[House Report 111-236]
[From the U.S. Government Publishing Office]


111th Congress  }                                             {  Report
  1st Session   }         HOUSE OF REPRESENTATIVES            { 111-236

======================================================================
 
 CORPORATE AND FINANCIAL INSTITUTION COMPENSATION FAIRNESS ACT OF 2009 

                                _______
                                

 July 30, 2009.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Frank of Massachusetts, from the Committee on Financial Services, 
                        submitted the following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 3269]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 3269) to amend the Securities Exchange Act of 
1934 to provide shareholders with an advisory vote on executive 
compensation and to prevent perverse incentives in the 
compensation practices of financial institutions, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
Amendment........................................................     2
Purpose and Summary..............................................     6
Background and Need for Legislation..............................     6
Hearings.........................................................    11
Committee Consideration..........................................    12
Committee Votes..................................................    12
Committee Oversight Findings.....................................    22
Performance Goals and Objectives.................................    22
New Budget Authority, Entitlement Authority, and Tax Expenditures    22
Committee Cost Estimate..........................................    23
Congressional Budget Office Estimate.............................    23
Federal Mandates Statement.......................................    24
Advisory Committee Statement.....................................    24
Constitutional Authority Statement...............................    24
Applicability to Legislative Branch..............................    25
Earmark Identification...........................................    25
Section-by-Section Analysis of the Legislation...................    25
Changes in Existing Law Made by the Bill, as Reported............    28
Dissenting Views.................................................    32

                               Amendment

    The amendment is as follows:
    Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Corporate and Financial Institution 
Compensation Fairness Act of 2009''.

SEC. 2. SHAREHOLDER VOTE ON EXECUTIVE COMPENSATION DISCLOSURES.

  (a) Amendment.--Section 14 of the Securities Exchange Act of 1934 (15 
U.S.C. 78n) is amended by adding at the end the following new 
subsection:
  ``(i) Annual Shareholder Approval of Executive Compensation.--
          ``(1) Annual vote.--Any proxy or consent or authorization 
        (the solicitation of which is subject to the rules of the 
        Commission pursuant to subsection (a)) for an annual meeting of 
        the shareholders to elect directors (or a special meeting in 
        lieu of such meeting) where proxies are solicited in respect of 
        any security registered under section 12 occurring on or after 
        the date that is 6 months after the date on which final rules 
        are issued under paragraph (4), shall provide for a separate 
        shareholder vote to approve the compensation of executives as 
        disclosed pursuant to the Commission's compensation disclosure 
        rules for named executive officers (which disclosure shall 
        include the compensation committee report, the compensation 
        discussion and analysis, the compensation tables, and any 
        related materials, to the extent required by such rules). The 
        shareholder vote shall not be binding on the issuer or the 
        board of directors and shall not be construed as overruling a 
        decision by such board, nor to create or imply any additional 
        fiduciary duty by such board, nor shall such vote be construed 
        to restrict or limit the ability of shareholders to make 
        proposals for inclusion in such proxy materials related to 
        executive compensation.
          ``(2) Shareholder approval of golden parachute 
        compensation.--
                  ``(A) Disclosure.--In any proxy or consent 
                solicitation material (the solicitation of which is 
                subject to the rules of the Commission pursuant to 
                subsection (a)) for a meeting of the shareholders 
                occurring on or after the date that is 6 months after 
                the date on which final rules are issued under 
                paragraph (4), at which shareholders are asked to 
                approve an acquisition, merger, consolidation, or 
                proposed sale or other disposition of all or 
                substantially all the assets of an issuer, the person 
                making such solicitation shall disclose in the proxy or 
                consent solicitation material, in a clear and simple 
                form in accordance with regulations to be promulgated 
                by the Commission, any agreements or understandings 
                that such person has with any named executive officers 
                of such issuer (or of the acquiring issuer, if such 
                issuer is not the acquiring issuer) concerning any type 
                of compensation (whether present, deferred, or 
                contingent) that is based on or otherwise relates to 
                the acquisition, merger, consolidation, sale, or other 
                disposition of all or substantially all of the assets 
                of the issuer and the aggregate total of all such 
                compensation that may (and the conditions upon which it 
                may) be paid or become payable to or on behalf of such 
                executive officer.
                  ``(B) Shareholder approval.--Any proxy or consent or 
                authorization relating to the proxy or consent 
                solicitation material containing the disclosure 
                required by subparagraph (A) shall provide for a 
                separate shareholder vote to approve such agreements or 
                understandings and compensation as disclosed, unless 
                such agreements or understandings have been subject to 
                a shareholder vote under paragraph (1). A vote by the 
                shareholders shall not be binding on the issuer or the 
                board of directors of the issuer or the person making 
                the solicitation and shall not be construed as 
                overruling a decision by any such person or issuer, nor 
                to create or imply any additional fiduciary duty by any 
                such person or issuer.
          ``(3) Disclosure of votes.--Every institutional investment 
        manager subject to section 13(f) shall report at least annually 
        how it voted on any shareholder vote pursuant to paragraphs (1) 
        or (2) of this section, unless such vote is otherwise required 
        to be reported publicly by rule or regulation of the 
        Commission.
          ``(4) Rulemaking.--Not later than 6 months after the date of 
        the enactment of the Corporate and Financial Institution 
        Compensation Fairness Act of 2009, the Commission shall issue 
        final rules to implement this subsection.
          ``(5) Exemption authority.--The Commission may exempt certain 
        categories of issuers from the requirements of this subsection, 
        where appropriate in view of the purpose of this subsection. In 
        determining appropriate exemptions, the Commission shall take 
        into account, among other considerations, the potential impact 
        on smaller reporting issuers.''.
  (b) Prohibition on Clawbacks.--
          (1) Prohibition.--No compensation of any executive of an 
        issuer, having been approved by a majority of shareholders 
        pursuant to section 14(i) of the Securities Exchange Act of 
        1934 (as added by subsection (a)), may be subject to any 
        clawback except--
                  (A) in accordance with any contract of such executive 
                providing for such a clawback; or
                  (B) in the case of fraud on the part of such 
                executive, to the extent provided by Federal or State 
                law.
          (2) Regulations.--The Securities and Exchange Commission 
        shall promulgate rules necessary to implement and enforce 
        paragraph (1).

