This is the first in a recurring series of articles examining the Dodd-Frank Act and its implications for community banks. This quarter’s selection takes a closer look at reforms related to corporate governance issues.

In addition to extensive provisions affecting large and small institutions, the Dodd-Frank Act set forth certain corporate governance reforms all businesses, including community banks, need to keep in mind. As of today, only one-third of the Dodd-Frank Act’s 240 rule-making requirements have been promulgated in any form, let alone as final rules that institutions can assess and implement. Compliance with Dodd-Frank will unfortunately continue to be an administrative burden that institutions will need to address. This series of articles, Dodd-Frank Act Essentials, will keep readers updated and apprised of new rules that come out of Washington.

The provisions discussed in this first installment arise out of public opinion and sentiments following the financial crisis. They may not require significant changes for a banking institution. However, it is important to consider how these new rules align with the institution’s bylaws and needs, and to consult with counsel if needed.
     
Say on Pay
Publicly traded companies must include a resolution in their proxy statements asking shareholders to approve (in a non-binding vote) the compensation of their named executive officers. The board does not have to adopt the resolution, but it must be included. An additional layer of shareholder disclosure and voting is required in the event of extraordinary transactions, such as mergers triggering “golden parachutes” if the extra compensation was not previously disclosed. A high-profile example of this rule was Vikram Pandit’s departure from Citigroup, where shareholders rejected his proposed annual compensation, and then he departed without the “golden parachute” he presumably expected. The Dodd-Frank Act also provides for a three-year clawback for excess compensation derived from the failure to get approval of shareholders. There are special “say on pay” rules carved out for recipients of TARP funding.

Proxy Access
Dodd-Frank authorizes the SEC to promulgate rules allowing certain shareholders to include director nominees in the company’s proxy materials sent to all shareholders. Shareholders must hold at least three percent of the stock and have held it for at least three years. This provision sidesteps the hurdles that previously hindered an effective nomination and generally prevented companies from having to permit shareholder director nominations in the proxy documents.

(More) Whistleblower Provisions
Dodd-Frank contains multiple sets of whistleblower provisions creating financial incentives for individuals to report alleged violations of securities laws. Section 922 of the Dodd-Frank Act requires the SEC to pay awards to whistleblowers who voluntarily provide original information to the SEC that leads to the successful enforcement of a violation of the federal securities laws resulting in monetary sanctions exceeding $1,000,000. By statute, the awards must range from at least 10 percent to a maximum of 30 percent of the monetary sanctions collected in the case. Notably, the SEC’s final rules define a whistleblower as an individual (entities do not qualify) who, alone or with others, provides information voluntarily to the SEC, pursuant to the procedures specified by the SEC, relating to a “possible violation of the federal securities laws (including rules and regulations thereunder) that has occurred, is ongoing or is about to occur.” (emphasis added)

Section 922 of the Dodd-Frank Act also prohibits retaliation by employers against individuals who provide the SEC with information about possible securities law violations. The final rules clarify that, to have anti-retaliation protection, an individual must have a reasonable belief that the information being provided to the SEC relates to a possible securities law violation. While the SEC may decline to pursue leads reflecting immaterial violations, the employee who provides information to the SEC about immaterial possible violations will nonetheless be entitled to anti-retaliation protection. Unlike the Sarbanes-Oxley anti-retaliation provisions, the Dodd-Frank provisions do not require an employee to first file a complaint with the Department of Labor and instead permit retaliation claims to be initiated in federal court.

Concerns or questions about these new corporate governance provisions should be discussed with knowledgeable legal counsel.