Executive Compensation Regulation - Comment Letters

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Gavel.png FINAL RULE: This page refers to the proposed rulemaking on executive compensation. The SEC final rule on shareholder approval of executive compensation and golden parachute compensation was issued at its January 25, 2011 open meeting.
Dodd-Frank Timeline, Incentive-Based Compensation Arrangements, SEC
Proposal Date Comment Deadline Final Rule Issue
April 14, 2011 May 31, 2011 TBA
Dodd-Frank Timeline, Shareholder Approval of Executive Compensation and Golden Parachute Compensation, SEC
Approval Date Effective Date Compliance Date
February 2, 2011 April 4, 2011 April 4, 2011
Dodd-Frank Timeline, Listing Standards for Compensation Committees, SEC
Final Rule Issue Effective Date Compliance Date, Rule Changes Compliance Date, Disclosure
June 27, 2012 July 27, 2012 September 25, 2012 January 1, 2013

On September 18, 2013, the SEC proposed a rule that would require companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The rule is a mandate from section 953 of the Dodd-Frank Act. The deadline for public comment was December 2, 2013.

The commission received over 100,000 letters regarding this rule, most of which were from citizens and investors urging the commission to adopt the rule with no loopholes or exemptions. Several trade groups and corporations wrote requesting exemptions for, among other things, foreign and part-time workers, citing the cost and time burden involved.

Comment letters on the pay ratio disclosure rule can be found HERE.

Contents

Shareholder Approval of Executive Compensation and Golden Parachute Compensation

The following letters include only those sent on behalf of financial institutions. Thousands of responses were sent in by individuals using four different form letters. The letters from individuals can be found HERE.

Time Warner - December 7, 2010

Shareholder Approval of Executive Compensation and Golden Parachute Compensation
December 7, 2010

Media and entertainment company Time Warner Inc. submitted the following comments in its letter:

  • "The proposed Compensation Discussion & Analysis (CD&A) disclosure should not be mandatory;
  • If disclosure is required, companies should have the flexibility to consider either the results of only the most recent vote or the results of votes from prior years;
  • Companies should be allowed to exclude 'say-on-frequency' proposals irrespective of whether the company made a material change to its compensation program; and
  • Companies should not be required to disclose their determination as to the frequency of their shareholder advisory votes on executive compensation before the filing of their next proxy statement for a meeting at which directors will be elected."
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Pfizer - November 18, 2010

Shareholder Approval of Executive Compensation and Golden Parachute Compensation
November 18, 2010

Pharmaceutical company Pfizer Inc. suggests in its letter that although the company provides general support for the proposed rules related to shareholder approval of executive compensation, that the proposals be modified.

The letters says:

  • "We generally support the Commission's approach to say-on-pay proposals;
  • The Commission should not mandate disclosure of the consideration given to votes on previous say-on-pay proposals;
  • We support the Commission's approach to frequency proposals;
  • We request clarification on company recommendations as to frequency proposals;
  • The Commission should not require 10-Q or 10-K disclosure on the frequency of future say-on-pay proposals;
  • We strongly support the proposed amendment of Rule 14a-8 to exclude say-on-pay and frequency proposals, but the scope of the amendment should be clarified;
  • We support the proposed amendment of Rule 14a-6(a) regarding preliminary filing of proxy materials and the Commission's related transition guidance;
  • The Commission should modify the proposed 'golden parachute' disclosure requirements to conform to the requirements of the Dodd-Frank Act; and
  • We agree that 'golden parachute' disclosures should not be provided for previously vested benefits and should not be included in routine proxy statements."
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Financial Services Roundtable - November 18, 2010

Shareholder Approval of Executive Compensation and Golden Parachute Compensation
November 18, 2010

From the comment letter:

"We do not believe the Commission should include more specific requirements regarding the manner in which issuers present the shareholder vote on (i) executive compensation or (ii) the frequency of shareholder votes on executive compensation. Rather, the Commission should let best practices evolve as they have in other areas of executive compensation disclosure."

The Financial Services Roundtable also believes that state laws rather than federal law should govern which issuer shares are entitled to vote in say-on-pay or say-on-frequency by shareholders.