SEC. 3. COMPENSATION COMMITTEE INDEPENDENCE.

  (a) Standards Relating to Compensation Committees.--The Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting 
after section 10A the following new section:

``SEC. 10B. STANDARDS RELATING TO COMPENSATION COMMITTEES.

  ``(a) Commission Rules.--
          ``(1) In general.--Effective not later than 9 months after 
        the date of enactment of the Corporate and Financial 
        Institution Compensation Fairness Act of 2009, the Commission 
        shall, by rule, direct the national securities exchanges and 
        national securities associations to prohibit the listing of any 
        class of equity security of an issuer that is not in compliance 
        with the requirements of any portion of subsections (b) through 
        (f).
          ``(2) Opportunity to cure defects.--The rules of the 
        Commission under paragraph (1) shall provide for appropriate 
        procedures for an issuer to have an opportunity to cure any 
        defects that would be the basis for a prohibition under 
        paragraph (1) before the imposition of such prohibition.
          ``(3) Exemption authority.--The Commission may exempt certain 
        categories of issuers from the requirements of subsections (b) 
        through (f), where appropriate in view of the purpose of this 
        section. In determining appropriate exemptions, the Commission 
        shall take into account, among other considerations, the 
        potential impact on smaller reporting issuers.
  ``(b) Independence of Compensation Committees.--
          ``(1) In general.--Each member of the compensation committee 
        of the board of directors of the issuer shall be independent.
          ``(2) Criteria.--In order to be considered to be independent 
        for purposes of this subsection, a member of a compensation 
        committee of an issuer may not, other than in his or her 
        capacity as a member of the compensation committee, the board 
        of directors, or any other board committee accept any 
        consulting, advisory, or other compensatory fee from the 
        issuer.
          ``(3) Exemption authority.--The Commission may exempt from 
        the requirements of paragraph (2) a particular relationship 
        with respect to compensation committee members, where 
        appropriate in view of the purpose of this section.
          ``(4) Definition.--As used in this section, the term 
        `compensation committee' means--
                  ``(A) a committee (or equivalent body) established by 
                and amongst the board of directors of an issuer for the 
                purpose of determining and approving the compensation 
                arrangements for the executive officers of the issuer; 
                and
                  ``(B) if no such committee exists with respect to an 
                issuer, the independent members of the entire board of 
                directors.
  ``(c) Independence Standards for Compensation Consultants and Other 
Committee Advisors.--Any compensation consultant or other similar 
adviser to the compensation committee of any issuer shall meet 
standards for independence established by the Commission by regulation.
  ``(d) Compensation Committee Authority Relating to Compensation 
Consultants.--
          ``(1) In general.--The compensation committee of each issuer, 
        in its capacity as a committee of the board of directors, shall 
        have the authority, in its sole discretion, to retain and 
        obtain the advice of a compensation consultant meeting the 
        standards for independence promulgated pursuant to subsection 
        (c), and the compensation committee shall be directly 
        responsible for the appointment, compensation, and oversight of 
        the work of such independent compensation consultant. This 
        provision shall not be construed to require the compensation 
        committee to implement or act consistently with the advice or 
        recommendations of the compensation consultant, and shall not 
        otherwise affect the compensation committee's ability or 
        obligation to exercise its own judgment in fulfillment of its 
        duties.
          ``(2) Disclosure.--In any proxy or consent solicitation 
        material for an annual meeting of the shareholders (or a 
        special meeting in lieu of the annual meeting) occurring on or 
        after the date that is 1 year after the date of enactment of 
        the Corporate and Financial Institution Compensation Fairness 
        Act of 2009, each issuer shall disclose in the proxy or consent 
        material, in accordance with regulations to be promulgated by 
        the Commission whether the compensation committee of the issuer 
        retained and obtained the advice of a compensation consultant 
        meeting the standards for independence promulgated pursuant to 
        subsection (c).
          ``(3) Regulations.--In promulgating regulations under this 
        subsection or any other provision of law with respect to 
        compensation consultants, the Commission shall ensure that such 
        regulations are competitively neutral among categories of 
        consultants and preserve the ability of compensation committees 
        to retain the services of members of any such category.
  ``(e) Authority To Engage Independent Counsel and Other Advisors.--
The compensation committee of each issuer, in its capacity as a 
committee of the board of directors, shall have the authority, in its 
sole discretion, to retain and obtain the advice of independent counsel 
and other advisers meeting the standards for independence promulgated 
pursuant to subsection (c), and the compensation committee shall be 
directly responsible for the appointment, compensation, and oversight 
of the work of such independent counsel and other advisers. This 
provision shall not be construed to require the compensation committee 
to implement or act consistently with the advice or recommendations of 
such independent counsel and other advisers, and shall not otherwise 
affect the compensation committee's ability or obligation to exercise 
its own judgment in fulfillment of its duties.
  ``(f) Funding.--Each issuer shall provide for appropriate funding, as 
determined by the compensation committee, in its capacity as a 
committee of the board of directors, for payment of compensation--
          ``(1) to any compensation consultant to the compensation 
        committee that meets the standards for independence promulgated 
        pursuant to subsection (c), and
          ``(2) to any independent counsel or other adviser to the 
        compensation committee.''.
  (b) Study and Review Required.--
          (1) In general.--The Securities and Exchange Commission shall 
        conduct a study and review of the use of compensation 
        consultants meeting the standards for independence promulgated 
        pursuant to section 10B(c) of the Securities Exchange Act of 
        1934 (as added by subsection (a)), and the effects of such use.
          (2) Report to congress.--Not later than 2 years after the 
        rules required by the amendment made by this section take 
        effect, the Commission shall submit a report to the Congress on 
        the results of the study and review required by this paragraph.

SEC. 4. ENHANCED COMPENSATION STRUCTURE REPORTING TO REDUCE PERVERSE 
                    INCENTIVES.

