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Thursday, July 29, 2010

Executive Compensation: SEC Regulations and Congressional Proposals

Michael V. Seitzinger
Legislative Attorney

Concern about shareholder value, corporate governance, and the economic and social impact of escalating pay for corporate executives has led to a controversy regarding the practices of paying these executives. On July 26, 2006, the Securities and Exchange Commission (SEC or Commission) voted to adopt revisions to its rules on disclosure of executive compensation. On December 22, 2006, the SEC announced that it had adopted changes to the July 26 rules. These December 22 changes have become somewhat controversial, with opponents saying that they obfuscate executive compensation and with proponents saying that the changes are necessary to give a truly accurate picture of executive compensation. On December 16, 2009, the SEC adopted rule changes titled "Proxy Disclosure Enhancements." The provisions addressing disclosures of executive compensation require a discussion of overall employee compensation policies and practices if risks arise that are reasonably likely to have a material adverse effect upon the company.

Additionally, proposals have been made in the current and recent Congresses to limit executive compensation and the amount of deferred compensation for tax purposes. In the 110th Congress, two laws containing executive compensation provisions were enacted: P.L. 110-289, the Housing and Economic Recovery Act of 2008, and P.L. 110-343, the Emergency Economic Stabilization Act of 2008. Bills have also been introduced in the 111th Congress concerning limiting executive compensation. In the 111th Congress, Title VII of P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), sets forth restrictions on the compensation of executives of companies during the period in which any obligation arising from financial assistance provided under the Troubled Assets Relief Program (TARP) remains outstanding. In July 2009 the House Committee on Financial Services circulated a discussion draft of H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act of 2009. On July 31, 2009, the House passed an amended version of H.R. 3269, which is included as Title II of H.R. 4173, passed by the House on December 11, 2009. The Senate considered a proposal of a financial regulatory reform bill, of which Subtitle E of Title IX concerned executive compensation.

Both the House and the Senate passed bills with provisions applying to executive compensation. The House- and Senate-passed executive compensation provisions differed, in some cases significantly. The House and Senate conferees on Wall Street reform passed an executive compensation subtitle. On June 30, 2010, the House agreed to the conference report for H.R. 4173, now referred to as the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Senate agreed to the conference report on July 15, 2010. The President signed the bill into law as P.L. 111-203 on July 21, 2010.

On March 3, 2009, the United States Supreme Court granted certiorari in Jones v. Harris Associates, a case which challenges the fees charged by a mutual fund's investment advisers as excessive and a breach of fiduciary duty. Interest in this case from the executive compensation angle centers on the possibility that the decision may provide a hint as to what the Court could consider excessive executive compensation if it has before it a case concerning, for example, government actions limiting executive compensation. On November 2, 2009, the Court heard oral argument in this case. On March 30, 2010, the Court held that, in order to be successful in holding that an adviser misled the fund's directors and thereby violated his fiduciary duty, investors must show that an investment adviser has charged a "fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining."

Date of Report: July 21, 2010
Number of Pages: 12
Order Number: RS22583
Price: $29.95

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