The Treasury today announced the development of three programs under the Emergency Economic Stabilization Act of 2008 (“EESA”): (1) the auction purchase of troubled assets; (2) the direct purchase program; and (3) interventions to prevent the impending failure of a systemically significant institution. In connection with these programs, the Treasury has issued guidance regarding the executive compensation and corporate governance standards which will apply to institutions who decide to take advantage of these programs. The standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers. Any firm participating in these programs will be required to adopt the standards.
Those standards were outlined in a press release as follows:
(1) Troubled Asset Auction Program- As prescribed by EESA, any financial institution that sells more than $300 million of troubled assets to the Treasury via an auction would be prohibited from entering into new executive employment contracts that include golden parachutes for the term of the program. (See Notice 2008-TAAP regarding this restriction – No link yet.) Furthermore, under the Act, (1) the financial institution may not deduct for tax purposes executive compensation in excess of $500,000 for each senior executive, (2) the financial institution may not deduct certain golden parachute payments to its senior executives and (3) a 20-percent excise tax will be imposed on the senior executive for these golden parachute payments. (See Notice 2008-94 regarding these new tax rules.)(2) Capital Purchase Program- Any financial institution participating in the Capital Purchase Program will be subject to more stringent executive compensation rules for the period during which Treasury holds equity issued under this program. The financial institution must meet certain standards, including: (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. Treasury will be issuing interim final rules for these executive compensation standards.
(3) Programs for Systemically Significant Failing Institutions- The Treasury Department is currently developing a third program to potentially provide direct assistance to certain failing firms on terms negotiated on a case-by-case basis. The Treasury will be issuing guidance for the executive compensation standards that will apply to the firms participating in such programs and their senior executives (Treasury Notice 2008-PSSFI). These standards will be similar in all respects to the Capital Purchase Programs executive compensation standards described above, with one significant difference. In situations where the Treasury provides assistance under the systemically significant failing institutions programs, golden parachutes will be defined more strictly to prohibit any payments to departing senior executives.