Federal Securities Law Blog

Even though the Dodd-Frank Act is already in effect, the full scope of the law will not be known until numerous regulations are finalized. Public companies faced with complying with these future regulations should consider taking the following actions now to be ready for the new rules:

• Decide how often to recommend say on pay votes. Companies must offer a shareholder advisory “say on pay” vote in the 2011 proxy season. Following 2011, a similar vote must occur at least once every three years. The compensation committee should recommend how often this vote should occur. A vote every three years may be preferable where elements of compensation extend over a two- or three-year period.

• Review compensation committee independence. New independence rules for the compensation committee are planned. To prepare, boards should evaluate compensation committee members based on the independence requirements of the audit committee and consider potential conflicts of interest arising from connections with advisors, compensation consultants, and affiliates. The new rules may require updating the director and officer questionnaires and the compensation committee charter.

• Adopt a policy on hedging. Companies must disclose in the proxy statement if employees and directors are allowed to hedge against losses on their company stock. If no policy exists, the board should adopt one.

• Review compensation arrangements in anticipation of clawback rules. The Dodd-Frank Act directs the SEC to issue rules regarding companies adopting a policy to recoup executive incentive compensation if an accounting restatement is needed due to material noncompliance with a financial reporting requirement. Companies should review current compensation arrangements to consider how clawback provisions might be included.

• Decide how to gather new compensation information. Companies will likely need to collect new compensation information to meet new disclosure requirements, including (1) the median annual total compensation of all employees, excluding the CEO, and (2) the ratio of the median employee annual total compensation to the CEO’s annual total compensation.

• Review the bylaws. Companies should review any advance notice provisions in the bylaws to ensure compliance with the new proxy access rule. Also consider reviewing the company’s process for considering shareholder-nominated directors in the context of the new proxy access rule.

• Reach out to shareholders. Say on pay, proxy access, and the increased influence of proxy advisory firms will likely contribute to increased shareholder power. Effective communication with large and active shareholders is important. Companies should review policies for such communication to ensure the protection of confidentiality and compliance with Regulation FD.

Several of the Dodd-Frank requirements are dependent on future rules to be issued by the SEC, but public companies should begin thinking about what these rules might require.