Washington D.C. Employment Law Update : Washington D.C. Employment Lawyer & Attorney : Littler Mendelson Law Firm : Virginia, Tyson's Corner

Say-on-Pay

The regulations would require public companies subject to the federal proxy rules to provide their shareholders with a non-binding vote on executive compensation and a separate non-binding vote on how often such votes should occur. The Act requires these votes to take place at least once every three years beginning with the first annual shareholders’ meeting conducted on or after January 21, 2011. Shareholders would be permitted to vote at least once every six years starting with the first shareholder meeting held on or after January 21, 2011 to determine how often these say-on-pay votes should take place. The Act requires separate resolutions subject to shareholder vote to approve executive compensation and to approve the frequency of say-on-pay votes for proxy statements relating to an issuer’s annual or other meeting of the shareholders occurring on or after January 21, 2011, whether or not the SEC has adopted final rules to implement these provisions by that date.

Under the SEC proposed rules, companies must provide disclosure of the say-on-pay and frequency votes in the annual proxy statement and explain the non-binding nature of the votes. The proposal would amend Form 10-K and Form 10-Q to require additional disclosure regarding the company’s action as a result of the shareholder vote on the frequency of shareholder votes on executive compensation. The proposed rule does not require companies to use any specific information or form of resolution to be voted on by the shareholders. However, the SEC is soliciting comments on whether the SEC should designate the specific language to be used and/or require issuers to frame the shareholder vote to approve executive compensation in the form of a resolution.

The proposed regulations require a company to explain in the CD&A whether and how it has applied the results of previous say-on-pay votes. The SEC is soliciting comments on whether the proposed requirement for CD&A discussion of the issuer’s application of previous shareholder advisory votes be revised to relate only to application of the most recent shareholder advisory votes.

Golden Parachutes

Shareholders would be entitled to an advisory vote on compensation arrangements and understandings in connection with merger transactions, commonly referred to as “golden parachutes.” Moreover, under the proposed regulations, companies would be required to provide additional information to shareholders regarding such arrangements in their merger proxy statements. Because the Act requires such disclosure “in accordance with regulations to be promulgated by the Commission,” the golden parachute disclosure and vote would not be required until the SEC has issued final rules on this provision.

Disclosure of any golden parachute arrangements would be required of all agreements and understandings that the acquiring and target companies have with the named executive of both entities, and in connection with going-private transactions and third-party tender offers. The proposed rule would require disclosure of named executive officers’ golden parachute arrangements in both tabular and narrative formats. Issuers must describe any material conditions or obligations applicable to the receipt of payment, including but not limited to non-compete, non-solicitation, non-disparagement or confidentiality agreements, their duration, and provisions regarding waiver or breach. The SEC proposal also requires issuers to provide a description of the specific circumstances that would trigger payment of the golden parachute, whether the payments would or could be lump sum, or annual, and their duration, and by whom the payments would be provided, and any material factors regarding each agreement.

Institutional Investment Manager Reporting

All institutional investment managers that manage certain equity securities of at least $100 million in fair market value must report to the SEC their votes on executive compensation and golden parachutes at least once a year, unless their votes are already required to be reported publicly. As discussed in an SEC press release, such managers must identify and describe the securities and executive compensation matters voted on, “disclose the number of shares over which the manager held voting power and the number of shares voted, and indicate how the manager voted.” These reports must be disclosed by August 31 of each year for the prior 12-month period ending June 30.

Smaller Companies

The proposed rule does not exempt smaller reporting companies from the say-on-pay vote, frequency of say-on-pay votes, and golden parachute disclosure and vote. According to the preamble to the proposed rule, the SEC “believe[s] investors have the same interest in voting on the compensation of smaller reporting companies and in clear and simple disclosure of golden parachute compensation in connection with mergers and similar transactions as they have for other issuers.” The SEC is also soliciting comments on whether it would be appropriate to exempt smaller reporting companies from the shareholder vote to approve executive compensation.

Comments on these proposed regulations must be received on or before November 18, 2010, and contain the file number S7-30-10 for comments on the regulations governing the reporting of proxy votes on executive compensation, and file number S7-31-10 for comments on the regulations governing the shareholder approval of executive compensation and golden parachutes. Comments may be made electronically using the SEC’s Internet comment form; via email: rule-comments@sec.gov (include the appropriate file number on the subject line); or through the federal eRulemaking portal: http://www.regulations.gov. Written comments should be sent in triplicate to: Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

For more information on the executive compensation provisions contained in the Dodd-Frank Act, see Littler's ASAP: Executive Compensation and the Wall Street Reform and Consumer Protection Act by Nick Linn, Ilyse Schuman, and Ellen Sueda.

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Contractors dealing with these agencies will be required to provide a written statement attesting to the fact that they – and their subcontractors – have fairly included women and minorities in their workforces. Standards and procedures will be developed to assess whether such contractors and subcontractors have failed to make a good faith effort to do so. In this event, the director of the OMWI will have the ability to recommend that the agency head terminate the contract; make a referral to the Office of Federal Contract Compliance Programs (OFCCP); or take other appropriate action.

The applicability of this section is fairly broad. Specifically, it applies:

to all contracts of an agency for services of any kind, including the services of financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants, and providers of legal services. The contracts referred to in this subsection include all contracts for all business and activities of an agency, at all levels, including contracts for the issuance or guarantee of any debt, equity, or security, the sale of assets, the management of the assets of the agency, the making of equity investments by the agency, and the implementation by the agency of programs to address economic recovery.

Any company or contractor doing business with the following agencies will be affected by this new law: Departmental Offices of the Department of the Treasury; Federal Deposit Insurance Corporation; Federal Housing Finance Agency; each of the Federal reserve banks; the Board of Governors of the Federal Reserve System; National Credit Union Administration; Office of the Comptroller of the Currency; Securities and Exchange Commission; and the Bureau of Consumer Financial Protection.

