The U.S. House of Representatives voted today to require public companies to hold annual "say on pay" advisory votes on executive compensation.

The bill, the "Corporate and Financial Institution Compensation Fairness Act of 2009," passed by a 237-to-185 vote, with most Democrats supporting the legislation. Just two Republicans voted for H.R. 3269, while 16 Democrats opposed the measure. The overall margin of support was less than in 2007, when 269 House members supported similar advisory vote legislation.

This year's bill also calls for financial firms with more than $1 billion in assets to provide more disclosure on incentive pay, and directs regulators to prepare rules to deter "inappropriate or imprudently risky compensation practices." In addition, the bill would impose stricter independence standards on compensation committees and authorize pay panels to retain their own independent consultants.

Lawmakers voted along party lines to reject an amendment from Republican Rep. Scott Garrett of New Jersey that would only require an advisory vote once every three years and would allow companies to opt out of advisory votes for five years if they obtained a two-thirds investor vote.

"We have found out what happens when there are no rules, when there is no oversight, when there is no watchdog," Rep. Brad Miller, a Democrat from North Carolina, said during floor debate on the bill, according to the Dow Jones news service.

Republicans criticized the legislation as another example of government intervention into private business. The bill would "take away the rights of individual companies to conduct business as they see fit," said Rep. Michael Castle, a Delaware Republican, according to The New York Times.

The bill's prospects for becoming law appear to be good. The Obama administration supports annual advisory votes, while Senator Christopher Dodd, who chairs the Banking Committee, pushed for requiring pay votes at federally supported financial firms earlier this year. The Senate will likely consider advisory vote legislation after it returns from its August recess in September.

The House bill no longer has a Dec. 15, 2009, deadline for companies to start holding advisory votes. The legislation now directs the Securities and Exchange Commission to issue final rules within six months of the date of enactment; the pay vote requirement would apply to all shareholder meetings held more than six months after final rules are released. Assuming the bill is not enacted until mid-September, and the SEC permits a 60-day comment period before finalizing rules, it appears that most companies with spring 2010 meetings will not be required to conduct advisory votes.

The House of Representatives is scheduled to vote today on legislation that would require U.S. companies to hold annual advisory votes on executive compensation. However, the version of the bill that was passed by the House Financial Services Committee this week includes a notable change that hasn't gotten much attention.

The bill no longer has a Dec. 15, 2009, deadline for companies to start holding advisory votes. The legislation now directs the Securities and Exchange Commission to issue final rules within six months of the date of enactment; the pay vote requirement would apply to all shareholder meetings held more than six months after final rules are released. Assuming the bill is not enacted until at least September and the SEC permits a 60-day comment period before finalizing rules, it appears that most companies with spring 2010 meetings will not be required to conduct advisory votes.

Some institutional investors, such as the United Brotherhood of Carpenters, have complained about the potential burden of analyzing the compensation practices of thousands of companies every year. Assuming that the Dec. 15 deadline is not restored later in the legislative process, both companies and investors will have more time to prepare for marketwide "say on pay" votes.

The House Financial Services Committee approved legislation on Tuesday that would require U.S. companies to hold annual advisory votes on executive compensation.

The bill, H.R. 3269, calls for a "say on pay" advisory vote at public companies after Dec. 15, 2009, as well as separate shareholder votes on "golden parachute" payments. The Democratic-sponsored legislation, the "Corporate and Financial Institution Compensation Fairness Act of 2009," was approved on a straight party line vote of 40 to 28.

At the request of the bill's chief sponsor, Rep. Barney Frank, the committee amended the bill to allow the Securities and Exchange Commission to exempt smaller issuers from the advisory vote requirement. The panel also approved an amendment from Democratic Rep. Mary Jo Kilroy of Ohio that would require institutional investors (with more than $100 million in assets) to annually report their votes on "say on pay" and golden parachute agenda items. Mutual funds now must disclose their proxy votes, but hedge funds and public pensions don't have to.

