules “unworkable.” 
"Unfortunately, we are proposing rules that are virtually identical to the other agencies' proposed rules well after they have been widely criticized and after many have called for those agencies to start over, including Paul Volcker," Sommers said. "It seems as if we have put ourselves on a separate track, which I fear will needlessly complicate an already convoluted and likely unworkable set of rules," she added.

O’Malia echoed her concerns saying, "I do not support the commission's version of the Volcker rule. It is an unworkable solution that is entirely too complex and provides the commission with little or no means to enforce or to deter violations of this rule. Obviously we have to comply with the statute and do so in a responsible way, [but] my concern with this fatally flawed rule [is that] this rule does not do that."

One of the more controversial proposals included in Dodd-Frank, the Volcker Rule was first proposed in January 2010, when the financial regulatory overhaul was in its infancy. Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) introduced the original Volcker Rule as an amendment to the Senate version of Dodd-Frank, but Sen. Richard Shelby (R-AL), blocked the amendment from ever coming to a vote.

Although the language eventually made its way into the bill, Sen. Scott Brown (R-MA) used his position as the swing vote to insist that the proprietary trading ban be changed to allow banks to invest in hedge and private equity funds. The final, watered-down rule allows banks to invest up to three percent of their Tier 1 capital in private equity and hedge funds but bars banks from owning more than a three percent stake in any private equity group or hedge funds. Since then, there have been several legislative attempts to scale back or delay the rules, but none has been successful. 

The proposed rules are open for public comment for the next 60 days. While the rules have yet to be finalized, many large banks are actively divesting their proprietary trading desks to prepare for the July 21, 2012 implementation date. 

While many Democrats are claiming victory, all signs suggest that the battle is just beginning for Cordray. Many Republicans are already threatening court challenges, and Rep. Patrick McHenry, Chairman of the House Financial Services Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs wrote to Cordray today, requesting that he testify before the Subcommittee on January 24th.

This will not be the first time a presidential recess appointment has ended up in a courtroom. In 1921, the attorney general, at the request of the president, held that recess appointments could be made during an almost month-long recess, but noted that recess appointments during short recesses are unconstitutional finding that “ the term ‘recess’ must be given a ‘practical construction.’”

According to a report released by the Congressional Research Service last month, no recess appointments have been made in recent history during recesses lasting fewer than 10 days. During the Clinton Administration, the Department of Justice argued that any recess longer than three days meets the Constitutional standard for recess appointments. The DOJ did not claim that a recess appointment made in a recess of three days or less is unconstitutional, rather, only that it would present a “closer question.” It remains to be seen who will bring the suit, though there are undoubtedly a number of third parties that have a vested interest in the issues.

Senate Democrats were vocal opponents of recess appointments during the George W. Bush Administration. When President Bush recess appointed John Bolton as Ambassador to the United Nations, then-Senator Barack Obama (D-IL) said that a recess appointment was “the wrong thing to do,” and added that a recess appointee is “damaged goods… somebody who couldn't get through a nomination in the Senate. And I think that that means that we will have less credibility...” Also during the Bush Administration, Senate Majority Leader Harry Reid called recess appointments “mischievous” and “an end run around the Senate and the Constitution.” Now that the tables have turned, Senate Republicans have several of their Democrat colleagues on the record making similar comments. 

The Senate failed to confirm Cordray on December 8, 2011, when it voted 53-45 to end the filibuster and proceed with the confirmation, falling short of the 60 votes needed to proceed. All but two Republicans voted to sustain the filibuster. Sen. Scott Brown (R-MA) is the only Republican Senator to publicly support Cordray, likely because he finds himself in a tight Senate race against CFPB architect Elizabeth Warren. Sen. Olympia Snowe (R-ME), who was one of only three Republicans to vote for Dodd-Frank, voted “present.”

Forty-Five Republican Senators signed onto a letter vowing to oppose any nominee for director until the CFPB is restructured. Specific reforms suggested in the letter were: (1) the establishment of a board of directors; (2) the requirement that the CFPB submit a budget request and go through the appropriations process just like the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission; and (3) the oversight of CFPB regulations by Federal bank regulators to ensure that such regulations do not needlessly cause bank failures.

