New Regulations Implement EESA and ARRA Compensation Restrictions

On June 10, 2009, the Treasury Department issued regulations implementing and providing guidance on the executive compensation and corporate governance provisions of the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009, which apply to entities receiving financial assistance from the federal government under the Troubled Asset Relief Program (“TARP”). The regulations were published in the Federal Register, and generally became effective, on June 15, 2009.

The regulations provide guidance on a number of important questions regarding the application of the TARP executive compensation requirements. The attached memorandum summarizes and analyzes the new regulations, including some new interpretive questions that they raise. The regulations, as published in the Federal Register, are also attached. Some of the highlights of the regulations are as follows:

• The TARP requirements are implemented by the regulations and generally do not apply retroactively. Limitations on bonus payments do not apply to bonuses paid or accrued before June 15, 2009, and the prohibition on golden parachute payments does not apply to payments due to departures before June 15, 2009. (However, existing restrictions agreed to in contracts with Treasury continue to apply.)
• Employees of all affiliates under a 50% control group test are potentially subject to the rules, extending the reach of the rules to a broader group of employees than the 80% control group test that applied pursuant to the prior rules under the Capital Purchase Program.
• “Senior executive officers” and additional highly compensated employees subject to the rules are identified using an approach similar to the compensation disclosure rules under the Securities Exchange Act of 1934. However, the additional highly compensated employees are not limited to executive officers.
• The prohibition on paying or accruing bonuses does not apply to qualifying commission compensation, or to grandfathered payments to which the employee had a legally binding right under an arrangement existing prior to February 11, 2009. The grandfather includes arrangements such as equity awards and deferred compensation plans (and is not limited to a narrow interpretation of “employment agreement”).
• Guidance is provided on how permissible awards of restricted stock are to be structured. Restricted stock units payable in cash and phantom units based on the value of a business division or unit are also permitted. Awards must have at least a two-year service-based vesting condition and may only be transferred or paid out in stages as portions of TARP funding are repaid.
• A portion or all of base salary may be paid in the form of equity awards, as long as no vesting condition applies and the payments are made on a periodic basis like the underlying salary payments.
• Prohibited “golden parachute payments” now include payments triggered by a change in control, as well as payments due to departure.
• Golden parachute payments do not include payments for services performed or benefits accrued, such as vested deferred compensation and pension amounts.
• Payments may be delayed as necessary to comply with the rules (e.g., until TARP obligations are repaid or until an employee is no longer subject to the rules) without violating Section 409A of the Internal Revenue Code.
• The Office of the Special Master for TARP Executive Compensation is established to review certain payments to employees of TARP recipients.