  (a) Enhanced Disclosure and Reporting of Compensation Arrangements.--
          (1) In general.--Not later than 9 months after the date of 
        enactment of this Act, the appropriate Federal regulators 
        jointly shall prescribe regulations to require each covered 
        financial institution to disclose to the appropriate Federal 
        regulator the structures of all incentive-based compensation 
        arrangements offered by such covered financial institutions 
        sufficient to determine whether the compensation structure--
                  (A) is aligned with sound risk management;
                  (B) is structured to account for the time horizon of 
                risks; and
                  (C) meets such other criteria as the appropriate 
                Federal regulators jointly may determine to be 
                appropriate to reduce unreasonable incentives offered 
                by such institutions for employees to take undue risks 
                that--
                          (i) could threaten the safety and soundness 
                        of covered financial institutions; or
                          (ii) could have serious adverse effects on 
                        economic conditions or financial stability.
          (2) Rules of construction.--Nothing in this subsection shall 
        be construed as requiring the reporting of the actual 
        compensation of particular individuals. Nothing in this 
        subsection shall be construed to require a covered financial 
        institution that does not have an incentive-based payment 
        arrangement to make the disclosures required under this 
        subsection.
  (b) Prohibition on Certain Compensation Arrangements.--Not later than 
9 months after the date of enactment of this Act, and taking into 
account the factors described in subparagraphs (A), (B), and (C) of 
subsection (a)(1), the appropriate Federal regulators shall jointly 
prescribe regulations that prohibit any incentive-based payment 
arrangement, or any feature of any such arrangement, that the 
regulators determine encourages inappropriate risks by covered 
financial institutions that--
          (1) could threaten the safety and soundness of covered 
        financial institutions; or
          (2) could have serious adverse effects on economic conditions 
        or financial stability.
  (c) Enforcement.--The provisions of this section shall be enforced 
under section 505 of the Gramm-Leach-Bliley Act and, for purposes of 
such section, a violation of this section shall be treated as a 
violation of subtitle A of title V of such Act.
  (d) Definitions.--As used in this section--
          (1) the term ``appropriate Federal regulator'' means--
                  (A) the Board of Governors of the Federal Reserve 
                System;
                  (B) the Office of the Comptroller of the Currency;
                  (C) the Board of Directors of the Federal Deposit 
                Insurance Corporation;
                  (D) the Director of the Office of Thrift Supervision;
                  (E) the National Credit Union Administration Board;
                  (F) the Securities and Exchange Commission; and
                  (G) the Federal Housing Finance Agency; and
          (2) the term ``covered financial institution'' means--
                  (A) a depository institution or depository 
                institution holding company, as such terms are defined 
                in section 3 of the Federal Deposit Insurance Act (12 
                U.S.C. 1813);
                  (B) a broker-dealer registered under section 15 of 
                the Securities Exchange Act of 1934 (15 U.S.C. 78o);
                  (C) a credit union, as described in section 
                19(b)(1)(A)(iv) of the Federal Reserve Act;
                  (D) an investment advisor, as such term is defined in 
                section 202(a)(11) of the Investment Advisers Act of 
                1940 (15 U.S.C. 80b-2(a)(11));
                  (E) the Federal National Mortgage Association;
                  (F) the Federal Home Loan Mortgage Corporation; and
                  (G) any other financial institution that the 
                appropriate Federal regulators, jointly, by rule, 
                determine should be treated as a covered financial 
                institution for purposes of this section.
  (e) Exemption for Certain Financial Institutions.--The requirements 
of this section shall not apply to covered financial institutions with 
assets of less than $1,000,000,000.
  (f) GAO Study.--
          (1) Study required.--
                  (A) In general.--The Comptroller General of the 
                United States shall carry out a study to determine 
                whether there is a correlation between compensation 
                structures and excessive risk taking.
                  (B) Factors to consider.--In carrying out the study 
                required under subparagraph (A), the Comptroller 
                General shall--
                          (i) consider compensation structures used by 
                        companies from 2000 to 2008; and
                          (ii) compare companies that failed, or nearly 
                        failed but for government assistance, to 
                        companies that remained viable throughout the 
                        housing and credit market crisis of 2007 and 
                        2008, including the compensation practices of 
                        all such companies.
                  (C) Determining companies that failed or nearly 
                failed.--In determining whether a company failed, or 
                nearly failed but for government assistance, for 
                purposes of subparagraph (B)(ii), the Comptroller 
                General shall focus on--
                          (i) companies that received exceptional 
                        assistance under the Troubled Asset Relief 
                        Program under title I of the Emergency Economic 
                        Stabilization Act of 2009 (12 U.S.C. 5211 et 
                        seq.) or other forms of significant government 
                        assistance, including under the Automotive 
                        Industry Financing Program, the Targeted 
                        Investment Program, the Asset Guarantee 
                        Program, and the Systemically Significant 
                        Failing Institutions Program;
                          (ii) the Federal National Mortgage 
                        Association;
                          (iii) the Federal Home Loan Mortgage 
                        Corporation; and
                          (iv) companies that participated in the 
                        Security and Exchange Commission's Consolidated 
                        Supervised Entities Program as of January, 
                        2008.
          (2) Report.--Not later than the end of the 1-year period 
        beginning on the date of the enactment of this Act, the 
        Comptroller General shall issue a report to the Congress 
        containing the results of the study required under paragraph 
        (1).

                          Purpose and Summary

    The purposes of this bill are (1) to give shareholders of 
public companies a nonbinding advisory vote on the pay of the 
top five executives in connection with proxy solicitations; (2) 
to establish standards of independence for compensation 
committees and the consultants and other advisers retained by 
them at companies that are listed on a national securities 
exchange or subject to the rules of a national securities 
association; and (3) to require federal financial regulators to 
monitor incentive-based payment arrangements of all covered 
financial institutions and prohibit incentive-based payment 
arrangements that could threaten financial institutions' safety 
and soundness or could have serious adverse effects on economic 
conditions or financial stability.

                  Background and Need for Legislation

    In the decade leading to the current financial crisis, 
increasing concerns arose regarding seemingly excessive 
executive and financial institution compensation. These 
concerns, however, were muted by a period of general prosperity 
that obscured the impact that compensation structures, 
particularly those at financial institutions, can have on 
overall financial and economic stability. As the current 
financial crisis has developed, a broad consensus has developed 
that executive and financial institution compensation 
structures relate directly to both the safety and soundness of 
individual financial institutions and the health of the broader 
financial system. H.R. 3269, the Corporate and Financial 
Institution Compensation Fairness Act of 2009, is designed to 
address the relationship between compensation structures and 
health of the broader financial system.

