ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

As I have reported previously, Dodd Bill, the Restoring American Financial Stability Act of 2010 (1,600 page PDF), includes extensive governance and compensation reforms that apply to all public companies (or, in some cases, all listed companies), not just financial institutions. However, a lesser-known provision in the Dodd Bill could also have a significant impact on public companies: a program that would pay whistleblowers a bounty for reporting violations of securities law.

Under Section 922 of the Dodd Bill (starting on page 974), if a whistleblower provides information on a securities law violation that leads to monetary sanctions of more than $1 million, the SEC will be required to pay the whistleblower an amount ranging from ten percent to 30 percent of what has been collected. This bounty would apply to a wide range of securities law violations, including violations of the Foreign Corrupt Practices Act. The Frank Bill, which is being reconciled with the Dodd Bill in conference committee, contains a similar provision, without the ten percent minimum. Because the Senate and House versions are similar, it seems likely that the provision will be part of the final bill, expected to be passed this summer.

I view this provision as the “sleeper” in the Dodd Bill for public companies. It’s received less publicity than other provisions such as mandatory Say-on-Pay and a majority voting requirement for directors in listed companies. However, its impact on public companies could be even greater than those other provisions. The bounty provision may encourage employees to report perceived violations in a greater number of cases than before. Considering the recent increases in SEC enforcement staffing and activity, public companies will also be at greater risk of SEC investigations and enforcement proceedings.

In preparation for the likely passage of the bill, public companies should ensure that their whistleblower policies are up to date and that they are prepared to process a possible increase in whistleblower reports. The policies should provide clear procedures for employees to report possible violations within the company. Careful preparation may help reduce the chances of an expensive and time-consuming problem in the future.
 

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The Restoring American Financial Stability Act of 2010 (1,410 page PDF) (the “Dodd Bill”), which would reform regulation of financial institutions and the securities markets, has been introduced, and debate on the Senate floor has finally begun. It appears that the bill will probably be approved in the next few weeks in some form, followed by conference committee action to resolve differences with the Frank Bill that was approved by the House in December. The two bills include overlapping but differing governance and compensation reform provisions that apply to all public companies (or, in some cases, to all companies listed on a securities exchange). The ON Securities Cheat Sheet (PDF) has been updated, making it easier to compare these provisions in the two bills.

Both the Senate and House bills would require Say-on-Pay – an annual shareholder advisory "up or down" vote on compensation. Therefore, it is very likely that Say-on-Pay will be a reality by next year’s proxy season. Public companies should start planning for Say-on-Pay now, including considering what compensation practices might trigger a negative vote.

The Council of Institutional Investors (CII) just published “Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Pay” (PDF), which provides rules of thumb to help institutional investors identify pay programs that might be objectionable. Whether you agree or disagree, the CII document makes interesting reading. Most of the red flags are pretty obvious, including option repricing. Others are more thought-provoking. For example, CII considers it a “problematic pay practice” to grant conventional (time-vested) stock options to the CEO. The CII document recommends:

To isolate management’s contribution to stock price performance, stock options should be indexed to a peer group or should have an exercise price higher than the market price of common stock on the grant date and/or vest on achievement of specific performance targets that are based on challenging quantitative goals.

"I’m Just a Bill"

Thinking about the committee process in Congress brought to mind the great "Schoolhouse Rock" series of animated shorts from the 1970s, and the episode called “I’m Just a Bill.” The song was written by the equally great Dave Frishberg (a songwriter who also wrote “My Attorney Bernie”), and it actually does a pretty good job of explaining the process by which Senate and House bills become laws.

Video: YouTube

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