R E TA I L & P R O F E S S I O N A L S E RV I C E S I
N
T
H
E
S
O
U
T
H
B
A
Y
Recent Developments Affecting Businesses By Lee R. Petillon and Mark T. Hiraide “Dodd-Frank,” “Say-on-Pay,” “Proxy Access,” dominate today’s headlines in the financial media. The following is a quick overview of these and other recent regulatory developments and how they may affect small and medium size businesses. Shareholder Democracy: “Say-on-Pay” and “Proxy Access” The authority to oversee a corporation’s management is vested in its Board of Directors. With the rise of institutional shareholder activism, and a perceived lack of oversight over executive compensation by Boards of Directors, both Congress and the Securities and Exchange Commission have recently enacted laws that allow shareholders who have owned at least 3% of a public company for three years to nominate directors, and all shareholders to voice an opinion on executive pay. Regulations adopted by the SEC on August 25, 2010, pursuant to the DODDFRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT, which became effective on July 22, 2010, require public companies, not less frequently than once every three years, to include in their annual proxy statement a resolution to approve or disapprove of the compensation paid to the company’s top executives (CEO, CFO and the three other most highly compensated executive officers). Although the resolutions are non-binding, we expect many compensation practices, such as guaranteed salary increases, non-performance based bonuses, perquisites for former and/or retired executives, excessive change-in-control payments and change-in-control payments without job loss or substantial diminution of duties, will come under increased scrutiny. Other provisions of Dodd-Frank that significantly increase regulation in the
financial services industry include: Private Equity Funds: managers/advisors to hedge funds and domestic private equity funds managing assets over $100 million are now required to register with the SEC under the Investment Advisers Act of 1940, submitting to extensive record keeping and regulation; Insurance Companies: a new Federal Insurance Office will monitor the industry with rules designed to promote uniformity among the states in market regulation of specified types of insurance, and, for the first time, some of the largest insurance companies will be designated as “nonbank financial companies,” subject to oversight by the Federal Reserve (whereas insurance companies have traditionally been regulated by the states); Capital Markets: home equity is now excluded from the calculation of net worth for determining whether an investor is an “accredited investor” (under the Securities Act of 1933, the requirements for disclosure, the number of investors permitted and other limitations are relaxed for sales of securities to “accredited investors”); Consumer Finance: a new governmental authority, the “Bureau of Consumer Financial Protection” is given broad power to regulate retail financial products and services, and to promote the new prohibitions or restrictions on certain lending practices.
LEE R. PETILLON Partner Petillon Hiraide Loomis Zagzebski & Zagzebski LLP
MARK T. HIRAIDE Partner Petillon Hiraide Loomis Zagzebski & Zagzebski LLP
Continued on page 22
Both Congress and the Securities and Exchange Commission have recently enacted laws that allow shareholders who have owned at least 3% of a public company for three years to nominate directors, and all shareholders to voice an opinion on executive pay. TO R R A N C E M AG A Z I N E
I
O C TO B E R 2 0 1 0
21