                         EXECUTIVE COMPENSATION

    In the book Pay Without Performance, Lucian Bebchuk and 
Jesse Fried calculated that, in 1991, CEO compensation was 140 
times that of an average worker but, by 2003, the ratio had 
increased to 500 to 1.\1\ Further research has found that the 
increase in pay far outstrips the improvement in company 
performance or growth in company size. Analyzing these data 
with Yaniv Grinstein, Bebchuk concluded, ``[h]ad the 
relationship of compensation to size, performance and industry 
classification remained the same in 2003 as it was in 1993, 
mean compensation in 2003 would have been only half its actual 
size.''\2\
---------------------------------------------------------------------------
    \1\Bebchuk, Lucian A. and Jesse Fried, Pay Without Performance: The 
Unfulfilled Promise of Executive Compensation, Harvard University 
Press, (2004).
    \2\Bebchuk, Lucian A. and Yaniv Grinstein. ``The Growth in 
Executive Pay,'' 21 Oxford Review of Economic Policy 283 (2005), 
available at: http://www.law.harvard.edu/faculty/bebchuk/pdfs/Bebchuk-
Grinstein.Growth-of-Pay.pdf.
---------------------------------------------------------------------------
    The years following 2003 saw even greater growth in 
executive compensation. The Corporate Library's CEO Pay Survey 
found that total compensation for CEOs increased 30 percent in 
2004, 16 percent in 2005 and 9 percent in 2006.
    Even in 2008, a year of sharp declines in profits and stock 
prices, the median CEO salary increased by 4.5 percent.\3\ The 
average worker's wages increased by only 2.7 percent over the 
same period.\4\ Consequently, it appears that the income gap 
between CEO and average worker is widening in good times as 
well as bad. Further, the reported statistics are based on 
median CEO incomes and do not account for the most extreme pay 
packages. The Wall Street Journal's data show that the highest 
paid CEO in 2008 received over $100 million in compensation 
while presiding over a 76 percent decline in share price.\5\
---------------------------------------------------------------------------
    \3\Lublin, Joann S. ``CEO Pay Sinks Along With Profits,'' Wall 
Street Journal, April 6, 2009, available at: http://online.wsj.com/
article/SB123870448211783759.html.
    \4\Employment Cost Index--December 2008, Bureau of Labor Statistics 
(2009), available at: http://www.bls.gov/news.release/archives/
eci_01302009.pdf.
    \5\Lublin, Joann S., Phred Dvorak and Cari Tuna ``Motorola Co-CEO 
Tops Pay Survey,'' Wall Street Journal, April 3, 2009, available at: 
http://online.wsj.com/article/SB123870806394084045.html.
---------------------------------------------------------------------------
    In addition to their annual compensation, CEOs often 
receive seemingly excessive severance packages when they leave 
their jobs, even if they're forced out for bad performance. In 
2007, Robert Nardelli was forced out as CEO of Home Depot 
during a period of poor stock performance. He received a 
severance package estimated at $210 million.\6\
---------------------------------------------------------------------------
    \6\Creswell, Julie and Michael Barbaro. ``Home Depot Ousts Highly 
Paid Chief,'' New York Times, January 4, 2007, available at: http://
www.nytimes.com/2007/01/04/business/04home.html.
---------------------------------------------------------------------------
    Later in 2007, Merrill Lynch fired Stanley O'Neal as CEO 
shortly after announcing the largest loss in corporate 
history,\7\ but Mr. O'Neal received a $160 million exit 
package.\8\ In July 2008, AIG announced that it was paying 
Martin Sullivan $47 million in severance after it forced him 
out as CEO.\9\ In March 2009, General Motors offered $21 
million in severance to Rick Wagoner shortly after he was 
forced out as CEO.\10\ Each of these companies required $20 
billion or more in government assistance to remain in business 
over the past year.
---------------------------------------------------------------------------
    \7\Thomas, Jr., Landon and Jenny Anderson. ``Risk Taker's Reign at 
Merrill Ends With Swift Fall,'' New York Times, October 29, 2007, 
available at: http://www.nytimes.com/2007/10/29/business/
29merrill.html.
    \8\``The Price of Saying Goodbye,'' New York Times DealBook Blog, 
October 30, 2007, available at: http://dealbook.blogs.nytimes.com/2007/
10/30/the-price-of-saying-goodbye/
    \9\``A.I.G. Pays Its Ex-Chief $47 Million,'' New York Times, July 
2, 2008, available at: http://www.nytimes.com/2008/07/02/business/
02aig.html
    \10\Wagoner refused to accept the full severance package and took a 
cut consistent with that suffered by other retirees. ``Ex-G.M. Chief to 
Get $8.5 Million in Retirement Pay,'' New York Times, July 14, 2009, 
available at: http://www.nytimes.com/2009/07/15/business/15auto.html.
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                    FINANCIAL INDUSTRY COMPENSATION

    Pay packages in the financial industry swelled to enormous 
sizes before the failures of Bear Stearns and Lehman Brothers 
in 2008. In 2007, at several of the largest banks, the average 
end-of-year bonus was more than $100,000. At Goldman Sachs, the 
average employee made $700,000.\11\ And the highest paid 
employees make many multiples of the average.
---------------------------------------------------------------------------
    \11\Tse, Tomoeh Murakami. ``Wall Street Jacks Up Pay After 
Bailouts,'' Washington Post, July 23, 2009, available at: http://
www.washingtonpost.com/wp-dyn/content/article/2009/07/22/
AR2009072203687.html.
---------------------------------------------------------------------------
    Outsized pay in the financial industry seems closely 
correlated with financial bubbles. Thomas Philippon and Ariell 
Reshef studied 100 years of financial industry pay and found 
``wages in finance were excessively high around 1930 and from 
the mid 1990s until 2006.''\12\ These time periods correspond 
with the pre-Depression excesses of the 1920s, the internet 
boom and the housing boom--three stock market bubbles that 
burst and dragged the broader economy into recession or 
depression.
---------------------------------------------------------------------------
    \12\Philippon, Thomas and Ariell Reshef. ``Wages and Human Capital 
in the U.S. Financial Industry, 1909-2006,'' NBER working paper (2009), 
available at: http://www.nber.org/papers/w14644.pdf.
---------------------------------------------------------------------------
    Several researchers suggest that the correlation between 
high pay and bubbles in finance may be caused by pay practices. 
Compensation in the financial industry is based on performance 
but the incentives are skewed to encourage excessive risk 
taking. Employees who take risks and win are rewarded greatly 
but those who lose do not face any financial losses, 
colloquially described as a ``heads you win, tails you break 
even'' pay plan. Under this system, employees are induced to 
take on far more risk than is good for the company or the 
financial system, and when those risks fail en masse, collapse 
can result, as occurred in 2008.
    In the wake of the financial market collapse of late 2008, 
several institutions undertook studies to understand how the 
system became so vulnerable. Financial industry compensation 
practices are repeatedly cited as exacerbating the danger. A 
Group of 30 investigation led by Paul Volcker found ``there are 
numerous examples of misaligned incentives, of incentives that 
contribute to instability and cyclicality in financial 
markets,''\13\ and later singled out compensation incentives: 
``the crisis has driven home the importance of aligning 
compensation practices with the incentives and controls in a 
firm's risk management program. Senior management and boards 
need to ensure a consistency in that respect, aligning pay with 
long-run shareholder interest rather than short-term returns 
that cannot be sustained and entail greater risk.''\14\
---------------------------------------------------------------------------
    \13\Financial Reform: A Framework for Financial Stability. Group of 
Thirty Working Group on Financial Reform (2009) p. 40, available at: 
http://www.group30.org/pubs/reformreport.pdf.
    \14\Id., p. 41.
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    Lord Turner, looking at the global crisis on behalf of the 
British government, explained:

          Thus for instance if a trader, a senior executive or 
        an institution (e.g. a hedge fund) is remunerated on 
        the basis of a contract which provides for a 
        significant profit share in good years but no claw back 
        in years of poor performance, that person or 
        institution will have a strong incentive to pursue 
        strategies which generate strong return in many years 
        but at the expense of the small probability of 
        occasional very large losses. Applied in general across 
        the financial system, such contracts will result on 
        average in excessive compensation relative to the 
        economic functions performed.\15\
---------------------------------------------------------------------------
    \15\Turner, Jonathan Adair, Baron Turner of Ecchinswell. The Turner 
Review: A regulatory response to the global banking crisis, Financial 
Services Authority (2009), footnote 24 at p. 49, available at: http://
www.fsa.gov.uk/pubs/other/turner.review.pdf.

Lord Turner went on to observe, ``[t]here is a strong prima 
facie case that inappropriate incentive structures played a 
role in encouraging behaviour which contributed to the 
financial crisis.''\16\ Finally, Lord Turner concluded,
---------------------------------------------------------------------------
    \16\Id. p. 80.

          [P]ast remuneration policies, acting in combination 
        with capital requirements and accounting rules, have 
        created incentives for some executives and traders to 
        take excessive risks and have resulted in large 
        payments in reward for activities which seemed profit 
        making at the time but subsequently proved harmful to 
        the institution and in some cases to the entire 
        system.\17\
---------------------------------------------------------------------------
    \17\Id. p. 80.

    In a May 28, 2009 essay in the Wall Street Journal, Alan 
Blinder warned that these bubble-producing practices could 
return: ``when fear gives way to greed, most traders and CEOs 
will have the bad old incentives they had before--unless we 
reform the system.''\18\ On July 23, 2009, the Washington Post 
confirmed Blinder's prediction: ``Wall Street, helped by 
improving profits, is on track to pay employees as much as, or 
even more than, it did in its pre-crisis days. So far this 
year, the top six U.S. banks have set aside $74 billion to pay 
their employees, up from $60 billion in the corresponding 
period last year.''\19\
---------------------------------------------------------------------------
    \18\Blinder, Alan. ``Crazy Compensation and the Crisis'', Wall 
Street Journal, May 28, 2009. Available at: http://online.wsj.com/
article/SB124346974150760597.html.
    \19\``Wall Street Jacks Up Pay After Bailouts'', id.
---------------------------------------------------------------------------
    Executive compensation at financial institutions and 
financial services companies has been widely criticized for 
being excessive and providing perverse incentives for reckless 
behavior.\20\ Many experts believe that unsuitably-designed 
compensation policies that rewarded executive failures rather 
than successes have contributed to the current financial 
crisis. Although most media, public, and political attention 
have been focused on compensation practices at financial 
services companies receiving Federal assistance under the 
Emergency Economic Stabilization Act of 2008 (EESA),\21\ recent 
discussion has widened to address executive compensation 
practices more generally.\22\
---------------------------------------------------------------------------
    \20\http://www.law.yale.edu/news/8954.htm.
    \21\P.L. 110-343 (Division A), codified as 12 U.S.C. 5221.
    \22\http://online.wsj.com/article/SB124346974150760597.html; http:/
/www.nytimes.com/2009/06/08/business/08bank.html; http://
www.nytimes.com/2009/02/05/us/politics/05pay.html.
---------------------------------------------------------------------------
    Regulators responsible for monitoring the safety and 
soundness of financial institutions are aware that excessive 
compensation and incentive packages that encourage 
inappropriate risk taking can jeopardize the financial health 
of those institutions and can weaken the broader economy.\23\
---------------------------------------------------------------------------
    \23\See statement by Ben S. Bernanke, chairman, Federal Reserve 
Board, The Financial Crisis and Community Banking, speech given at the 
Independent Community Bankers of America's National Convention and 
Techworld, Phoenix, Arizona (03/20/2009), available at http://
www.federalreserve.gov/newsevents/speech/bernanke20090320a.htm#fn.3.
---------------------------------------------------------------------------