The bill is scheduled for a full House vote on Friday, where it is likely to pass, and is not expected to be considered by the Senate until later this year.

The House bill also would impose stricter independence standards on compensation committees; and authorize pay panels to retain their own independent consultants. In addition, financial firms would have to provide enhanced disclosure of incentive-based pay arrangements to federal regulators, which would determine "whether the compensation structure is aligned with sound risk management; is structured to account for the time horizon of risks; and reduces unreasonable incentives for officers and employees to take undue risks that could threaten the safety and soundness of covered financial institutions."

Rep. Spencer Bachus of Alabama, the ranking Republican on the committee, opposed the incentive-pay review provision, arguing that it would "empower the federal government to have the say on pay." According to Bachus, the Republican plan of "no more bailouts and no more injecting tax payer money into these companies is the ultimate solution."

Other Republicans offered amendments in an attempt to lighten the burden on issuers. Rep. Scott Garrett of New Jersey called for a non-binding shareholder vote every three years, and to permit companies to opt out of the "say on pay" mandate with a two-thirds shareholder vote. His amendment was rejected by a 26-to-41 vote. Some investors, including the United Brotherhood of Carpenters, have argued that triennial votes also would lessen the burden on shareholders and allow for more thoughtful consideration of pay practices.

The House panel approved four Republican-sponsored amendments. Those amendments would: exempt compensation approved by shareholders from a "claw back" unless there was fraud; exempt financial institutions with less than $1 billion in assets from the bill's incentive-pay provisions; direct the Government Accountability Office to study the correlation between compensation structures and excessive risk-taking, and add Fannie Mae and Freddie Mac to the financial institutions subject to the incentive-pay rules.

The Canadian Coalition for Good Governance (CCGG), which represents pension funds and other institutional investors, is urging companies to move away from stock awards and to place a greater emphasis on "pay for performance."

So far, the group has met with the compensation committees at 11 large issuers, including most of Canada's major banks. Coalition members plan to meet with directors at 25 more companies in the coming year, including those in energy sector.

In June, the coalition released a set of six principles that it wants boards to consider when devising compensation packages. The principles, which supplement the CCGG's 2005 compensation guidelines, include:

* "pay for performance" should be a large component of executive compensation;

* "performance" should be based on measurable risk adjusted criteria, matched to the time horizon needed to ensure the criteria have been met; compensation should be simplified to focus on key measures of corporate performance;

* executives should build equity in their company to align their interests with shareholders;

* companies should limit pensions, benefits, and severance and change of control entitlements; and

* effective succession planning reduces paying for retention.

Meanwhile, 13 issuers have agreed to start holding annual advisory votes on compensation in 2010 after shareholder "say on pay" proposals received unexpectedly broad support at Canada's major banks this year. Unlike the Obama administration, Canada's federal government has not called for legislation to mandate advisory votes, so investors likely will continue their efforts to seek voluntary "say on pay" votes.

According to Debra Sisti, head of Canadian Research at RiskMetrics, the CCGG is working with the "say on pay" target companies, the shareholder proponents who submitted the resolutions, legal counsel, and other relevant industry consultants in an inclusive process to draft wording for Canada's first management advisory vote proposal. The exercise aims to result in a version that will be acceptable to all issuers and investors.

Shareholders likely will be asked to vote on a proposal much like the more general version seen in the U.S. this year that asks for approval of the report of the compensation committee, the compensation discussion and analysis, and/or the accompanying tabular disclosures. Under advisory votes, there is an expectation that boards will take ownership of this disclosure to ensure its completeness and accuracy, Sisti said.

Even good directors can find themselves in the untenable position of having to capitulate on compensation issues with a strong corporate leader who, in their opinion, could not easily be replaced. For this reason, some corporate directors they have expressed the view that advisory votes will be a positive tool with which they can press more successfully for pay tied to performance, and if necessary, compensation restraint, Sisti noted.

