Financial Markets in Crisis: Executive Compensation Limits Tightened; Lobbyists’ TARP Access Restricted

February 4, 2009

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets.

We are providing updates on key regulatory and legislative issues, as well as information on legal issues that we believe could prove useful as firms and other entities navigate these challenging times.

This update focuses on the new TARP executive compensation and lobbying restrictions, other changes to economic support programs implemented over the last few months, as well as selected legislative proposals that have recently been introduced or circulated in Congress.

Executive Compensation Restrictions Announced Today

The Treasury Department announced a new set of guidelines on executive compensation for institutions participating in the government’s bailout under TARP.  There is a separate set of guidelines for institutions that participate in any "generally available capital access program" and for those that need "exceptional assistance."  Institutions falling under the "exceptional assistance" standard have bank-specific negotiated agreements, and the Treasury cites AIG, Bank of America and Citigroup as examples.

Treasury’s announcement expressly states that these new standards will not apply retroactively to existing investments or to programs already announced such as the Capital Purchase Program (the "CPP") and the Term Asset-Backed Securities Loan Facility (known as TALF).  However, Treasury did announce some retroactive compliance and certification requirements as described in more detail below.

Enhanced Conditions on Executive Compensation for Institutions who Receive "Exceptional Assistance"

  • Limit of $500,000 in total annual compensation for "senior executives".  The current TARP programs limit the right of a participating institution to deduct any compensation payable to its "senior executive officers" (SEOs) in excess of $500,000 per annum.  This new condition limits the total compensation paid to senior executives to $500,000 per annum, other than payment in long-term restricted stock (as described in more detail below).  Although the guideline does not use the term SEO, it describes the condition as extending from a deductibility limit to a cap on pay for "these senior executives."  Thus, it appears that this limit would be imposed only on the participating institutions’ SEOs (who are generally the CEO, CFO and three other most highly-compensated executive officers)
  • Any additional compensation must be in restricted stock with vesting tied to "repayment" to the government.  Any compensation to a senior executive in excess of the $500,000 cap must be in the form of restricted stock or other similar long-term incentive compensation that does not vest until the U.S. government has been "repaid with interest" or after a specified period that considers such factor as the degree to which the institution has repaid its obligations, protected tax payer interests or met lending and stability standards.  Presumably, the term "repaid with interest" is meant to cover the redemption of the preferred stock that the government purchases as part of any "exceptional" capital purchase program.
  • Requirement to submit executive compensation to a shareholder advisory vote.  Institutions must fully disclose their senior executive compensation structure and strategy, including the rationale for how compensation is tied to sound risk management, and submit the compensation to a non-binding "Say on Pay" shareholder resolution.  The Treasury does not provide the time period for this condition - i.e., whether it needs to happen prior to receiving "exceptional assistance" and/or whether it would be done on an annual basis.
  • Expansion of TARP’s "clawback" requirement to additional executive officers.  Under the original TARP programs, only the SEOs were required to repay bonuses and incentive compensation if those payments were based on materially inaccurate information.  The clawback applied even in the absence of misconduct.  This new condition expands the group of executives to the next twenty senior executives, but adds a culpability component for the non-SEO executives – the clawback applies only if the executive is found to have knowingly engaged in providing inaccurate information relating to financial statements or performance metrics used to calculate his or her own incentive pay. 
  • Increase ban on "golden parachutes" for senior executives.  This condition expands the group of senior executives who are prohibited from receiving any severance payment following termination of employment from the SEOs to the institution’s top ten senior executives.  Additionally, the next twenty-five senior executives are limited to a "golden parachute" of one year’s compensation.  "Compensation" is not defined, but it is likely to have the same meaning as "base amount" in the existing §280G regulations (generally, the average of the executive’s last five years’ taxable income).
  • Adoption of company policy relating to approval of "luxury expenditures".  An institution’s board of directors must adopt a company-wide policy on any expenditures related to aviation services, renovations, entertainment and holiday parties and conferences and events.  The guidelines exempt "reasonable expenditures" for sales conferences, staff development and other measures tied to normal business operations.  The institution’s CEO must certify expenditures that could be viewed as excessive or luxury items, and the institution should post the text of the policy on its website.  It is not clear how the CEO certification will work in practice (i.e., to whom is the CEO certifying and the scope of the certification). 

