Corporate Governance

Reconciling Financial Reform

By Tamar Weinrib

Tomorrow, lawmakers will meet to attempt to reconcile the different versions of financial reform bills before the House and the Senate.  With regard to the issue of executive pay, the Senate version of the bill states that shareholders would have the right to cast nonbinding votes on executive pay packages and the Fed would set standards on excessive compensation that would be deemed an unsafe and unsound practice for the bank.  The House version gives shareholders the same right and states that regulators would have a say on compensation practices, not on pay itself.  On the issue of rating agencies the Senate version provides for an independent board that would select ratings agencies to assess the risks of new financial products, replacing a long-standing practice where banks select and pay ratings agencies to rate their new offerings. The bill would also require a wholesale re-evaluation on how the government uses ratings agencies to assess risk. Ratings agencies have been lambasted for their role in the current economic crisis stemming from their willingness to give undeserved high ratings to bad mortgage-related securities.  The House version states that ratings agencies would have to register with the Securities and Exchange Commission and would face increased liability standards.  Both bills contain provisions that affirm the authority of the Securities and Exchange Commission to adopt a proxy access rule.  Both bills include an annual ?say on pay? mandate, but the House version permits the SEC to exempt small issuers. As opposed to the Senate legislation, the House bill also would require shareholder votes on ?golden parachute? arrangements. Both bills include various provisions to increase the independence of compensation committees and their advisers.   Both bills would require advisers to hedge funds to register with the SEC, subjecting them to record keeping, examination, and disclosure requirements.  The Senate bill, however, exempts private equity fund advisers, while the House version includes such advisers in the registration requirement. 

The need for financial reform is undisputed and the final version of the financial reform bill will shape the economic landscape going forward.  In a letter to Congressional leaders, the Council of Institutional Investors has voiced its support for corporate governance reform in the bill.  To read the letter click here.

Full post as published by PomTalk on June 09, 2010 (boomark / email).