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The U.S. Department of Treasury issued new rules last Friday for reporting and record-keeping to comply with the executive compensation standards under the Troubled Asset Relief Program's (TARP) Capital Purchase Program (CPP). The Treasury also provided new Frequently Asked Questions (FAQs) and a revised Treasury Notice 2008-PSSFI (Notice) to aid companies in complying with the new rules.
The Treasury originally published executive compensation standards last October for institutions participating in the CPP. The standards apply to the chief executive officer (CEO), chief financial officer (CFO), and the next three most highly compensated individuals. The standards are intended to: (1) ensure that incentive compensation for senior executive officers does not encourage the executive to take unnecessary or excessive risks that could threaten the value of the institution, (2) require a clawback of any bonus or incentive compensation paid to a senior executive officer based on earnings, gains or other criteria that is later found to be materially inaccurate, (3) prohibit an institution from making any golden parachute payments to a senior executive officer, and (4) prohibit deductions for tax purposes of compensation in excess of $500,000 for each senior executive.
The new rules are consistent with the October standards, making a few minor clarifications and a technical amendment, while providing additional guidance regarding the required certifications. The new rules establish a compliance reporting regime relating to the executive compensation requirements set forth in the October rules, and require the CEO, within 120 days of closing the purchase of the institution's securities by the Treasury, to certify that the compensation committee has reviewed the executive compensation with the senior risk officer to ensure that the compensation arrangement does not encourage the executive to take unnecessary or excessive risks. The CEO is also required to certify within 135 days after the end of the institution's fiscal year that the institution and its compensation committee have complied with the executive compensation standards. The certifications must be filed with the TARP Chief Compliance Officer.
The certifications should contain language similar to the language provided in the Notice. Records to substantiate the certifications must be retained for six years following the certification date, the first two years in an easily accessible place.
The new rules also amend the October rules requiring the certification of the compensation committee of a public company to be provided in the Compensation Committee Report rather than in the Compensation Discussion and Analysis required pursuant to Item 402 of Regulation S-K under the federal securities laws.
In addition, the new rules clarify that the bonus and incentive compensation subject to clawback includes any compensation which a senior executive officer obtains a legally binding right to payment during the period that the Treasury holds an interest in the institution.
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