Enhanced Conditions on Executive Compensation for Institutions that Participate in "Generally Available Capital Access Programs"[1]

  • Limit of $500,000 in total annual compensation plus restricted stock for "senior executives" – unless waived with disclosure and shareholder vote.  Like institutions receiving exceptional assistance, any participating institution will be required to limit senior executive annual compensation to $500,000 plus restricted stock unless the institution discloses its compensation packages and, if requested, allows a non-binding "Say on Pay" shareholder resolution.  Again, the timing of fulfilling this condition is not clear.
  • Expanded review of compensation arrangements for "unnecessary and excessive risk".  Institutions must review and disclose the reasons their compensation programs for both its senior executives and other employees do not encourage excessive and unnecessary risk taking.  Thus, participating institutions must expand both the scope of compensation arrangements they review (from only those affecting SEOs to those affecting potentially all employees) and the scope of the disclosure (from certifying that the arrangements do not encourage risk taking to explaining why the arrangements do not so encourage such behavior). 
  • Expansion of TARP’s "clawback" requirement to additional executive officers.  The same clawback provision that applies to institutions receiving exceptional assistance would apply to all participating institutions.
  • Lower limit on "golden parachutes" for SEOs.  The "golden parachute" limitation for the top five senior executives is lowered from no greater than three years’ compensation to no greater than one year’s compensation.
  • Adoption of company policy relating to approval of "luxury expenditures".  The same policy on expenditures that applies to institutions receiving exceptional assistance would apply to all participating institutions.

Retroactive Compliance and Certification Requirements

Each CEO of an institution participating in any TARP program to date must provide certification that the institution has strictly complied with statutory, Treasury and contractual executive compensation restrictions, and must re-certify compliance on an annual basis.  This certification requirement is likely meant to be the same as the CEO certification requirements set forth in the updated Interim Final Rule for the CPP, issued by the Treasury on January 16, 2009.  In such case, the CEO certifications must be done (i) within 120 days following the CPP closing (i.e., as early as February 25, 2009 for the initial CPP closings in late October 2008), (ii) within 135 days following the end the first fiscal year in which the institution participated in the CPP and (iii) within 135 days following the end of each subsequent fiscal year during which the government holds an equity or debt investment in the institution.  The CEO must provide the certifications to TARP’s Chief Compliance Officer.

Additionally, each institution’s compensation committees must provide an explanation of how their senior executive compensation arrangements do not encourage unnecessary and excessive risk taking.  Again, this is an expansion of the current TARP requirement that the compensation committee certify that it has reviewed compensation arrangements for its SEOs, and if necessary, modified such arrangements, to ensure they do not encourage excessive and unnecessary risk taking. The guidelines do not specify where this explanation is to be provided, but presumably it is meant to go in the Compensation Committee Report in the institution’s proxy statement, or, if the institution is not a public company, in a filing with its primary regulatory agency. 

Long-term Regulatory Reform

In addition to these conditions applicable to institutions participating in the government’s bailout, the Treasury’s press release suggest steps for the long-term examination of how company-wide compensation strategies at financial institutions – not just those related to top executives – may have encouraged excessive risk-taking.  The Treasury also suggests it is undertaking serious efforts to begin developing model compensation policies for the future

In order to achieve such long-range goals, the Treasury sets forth the following steps:

1.  Require all compensation committees of public financial institutions to review and disclose strategies for aligning compensation with sound risk-management.

2.  Require compensation of top executives to include incentives that encourage a long-term perspective on creating economic value for shareholders and the economy at large (e.g., by increasing the required hold period of any equity awards).

3.  Pass "Say on Pay" shareholder resolutions on executive compensation at all financial institutions.

4.  Seek input from shareholder advocates, major public pension and institutional investor leaders, policy-makers, executives, advocates and others on executive pay reform at financial institutions in order to establish best practices and guidelines going forward.

New TARP Lobbying Restrictions

Treasury Secretary Tim Geithner has announced a set of rules designed to limit lobbyists’ influence in the process to distribute funds under the Emergency Economic Stabilization Act.[2]  The rules are designed to restrict lobbyists’ contact with the application process for funds, as well as prevent them from influencing decisions about entities that will receive funding.  The rules also seek to make the funding process more transparent by requiring the Office of Financial Stability to certify to Congress that each investment is made based on certain financial criteria and to publish a report of the investment process, and by requiring banks be recommended by their primary banking regulator to receive funding. 

