Bill Would Limit Executive Compensation Paid by Systemically Significant Financial Institutions - 25 March 2010, Washington D.C. Employment Law Update

Sen. Bill Nelson (D-FL) has
introduced legislation that would amend the tax code to create special
rules for executive compensation paid at “systemically significant”
financial institutions. The Wall Street Compensation Reform Act
of 2010 (S. 3149)
would condition an institution’s eligibility for tax deductions on
ending certain compensation arrangements and adopting new, long term
compensation standards. A financial institution would be considered
“systemically significant” if it engages primarily in activities which
are financial in nature (as determined under section 4(k) of the Bank
Holding Company Act of 1956), and which either owns or controls assets
greater than $25 billion, or owns or controls assets greater than $10
billion and maintains a ratio of debt to equity which is
greater than 20 to 1. The bill’s provisions would apply to high-level
executives and other employees whose actions affect the institution’s
risk exposure. Employees that earn more than $1 million in applicable
remuneration are presumed to fall under this category, unless they
submit information returns describing their roles and responsibilities
and the reasons why their actions within the company do not have a
material impact on the taxpayer’s risk exposure.

Among other changes, the bill would condition the
tax-deductibility of executive compensation arrangements on the
following:

• Compensation over $1 million would be nondeductible unless it is
  performance-based;


• At least half of performance-based compensation must vest over a
  period of five years or more;


• At least 50 percent of the performance-based executive
  compensation paid at public companies must be in the form of employer
  stock;


• Certain executives would have to forfeit this remuneration if
  the taxpayer is required to prepare an accounting restatement due to
  material noncompliance, as a result of misconduct, with any financial
  reporting requirement under federal securities laws; and


• Employees would be prohibited from engaging in personal hedging
  strategies, such as compensation insurance.

These and other provisions would be incorporated into an existing
section (162(m)) of the tax code. This bill has been referred to the
Senate Committee on Finance.

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