Photo credit:   Ramy Majouji

• the number of “significant and substantial” (S&S) citations from MSHA;
• the number of 104(b) orders; 
• the number of unwarrantable failure actions;
• the number of flagrant violations;
• the number of imminent danger orders;
• the dollars in proposed assessments; and
• all mining-related fatalities.

The legislation also requires filing companies to list mines that receive a pattern of violations notice, or have the potential for a pattern. Finally, all legal actions pending before the Federal Mine Safety and Health Review Commission must be reported.

In the following circumstances a covered company will be required to affirmatively file and report on Form 8-K:

• receipt of an imminent danger order shutting down the mine or part thereof;
• receipt of a pattern of violations notice; and
• receipt of the potential for a pattern of violations notice.

These reporting provisions take effect 30 days after enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

This entry was written by Thomas Benjamin Huggett.

Photo credit: Ramy Majouji

A discussion of the new provisions follows:

• Section 922 – Whistleblower protection. This section amends the Securities Exchange Act to establish a new securities whistleblower incentive and protection program. In essence, it provides monetary rewards to those who contribute original information that leads to recoveries of monetary sanctions of $1,000,000 or more in criminal and civil proceedings. This program awards whistleblowers with between 10% and 30% of any monetary sanctions that are collected, based on the original information provided by the whistleblower. “Original information” is defined as information that is derived from the independent analysis or knowledge of the whistleblower and is not derived from an allegation in court or government reports nor exclusively from news media. The Securities and Exchange Commission (SEC) has discretion in determining the amount and whether or not a whistleblower is to be awarded. This section also includes various protections for whistleblowers, including a prohibition on discharging, demoting, suspending, threatening, harassing (directly or indirectly) or otherwise discriminating against an employee for providing information to the SEC or assisting in an investigation or judicial or administrative action relating to the information provided. The bill would allow one who has been retaliated against to bring an action against his or her employer in federal court for reinstatement, double back pay plus interest, and attorneys’ fees and litigation costs. The legislation provides that no pre-dispute arbitration agreement shall be valid or enforceable if it requires arbitration of a dispute arising under this section.
• Section 748 – Commodity Whistleblower Incentives And Protection. This section would amend the Commodity Exchange Act by adding a “Commodity Whistleblower Incentives and Protection” section that provides whistleblower incentives and protections similar to those set forth in Section 922.
• Section 1057 – Employee Protection. This section provides protection against firings of, or discrimination against, employees who provide information or testimony to the Bureau of Consumer Financial Protection (CFPB or “Bureau”) – an independent consumer entity within the Federal Reserve created by the legislation. These new provisions, which are very broad in scope, stipulate that:

No covered person or service provider shall terminate or in any other way discriminate against, or cause to be terminated or discriminated against, any covered employee or any authorized representative of covered employees by reason of the fact that such employee or representative, whether at the initiative of the employee or in the ordinary course of the duties of the employee (or any person acting pursuant to a request of the employee), has –

(1) provided, caused to be provided, or is about to provide or cause to be provided, information to the employer, the Bureau, or any other State, local, or Federal, government authority or law enforcement agency relating to any violation of, or any act or omission that the employee reasonably believes to be a violation of, any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau;

(2) testified or will testify in any proceeding resulting from the administration or enforcement of any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau;

(3) filed, instituted, or caused to be filed or instituted any proceeding under any Federal consumer financial law; or

(4) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any law, rule, order, standard, or prohibition, subject to the jurisdiction of, or enforceable by, the Bureau.

A “covered employee” would include any individual performing tasks related to the offering or provision of a consumer financial product or service. Any predispute arbitration agreement would be deemed invalid and unenforceable to the extent that it requires arbitration of a dispute arising under this section.

An employee aggrieved under this section would have 180 days to file a complaint with the Secretary of Labor. An employee would have a viable cause of action if the Secretary determines that any of the employee’s actions described in paragraphs (1) – (4), above, constituted a “contributing factor” to the alleged adverse employment action. In its defense, an employer would have to demonstrate “by clear and convincing evidence” that it would have taken the same adverse actions regardless of the employee’s conduct. This new burden-shifting framework is advantageous to the employee.

• Section 929A – Protection For Employees of Subsidiaries and Affiliates of Publicly-Traded Companies. This section extends the whistleblower protection provisions in the Sarbanes-Oxley Act of 2002 (“SOX”) to employees of subsidiaries and affiliates of publicly-traded companies whose financial information is included in the consolidated financial statements of such companies. Section 806 of the Sarbanes-Oxley Act creates protections for whistleblowers who report securities fraud and other violations.
• Section 1079A – Financial Fraud Provisions. This section amends the False Claims Act (FCA) by, among other things, expanding protected whistleblower conduct under the FCA to include an “agent or associated others in furtherance of an action under this section.” In essence, the provision clarifies that those “associated” with the whistleblower are protected by the FCA. Additionally, the amendment allows a civil action to be brought in this instance within three years after the date of the act of discrimination or retaliation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act ushers in a new era of accountability and transparency for Wall Street and beyond. The whistleblower provisions in the new law necessitate even greater emphasis on compliance policies and practices by affected employers.

For more information on these provisions, see Littler's Insight:  Cementing a Trend: Financial Reform Act Dramatically Expands Whistleblower Protections by Gregory C. Keating, Eric A. Savage, Ilyse W. Schuman, Roberta Limongi Ruiz and Amy E. Mendenhall.

This entry was written by Ilyse Schuman and Greg Keating.

Photo credit: Lkmorlan