Treasury’s announcement indicates that lobbyists will be restricted from contacting the Department "in connection with applications for, or disbursements of, EESA funds."  The scope of the restriction, therefore, is fairly clear and appears to be limited to particular transactions.  The question is whether, in practice, Treasury staff will avoid engaging with lobbyists even when the contacts relate to a process or policy, as opposed to a particular application.

Treasury also announced that it will begin posting commitments to future completed transactions to the Department’s website within five to ten business days after entering the contract, and will post completed commitments to the site on a rolling basis.

Expansion of the Temporary Liquidity Guarantee Program (TLGP)

Recently, the FDIC announced that it likely would extend its program to guarantee senior unsecured debt of AAA rated financial institutions to bank debt with ten year  maturities, a decision which will offer significant support to consumer lending.[3]  Under the TLGP, the FDIC guarantees newly issued senior unsecured debt of FDIC-insured depository institutions and other banking entities, as well as provides coverage for non-interest bearing deposit transaction accounts.  The FDIC designed the TLGP to reduce the cost of bank funding, thereby supporting consumer and business lending.  Currently, the program only applies to debt with a three and a half year maturity limit.  We understand that the FDIC board likely will consider and approve the measure very soon. 

New Commercial Paper Funding Facility Rule (CPFF)

Along with Treasury and the FDIC, the Federal Reserve also has been re-evaluating and tweaking its economic support programs.  The Fed announced last week that the CPFF, a facility designed to act as a funding backstop to promote the issuance of commercial paper, would no longer be available for issuers of asset backed commercial paper which were inactive prior to the institution of the CPFF.  The Fed stated it would consider issuers to have been inactive if they had not issued ABCP to other institutions for any three consecutive months between January 1 and August 31, 2008.  The Fed explained that this change would allow the CPFF to focus on supporting those institutions that were hurt by the recent economic downturn.[4]

The Federal Reserve also announced the extension of the CPFF along with its other liquidity programs - the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Money Market Investor Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility - through October 30, 2009.  The programs had been set to expire on April 30, 2009. 

Legislative Updates

The following are bills that recently were introduced or released and that we believe are significant additions to the debate on financial markets regulatory reform.  This is by no means an exclusive list of significant, new legislative initiatives.  But it conveys a flavor of some of the issues that concern Members of Congress and, hence, are likely to be part of the larger regulatory reform debate.  Note that, yesterday, House Financial Services Committee Chairman Barney Frank indicated that he does not support a piecemeal approach to regulatory reform and that, instead, he expects to effect reform in two stages.  The first will empower and give responsibilities to a new systemic risk regulator, likely the Federal Reserve Board.  The second will focus on the "details" of restructuring our financial services regulatory system.

  • Grassley/Levin Hedge Fund Transparency Act of 2009 (S. 344):  On Thursday, January 29, Senators Grassley and Levin introduced the Grassley/Levin Hedge Fund Transparency Act of 2009 which would authorize the Securities and Exchange Commission to require hedge funds to register with the SEC. Senators Grassley and Levin acknowledged that historically, hedge funds were designed to encourage risk-taking behavior by sophisticated investors who needed less protection than the average investor.  Now, however, hedge funds have grown large enough that their economic problems could impact the entire U.S. market. Current law allows hedge funds to avoid registration by escaping the definition of "investment company" under the Investment Company Act of 1940.  The Act will amend the Investment Company Act to clarify that the SEC does have authority to regulate hedge funds.  The Act also would impose anti-money laundering obligations on the hedge funds.[5]
  • Hedge Fund Study Act of 2009 (H.R. 713): Representative Mike Castle has introduced the Hedge Fund Study Act of 2009, which would require the President’s Working Group to examine the hedge fund industry, particularly regarding the growth and changing nature of hedge funds, pension investments in hedge funds, whether hedge fund investors can protect themselves adequately, and the systemic risks hedge funds pose to the markets and investors.  The Act would require the Working Group to submit a report to Congress offering legislative proposals, a discussion of disclosure requirements for hedge funds, and suggestions to improve the functioning of hedge funds.[6]
  • Derivatives Markets Transparency and Accountability Act of 2009:  House Agricultural Committee Chairman Collin Peterson has released the draft of his Derivatives Transparency and Accountability Act of 2009. The bill would impose transparency requirements for offshore trading of derivatives, increase public disclosures about index funds by the Commodities Futures Trading Commission (CFTC), provide the CFTC with authority to subject over-the-counter (OTC)  transactions involving commodities to greater reporting requirements, require that all OTC transactions be cleared through a federal clearinghouse regulated by the CFTC, mandate that the CFTC hire 200 new employees, and forbid naked credit default swaps.[7]

[1] The press release indicates that the Treasury intends to issue proposed guidance subject to public comment on the following executive compensation requirements so it is likely that these requirements will be modified over time. 