Rep. Barney Frank, chairman of the House Financial Services Committee, today released a "discussion draft" of legislation that would require shareholder advisory votes and address other executive compensation concerns.

His bill would require annual "say on pay" votes at all U.S. companies after Dec. 15, 2009; mandate separate investor votes on "golden parachute" payments; impose stricter independence standards on compensation committees; and authorize pay panels to retain their own independent consultants. The bill also directs the Securities and Exchange Commission to prepare a study on pay consultant independence within two years.

In a press release, Frank, a Democrat from Massachusetts, said his committee would mark up the bill next week. The advisory vote provisions are similar to those in legislation that the House of Representatives approved in 2007. The Treasury Department released its own version of advisory vote legislation on Thursday. Currently, only companies that have received (and not paid back) federal assistance from the Troubled Asset Relief Program (TARP) are required to hold annual votes on pay.

"With the SEC's unanimous support for 'say on pay' for TARP companies, the Treasury declaration for an advisory vote, and Congressman Frank's indication that he will move forward on legislation this month, there is a virtually inevitable movement toward institutionalizing the advisory vote," noted Tim Smith, senior vice president at Walden Asset Management, which is part of an investor coalition of pay vote proponents. "The next challenge is finding other new and creative ways to limit compensation spiraling out of control."

Frank's draft bill, the "Corporate and Financial Institution Compensation Fairness Act of 2009," also directs the SEC, the Federal Reserve, and other financial regulators to jointly prepare regulations to "reduce perverse incentives." Within 270 days of the enactment of the legislation, regulators would issue rules that direct firms to disclose information on their incentive-based pay arrangements so regulators can determine if their compensation structures "properly" measure and reward performance, are "structured to account for the time horizon of risks," are "aligned with sound risk management," and meet other criteria set by regulators. The bill also calls for rules within 270 days that prohibit compensation structures that financial regulators conclude would encourage "inappropriate risks by financial institutions or officers or employees [of those firms] that could have serious adverse effects on economic conditions or financial stability;" or "could threaten the safety and soundness" of the firm.

Under Frank's bill, these regulations would not be limited to TARP firms and would apply to all banks, bank holding companies, broker-dealers, credit unions, investment advisers, and other financial institutions designated by regulators.

On Thursday, the U.S. Treasury Department delivered draft legislation to Congress that would require all public companies to hold an annual advisory vote on compensation. The bill also calls for separate votes on "golden parachute" payments when shareholders vote on mergers or other transactions.

The annual vote would include pay packages for a company's senior executive officers, including the tables summarizing their salaries, bonuses, stock and option awards and total compensation, as well as summaries of golden parachute and pension compensation and the narrative explanation of the board's compensation decisions.

The press release announcing the legislation cited the perceived success of advisory votes in the United Kingdom in increasing dialogue and engagement that have led to pay modifications, as well as the "restraint" shown by investors in that market and the London Stock Exchange's touting of these votes as a competitive edge in attracting capital. While some U.S. companies have agreed to conduct annual pay votes, most have not, the Treasury noted, despite increasing support for the idea from investors.

In related draft legislation, the Treasury called for Congress to take steps to ensure that compensation committees are "independent in fact, not just in name." If enacted, this bill would implement three requirements to that end. First, it requires that members of the compensation committee meet new standards for independence, just as Sarbanes-Oxley did for audit committee members. Second, to ensure that committees are receiving objective advice, any compensation consultants and legal counsel the committee hires would have to be independent from company management. Finally, the legislation requires that compensation committees be given the authority and funding to hire such independent compensation consultants, outside counsel, and other advisers who can help ensure that the committee bargains for pay packages in the best interests of shareholders. At the same time, if the committee decides not to use its own compensation consultant, it would have to explain that decision to shareholders.