Members on both sides of the aisle issued strongly-worded statements on the president’s move:

Senate Minority Leader Mitch McConnell (R-KY), who has led the Republican effort to block the confirmation, blasted President Obama’s decision, accusing him of “arrogantly circumventing the American people with an unprecedented ‘recess appointment’ of an unaccountable czar.” McConnell described the historical precedent of limiting recess appointments to recesses lasting ten days or more and said “breaking from this precedent lands this appointee in uncertain legal territory, threatens the confirmation process and fundamentally endangers the Congress’s role in providing a check on the excesses of the executive branch.”

Senate Majority Leader Harry Reid (D-NV) said, “I support President Obama’s decision to make sure that in these tough economic times, middle-class families in Nevada and across the country will have the advocate they deserve to fight on their behalf against the reckless practices that denied so many their economic security… I hope that moving forward, Republicans will work with Democrats to address the concerns of middle-class Americans, instead of turning every issue into a partisan fight.”

House Speaker John Boehner (R-OH) issued a statement calling the move “an extraordinary and entirely unprecedented power grab by President Obama that defies centuries of practice and the legal advice of his own Justice Department," Boehner said. “This action goes beyond the President’s authority, and I expect the courts will find the appointment to be illegitimate.”

Senate Banking Committee Chairman Tim Johnson (D-SD) said, “With Richard Cordray leading the Consumer Financial Protection Bureau, Americans will finally get the consumer protections they deserve. Mr. Cordray is eminently qualified for the job, as even my Senate Republican colleagues have acknowledged…It’s disappointing that Senate Republicans denied him an up-or-down vote, especially when it’s clear he had the support of a majority of the Senate.”

House Financial Services Committee Chairman Spencer Bachus (R-AL) said, “The President’s unprecedented decision to attempt to circumvent the Constitution and ignore the law he himself signed is the clearest indication yet that he has abandoned any effort to work in a bipartisan manner to strengthen accountability and oversight of this new government bureaucracy… In doing so, President Obama has delegitimized the CFPB and has opened the agency up to legitimate legal challenges that will cripple it for years. The greatest threat to our economy right now is uncertainty, and the President just guaranteed there will be even more uncertainty.”

The primary threshold for filing Form PF is any investment adviser that (i) is registered or required to register with the SEC, (ii) advises one or more private funds (see seven types of private funds below) and (iii) had at least $150 million in regulatory assets under management attributable to private funds at the end of its most recently completed fiscal year. For purposes of determining assets under management, the key phrase is assets "attributable to private funds." This clause is broad as it encompasses any issuer that would be an investment company but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Collateralized debt obligation ("CDO") and collateralized loan obligation ("CLO") issuers typically rely on one of these exemptions from registration under the Investment Company Act; therefore, registered investment advisers who manage investments for CDO or CLO issuers would need to include the assets of those issuers in determining whether they meet the basic filing threshold.

An adviser meeting that initial threshold will be required to complete section 1 of Form PF, including certain basic information regarding the private funds (see seven types below) advised and information about the assets under management, fund performance and use of leverage.

Large private fund advisers will be subject to more extensive quarterly reporting requirements. These reporting requirements will apply to, among others, advisers who have at least $1.5 billion in assets under management attributable to hedge funds. Unlike the initial threshold, with reference to assets attributable to "private funds," the higher reporting obligation will attach based on assets attributable to "hedge funds." The final rules identify seven types of private funds: (i) hedge funds, (ii) liquidity funds, (iii) private equity funds, (iv) real estate funds, (v) securitized asset funds, (vi) venture capital funds and (vii) other private funds. The definition of hedge funds expressly excludes securitized asset funds. The definition of private equity funds includes private funds that are not hedge funds, liquidity funds, real estate funds, securitized asset funds or venture capital funds.

As defined in the final rule, securitized asset funds encompass any private fund "whose primary purpose is to issue asset backed securities and whose investors are primarily debt-holders." CLOs and CDOs would appear to fit within that definition. The adopting release does not provide any greater details of how an adviser should determine whether a private fund is a securitized asset fund. The determination may be significant as the determination that a CDO or CLO is a securitized asset fund (and thereby excluding it as a hedge fund or private equity fund) will exclude the related assets in determining whether the adviser is subject to the increased quarterly reporting obligations.<

In the proposed rule, securitized asset funds would have been defined as any private fund that is not a hedge fund and that issues asset backed securities and whose investors are primarily debt-holders.³ One commenter requested that the SEC clarify that hedge funds do not include securitized asset funds.⁴ In adopting the final rules, the SEC and the CFTC have expressly excluded securitized asset funds from the definition of hedge funds and private equity funds.