                          LEGISLATIVE HISTORY

    Concerns about and possible responses to excessive 
executive pay were addressed by this Committee and by the House 
long before the current financial crisis. Present efforts to 
address excessive executive compensation began with the 
introduction of the Protection Against Executive Compensation 
Abuse Act (say-on-pay) in the 109th Congress and continued with 
House passage (by a vote of 269-134) of H.R. 1257, the 
Shareholder Vote on Executive Compensation Act (say-on-pay), in 
the 110th Congress. In requiring public companies to hold a 
non-binding shareholder vote on the compensation packages of a 
company's top five executives, the say-on-pay bill was, at the 
time, the most extensive limitation on executive compensation 
to pass the House in decades. The impact of this achievement 
was overtaken by the magnitude of the growing housing, credit, 
and financial crisis, which focused the discussion of 
compensation practices primarily on companies receiving 
assistance under EESA. Both EESA and the American Recovery and 
Reinvestment Act of 2009 (ARRA) require the elimination of 
incentives to take ``unnecessary and excessive risks'' in firms 
receiving TARP funds.\24\ ARRA builds on the restrictions in 
EESA and requires the Securities and Exchange Commission (SEC) 
to issue regulations regarding say-on-pay for public companies 
that receive EESA assistance.
---------------------------------------------------------------------------
    \24\See Sections 111 and 302 of the Emergency Economic 
Stabilization Act of 2008 (EESA). In particular, Section 111b(2)(A) 
EESA required the Treasury Secretary to ensure that financial 
institutions receiving assistance had ``limits on compensation that 
exclude incentives for senior executive officers of a financial 
institution to take unnecessary and excessive risks that threaten the 
value of the financial institution during the period that the Secretary 
holds an equity or debt position in the financial institution.'' 
Treasury issued guidance on February 4, 2009 that requires executive 
base pay to be limited to $500,000 and any incentive pay to be granted 
in the form of restricted stock. See US Department of the Treasury, 
press release of February 4, 2009 available at http://www.ustreas.gov/
press/releases/tg15.htm. See Title VII of the American Recovery and 
Reinvestment Act of 2009, Public Law 111-5 (H.R. 1 of the 111th 
Congress), amending Sections 109(a) and 111 of the EESA.
---------------------------------------------------------------------------
    When issuing final regulations to implement the provisions 
of ARRA, Treasury announced its intention prospectively to 
address compensation issues not only in the limited context of 
firms receiving TARP assistance, but rather in the broader 
context of compensation as it relates to the health of the 
countries' corporations.\25\ Recognizing and concurring with 
the Administration's intent to address compensation issues as 
they impact overall economic and financial stability, the 
Committee conducted a hearing entitled ``Compensation Structure 
and Systemic Risk'' on June 11, 2009. That hearing focused on 
oversight and regulation of compensation practices in the 
financial services industry, particularly in the context of 
systemic regulatory reform.
---------------------------------------------------------------------------
    \25\See, US Department of the Treasury, press release of June 6, 
2009 and Interim Final Rule on TARP Standards for Compensation and 
Corporate Governance available at: http://www.financialstability.gov/
latest/tg_0609b2009.html.
---------------------------------------------------------------------------
    The importance of compensation reform was again highlighted 
by the President's decision to address this issue in his 
administration's major financial regulatory reform initiative 
released June 17, 2009, in a white paper entitled, ``Financial 
Regulatory Reform: A New Foundation.''\26\ The Administration's 
white paper identified three compensation related initiatives 
as essential to overall financial regulatory reform. First, the 
administration endorsed the say-on-pay legislation initiated by 
the Committee in the 109th and 110th Congresses.\27\ Next, the 
administration indicated an intention to enhance the 
independence of compensation committees of corporate boards of 
directors.\28\ Third, the administration indicated its support 
for federal financial regulators ``laying out standards on 
compensation for financial firms that will be fully integrated 
into the supervisory process.''\29\
---------------------------------------------------------------------------
    \26\See, Financial Regulatory Reform: A New Foundation, at pp. 29-
30, available at: http://www.financialstability.gov/docs/regs/
FinalReport._web.pdf.
    \27\For additional background on the Administration's say-on-pay 
initiative, see, ``Fact Sheet: Administration's Regulatory Reform 
Agenda Moves Forward, Say-On-Pay'' available at: http://
www.financialstability.gov/docs/regulatoryreform/say-on-pay.pdf.
    \28\For additional background on the Administration's compensation 
committee independence initiatives, see, ``Fact Sheet: Administration's 
Regulatory Reform Agenda Moves Forward, New Independence for 
Compensation Committees'' available at: http://
www.financialstability.gov/docs/regulatoryreform/
extended_comp_comm_analysis.pdf.
    \29\See, Financial Regulatory Reform: A New Foundation, at pp. 29-
30, available at: http://www.financialstability.gov/docs/regs/
FinalReport_web.pdf.
---------------------------------------------------------------------------
    On July 21st, Chairman Frank introduced H.R. 3269, the 
Corporate and Financial Institution Compensation Fairness Act 
of 2009 to enact the Administration's three compensation 
related regulatory reform initiatives into law.

                                Hearings

    The Committee conducted a hearing entitled ``Compensation 
Structure and Systemic Risk'' on June 11, 2009. That hearing 
focused on oversight and regulation of compensation practices 
in the financial services industry, particularly in the context 
of systemic regulatory reform. The following witnesses 
testified:

    Panel one:

            Mr. Gene Sperling, Counselor to the 
        Secretary of the Treasury, U.S. Department of the 
        Treasury

            Mr. Scott Alvarez, General Counsel, Board 
        of Governors of the Federal Reserve System

            Mr. Brian Breheny, Deputy Director of 
        Corporate Finance, U.S. Securities and Exchange 
        Commission

    Panel two:

            Mr. Lucien Bebchuk, Professor of Law, 
        Economics, and Finance, and Director of the Program on 
        Corporate Governance, Harvard Law School

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
    The following other amendments were also considered by the 
Committee:
    An amendment by Mr. Frank, no. 1, a manager's amendment, 
was agreed to by a voice vote.
    An amendment by Mrs. Kilroy, no. 4, regarding disclosure of 
votes, was agreed to by a voice vote.
    An amendment by Mr. Hensarling, no. 5, regarding a 
community institution exemption, was agreed to, as modified, by 
a voice vote.
    An amendment by Mr. Foster, no. 6, regarding a GAO study of 
accreditation of directors, was offered and withdrawn.
    An amendment by Mr. Hensarling, no. 7, regarding a GAO 
study of the correlation between compensation structures and 
excessive risk taking, was agreed to by a voice vote.
    An amendment by Mr. Price, no. 8, regarding a prohibition 
on clawbacks, was agreed to, as modified, by a voice vote.
    An amendment by Mr. Campbell, no. 10, regarding majority 
voting and election of directors, was offered and withdrawn.
    An amendment by Mr. Hensarling, no. 12, regarding GSEs, was 
agreed to by a voice vote.
    An amendment by Mr. Castle, no. 16, striking section 4, was 
not agreed to by a voice vote.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held a hearing and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    The purposes of H.R. 3269 are: (1) to give shareholders of 
public companies a nonbinding advisory vote on the pay of the 
top five executives in connection with proxy solicitations; (2) 
to establish standards of independence for compensation 
committees and the consultants and other advisers retained by 
them at companies that are listed on a national securities 
exchange or subject to the rules of a national securities 
association; and (3) to require federal financial regulators to 
monitor incentive-based payment arrangements of all covered 
financial institutions and prohibit incentive-based payment 
arrangements that could threaten financial institutions' safety 
and soundness or could have serious adverse effects on economic 
conditions or financial stability.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                                     July 30, 2009.
Hon. Barney Frank,
Chairman, Committee on Financial Services,
U.S. House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3269, the 
Corporate and Financial Institution Compensation Fairness Act 
of 2009.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 3269--Corporate and Financial Institution Compensation Fairness 
        Act of 2009

