SEC’s Say on Pay
On Tuesday, the SEC passed by a 3-2 margin new rules for corporate pay and executive compensation. The divided vote pitted three Democrats against two Republicans. SEC Chairwoman Mary Schapiro empowers shareholders of publicly traded corporations to have a say on issues like golden parachutes, executive pay and corporate bonuses, three areas where shareholders felt betrayed in 2008.
The “say-on-pay” regulations were opposed by Republicans Kathleen L. Casey and Troy A. Paredes. Casey’s stated her opposition, “I believe the say-on-pay rules we are adopting today are unduly restrictive and impose unnecessary burdens, particularly on smaller reporting companies with minimal corresponding benefits for investors.”
In an effort to temper the regulations, the SEC agreed that companies whose shareholders own less than $75 million in shares will not be subjected to the new regulations until 2013. Other companies will be expected to comply beginning 2011.
Ironically, the board of directors for these larger firms do not have to comply with the shareholders vote. The balloting is considered non-binding. The SEC’s newest rules are an offshoot of the Dodd-Frank Act passed in July 2010. The intent is to discourage the high-risk practices that businesses used before 2008 for the benefit of the executives and high ranking company officials.
These practices are closely connected to the downfall of Lehman Brothers and AIG. Even as companies acknowledged disproportionate wages and bonuses and were pressured by government and shareholders alike, the latest round of compensation revelations indicate little has been done by financial institutions to bring compensation in linen with performance.
In a letter to the SEC, Michigan Democrat Carl Levin expressed his concern. “Excessive executive compensation is an outgoing outrage.” The SEC has received input from more than 60 protestors, including the A.F.L.- C.I.O. and the New York Stock Exchange, of executive compensation practices for publicly traded corporations. The agency has held more than 15 meetings to put practical rules in place.
In the new say-on-pay program, compensation policies are to be put to a shareholder vote at least once every three years. While the Board of Directors is not forced to comply with shareholder wishes, the company must make public whether or not they adhered to the shareholder wishes.
Since 2008, many companies already comply with the say-on-pay rules. Other companies have fought against the compensation rules. Corporations whose board members do not recognize the will of the shareholders stand the chance of being voted off the board by those shareholders.
In addition to the say-on-pay rules, the SEC also voted to raise the bar on scrutiny for hedge funds. Fund managers will now have to provide precise details about their exposure to assets. Additionally, the SEC changed the rules for investors looking to invest in private offerings. Now, the investor must have a net worth of at least $1 million, excluding the value of their primary residence.
In a separate issue, Merrill Lynch agreed to pay the SEC $10 million for using client information to place buy and sell orders to its own advantage. Merrill Lynch reportedly used information gathered from the company’s trade desk to determine their investment strategy.
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