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"
Enhanced Conditions on Executive Compensation for Institutions that Participate in "Generally Available Capital Access Programs"
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. 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. 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.
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.
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.
 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.
 For additional information, see Treasury’s announcement at
 For additional information on the TLGP, see
 For additional information, see the Fed’s announcement at:
 For more information about the Grassley/Levin Hedge Fund Transparency Act of 2009, see Gibson, Dunn & Crutcher’s January 30, 2009 client alert.
 For the text of the Act, see http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.+713:
 To view the draft, see
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, firstname.lastname@example.org) 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@example.com)
John F. Olson – Washington, D.C. (202-955-8522, firstname.lastname@example.org)
Amy L. Goodman – Washington, D.C. (202-955-8653, email@example.com)
Alan Platt – Washington, D.C. (202- 887-3660, firstname.lastname@example.org)
Michael Bopp – Washington, D.C. (202-955-8256, email@example.com)
Securities Law and Corporate Governance Expertise
Ronald O. Mueller – Washington, D.C. (202-955-8671, firstname.lastname@example.org)
K. Susan Grafton – Washington, D.C. (202- 887-3554, email@example.com)
Brian Lane – Washington, D.C. (202-887-3646, firstname.lastname@example.org)
Lewis Ferguson – Washington, D.C. (202- 955-8249, email@example.com)
Barry Goldsmith – Washington, D.C. (202- 955-8580, firstname.lastname@example.org)
John H. Sturc – Washington, D.C. (202-955-8243, email@example.com)
Dorothee Fischer-Appelt – London (+44 20 7071 4224, firstname.lastname@example.org)
Alan Bannister – New York (212-351-2310, email@example.com)
Adam H. Offenhartz – New York (212-351-3808, firstname.lastname@example.org)
Mark K. Schonfeld – New York (212-351-2433, email@example.com)
Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, firstname.lastname@example.org)
Christopher Bellini – Washington, D.C. (202- 887-3693, email@example.com)
Amy Rudnick – Washington, D.C. (202-955-8210, firstname.lastname@example.org)
Rachel Couter – London (+44 20 7071 4217, email@example.com)
Howard Adler – Washington, D.C. (202- 955-8589, firstname.lastname@example.org)
Richard Russo – Denver (303- 298-5715, email@example.com)
Dennis Friedman – New York (212- 351-3900, firstname.lastname@example.org)
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, email@example.com)
Robert Cunningham – New York (212-351-2308, firstname.lastname@example.org)
Joerg Esdorn – New York (212-351-3851, email@example.com)
Wayne P.J. McArdle – London (+44 20 7071 4237, firstname.lastname@example.org)
Stewart McDowell – San Francisco (415-393-8322, email@example.com)
C. William Thomas, Jr. – Washington, D.C. (202-887-3735, firstname.lastname@example.org)
Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, email@example.com)
Private Investment Funds Expertise
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Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, email@example.com)
Alan Samson – London (+44 20 7071 4222, firstname.lastname@example.org)
Andrew Levy – New York (212-351-4037, email@example.com)
Fred Pillon – San Francisco (415-393-8241, firstname.lastname@example.org)
Dennis Arnold – Los Angeles (213-229-7864, email@example.com)
Michael F. Sfregola – Los Angeles (213-229-7558, firstname.lastname@example.org)
Andrew Lance – New York (212-351-3871, email@example.com)
Eric M. Feuerstein – New York (212-351-2323, firstname.lastname@example.org)
David J. Furman – New York (212-351-3992, email@example.com)
Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, firstname.lastname@example.org)
Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, email@example.com)
David M. Feldman – New York (212-351-2366, firstname.lastname@example.org)
Oscar Garza – Orange County (949-451-3849, email@example.com)
Craig H. Millet – Orange County (949-451-3986, firstname.lastname@example.org)
Thomas M. Budd – London (+44 20 7071 4234, email@example.com)
Gregory A. Campbell – London (+44 20 7071 4236, firstname.lastname@example.org)
Janet M. Weiss – New York (212-351-3988, email@example.com)
Matthew J. Williams – New York (212-351-2322, firstname.lastname@example.org)
J. Eric Wise – New York (212-351-2620, email@example.com)
Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582, firstname.lastname@example.org)
Paul Issler – Los Angeles (213-229-7763, email@example.com)
Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, firstname.lastname@example.org)
Charles F. Feldman – New York (212-351-3908, email@example.com)
Michael J. Collins – Washington, D.C. (202-887-3551, firstname.lastname@example.org)
Sean C. Feller – Los Angeles (213-229-7579, email@example.com)
Amber Busuttil Mullen – Los Angeles (213-229-7023, firstname.lastname@example.org)
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