    H.R. 3269 would require all companies whose stock is traded 
on public exchanges to allow shareholders to approve, in 
nonbinding votes, the compensation received by executives and 
certain compensation agreements between executives and an 
acquiring entity. The bill also would require certain 
institutional investment managers to report at least annually 
on how they voted on any company's shareholder votes regarding 
compensation. H.R. 3269 would establish standards to ensure the 
independence of members of a company's compensation committee 
and the consultants and other advisors that provide support to 
such a committee. In addition, H.R. 3269 would require 
financial institutions to disclose to federal regulators the 
structure of any employee compensation agreements that include 
performance incentives.
    The bill would require the Securities and Exchange 
Commission (SEC) as well as the federal financial regulatory 
agencies--the Federal Deposit Insurance Corporation (FDIC), 
National Credit Union Association (NCUA), Office of the 
Comptroller of the Currency (OCC), the Office of Thrift 
Supervision (OTS), the Federal Housing Finance Agency (FHFA), 
and the Federal Reserve--to develop regulations to implement 
the bill's requirements, including regulations to restrict the 
use of certain employee compensation structures if they would 
pose a risk to a financial institution or to the economy. The 
bill also would require the Government Accountability Office 
(GAO) to conduct a study to determine whether there is a 
relationship between companies' compensation structures and 
their risk-taking behavior.
    Based on information from the SEC and GAO, CBO estimates 
that implementing H.R. 3269 would cost about $1 million in 2010 
to develop regulations and prepare reports to the Congress, and 
less than $500,000 per year thereafter for the SEC to monitor 
compliance by companies affected by the regulations. Such 
spending would be subject to the availability of appropriated 
funds.
    Any additional costs to the OCC, the OTS, and the FHFA as a 
result of enacting H.R. 3269 would be recorded on the budget as 
direct spending and offset by income from annual fees collected 
by those agencies for their administrative expenses. Similarly, 
the FDIC and NCUA would recover any added costs when they 
adjust the premiums and fees paid by insured depository 
institutions. Thus, CBO estimates that enacting the bill would 
have a negligible effect on net direct spending over the 2010-
2014 and 2010-2019 periods.
    The budgetary effects on the Federal Reserve would be 
recorded as changes in revenues (governmental receipts). CBO 
expects that implementing H.R. 3269 would not have a 
significant effect on the workload of the Federal Reserve and 
anticipates that existing resources would be used to comply 
with the bill's requirements. Therefore, we estimate that 
enacting this bill would not have a significant effect on 
revenues.
    H.R. 3269 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments.
    The requirements of H.R. 3269 would impose several private-
sector mandates as defined in UMRA on publicly traded 
companies, financial institutions, institutional investment 
managers, and national securities exchanges and associations. 
Because the cost of some of the mandates in the bill would 
depend on federal regulations yet to be established, CBO cannot 
determine whether the total cost of those mandates would exceed 
the annual threshold established in UMRA for private-sector 
mandates ($139 million in 2009, adjusted annually for 
inflation).
    The CBO staff contacts for this estimate are Susan Willie 
(for federal costs), Barbara Edwards (for federal revenues), 
and Brian Prest (for the private-sector impact). This estimate 
was approved by Theresa Gullo, Deputy Assistant Director for 
Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
general welfare of the United States) and clause 3 (relating to 
the power to regulate interstate commerce).

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 3269 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

             Section-by-Section Analysis of the Legislation


                         SECTION 1. SHORT TITLE

    This Act may be cited as the ``Corporate and Financial 
Institution Compensation Fairness Act of 2009.''

SECTION 2. SHAREHOLDER VOTE ON EXECUTIVE COMPENSATION DISCLOSURES (SAY-
                                ON-PAY)

Subsection (a)--Amendments to Section 14 of the Securities Exchange Act 
        of 1934

    Annual Shareholder Approval of Executive Compensation 
(``say-on-pay''). Requires all public companies (``issuers'') 
that are subject to the SEC's rules on solicitation of proxies 
to hold an annual advisory shareholder vote on compensation of 
the top five executives as disclosed pursuant to the SEC's 
compensation disclosure rules.
    Shareholder Approval of Golden Parachute Compensation. In 
connection with a merger, acquisition, consolidation, or 
proposed sale or other disposition of all of substantially all 
of the assets of an issuer that is subject to the SEC's rules 
on solicitation of proxies, shareholders get a separate, 
nonbinding vote on ``golden parachute'' arrangements with any 
principal executive officers of the target or the acquirer, 
unless such arrangements already were subject to an annual say-
on-pay vote.
    Disclosure of Votes. Requires institutional investment 
managers to report at least annually on how they voted pursuant 
to this section, unless their votes are otherwise required to 
be reported publicly by SEC rule.
    Rulemaking and Effective Date. SEC required to issue final 
say-on-pay rules within 6 months of enactment; the say-on-pay 
provisions become effective 6 months after issuance of final 
rules.
    Exemption Authority. SEC allowed to exempt certain 
categories of issuers from say-on-pay requirements when 
appropriate in view of the purposes of this section; in 
determining exemptions, the SEC shall take into account, among 
other things, the potential impact on smaller reporting issuers

Subsection (b)--Prohibition on Clawbacks

    Provides that no compensation approved by a majority of 
shareholders under this section may be subject to clawback, 
except in accordance with any contract of such executive 
providing for a clawback, or in the case of fraud on the part 
of such executive to the extent provided by federal or state 
law.