The same commenter suggested that there was a risk that CDOs could be classified as private equity funds under the proposed rule, even though the definition in the proposed rules expressly excluded securitized asset funds. While the SEC declined to adopt the proposed revisions offered by this commenter, it left open the issue of whether CDOs might properly be classified as private equity funds on the basis that CDOs often invest in asset backed securities. As CDOs and CLOs are primarily used to issue asset backed securities (similar to other types of securitizations) and whose investors are primarily debt-holders, the better reading is that CDOs and CLOs are securitized asset funds and should be excluded from hedge funds and private equity funds when determining whether the registered investment adviser is subject to the higher reporting standards of a large private fund adviser.

The deadlines for initial filings of Form PF will vary among advisers. The first annual filings for smaller advisers will be within 120 days of the fiscal years ending on or after December 15, 2012 (or April 30, 2013 for advisers with a December 31st yearend). Larger advisers subject to quarterly reporting may need to file initial reports as early as August 29, 2012. Later filing deadlines may apply to newly registered advisers. Advisers should confirm the applicable deadlines based on their particular circumstances.

1. See Section 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

2. Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Act Release No. IA-3308 (Oct. 31, 2011).

3. See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Release No. IA-3145 (Jan. 26, 2011), 76 FR 8,068 (Feb. 11, 2011).

4. Comment letter of TCW Group, Inc. (Apr. 12, 2011), available at http://www.sec.gov/comments/s7-05-11/s70511.shtml.

In February, House Republicans passed an FY11 spending bill that would slash a whopping $56.8 million from the CFTC's current funding levels of $168.8 million; and $25 million from the SEC’s $1.1 billion levels. Aiming to significantly cut federal expenditures and slow down the implementation of Dodd-Frank, GOP lawmakers view these cuts as the best of both worlds.

During Congressional testimony in February, CFTC Chairman Gary Gensler and SEC Chairwoman Mary Shapiro warned that even current funding—FY10 levels due to the passage of CRs—is already forcing their agencies to limit hiring, travel and technology improvements. Both Gensler and Shapiro then testified that the GOP-proposed cuts may even compromise the function of day-to-day operations, let alone the implementation of Dodd-Frank.

As a likely attempt at preempting the FY11 budget discussions, SEC Chairwoman Mary Shapiro is slated to testify in front of the Senate Banking, Housing and Urban Affairs Committee on Thursday to discuss the FY12 budget. President Obama’s FY12 budget proposal calls for the CFTC budget to nearly double from $168 million to $308 million; and the SEC budget to increase from $1.1 billion to $1.4 billion.

The White House and Congressional Democrats are bound to fight proposed cuts to the financial regulators’ coffers tooth and nail. But even if they succeed, Republicans in both the House and Senate will be eager to leverage the power of the purse to influence the regulators’ rules, enforcement actions, and Dodd-Frank implementation efforts moving forward.

Prior to the passage of Dodd-Frank, the SEC was empowered to reward whistleblowers that helped the government prosecute successful enforcement actions. However, the SEC was not legally obligated to do so. With little incentive to bypass corporate compliance programs, whistleblowers availed themselves of such programs in hopes of motivating the company to address possible wrongdoing. But now, prospective whistleblowers are motivated to do just the opposite, to take advantage of the potential payday that lies ahead.

Those who fear that whistleblowers will now proliferate believe that the SEC should require whistleblowers, in order to be eligible for an award, to use available internal reporting procedures before going to the government. The SEC is not likely to warm to this position, because of the concern that such a requirement will have a chilling effect on the number of legitimate tips. Possible retaliation by employers is very much at the heart of the SEC’s concerns about such an approach.

In response to corporate concerns about Dodd-Frank rendering compliance programs ineffective, the SEC has proposed two rules:

First, the SEC has proposed a 90-day reporting window, which allows an employee to report complaints to internal compliance personnel and still be eligible for the reward if the company, in the whistleblower’s estimation, fails to properly address the complaint. This 90-day grace period also may serve to limit the number of allegations ultimately brought to the SEC, by allowing a company’s internal compliance program time to investigate and possibly ferret out meritless claims.