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Incentive-Based Compensation Arrangements

SIFMA - May 31, 2011

Incentive-Based Compensation Arrangements
May 31, 2011

A summary of the comment letter:

  • "The Proposed Rules' application to controlled groups with more than one covered financial institution should be clarified to ensure that the coverage of the Proposed Rules is appropriately tailored to achieve the purpose of the Dodd-Frank Act and that a lead regulator is appointed for the controlled group to avoid the potential for duplicative reports being filed with multiple regulators and inconsistent and overlapping interpretations of the rules.
  • The prescriptive rule for deferral of compensation of executive officers is not the least burdensome method to achieve the regulatory goals and is not mandated by Section 956.
  • The requirement to report the incentive compensation arrangements for each employee is needlessly burdensome.
  • The definition of executive officer and other concepts in the Proposed Rules should be harmonized with existing regulations issued by many of the Regulators designed to address the same policy issues as the Proposed Rules are designed to address."
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Managed Funds Association - May 31, 2011

Incentive-Based Compensation Arrangements
May 31, 2011

According to the comment letter, MFA believes:

  • "the Proposed Rules' approach of excluding client assets under management in calculation the assets of investment advisers is the appropriate method to implement the statutory exemption;"
  • "the asset test should be based on the net assets of the adviser and not the adviser's gross assets, as an adviser's net assets are a better reflection of the true economic size of the adviser;"
  • "that payments tied to a person's ownership stake in a hedge fund adviser should not be deemed incentive-based compensation under the Proposed Rules;"
  • "the Proposed Rules should not apply to employees of a hedge fund adviser who have substantial ownership directly or indirectly in a fund managed by the adviser;" and
  • "it is important that the $1 billion and $50 billion thresholds be adjusted over time to account for the effects of inflation and the growth of capital markets."

MFA encourages the adoption of a grandfathering provision be applied to compensation that has already been awarded but not paid via an existing employment agreement. It is also suggested that the asset test be required multiple times per calendar year rather than just once. MFA also cautions the SEC regarding overly prescriptive guidelines.

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Center on Executive Compensation, Financial Services Roundtable, et al. - May 25, 2011

Incentive-Based Compensation Arrangements
May 25, 2011

The comment letter is sent on behalf of the following organizations:

  • Center on Executive Compensation
  • The Financial Services Roundtable
  • Investment Adviser Association
  • Investment Company Institute
  • Managed Funds Association
  • Private Equity Growth Capital Council
  • The Real Estate Roundtable
  • United States Chamber of Commerce

The following points are included in the letter:

  • The proposed rules entertain a "one-size-fits-all" approach;
  • The SEC should provide a more detailed cost-benefit analysis to protect qualifying institutions from undue burden;
  • The asset thresholds ($1 billion and $50 billion) should be indexed for inflation in the future;
  • The SEC should clarify its definition of "covered financial institution" and "incentive-based compensation," and also the reporting requirements under Rule §248.205; and
  • More flexibility should be allowed in terms of the timing of annual reports.
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Center on Executive Compensation - May 31, 2011

Incentive-Based Compensation Arrangements
May 31, 2011

An executive summary of the comment letter:

  • "Section 956 should be implemented in a board-centric manner;
  • The authority to determine senior executive compensation should rest with the board;
  • Broad interpretation risks substituting government decisions for the judgment of the board;
  • [The rule should] provide more flexibility by implementing Section 956 through guidelines rather than regulations;
  • Prohibition on inappropriate risks leading to material financial loss should build on existing best practices;
  • Responsibility for risk mitigation should be overseen by the board of directors but implemented by a larger team;
  • Most institutions have a well-defined governance structure in place for assessing risk in incentives;
  • The business judgment of the board is to be respected unless there is evidence of action in bad faith or without due care;
  • Mandatory deferral of compensation for executive officers of larger institutions exceeds statutory mandate;
  • Deferral requirement goes beyond statutory authority;
  • The deferral requirement is ambiguous and creates uncertainty regarding adjustments;
  • [The rule should] limit board responsibility over compensation to senior executives, rather than extending it to all covered employees;
  • Section 956 does not give agencies unlimited authority to prohibit excessive compensation.
  • Boards should have discretion to determine what constitutes excessive compensation;
  • [The] definition of incentive-based compensation requires clarification;
  • Boards should have authority to determine what constitutes excessive compensation;
  • The proposed regulation creates the potential for significant unintended consequences;
  • [The] proposed regulations contain many duplicative provisions; and
  • [The rule should] revisit the appropriate regulating agency."
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Financial Services Roundtable - May 31, 2011

Incentive-Based Compensation Arrangements
May 31, 2011

In the comment letter, The Financial Services Roundtable presents the following concerns:

  • "The Agencies seem to be moving in a direction that financial institution regulators have never gone;
  • These overly prescriptive rules will inevitably lead to unintended consequences;
  • The Agencies must revise the rules to clarify how they intend the rules to apply in the context of consolidated groups; and
  • It is imperative that the final rules be coordinated or made consistent with the 2010 Interagency Guidance on Sound Incentive Compensation Policies adopted by the OCC, Board, FDIC and OTS, effective June 25, 2010, as well as interpretations issued by the Board under the horizontal review of incentive compensation practices at Large Complex Banking Organizations."

The Roundtable includes in its comment letter a study on incentive-based compensation practices. Suggested revisions are also included for the terms "incentive-based compensation," "covered financial institution," "executive officer" and "other covered employees."