Citing academic studies, as well as recommendations from the National Association of Corporate Directors and the Business Roundtable, the Treasury said, "Providing compensation committees with access to independent consultants can level the playing field in a way that protects shareholder interests."

The House of Representatives, which passed advisory vote legislation in 2007, likely will act on the Treasury's legislative proposals soon. Rep. Barney Frank, chair of the House Financial Services Committee, told reporters on Thursday that his panel plans to consider advisory vote legislation in late July, according to the Reuters news service.

While it's unclear when the Senate will address the issue, Senator Christopher Dodd, who chairs the Senate Banking Committee, was the main proponent of requiring federally supported financial firms to hold advisory votes this year.

During a House of Representatives hearing on Tuesday, SEC chair Mary Schapiro said she would support legislation that would confirm the authority of the commission to issue a proxy access rule.

Schapiro was asked by Rep. Gary Peters of Michigan if she agreed with Commissioner Elisse Walter's recent comments that access legislation "would remove the distraction of challenges to [the SEC's] authority" to issue a rule to permit investors to nominate board candidates to appear on corporate proxy statements. Peters and Senator Charles Schumer have introduced separate bills that call for proxy access and other governance reforms.

Schapiro told Peters that a "legislative backstop" would be "helpful" and said she expected that the SEC's proposed proxy access rule would face a court challenge. A divided commission voted 3-2 in May to issue an access rule; comments on the proposal are due Aug. 17. SEC officials say they hope to finalize an access rule before the 2010 proxy season.

Business groups and the SEC's two Republican commissioners have questioned whether the agency's authority to regulate proxy disclosures would also allow it to impose a marketwide access rule that would impact board elections, which are governed by state law. Earlier this decade, federal appeals courts ruled that the SEC lacked the authority to impose independence rules on mutual fund boards and to require hedge fund registration.

Schapiro also said she would welcome legislation that would allow investors to sue credit rating firms, such as Moody's and Standard & Poor's, which have been criticized by investors over the high ratings that they gave to mortgage-backed securities before the credit crisis. Senator Jack Reed of Rhode Island has sponsored a bill that would allow lawsuits against credit rating firms if they knowingly fail to review key information in developing ratings. In the past, courts have ruled that rating companies have First Amendment protection from lawsuits by investors who rely on their ratings.

Schapiro said legislation allowing investor lawsuits may help improve the quality of ratings. "It may make a big difference. You have to be careful in crafting it. You want credit rating agencies to work," she said, according to the Reuters news service.

Rep. Paul Kanjorski, chairman of the House's capital markets subcommittee, agreed and noted: "Anything we can do to get rating agencies more responsive to quality analysis is vitally important," according to Reuters.

In her prepared remarks to the subcommittee, Schapiro said the SEC was looking at possible regulations to address "rating shopping." The agency may require issuers to disclose the preliminary ratings they receive from credit agencies before selecting a firm to issue a public rating. She also said the SEC would establish a group of examiners to conduct routine compliance reviews of credit firms.

Throughout Tuesday's hearing, Schapiro generally received a warm reception from lawmakers, including from several Republicans on the subcommittee. Several Democrats promised to give the SEC more resources to hire staff, while Republican Rep. Jeb Hensarling of Texas called for "smarter regulation and smarter regulators."

Securities Docket will host a webcast on Tuesday, July 21 at 11 a.m. EDT on the securities litigation issues facing institutional investors. The webcast will include securities litigation experts and academics who will examine the fiduciary duties of institutional investors.

Significant topics to be covered, include:

-Monitoring the portfolio: When and why you would want to be a lead plaintiff

-Don't leave money on the table: Filing claim forms in settled cases to recover losses

-Opting in: Navigating the waters of non-US securities litigation

-Opting out: When does it make sense to leave the safety of the class action and pursue an individual case

Bruce Carton of Securities Docket will moderate the webcast, and panelists include Adam Savett, Director of RiskMetrics' Securities Class Action Services; Salvatore J Graziano, Partner, Berstein Litowitz Berger & Grossmann, LLP; and Wayne Schneider, General Counsel of the New York State Teachers' Retirement System.

