Title VII (Division B) of the American Recovery and Reinvestment Act of 2009
(the "Stimulus Package Act") further limits executive compensation for financial institutions receiving assistance under the Troubled Asset Relief Program ("TARP") enacted in the Emergency Economic Stabilization Act of 2008 ("EESA").
In particular, the Stimulus Package Act prohibits all severance payments for the top five executives, prohibits all incentive compensation other than restricted stock equal to a maximum of one-third of total compensation, expands the number of executives subject to these limitations compared with the original legislation and in the Treasury?s initial guidance under the TARP Capital Purchase Program (CPP),
and imposes new corporate governance requirements on TARP recipients.
Among the new rules is a requirement that TARP-recipient shareholders be given an annual, non-binding "say on pay." All of these rules apply only during the time the TARP recipient has outstanding obligations to the federal government arising from its financial assistance (the "TARP Obligation Period").
The Stimulus Package Act requires the Secretary of the Treasury to establish standards to apply to TARP recipients during the TARP Obligation Period. The standards include compensation and corporate governance provisions, as well as the following limitations that apply to the five most highly paid senior executive officers (SEOs) whose compensation is reported on the TARP recipient's proxy statement, and in some cases to a broader group of employees. The provisions apply only during the TARP Obligation Period. The standards, which will be supplemented by regulations and other guidance, include the requirement that the TARP recipient have the following:
(A) Limits on Risk Exposure Incentives. Limits on compensation arrangements that foster the taking of unnecessary and excessive risks that threaten the value of the TARP recipient, thus codifying the similar requirement contained in the initial guidance under the CPP.
(B) Bonus Clawback. An arrangement to recover any bonus, retention award or incentive compensation based on earnings, revenues, gains or other criteria that are later found to be materially inaccurate. The amendment codifies the provision included in the Initial Guidance under the TARP CPP but now extends the clawback beyond amounts paid to any SEO to include the next 20 most highly compensated employees.
(C) Prohibited Severance. A prohibition on "golden parachute" payments, defined to include any payment to an SEO and the next five most highly compensated employees for departure from a company for any reason, except for payments for services performed or benefits accrued. The Stimulus Package Act expands the definition of "golden parachute" to extend to all severance and not just severance that would not be deductible for federal income tax purposes.
(D) Limit Incentive Compensation Except for Certain Restricted Stock. A prohibition on paying certain executives any bonus, retention or incentive compensation other than certain long-term restricted stock that meets the following criteria:
(i) does not fully vest during the TARP Obligation Period,
(ii) has a value not greater than one-third of the total annual compensation of the employee receiving the stock, and
(iii) is subject to such other restrictions as the Secretary of the Treasury may determine are in the public interest. However, the scope of executives subject to these limitations on incentive compensation depends on the magnitude of the federal assistance received by the TARP recipient as indicated in the following table and arrangements pursuant to a written employment agreement executed on or before February 11, 2009, are grandfathered from the limitation on incentive compensation:
TARP Financial Assistance
Covered Executives *
Most highly compensated employee only
Five most highly compensated employees or higher public interest number
SEOs and 10 next most highly compensated employees or higher public interest number
SEOs and 20 next most highly compensated employees or higher public interest number 
* "higher public interest number" means such number as the Secretary of the Treasury determines is in the public interest with respect to any TARP recipient.
(E) Ban on Plans that Encourage Earnings Manipulation. A prohibition on any compensation plan that would encourage manipulation of the reported earnings of a TARP recipient to enhance the compensation of any of its employees.
(F) Required Compensation Committee and Functions. The Stimulus Package Act requires that TARP recipients have a compensation committee that satisfies the following:
(i) is comprised entirely of independent directors (except that the functions can be performed by the board of directors as a whole for a TARP recipient who has received less than $25,000,000), and
(ii) meets at least semiannually to discuss and evaluate employee compensation plans in light of any risks posed to the TARP recipient by such plans.
Limitation on TARP Recipient's Compensation Tax Deductions
Also included in the compensation standards required by the Stimulus Package Act is a requirement that the TARP recipient be subject to the provisions of Section 162(m)(5) of the Internal Revenue Code of 1986, as amended, which limits the deduction for compensation paid to certain senior executives to $500,000.
Limits on Luxury Expenditures
The Stimulus Package Act also includes provisions requiring the board of directors of each TARP recipient to have in place a company-wide policy regarding excessive or luxury expenditures, as identified by the Secretary of the Treasury, which may include entertainment or events, office and facility renovations, aviation or other transportation services, or other activities or events that "are not reasonable expenditures for staff development, reasonable performance incentives, or other similar measures conducted in the normal course of the business operation of the TARP recipient."
Shareholder Non-Binding "Say on Pay"
The Stimulus Package Act requires each TARP recipient to provide its shareholders during the TARP Obligation Period with a non-binding vote on senior executive compensation annually. For a public company, this can be accomplished through a non-binding resolution voted as a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the Securities & Exchange Commission (SEC) rules, including the compensation discussion and analysis, compensation tables, and any related material.
The Stimulus Package Act also includes provisions requiring a written certification by the TARP recipient's chief executive officer and chief financial officer (or their equivalents) of compliance with the provisions of EESA Section 111 outlined in this Alert. For a public company, the certification is to be made to the SEC with its annual filings, and in the case of other TARP recipients, to the Secretary of the Treasury.
Treasury Review Excessive Bonuses Previously Paid
The Secretary of the Treasury is also directed under the Stimulus Package Act to review all compensation paid to SEOs and the next 20 most highly compensated employees of each entity that was a TARP recipient before the date of enactment to determine whether any such payments were "inconsistent with the purposes" of the new rules or were "otherwise contrary to the public interest." And if so, is directed to negotiate for appropriate reimbursements to the federal government. 