The challenge, however, is that this grace period may not be enough to temper those who aspire to a big payday and, thus, are less motivated by a desire to see wrongdoing addressed internally. Moreover, 90 days may not be enough time for a company to conduct a thorough investigation, particularly in instances where the allegations implicate a statute such as the Foreign Corrupt Practices Act. Thus, the grace-period proposal ultimately may do little to stem the undermining of corporate compliance programs.

Second, the SEC proposes to take into account, when determining the award amount, whether a whistleblower reported the violation through internal compliance mechanisms before approaching the government. The SEC will consider higher percentage awards for whistleblowers who first report violations through these programs. In effect, then, the SEC seeks to counter any disincentive to internal reporting arising from the prospect of a significant award. (Under this proposed rule, however, whistleblowers who fail to avail themselves of these programs before going to the government will not be penalized, provided that they have a “fear of retaliation or other legitimate reasons.”)

Here, too, skeptics abound. Some commentators on the proposed rules take the position that whistleblowers may opt to “leave money on the table” by bypassing their internal compliance program rather than use those procedures, for fear that the employer might otherwise address the problem altogether or in a manner that minimizes the whistleblower’s potential award. This view hews closely to the position that the SEC mandate use of internal compliance programs in order for whistleblowers to be eligible for an award. Because that position might discourage potential whistleblowers, however, a middle road may be necessary.

One possible solution that has been put forth by some commenting on the proposed rules is to require whistleblowers to report allegations of wrongdoing simultaneously to the government and to the company, assuming the company has implemented and advertised an internal compliance program. Simultaneous reporting would allow the company to investigate the matter, while the SEC defers action until it hears back from the company. A whistleblower would be permitted to bypass reporting to the employer in instances where a legitimate reason, as determined by the SEC, exists.

This middle-of-the-road deferral approach acknowledges the government’s interest in encouraging valid tips and the interests of well-intended companies in being afforded an opportunity to conduct internal investigations that might, where appropriate, stave off unnecessary expenditure of corporate and public resources. Furthermore, because of the simultaneous-reporting requirement, whistleblowers can take comfort in knowing that the government, and not just the company, is aware of their allegations of wrongdoing. Presumably, an employer will think twice about retaliating against a whistleblower, whose identity—or, at a minimum, their legal counsel’s identity—is known to the government. This might very well prove to be a workable, win-win approach.

Absent such an approach, companies can best protect themselves by identifying any potential issues as early as possible through internal audits. Once identified, companies must then respond quickly and definitively to address the problem. Anything short of early and prompt response places the company at risk of government action initiated by a heavily-incentivized whistleblower.

Say-on-Pay and Frequency of Say-on-Pay Votes

Approval of Say-on-Pay and Frequency of Say-on-Pay Resolutions

Under new Rule 14a-21(a), a public company is required, not less frequently than once every three calendar years, to provide for a separate shareholder advisory vote to approve the compensation of its named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis ("CD&A"), compensation tables and narrative discussion3.

The final SEC rule does not require companies to use any specific language or form of resolution to be voted on by shareholders. The resolution should indicate that the shareholder advisory vote is to approve the compensation of the company's named executive officers as disclosed pursuant to Item 402 of Regulation S-K. A vote to approve a proposal on a different subject matter, such as a vote to approve only compensation policies and procedures, would not satisfy this requirement. The instruction to Rule 14a-21(a) provides the following non-exclusive example of a resolution that would satisfy Rule 14a-21(a):

RESOLVED, that the compensation paid to the company's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.4
The compensation of directors is not subject to the shareholder advisory vote. In addition, if a company includes disclosure about its compensation policies and practices as they relate to risk management and risk-taking incentives, these policies and practices will not be subject to the shareholder advisory vote. However, to the extent that risk considerations are a material aspect of the public company's compensation policies or decisions for its named executive officers, then the public company is required to discuss these policies in its CD&A. If this is the case, such disclosure would be considered by shareholders when voting on executive compensation. Finally, in addition to the required say-on-pay and frequency of say-on-pay votes, companies may solicit shareholder votes on a range of compensation matters to obtain more specific feedback on the company's compensation policies and programs.

