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SEC Issues Proposed Rules on Say-on-Pay and Related Matters

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

October 18, 2010

The SEC this afternoon issued its proposed rules on Say-on-Pay, Say When on Pay, Say-on-Parachutes and related matters under Section 951 of the Dodd-Frank Act. 

The release answers some questions we have been pondering since the adoption of the Dodd-Frank Act (and in some cases raise more questions):

  • The SEC confirmed that it will not object if companies do not file a preliminary proxy statement for Say-on-Pay or Say When on Pay resolutions – the same treatment it gave to TARP recipients who were required to hold Say-on-Pay votes starting in 2008.
  • Regarding Say-on-Pay, no specific language is required, but the resolution has to cover all compensation required to be disclosed in the proxy statement.
  • Companies will be required to address in CD&A how their compensation policies and decisions have taken into account the results of past Say-on-Pay votes.
  • Regarding the frequency vote (Say When on Pay), the SEC will definitely require four choices on the ballot: one year, two years, three years or abstain. The proxy card has to have the four boxes, but there are some transition rules if the transfer agent can’t tabulate four choices.
  • The SEC is affirming that the Say When on Pay vote is advisory, but the issuer must disclose in its filings whether it will follow the results of the advisory vote. If it does not, the rules will permit shareholder proposals in future years to change the frequency.
  • The SEC is requiring additional tabular information on change in control payments in merger proxies with respect to the Say on Parachutes vote. An issuer may voluntarily include that information in its annual meeting proxy statements, and in that case the Say on Parachutes vote will not be required in a future merger transaction if there are no changes.
  • Under the proposal, smaller reporting companies will be required to hold Say-on-Pay and Say When on Pay votes, even though the SEC had the statutory authority to exempt them from the rules.

Comment. Here is an updated list of Say-on-Pay action items in response to the proposed rules:

  1. Make sure compensation disclosures clearly describe the link between pay and performance, describe how the arrangements mitigate risk-taking behaviors, avoid misunderstandings on compensation design and prepare to explain any compensation structures or levels that may be unique to the company. Consider adding a summary section to CD&A.
  2. The board should review any executive compensation arrangements that may be classified by investors and governance rating agencies as "poor" practices. If any feedback has been received from investors on executive compensation, the board should decide the appropriate level of proactive shareholder engagement in this area.
  3. The board should think about the preferred frequency of periodic say-on-pay votes and determine how the board will recommend shareholders vote on this matter.
  4. The company should work with its advisors to determine whether a bylaws amendment will be required to accommodate a frequency vote with four possible choices (albeit a non-binding advisory vote).
  5. The company should work with its advisors to determine whether to include supplemental disclosures about golden parachutes in its annual meeting proxy statement, which may eliminate the need for a separate Say-on-Parachutes vote in connection with a future merger.

More questions will arise as we have more time to digest the 122 page release and as the SEC receives public comments on the rules. But this is a start.


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