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Investment Adviser Association - May 31, 2011

Incentive-Based Compensation Arrangements
May 31, 2011

From the comment letter:

"The IAA supports the Commission's efforts to implement its mandate under section 956 of the Dodd-Frank Act. We urge the Commission, however, to be mindful of the differences between depository institutions and investment managers in adopting rules on incentive-based compensation arrangements."

IAA asks for clarification of the following issues:

  • standards reflecting differences among covered institutions;
  • the calculation of the threshold;
  • advisory subsidiaries of banking holding companies; and
  • the proposal's effective date.
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Investment Company Institute - May 31, 2011

Incentive-Based Compensation Arrangements
May 31, 2011

From the comment letter:

  • "The standards for prohibited conduct are not clear;
  • There is very little, if any, meaningful discussion in the Release about the distinction between 'appropriate' risks and 'inappropriate' risks;
  • An overemphasis on comparators in determining the 'excessiveness' of compensation could quell legitimate competition for talent;
  • Statements in the Release about the Agencies' expectations for risk management and internal control personnel are overly prescriptive;
  • While we strongly support the use of a balance-sheet assets test for determining status as a 'covered financial institution,' the definition could be improved in several respects; [and]
  • Separate standards for 'larger' firms are not warranted at this time."

The Investment Company Institute indicates in the letter that larger covered financial institutions will have more difficulty adhering to the incentive-based compensation standards set forth by the proposed rules, and that this regulation should be adjusted based on this fact.

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Council of Institutional Investors - May 19, 2011

Incentive-Based Compensation Arrangements
May 19, 2011

The comment letter provides the following points in its executive summary:

  • "Compensation committees should cap incentive awards at a reasonable maximum level, since an unlimited potential upside promotes excessive risk-taking."
  • "Pay should incorporate company-wide performance metrics, not just business unit performance criteria. This should deter executives from increasing business unit performance in risky ways that might harm the company as a whole."
  • "Executives should own, after a reasonable period of time, a meaningful position in the company’s common stock, and hold a significant portion of their equity-based compensation for a period beyond their tenure. These measures should help rein in excessive risk-taking by encouraging executives to act in ways that create sustainable shareowner value over the long run. The Council believes a meaningful proportion of executive pay should be in an equity-based form."
  • "Executives should be prohibited from hedging equity-based awards granted as long-term incentive compensation or other stock holdings in the company."
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Better Markets - May 31, 2011

Incentive-Based Compensation Arrangements
May 31, 2011

From the comment letter:

  • "The definition of 'incentive-based compensation' should be expanded to include additional forms of compensation that can serve as incentives to high risk behavior;
  • Annual reports regarding incentive-based compensation should contain additional detail regarding incentive-based compensation arrangements; they should be submitted to the respective Agencies in a single electronic, searchable format; and they should be updated promptly in the event that compensation arrangements undergo material changes;
  • The factors used to determine whether compensation is excessive should include the degree to which the officer's services contributed to the long-term health and stability of the specific financial institution;
  • Reliance upon compensation practices at comparable institutions as a measure of excessive compensation should be severely limited;
  • Only independent board members should be responsible for overseeing the establishment and oversight of incentive-based compensation arrangements;
  • Mandatory deferral of incentive-based executive compensation should apply at all covered financial institutions, not only those with over $50 billion in assets; and
  • The Agencies should prohibit the directors and employees covered by the Proposed Rules from using hedging or other strategies to insulate themselves from potential losses in the value of equity they receive as incentive-based compensation."
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Americans for Financial Reform - May 31, 2011

Incentive-Based Compensation Arrangements
May 31, 2011

In the letter, Americans for Financial Reform recommends that the SEC take the following steps to improve the proposed rule:

  • Strengthen mandatory deferral by requiring a minimum of five years for said deferral, or more than 50 percent of pay deferred, as an alternative to the 50 percent, three-year proposed provision;
  • Require systemically important banks to ban their executives from hedging pay packages as a method of self-protection against long-term risks, as this would prevent the incentive-based compensation rule from achieving its goal of eliminating inappropriate financial risk-taking;
  • "Strengthen institutional reporting requirement;" and
  • "Establish public reporting requirement."
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American Bar Association - June 1, 2011

Incentive-Based Compensation Arrangements
June 1, 2011

In the comment letter, the ABA suggests that:

  • "covered institutions" be given a different compliance timeline or alternate regulation concerning incentive-based compensation, as current rules are unrealistic for institutions that have been previously unregulated;
  • any entity not included in the definition of "investment adviser" should not then be considered a "covered financial institution;"
  • the use of a balance sheet test rather than the proposed asset test would be a more appropriate measure of the size of an investment adviser, making necessary the revision of the definition of "total consolidated assets" under the proposed rule; and
  • "in terms of both risk and compensation,... policies and procedures will have to allow for the mission of the business and the degree to which the covered financial institution's capital is at risk (as opposed to risks that are not only accepted by but are embraced on an agency basis by clients and investors);"
  • institutions will have to resort to other compensation mechanisms to recover losses resulting from the proposed rules;
  • deferral requirements in the proposed rule are already covered by other regulation in the Dodd-Frank Act and are thus unnecessary and duplicative;
  • "the requirement related to board review of compensation arrangements for executive officers at covered financial institutions and deferral in respect of larger covered financial institutions, coupled with the obligation to 'balance' the rewards and risks utilizing methods including 'deferral of payments, risk adjustments of rewards, reduced sensitivity to short-term performance or longer performance periods' is sufficient to meet the policy objectives of Section 956 of the Dodd-Frank Act;" and
  • sufficient regulation regarding private right of action already exists within Dodd-Frank.
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Listing Standards for Compensation Committees

NYSE Euronext - April 29, 2011

Listing Standards for Compensation Committees
April 29, 2011

From the comment letter:

  • "We believe the 90-day deadline in proposed rule 10C-1(a)(4)(i) should be adequate to formulate and submit proposed rules to the Commission. However, we do not believe exchanges can be under an obligation to have rules approved by the Commission within any set timeframe, because approval by the Commission or its staff acting pursuant to delegated authority is not something an exchange can control."
  • "We believe that an exchange should be authorized to provide its listed companies a transition period to come into compliance with the exchange's new rules required by rule 10C-1... Similarly, we believe that an exchange should have the flexibility to permit an issuer listing in conjunction with its initial public offering to phase-in its independent compensation committee under the exchange rules to be adopted pursuant to rule 10C-1."
  • "We believe it would be helpful for the Commission to clarify, in the adopting release or in the rule text, that the general exemptive authority exchanges would have under proposed rule 10C-1(b)(5) is not limited to 'smaller reporting issuers.'"
  • "We do not believe it would be appropriate for the Commission to specify additional factors that exchanges must consider in developing compensation committee independence standards, beyond those set forth in Section 10C."
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Center on Executive Compensation - May 19, 2011

Listing Standards for Compensation Committees
May 19, 2011

A summary of the comment letter:

  • "A flexible approach to independence is preferable;
  • Large shareholders may serve on compensation committees;
  • Look-back period for compensation committee members [is] unnecessary;
  • Disclosure of selection process for outside advisors is unnecessary;"
  • Survey and broad-based plan exemptions should be continued; and
  • The proposed regulations "confuse the roles of compensation and governance committees."
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Investment Company Institute - April 28, 2011

Listing Standards for Compensation Committees
April 28, 2011

In the letter, the Investment Company Institute recognizes the need to apply appropriate measures to operating companies' compensation committees, but does not believe that need exists with regard to investment companies "because they do not have compensated executives and, accordingly, do not have compensation committees."

Further:

  • "We strongly recommend that the Commission exempt all registered investment companies from Rule 10C-1 in view of the fundamental differences between investment companies and other listed companies and the existence of regulatory requirements for investment companies that satisfy the policy goals underlying the proposed rule."
  • "Consistent with current [Exchange Act] regulations, under the proposal, registered investment companies would not be required to provide disclosure regarding compensation advisers. We support the proposed approach and urge the Commission to incorporate it in any final rules."
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CFA Institute - May 18, 2011

Listing Standards for Compensation Committees
May 18, 2011

The CFA Institute states in its letter that it is unnecessary for the SEC to set rules regarding what types of committees, i.e. compensation committees, a company's board should oversee. The board may already have a different committee that handles the responsibilities of a compensation committee, and in such a case, the SEC should set independence regulation for the director(s) of the already established committee(s).

The letter also suggests that having singular broad definitions for the terms "director independence" and "look-back" is excessive due to the fact that exchanges already provide similar, though separate, definitions for these terms.

It is also recommended that compensation advisers be independent of a company and its management.

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Better Markets - April 29, 2011

Listing Standards for Compensation Committees
April 29, 2011

From the comment letter:

  • "The proposed rules should apply to any board members who are responsible for compensation decisions, whether or not they comprise a formal 'compensation committee;'
  • The proposed rules should be more specific regarding the factors that exchanges must consider when defining independence;
  • The proposed rules should prohibit compensation committees from retaining non-independent legal counsel;
  • The proposed rules should enumerate additional factors bearing on the independence of consultants that compensation committees must consider;
  • The opportunity to cure a breach of the independence standards should be more limited;
  • The proposed rules should impose additional disclosure requirements to mitigate the potential impact of the exemptions; and
  • The proposed rules should also broaden the disclosure requirements with respec5t to any conflicts arising from work performed by consultants."

Better Markets Inc. states that the adoption of the above-listed recommendations would ensure the true independence of compensation committees and their consultants, as intended by Congress and by Dodd-Frank.

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References

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