In addition, under new Rule 14a-21(b), public companies are required, not less frequently than once every six calendar years, to include a separate resolution, subject to shareholder advisory vote, to determine whether the shareholder vote on the compensation of the company's executives should occur every 1, 2, or 3 years. The separate shareholder vote on executive compensation and frequency of say-on-pay votes are required only when proxies are solicited for an annual or other meeting of security holders at which directors will be elected and for which the SEC rules require the disclosure of executive compensation pursuant to Item 402 of Regulation S-K.

Public companies are required to disclose in a proxy statement for an annual meeting (or other meeting of shareholders at which directors will be elected and for which the SEC rules require executive compensation disclosure) that they are providing a separate shareholder say-on-pay and the frequency of say-on-pay votes pursuant to the Dodd-Frank Act and to briefly explain the general effect of the vote, such as whether the vote is non-binding. Companies should also provide disclosure of the current frequency of say-on-pay votes and when the next scheduled say-on-pay vote will occur in their proxy materials. Public companies are not expected to disclose either the current frequency or when the next scheduled say-on-pay vote will occur in proxy materials for the meeting where a company initially conducts the say-on-pay and frequency votes.

The SEC rules also provide requirements as to the form of proxy that public companies are required to include with their proxy materials with respect to the frequency vote. The amended rules require proxy cards to reflect the choice of 1, 2, or 3 years (or every year, every other year or every three years), or abstain, for the frequency of say-on-pay vote.

Amendments to Compensation Discussion and Analysis Requirements

The SEC amended the CD&A requirements to clarify that one of mandatory principles-based topics to be discussed in the CD&A should be the company's consideration of the most recent say-on-pay vote. Such mandatory topic should focus on whether, and if so, how the public company has considered the results of the most recent say-on-pay vote in determining compensation policies and decisions, and how that consideration has affected the company's executive compensation policies and decisions. Public companies should address their consideration of the results of earlier say-on-pay votes to the extent such consideration is material to the company's compensation policies and decisions discussed.

Smaller reporting companies are subject to scaled disclosure requirements in Item 402 of Regulation S-K and are not required to include a CD&A. Smaller reporting companies are required to provide a narrative description of any material factors necessary to an understanding of the information disclosed in the Summary Compensation Table. If the consideration of prior say-on-pay votes is such a factor for a particular public company, disclosure of this fact would be required in the narrative description accompanying the Summary Compensation Table.

Shareholder Proposals

Rule 14a-8(i)(10) permits a public company to exclude a shareholder's proposal if the company has already substantially implemented the proposal. Under certain conditions, a public company may exclude subsequent shareholder proposals that seek a vote on the same matters as the shareholder advisory votes on say-on-pay and frequency of say-on-pay. The SEC added a note to Rule 14a-8(i)(10) to permit the exclusion of a shareholder proposal that would provide a say-on-pay vote, seeks future say-on-pay votes, or relates to the frequency of say-on-pay votes if, in the most recent shareholder vote on frequency of say-on-pay votes, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast5 on the matter and the company adopted a policy on the frequency of say-on-pay votes that is consistent with the shareholders' choice. For example, if in the first vote under Rule 14a-21(b) a majority of votes were cast for a two-year frequency for future shareholder votes on executive compensation, and the public company adopts a policy to hold the vote every two years, a shareholder proposal seeking a different frequency could be excluded so long as the company seeks votes on executive compensation every two years.

A shareholder proposal that would provide an advisory vote or seek future advisory votes on executive compensation with substantially the same scope as the say-on-pay vote should also be subject to exclusion if the company adopts a policy that is consistent with the majority of votes cast. Like additional frequency votes, the note to Rule 14a-8(i)(10) conditions exclusion on the public company implementing the frequency favored by a majority of shareholders.

Amendment to Form 8-K

Item 5.07 of Form 8-K currently requires a public company to disclose the results of its shareholders' meeting and to indicate the number of votes cast for, against, or withheld, as well as the number of abstentions and broker non-votes as to each matter on which shareholders voted at the meeting. Under the amended Item 5.07, with respect to the vote on the frequency of say-on-pay votes, the company is required to disclose the number of votes cast for each of 1 year, 2 years, and 3 years options, as well as the number of abstentions.