To register for the webcast, please visit here.

The U.S. Treasury Department has released a draft bill, the "Investor Protection Act of 2009," which would increase the authority of the Securities and Exchange Commission to protect retail investors.

The new powers outlined for the SEC were part of the regulatory reform proposals released by the Obama administration in mid-June. The Treasury bill would authorize the commission to:

* Promulgate rules to harmonize the fiduciary duty standards for broker, dealers, and investment advisers and to clarify that any investment advice should in the interests of the investor, rather than the broker, dealer, or investment adviser.

* Prohibit sales practices and compensation schemes by brokers, dealers and investment advisers that are contrary to investors' interests.

* Restrict investor agreements with brokers, dealers, investment advisers, and municipal securities dealers that mandate arbitration of future disputes.

* Require investment funds to provide a summary prospectus (with disclosure of costs) to investors before completion of a sale.

* Provide payments to whistleblowers who assist the SEC in fraud cases that result in penalties that exceed $1 million. The SEC now only has the authority to compensate whistleblowers in insider trading cases.

* Bar regulated persons who engage in misconduct from serving in any part of the securities industry, rather than just one market segment.

The legislation also would make permanent the SEC's new Investor Advisory Committee. The bill states that the group should meet at least twice a year.

While the Obama administration has said supports legislation to mandate "say on pay" votes at all public companies, the Treasury Department's bill does not address that matter or other contentious governance issues, such as proxy access, that are included in bills offered by Democratic lawmakers.

Senator Charles Schumer of New York and Rep. Gary Peters of Michigan have introduced separate bills that would require companies to hold an annual advisory vote, to allow shareholders to nominate board candidates to appear on management proxy statements, to adopt a majority vote standard in uncontested director elections, and to appoint an independent board chair.

In addition, Senator Richard Durbin of Illinois has introduced legislation, the "Excessive Pay Shareholder Approval Act," that calls for supermajority shareholder approval of "excessive" executive pay. His bill, S. 1006, would require public companies to obtain 60 percent investor approval before paying total compensation to an executive that exceeds 100 times the average compensation paid to all employees.

In April, Rep. Peter DeFazio of Oregon introduced an amendment to require binding (instead of advisory) compensation votes at financial firms that receive government assistance, but the House rejected his proposal.

The U.S. government intends to take a neutral stance on non-binding shareholder proposals at Citigroup, General Motors, and other companies where it has a voting stake, according to Bloomberg News.

Although the Treasury Department won't release its voting policies until later this month, department officials say they likely will use "proportional" or "mirror" voting on shareholder proposals to replicate the votes of other investors, Bloomberg News reported on July 6.

It appears that the government's voting policies will be similar to those in place at Citigroup. In a June 9 share exchange agreement with the financial giant, the Treasury Department said the government would vote in the "same proportion" as other common stockholders on all agenda items except six "designated" matters: the election or removal of directors; the approval of any business combination; the sale of all or substantially all of the company's assets; dissolution of the company; the issuance of new securities; and any charter or bylaw amendments. In a June 1 press release on its stake in General Motors, the Obama administration said it would vote only on "core governance" matters and "intends to be extremely disciplined as to how it intends to use even these limited rights."

Andrew Williams, a Treasury spokesman, told Bloomberg News that the Citigroup and General Motors policies are "a good gauge of where we are going on this."

While the U.S. government arguably has a fiduciary duty as a responsible shareowner and as a representative of taxpayer investments to review the merits of shareholder proposals, it appears that the Treasury Department is trying to avoid making policy decisions on governance, social, and environmental issues that are regulated by other federal agencies. At the same time, the government will still have an active role in overseeing compensation. The Treasury Department has appointed a "special master" to review executive pay at Citigroup, Bank of America, Chrysler, General Motors, and American International Group, all of which have received more than one federal capital infusion.