[2] For additional information, see Treasury’s announcement at

[3] For additional information on the TLGP, see

[4] For additional information, see the Fed’s announcement at:

[5]  For more information about the Grassley/Levin Hedge Fund Transparency Act of 2009, see Gibson, Dunn & Crutcher’s January 30, 2009 client alert.

[6] For the text of the Act, see

[7] To view the draft, see

Gibson, Dunn & Crutcher LLP

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, [email protected]) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098, [email protected])
John F. Olson – Washington, D.C. (202-955-8522, [email protected])
Amy L. Goodman
– Washington, D.C. (202-955-8653, [email protected])
Alan Platt – Washington, D.C. (202- 887-3660, [email protected])
Michael Bopp – Washington, D.C. (202-955-8256, [email protected])

Securities Law and Corporate Governance Expertise
Ronald O. Mueller
– Washington, D.C. (202-955-8671, [email protected])
K. Susan Grafton – Washington, D.C. (202- 887-3554, [email protected])
Brian Lane – Washington, D.C. (202-887-3646, [email protected])
Lewis Ferguson – Washington, D.C. (202- 955-8249, [email protected])
Barry Goldsmith – Washington, D.C. (202- 955-8580, [email protected])
John H. Sturc
– Washington, D.C. (202-955-8243, [email protected])
Dorothee Fischer-Appelt – London (+44 20 7071 4224, [email protected])
Alan Bannister – New York (212-351-2310, [email protected])
Adam H. Offenhartz – New York (212-351-3808, [email protected])
Mark K. Schonfeld – New York (212-351-2433, [email protected])

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, [email protected])
Christopher Bellini – Washington, D.C. (202- 887-3693, [email protected])
Amy Rudnick – Washington, D.C. (202-955-8210, [email protected])
Rachel Couter – London (+44 20 7071 4217, [email protected])

Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589, [email protected])
Richard Russo – Denver (303- 298-5715, [email protected])
Dennis Friedman – New York (212- 351-3900, [email protected])
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, [email protected])
Robert Cunningham – New York (212-351-2308, [email protected])
Joerg Esdorn – New York (212-351-3851, [email protected])
Wayne P.J. McArdle – London (+44 20 7071 4237, [email protected])
Stewart McDowell – San Francisco (415-393-8322, [email protected])
C. William Thomas, Jr.
– Washington, D.C. (202-887-3735, [email protected])

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, [email protected])

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918, [email protected])

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, [email protected])
Alan Samson – London (+44 20 7071 4222, [email protected])
Andrew Levy – New York (212-351-4037, [email protected])
Fred Pillon – San Francisco (415-393-8241, [email protected])
Dennis Arnold – Los Angeles (213-229-7864, [email protected])
Michael F. Sfregola – Los Angeles (213-229-7558, [email protected])
Andrew Lance – New York (212-351-3871, [email protected])
Eric M. Feuerstein – New York (212-351-2323, [email protected])
David J. Furman – New York (212-351-3992, [email protected])

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, [email protected])

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, [email protected])
David M. Feldman – New York (212-351-2366, [email protected])

Oscar Garza – Orange County (949-451-3849, [email protected])
Craig H. Millet – Orange County (949-451-3986, [email protected])
Thomas M. Budd – London (+44 20 7071 4234, [email protected])
Gregory A. Campbell – London (+44 20 7071 4236, [email protected])
Janet M. Weiss – New York (212-351-3988, [email protected])
Matthew J. Williams – New York (212-351-2322, [email protected])
J. Eric Wise – New York (212-351-2620, [email protected])

Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582, [email protected])
Paul Issler – Los Angeles (213-229-7763, [email protected])

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, [email protected])
Charles F. Feldman – New York (212-351-3908, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (213-229-7579, [email protected])
Amber Busuttil Mullen – Los Angeles (213-229-7023, [email protected]

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