On July 31, 2009, the House of Representatives passed the Corporate and Financial Institution Compensation Fairness Act of 2009 (the “Act”). While the focus of the Act is to provide shareholders of public companies with a “say on pay”, certain provisions of the Act would impact investment advisers, if the Act is enacted in its current form.
The Act imposes significant regulatory oversight upon the incentive-based compensation arrangements of “covered financial institutions” (“CFIs”) (which are defined to include both registered and unregistered investment advisers). The appropriate Federal regulators, acting jointly, would have the authority to prescribe regulations requiring the CFIs to disclose the structures of their incentive-based compensation arrangements. The appropriate Federal regulator (the Securities and Exchange Commission with respect to investment advisers) would then determine whether such structures (i) are aligned with sound risk management, (ii) account for the time horizon of risks, and (iii) meet other criteria as may be appropriate to reduce the incentive to take undue risk that could threaten the soundness of the CFIs or adversely affect economic conditions and financial stability. The appropriate Federal regulators, acting jointly, would have the authority to prescribe regulations that prohibit certain incentive-based compensation arrangements (or features of such arrangements) that threaten the safety and soundness of CFIs or financial and economic stability.1
The Act includes an exemption from the disclosure requirements for CFIs with “assets” of less than $1,000,000,000. It is unclear whether the term “assets” refers to assets under management or capital of the CFI.
Additionally, the “say on pay” provisions of the Act require those institutional investment managers that are subject to Section 13(f) of the Securities Exchange Act of 1934, as amended, that file Schedule 13F to submit annual reports indicating how they voted with respect to any shareholder vote regarding executive compensation or “golden parachute” compensation. It is unclear to whom such reports would be submitted or whether the reports would be publicly available.
The Act has been referred to the Senate Committee on Banking, Housing, and Urban Affairs (which is chaired by Senator Chris Dodd, the senior Democratic Senator from Connecticut). Both the Senate and the House of Representatives are currently in recess and will reconvene on September 8, 2009. Seward & Kissel will be monitoring the progress of this legislation and will provide updated information as it becomes available.
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If you have any questions with respect to the foregoing, please contact your primary attorney in the Investment Management Group at Seward & Kissel LLP.
1 However, the legislation includes a “grandfather” provision that prohibits the recovery of any incentive-based compensation received by a CFI pursuant to an arrangement that is in effect on the date the legislation is passed, provided that such arrangement is for a period of not more than two years.