Amended Item 5.07 of Form 8-K also requires each public company to disclose its decision regarding how frequently it will conduct shareholder advisory votes on executive compensation. To comply with this new requirement related to the Board's decision regarding the frequency of the shareholder vote on executive compensation, a public company will have to file an amendment to its prior Form 8-K filing under Item 5.07 that disclosed the results of the shareholder vote on frequency no later than 150 calendar days after the date of the end of the annual or other meeting at which such vote took place, but in no event later than 60 calendar days prior to the deadline for the submission of shareholder proposals under Rule 14a-8 for the coming annual meeting.

Item 5.07 is not among the list of items subject to the safe harbor from liability under the Exchange Act. Companies that fail to file a timely report required by Item 5.07 will lose their eligibility to file Form S-3 registration statements.

Filing a Preliminary Proxy Statement for Say-on-Pay and Frequency Votes is Not Required

The SEC amended its rules to exclude shareholder votes to approve executive compensation and the frequency of shareholder votes on executive compensation, from the preliminary proxy statement filing requirement.

Approval and Disclosure of Golden Parachute Arrangements

Approval of Golden Parachute Arrangements

The SEC adopted new Rule 14a-21(c), pursuant to which a public company is required to include a separate resolution, subject to shareholder advisory vote, in a proxy statement for a meeting at which shareholders are asked to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all assets of the company, to approve any agreements or understandings and compensation disclosed pursuant to Item 402(t) of Regulation S-K (referred to as golden parachute arrangements). Any agreements or understandings between an acquiring company and the named executive officers of the registrant, where the registrant is not the acquiring company, are not required to be subject to the separate shareholder advisory vote.

Generally, the disclosure of golden parachute arrangements under Item 402(t) is not required to be included in annual meeting proxy statements. However, some public companies may choose to include this information because such companies will not be required to include in the merger proxy a separate shareholder vote on the golden parachute compensation if the same golden parachute compensation was included in the executive compensation disclosure that was subject to a prior say-on-pay vote.6

New golden parachute arrangements and any revisions to golden parachute arrangements that were subject to a prior say-on-pay vote require a separate merger proxy shareholder vote.7 However, changes that result only in a reduction in value of the total compensation payable would not require a new shareholder vote. Examples of changes requiring a new vote include: changes in compensation because of a new named executive officer, additional grants of equity compensation in the ordinary course, and increases in salary.

Companies providing for a shareholder vote on new arrangements or revised terms will need to provide two separate tables in merger proxy statements. One table will disclose all golden parachute compensation, including both arrangements and amounts previously disclosed and the new arrangements or revised terms. The second table will disclose only the new arrangements or revised terms subject to the vote, so that shareholders can clearly see what is subject to the shareholder vote. Similarly, in cases where Item 402(t) requires disclosure of arrangements between an acquiring company and the named executive officers of the soliciting target company, companies will need to clarify whether these agreements are included in the shareholder advisory vote by providing a separate table of all agreements and understandings subject to the shareholder advisory vote, if different from the full scope of golden parachute arrangements disclosed under Item 402(t).

Disclosure of Golden Parachute Arrangements

The SEC adopted the new Item 402(t) of Regulation S-K to require disclosure of named executive officers' golden parachute arrangements in both tabular and narrative formats. The required table is included as Exhibit A hereto. In the event uncertainties exist as to the provision of payments and benefits, or the amounts involved, a public company is required to make a reasonable estimate applicable to the payment or benefit and disclose material assumptions underlying such estimate in its disclosure. Item 402(t) does not permit the disclosure of an estimated range of payments.

The tabular disclosure required by Item 402(t) requires quantification with respect to any agreements or understandings, whether written or unwritten, between each named executive officer and the acquiring company or the target company, concerning any type of compensation, whether present, deferred or contingent, that is based on or otherwise relates to an acquisition, merger, consolidation, sale or other disposition of all or substantially all assets.

Item 402(t) also requires companies to describe any material conditions or obligations applicable to the receipt of payment, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality agreements, their duration, and provisions regarding waiver or breach. Public companies are also required to provide a description of the specific circumstances that would trigger payment, whether the payments would be lump sum, or annual, and their duration, and by whom the payments would be provided, and any material factors regarding each agreement. Such material factors would include, provisions regarding modifications of outstanding options to extend the vesting period or the post-termination exercise period, or to lower the exercise price.

