The Prospective Impact on Public Companies of theFinancial Regulatory Reform Bills: A Legislative Update
June 3, 2010
On May 20, 2010, the U.S. Senate passed a comprehensive set of financial regulatory reforms
that, if enacted, will represent the most sweeping set of changes to the U.S. financial regulatory
system since the Great Depression. The reforms, which are set forth in a bill of more than 1,500
pages called the Restoring American Financial Stability Act of 2010 (S. 3217, or the “SenateBill”), come after nearly a year of Congressional hearings and months of stop-and-startlegislative negotiations.1 The Senate Bill tracks many of the themes contained in the Wall Street
Reform and Consumer Protection Act of 2009 (H.R. 4173, or the “House Bill”) that was passedby the U.S. House of Representatives on December 11, 2009.2 Both bills mandate specificexecutive compensation and corporate governance practices at U.S. public companies generally.
Set forth below are highlights of the provisions of the Senate Bill and the House Bill relating to
executive compensation and corporate governance. In some cases, the requirements of the bills
would only apply to companies that have listed their securities on a national securities
exchange such as the New York Stock Exchange (“NYSE”) or the NASDAQ Stock Market, but,in other cases, the requirements would apply to all companies that are required to deliver a
proxy or information statement to shareholders.
Compensation Committee Independence; Independence of Compensation Committee Consultantsand Advisers – The Senate and House Bills would require the SEC to issue rules directing
the national securities exchanges to prohibit the listing of any security of a company thatfails to have a compensation committee comprised entirely of members subject to aheightened independence standard. This prospective legislative mandate tracks theSarbanes-Oxley requirement that audit committees of listed companies be composed
entirely of independent directors that meet a higher standard of independence.3 To theextent that the SEC, in promulgating rules defining “independence” for compensationcommittee purposes, adheres to the same standards applicable to independence for
audit committee purposes, public companies may have to exclude private equity
sponsors from their compensation committees. The bills would also impose additional
requirements relating to the retention and independence of compensation consultants
and to disclosure regarding the use of such consultants.

1

The Senate Bill is available at:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173eas.txt.pdf.

2

The House Bill is available at:
http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/FinancialRegulatoryReform/hr4173eh.pdf.

3

Section 952 of the Senate Bill requires that, in determining independence for purposes of membership on the compensationcommittee, companies must consider any consulting or other compensatory fees paid to a director as well as any affiliationthat a director may have with the company, its subsidiaries or any affiliates of the company’s subsidiaries.

Memorandum – June 3, 2010

Annual Shareholder “Say on Pay” and “Golden Parachute” Votes – Both the Senate andHouse Bills generally provide that proxy statements that contain compensation
disclosure under SEC rules must include a separate non-binding annual shareholder
vote on compensation paid to certain executive officers. In addition, to the extent thatany “golden parachute”-related compensation is not approved at the annual “say on payvote,” the House Bill, but not the Senate Bill, would require a separate shareholder voteon such golden parachute compensation at any meeting at which shareholders are asked
to approve a merger, acquisition or other extraordinary transaction. The Senate Bill also
includes a requirement that the national securities exchanges prohibit broker
discretionary voting in connection with the election of directors, executive compensationor any other significant matter (as determined by the SEC), which would ensure that
discretionary voting by brokers would not be permitted in say on pay or golden
parachute votes.

Additional Compensation Disclosures – Under the Senate Bill, the SEC would be directed toissue rules requiring companies to disclose in annual proxy statements a “cleardescription” of compensation that is being offered to executive officers, including
information that shows, graphically or otherwise, “the relationship between executive
compensation actually paid and the financial performance of the issuer, taking into
account any change in the value of the shares of stock and dividends of the issuer andany distributions.” The SEC would also be directed to require companies to makeadditional disclosure regarding internal pay disparity between the CEO’s compensationand the median annual total compensation of all employees (other than the CEO) andregarding whether directors and employees of the companies are permitted to hedge
their equity in the companies. There are no comparable provisions in the House Bill.

Clawback of “Erroneously Awarded” Compensation – Under the Senate Bill, the SEC is also
directed to require national securities exchanges to prohibit the listing of any security
issued by a company that fails to adopt and implement a policy providing for theclawback of “erroneously awarded” incentive-based compensation received by any
current or former executive officer on the basis of financial statements that had to berestated due to material noncompliance with any financial reporting requirement under
the securities laws. There is no comparable provision in the House Bill.

Majority Voting Standard – Under the Senate Bill, public companies would be required toapply a majority voting standard in uncontested elections for directors. If a director
were to receive less than a majority of votes cast in such an election, then the director
would be required to tender his or her resignation. However, the board of directors
may, upon a unanimous vote, decline to accept such resignation, provided that within
30 days after the uncontested election the board publicly discloses the specific reasons
why it chose not to accept the resignation and how it determined such a decision was in
the best interests of the company and its shareholders. There is no comparable
provision in the House Bill.

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Memorandum – June 3, 2010Proxy Access for Shareholder Nominees – Both the Senate and House Bills would authorize
the SEC to promulgate rules requiring issuers to include in their proxy materials director
nominees submitted by shareholders.

Disclosure on Dual CEO/Chairman Roles – Under the Senate Bill, the SEC would berequired to promulgate rules requiring public companies to disclose in their annual
proxy statements the reasons why they have chosen either to have one person to serve inthe dual roles of chairman of the board of directors and chief executive officer or to havedifferent individuals serve in such roles. It is unclear whether the Senate Bill would
require companies to disclose information that they are not already required to disclose
by SEC rules. There is no comparable provision in the House Bill.
***The Senate and House Bills contain important provisions applicable to public companies. Whilethese bills share many of the same features, there are some significant differences, and thelegislative terrain is far from settled as the bills undergo the reconciliation process. Even after
the reconciled legislation is enacted into law, many key details will be left to regulators to dealwith through the rulemaking process, which itself will present further questions anduncertainties. In the weeks and months ahead, we will continue to monitor legislative andregulatory developments affecting public companies.

This memorandum is for general informational purposes and should not be regarded as legal advice.
Furthermore, the information contained in this memorandum does not represent, and should not be
regarded as, the view of any particular client of Simpson Thacher & Bartlett LLP. Please contact yourrelationship partner if we can be of assistance regarding these important developments. The names andoffice locations of all of our partners, as well as additional memoranda, can be obtained from our website,www.simpsonthacher.com.

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it are
rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

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