While some activists may be disappointed that the government won't be supporting their proposals, other investors point out that a neutral stance is better than following management recommendations. At AIG's June 30 annual meeting, the three Federal Reserve-appointed trustees voted against investor proposals seeking a retention period for executive equity grants, reincorporation to North Dakota, and the right of investors to call special meetings. With the AIG trust holding a 79.8 percent stake, all three proposals received less than 5 percent support.

However, John Keenan of the American Federation of State, County, and Municipal Employees noted that the union's "hold through retirement" retention proposal, which posted a 3.7 percent vote at AIG, actually received 54 percent majority support if the trustees' 10.64 billion shares are excluded.

July 1 was a momentous day at the U.S. Securities and Exchange Commission as the commissioners approved a long-awaited board election reform and proposed a series of wide-ranging disclosure rules.

By a 3-2 vote, the SEC gave final approval to a New York Stock Exchange rule change to bar brokers from casting uninstructed client shares in uncontested director elections starting in 2010.

The rule approval was praised by advocates for institutional investors, which have lobbied for a ban on "broker votes" for more than a decade. However, the SEC's two Republican commissioners warned that the new rule could diminish the influence of retail shareholders, increase the number of directors who lose their seats each their year, and impose additional costs on issuers.

Also on July 1, the SEC unanimously voted to propose new rules that seek more information on compensation risks, other services performed by pay consultants, director qualifications, and board leadership structures. The disclosure proposals also include a new mandate that companies disclose proxy vote results in an 8-K filing within four business days of an annual meeting, instead of up to several months later in a quarterly filing. The commission also voted to issue draft rules that address the annual advisory vote on pay requirement that now applies to financial firms that receive support under the Troubled Asset Relief Program (TARP). Both rule proposals will be subject to a 60-day comment period, and SEC officials hope to have final rules in place before the 2010 proxy season.

By a 3-2 vote, the SEC today approved a long-anticipated New York Stock Exchange proposal to bar brokers from casting uninstructed client shares in uncontested director elections.

Also today, the SEC unanimously voted to propose new rules that seek more information on compensation risks, director qualifications, and board leadership structures. In a pleasant surprise for investor activists, the disclosure proposals also include a new mandate that companies disclose proxy vote results in an 8-K filing within four business days of an annual meeting, instead of several months later in a quarterly filing. The commission also voted to issue draft rules that codify the annual advisory vote on pay requirement that now applies to federally supported financial firms. Both rule proposals will be subject to a 60-day comment period.

The "broker vote" rule change, which takes affect on Jan. 1, 2010, will apply to all NYSE-listed issuers, except for registered investment companies. The rule change, which was backed by many institutional investors, may lead to a significant increase in the number of directors who fail to win majority support in the face of shareholder "vote no" campaigns.

Commissioners Troy Paredes and Kathleen Casey voted against the rule change. They warned that the amendment to NYSE Rule 452 could diminish the influence of retail investors while increasing the power of institutional shareholders. They also said that the SEC should have moved first to address other "proxy plumbing" issues, such as the shareholder communication rules and the problems of "empty" and "over voting."

While noting the concerns raised by issuers and the commissioners who urged delay of the rule change, SEC chair Mary Schapiro recalled that the rule was first drafted three years ago by a NYSE proxy working group with a "widely diverse" membership. "Keeping hard decisions on hold for many years doesn't solve any problems. It's time to move forward," Schapiro said.

Schapiro called on the SEC staff to start work on developing regulatory proposals to address other proxy voting issues. However, any such rules won't be proposed and finalized in time for the 2010 proxy season. SEC staff members said the commission may hold a roundtable on these issues in October or November.

Schapiro also urged the agency staff to work with the NYSE and issuers on new efforts to educate investors about proxy voting in the absence of broker votes.

For more details on today's agenda items, click here.