With more than a month since the Dodd-Frank Act was approved and signed in to law by President Obama, the interpretative dust is beginning to settle.
According to Skadden Arps, The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affects almost every aspect of the U.S. financial services industry. Its goal is to restore public confidence in the financial system and prevent another financial meltdown. Put simply, it significantly increases regulation.
But, from a practical standpoint, what does it really mean?
Among other things, regulators will have the authority to take control of and liquidate troubled financial firms if their failure would “pose a significant risk to the financial stability of the United States.” The Federal Reserve will have the authority to extend credit in “unusual and exigent circumstances.”
Most important from a public company standpoint, the SEC’s enforcement program will be enhanced, disclosure of executive compensation will become mandatory, and shareholders will have the right to a “say-on-pay” vote on executive compensation.
New SEC enforcement programs will effectively “increase the flow of enforcement tips from potentially knowledgeable insiders.” Skadden Arps recommends “robust compliance and self-evaluative programs for all entities that are subject to SEC regulation.” The Act also expands the SEC’s authority to bring enforcement actions against those who aid and abet violations of the securities laws.
One likely outcome of the Dodd-Frank Act is increased contesting of annual director elections. Activist investors will have more leverage to pressure companies to take short-term-focused actions rather than allow boards to focus on the long term. Skadden Arps notes that this could keep qualified directors from continuing to serve on public company boards. In keeping with PondelWilkinson’sview of investor communications, public companies should work to increase engagement with shareholders now, to develop and maintain long-term, mutually beneficial relationships.
Cravath, Swaine & Moore notes that public companies will also need to disclose in their annual proxy statements the reasons why the positions of chief executive officer and chairman are filled by the same person or by different people (although the SEC has already adopted rules requiring this disclosure). In a follow on to last year’s New York Stock Exchange ruling, which eliminated broker discretionary voting with regard to director elections, the Act also prohibits broker discretionary voting with regard to shareholder votes on executive compensation matters.
Executive Compensation (Say on Pay)
During a recent speech, SEC Chairman Mary L. Schapiro said that investors’ “concerns must be addressed to fully modernize our system and ensure that our markets continue to foster capital formation and serve as an efficient engine for turning savings into jobs and economic growth. And, I believe that the recently-enacted regulatory modernization legislation goes a long way to addressing them.”
— Laurie Berman, firstname.lastname@example.org