In 2011, Ryan Hemphill wrote a comprehensive analysis of the then-recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The following is Ryan Hemphill’s analysis of three distinct sections of the Act. The specific sections addressed are (1) Section 953’s Executive Compensation provisions, (2) Section 342’s Office(s) of Minority and Women Inclusion and (3) Section 619(d)(4)’s de minimus exception to the “Volcker Rule”. Each section will be analyzed by addressing (a) the plain meaning of the legislation, (b) the legislative intent and history relative to that section and, finally, (c) the public policies implications intertwined with the pertinent section. Please note that this analysis was written prior to the passage of any of the relevant laws enacted as a result of the Dodd-Frank legislation, so any subsequent changes in the promulgated rules/laws since 2011 will not be reflected in the analysis.
Topic I: Sec. 953. Executive Compensation Disclosures
Although the issue of Executive Compensation (“EC”) has gained increasing public attention and scrutiny in the past decade, the Executive Compensation provision(s) within the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank,” “the Act”) is more liberally constructed than many other portions of the Act. Instead of strict caps on executive compensation amounts, these provisions focus on ensuring clear EC disclosure of to shareholders.
Plain Meaning: Section 953
Section 953(a) amends the Proxies section of the Securities Exchange Act of 1934 regarding shareholder approval of EC. As each shareholder is entitled to vote in accordance with their share ownership, the proxy statements are intended to serve as the basis for which a shareholder casts their informed vote. The primary function of section 953(a) is to require the Securities Exchange Commission (“SEC”) to promulgate new rules which ensure that shareholders of any public company subject to the Securities Exchange Act of 1934 will receive clearer disclosure of the issuer’s EC packages than the previous EC disclosures already required under section 229.402 of title 17, Code of Federal Regulations (or any successor thereto). Id. Although this information is already available to shareholders, section 953(a) seeks to provide this information more concisely to ensure that shareholders are aware of EC amounts when preparing exercise their shareholder voting rights.
Public companies, which this section controls, are those with exchange-traded securities and are required to register under both the Securities Act of 1933 (“the 33 Act”) and the Securities Exchange Act of 1934 (“the 34 Act”). A non-public company may become a public company by choice (via voluntary filings with the SEC) or by force if it exceeds the SEC’s maximum size or shareholder threshold set forth in section 12(g) of the 1934 Act.
Only a company’s “named executive officers” are subject to this provision and no disclosure is required for an executive whose “total compensation” does not exceed $100,000. Id. While it may be difficult to imagine a scenario where a public company PEO/CEO has total annual compensation under this $100,000 threshold – especially when median CEO compensation topped out at $9.6 million last year (a 12% increase from 2009) – a careful read of the calculations referenced in 953(a) yields some rather strange, cryptic deductions for post-retirement and benefit compensation packages when calculating “total compensation.” Id.
Section 953(a)’s unique “total compensation” calculation differs from that used in 953(b). Specifically, subsection (a)’s calculation does not factor in any executive non-equity incentive plans or retirement/post-employment benefit packages. Non-equity incentive plans are performance-based cash awards that differ from bonuses because their thresholds are, supposedly, pre-determined (and therefore, not as subjective as bonus awards). This also provides the company with greater tax-deductibility than with a bonus, because bonuses are construed as “gifts” and therefore have little tax-deductibility value to the company. This method of construction allows for easy manipulation of the existing reporting requirements required for public companies, and the Dodd-Frank Act does not address this loophole in any capacity whatsoever. Such manipulation of this “total compensation” calculation occurred with disgraced former Fannie Mae CEO Franklin Delano Raines’ compensation disclosures between 2000 and 2004. Raines was able to accomplish this magical feat by manipulating the SEC’s curious omission of post-retirement, long-term incentive plans (LTIPs) and the requirement that executives only disclose the number of shares received as stock options, not the value of those shares as an additional figure in the total compensation calculation. Although the SEC acknowledged this as a concern in 2006, it is the same calculation used in section 953(a).
Section 953(a)(i) specifically requires the clear disclosure of both the compensation paid to the aforementioned named executive officers and the overall performance of the issuing company (a figure which is also readily and publicly available). This section includes a non-binding suggestion that each disclosure “may” contain a graphic representation of the ratio of executive compensation to the issuer’s overall financial performance. This suggestion is highly indicative of the legislative intent of this section.
The next section, 953(b), amends the existing requirements in 17 CFR §229.10. Specifically, this section requires that the following disclosures be included in any and all SEC registration materials, including but not limited to, annual reports, tender offer statements, going-private transaction statements: section 953(b)(1)(A) calls for the disclosure of the median annual total compensation (not the average total compensation) of all employees of the issuer except for the chief executive officer (or any equivalent position); section 953(b)(1)(B) requires disclosure of the annual compensation of the chief executive officer (or any equivalent position) of the issuer; and section 953(b)(1)(C) requires the disclosure of the ratio between the amounts disclosed in section 953(b)(1)(A) and the amount disclosed in section 953(b)(1)(B). Although it would perhaps be more effective, there is no suggestion for a graphic representation in section (b) as there is in section (a).
The “total compensation” calculation for Section (b) specifically operates under 17 CFR §229.402(c)(2)(x). Here, the total compensation figure must be the column (j) figure from the “Summary Compensation Table.” This figure is the aggregate of salary, bonus, stock and option awards, non-equity incentives, changes in pension value, deferred compensation and any other compensation paid to the executive during the prior fiscal year. As previously indicated, this is a different “total compensation” figure than that which is represented in subsection (a).