Bailing Out of the Bailout
The amendments conclude with a provision stating that with appropriate consultation with the appropriate federal banking agency, the Secretary of the Treasury will permit a TARP recipient to repay any assistance previously provided under the TARP, without regard to whether the institution has replaced the funds, and when such assistance is repaid, the Secretary is to liquidate any warrants associated with the assistance at the current market price.
The executive compensation limitations and governance provisions imposed by the Stimulus Package Act amendments to EESA Section 111 appear intended to apply retroactively to all TARP recipients, including to financial institutions that received funds under the CPP and other TARP programs.
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For further information on the application of these rules, please contact any of the attorneys listed in the sidebar.
 President Obama is expected to sign The American Recovery and Reinvestment Act of 2009 (herein, the "Stimulus Package Act") on Tuesday, February 17, 2009. For the text of the Stimulus Package Act, as approved by Congress, and the related Conference Report, see http://www.rules.house.gov/bills_details.aspx?NewsID=4149.
 Section 7001 of Division B (Title VII) of the the Stimulus Package Act amends and restates Section 111 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5221) (EESA) in its entirety, modifying the non-tax TARP executive compensation rules enacted by EESA and codifying aspects of the initial guidance provided in Treasury releases. Section references in this Alert are to EESA Section 111, as amended, except as otherwise indicated. For the text of the amendments to Section 111, see http://www.house.gov/billtext/hr1_legtext_crb.pdf at pages 564-574.
 See Section 111(c) for the requirement to have a Compensation Committee and certain actions it must take periodically. See discussion below in text at note 19.
 Section 111(e). See discussion below in text at note 23.
 A "TARP recipient" is defined in Section 111(a)(3) to include anyone who "has received or will receive" financial assistance under TARP. Section 111(a)(5) limits the TARP Obligation Period and does not include any time the federal government only holds warrants to purchase common stock of the TARP recipient. Most of the Stimulus Package Act executive compensation provisions were foreshadowed in the Treasury's February 4, 2009, release.
 Sections 111(b)(1) through (3)
 Section 111(b)(3)(A). It is anticipated that these rules will encompass the rules presently contained in the Initial Guidance on the TARP Capital Purchase Program. See DP Exec Comp Alert, supra note 3, at Section II.B.i. Subsequent to the release of the Initial Guidance, the Treasury issued a set of rules that require that the Compensation Committee or similar body of a TARP recipient to review senior management compensation arrangements with their risk officer and comply with certain certification procedures.
 For a discussion of the clawback in the Initial Guidance under the TARP CPP, see DP Exec Comp Alert, supra note 3, at Section II.B.ii.
 While Section 111(a)(2) defines "golden parachute" by reference to SEOs only, Section 111(b)(3)(C) extends the term to the next five most highly compensated employees.
 Id. Under the federal income tax rules, severance up to three times five year average W-2 compensation would have been permitted. For a discussion of the limitation on golden parachutes in the Initial Guidance under the TARP CPP, see DP Exec Comp Alert, supra note 3, at Section II.B.iii.
 Section 111(b)(3)(D)(iii)
 Section 111(b)(3)(D)(ii)((I). There is no reference to the employee's title or status as an officer.
 Section 111(b)(3)(D)(ii)((II). Similarly, there is no reference to the employee's title and the term SEO is not used so it is possible, subject to regulations, that the persons in this category could be different from the TARP recipient's SEOs in a given year.
 Section 111(b)(3)(D)(ii)((III). Note that the term SEO is used for this category and the next.
 Section 111(b)(3)(D)(ii)((IV)
 Section 111(b)(3)(E). It will be interesting to see how the term "encourage" is defined in regulations that presumably would want to permit plans intended to incentivize increasing earnings while not "encouraging" their manipulation.
 Sections 111(b)(3)(F)
 For a discussion of Section 162(m)(5), see DP Exec Comp Alert, supra note 3, at Section IA. The amendment codifies the requirement imposed by the Initial Guidance under the TARP Capital Purchase Program and expands it to all TARP recipients. The tax rules apply to compensation paid to (i) the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) (or an individual acting in either of those capacities), and (ii) the three highest compensated officers of the applicable employer (including the entire controlled group) other than the CEO or CFO, in each case taking into account only individuals employed during the taxable year that includes any portion of the TARP authorities period. For a public company subject to the Securities Exchange Act of 1934 ("Exchange Act"), the determination of the three highest compensated officers is determined under the shareholder disclosure rules, except that the measurement period for purposes of determining the high three officers for an applicable taxable year is that taxable year and not total compensation for the last completed fiscal year as under the Exchange Act rules. For private employers and noncorporate entities, rules analogous to the Exchange Act disclosure rules are to be applied.
 Section 111(e). The statute specifically provides that the vote may not be construed as overruling a decision by the board of directors nor does it create or imply any additional fiduciary duty by the board nor does it restrict or limit the ability of shareholders to make other proposals related to executive compensation. Section 111(e)(2). The SEC is required to issue any required related final rules and regulations within a year of enactment of the Stimulus Package Act.
 Section 111(f). This appears to be directed at highly publicized year-end bonuses that some perceive as excessive made to executives of some companies that received TARP funds. Section 111(f). The legislation appears intended to apply retroactively. Financial institutions that received funds under the CPP can be reached through a section in the CPP Standard Purchase Terms. Some individuals who received amounts under contractual arrangements that were not precluded under the CPP, but would be under the Stimulus Package Act amendments and that the Treasury now seeks to have reimbursed, may have valid defenses.