Item 402(t) does not require disclosure or quantification of previously vested equity awards because these award amounts are vested without regard to the transaction. Also, the SEC rules do not require tabular disclosure and quantification of compensation from bona fide post-transaction employment agreements to be entered into in connection with the merger or acquisition transaction. However, information regarding such future employment agreements is subject to disclosure pursuant to Item 5 of Schedule 14A to the extent that such agreements constitute a "substantial interest" in the matter to be acted upon.

A public company may choose to include the disclosure in the annual meeting proxy statement to qualify for the exception from the separate merger proxy vote. If the golden parachute disclosure is included in an annual meeting proxy statement, the price per share amount will be calculated based on the closing market price per share of the company's securities on the last business day of the public company's last completed fiscal year. In a proxy statement soliciting shareholder approval of a merger or similar transaction, the tabular quantification of dollar amounts based on the company's stock price will be based on the consideration per share, if such value is a fixed dollar amount, or otherwise on the average closing price per share over the first five business days following the first public announcement of the transaction.

In addition, a company seeking to satisfy the exception from the separate merger proxy shareholder vote by including Item 402(t) disclosure in an annual meeting proxy statement soliciting the say-on-pay vote will be able to satisfy Item 402(j) disclosure requirements8 with respect to a change-in-control of the public company by providing the disclosure required by Item 402(t). The public company must still include in its annual meeting proxy statement disclosure in accordance with Item 402(j) about payments that may be made to the named executive officers upon termination of employment.

EXHIBIT A: Golden Parachute Compensation

1. See SEC Release No. 34-63768, Shareholder Approval of Executive Compensation and Golden Parachute Compensation (Jan. 25, 2011) at http://www.sec.gov/rules/final.shtml and SEC Compliance and Disclosure Interpretations dated February 11, 2011 at http://www.sec.gov/divisions/corpfin/cfguidance.shtml.
2. A smaller reporting company is generally a company that had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter.
3. Smaller reporting companies are not required to provide a CD&A in order to comply with this requirement. Smaller reporting companies may include supplemental disclosure to facilitate an understanding of their compensation arrangements in connection with say-on-pay vote.
4. The SEC has provided guidance that the following plain English version of the resolution is also permissible:   RESOLVED, that the compensation paid to the company's named executive officers, pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the compensation discussion and analysis, the compensation tables and any related material disclosed in the proxy statement, is hereby APPROVED.
5. In light of the nature of the vote—with three substantive choices—it is possible that no single choice will receive a majority of votes and that, as a result, there may be companies that may not be able to exclude subsequent shareholder proposals regarding say-on-pay matters even if they adopt a policy on frequency that is consistent with plurality of votes cast. In addition, for the purposes of this analysis, an abstention would not count as a vote cast. This voting standard applies only to determine whether the exclusion of the proposal is appropriate under Rule 14a-8(i)(10) and not to determine whether a particular voting frequency was adopted pursuant to state law.
6. The exception will be available only to the extent the same golden parachute arrangements previously subject to an annual meeting shareholder vote remain in effect, and the terms of those arrangements have not been modified subsequent to the say-on-pay shareholder vote.
7. If the disclosure pursuant to Item 402(t) has been updated to change only the value of the items in the Golden Parachute Compensation Table to reflect price movements in the company's securities, no new shareholder advisory vote will be required. Any change that would result in an IRC Section 280G tax gross-up becoming payable would be viewed as a change in terms triggering such separate vote, even if such tax gross-up becomes payable only because of an increase in the company's share price.
8. Item 402(j) requires this disclosure of potential payments upon termination of executive's employment or change-in-control of the company.

The same is true in the House where Financial Services Committee Chairman Barney Frank (D-MA) has thrown his weight behind additional powers for a regulatory council, telling reporters this week that systemic risk oversight powers are “going to be shared authority.”

During House and Senate hearings this week, Federal Reserve Chairman Ben Bernanke listened as members on both sides of the aisle sharply criticized the Fed for its inability to prevent an economic collapse and questioned the wisdom of expanding the central bank’s role beyond its core function of setting monetary policy.

This strong momentum shows that the Fed has still not recovered from its perceived shortcomings at regulating bank holding companies in recent years. In a town where success is measured in the accretion of responsibility, staff, and budget, the Fed is, in effect, being denied a "performance bonus".