             SECTION 3. COMPENSATION COMMITTEE INDEPENDENCE

Subsection (a)--Standards Relating to Compensation Committees 
        Commission Rules

    Requires the SEC to, within 9 months of enactment, by rule 
direct the national securities exchanges and associations to 
prohibit the listing of any class of equity security of an 
issuer that is not in compliance with the independence 
standards contained in this subsection, after giving the issuer 
an opportunity to cure defects.
    Exemption Authority. Allows the SEC to exempt certain 
categories of issuers from coverage of its compensation 
committee rules when appropriate in view of the purposes this 
section; in determining exemptions, the SEC shall take into 
account, among other things, the potential impact on smaller 
reporting issuers.
    Definition of Compensation Committee. For purposes of this 
section, the term ``compensation committee'' means a committee 
(or equivalent body) established by and amongst the board of 
directors of an issuer for the purpose of determining and 
approving the compensation arrangements for the executive 
officers of the issuer, or, if no such committee exists, the 
independent members of the entire board of directors
    Independence of Compensation Committees. Requires each 
member of the compensation committee of the board of directors 
to be independent. Independent directors are defined as 
directors that receive no ``consulting, advisory or other 
compensatory fee'' from company other than compensation 
received as a director. The SEC may exempt from this 
requirement a particular relationship with respect to 
compensation committee members where appropriate in view of the 
purposes of this section.
    Independence Standards for Compensation Consultants. The 
SEC must promulgate regulations establishing independence 
standards and shareholder disclosure rules regarding 
compensation consultants that provide advice to compensation 
committees. In promulgating rules under this section, or any 
other provision of law with respect to compensation 
consultants, the SEC must ensure that such rules are 
competitively neutral among categories of consultants (e.g., 
firms that only provide compensation advisory services to 
compensation committees of a public company and multi-
disciplinary firms that also provide other services to public 
companies) and preserve the ability of compensation committees 
to retain the services of members of any such category.
    Compensation Committee Authority Relating to Compensation 
Consultants, Independent Counsel, and Other Advisers. The 
compensation committee is specifically authorized to retain and 
obtain the nonbinding advice of independent compensation 
consultants or other advisors. The independent compensation 
committee must be directly responsible for the appointment and 
compensation of persons so retained, and directly responsible 
for the oversight of their work.
    Disclosure. Starting a year after enactment, routine proxy 
and consent solicitation materials must disclose whether the 
compensation committee retained and obtained the advice of an 
independent compensation consultant. This disclosure 
requirement does not apply to other similar advisers that the 
compensation committee may have retained.
    Funding. Each issuer shall provide for appropriate funding, 
as determined by the compensation committee, for payment of 
compensation to any independent compensation consultant, 
independent counsel, or other adviser to the compensation 
committee.

Subsection (b)--Study and review required

    The SEC must study and review the use of independent 
compensation consultants and the effects of such use and report 
its finding to Congress within 2 years after the rules required 
by subsection (a) take effect.

SECTION 4. ENHANCED COMPENSATION STRUCTURE REPORTING TO REDUCE PERVERSE 
                               INCENTIVES

Subsection (a)--Enhanced Disclosure and Reporting of Compensation 
        Arrangements

    Reporting of incentive-based compensation structures. 
Requires the appropriate Federal regulators (defined below) 
jointly to issue rules that require covered financial 
institutions (also defined below) to disclose incentive-based 
compensation arrangements to the regulators sufficient for the 
regulators to determine whether such compensation structures 
encourage undue risk-taking that could threaten the safety and 
soundness of covered financial institutions or have serious 
adverse effects on economic conditions or financial stability. 
For purposes of this section, incentive-based compensation 
arrangements include, but are not limited to, stock options.
    This subsection shall not be construed to require reporting 
of the actual compensation of particular individuals or to 
require a covered financial institution that does not have an 
incentive-based payment arrangement to make the disclosures 
required under this subsection.

Subsection (b)--Prohibition on certain compensation arrangements

    Requires the appropriate Federal regulators jointly to 
issue rules that prohibit any incentive-based pay arrangement, 
or any feature thereof, that encourages undue risk-taking that 
could threaten the safety and soundness of covered financial 
institutions or could have serious adverse effects on economic 
conditions or financial stability.

Subsection (c)--Enforcement

    Provisions of this section shall be enforced under section 
505 of the Gramm-Leach-Bliley Act and, for purposes of such 
section, a violation of this section shall be treated as a 
violation of subtitle A of title V of such Act.

Subsection (d)--Definitions

    The ``appropriate federal regulators'' are the Federal 
Reserve Board, the Office of the Comptroller of the Currency, 
the Board of the Federal Deposit Insurance Corporation, the 
Director of the Office of Thrift Supervision, the National 
Credit Union Administration Board, the Securities and Exchange 
Commission, and the Federal Housing Finance Agency.
    The ``covered financial institutions'' are depository 
institutions, depository institution holding companies, 
registered broker-dealers, credit unions, investment advisors, 
the Federal National Mortgage Association, the Federal Home 
Loan Mortgage Corporation, and any other financial institution 
that the appropriate federal regulators jointly by rule 
determine should be treated as a covered financial institution.

Subsection (e)--Exemption for certain covered financial institutions

    The requirements of this section specifically do not apply 
to covered financial institutions with assets of less than $1 
billion.

Subsection (f)--GAO Study and Report

    The GAO must conduct a study to determine whether there is 
a correlation between compensation structures and excessive 
risk taking and issue a report to Congress containing the 
results of this study within one year of enactment.
    Joint Rulemaking. The rulemakings required under 
subsections (a) and (b) must be completed within 9 months of 
enactment.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (new matter is 
printed in italic and existing law in which no change is 
proposed is shown in roman):

                    SECURITIES EXCHANGE ACT OF 1934

TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *


SEC. 10B. STANDARDS RELATING TO COMPENSATION COMMITTEES.

  (a) Commission Rules.--
          (1) In general.--Effective not later than 9 months 
        after the date of enactment of the Corporate and 
        Financial Institution Compensation Fairness Act of 
        2009, the Commission shall, by rule, direct the 
        national securities exchanges and national securities 
        associations to prohibit the listing of any class of 
        equity security of an issuer that is not in compliance 
        with the requirements of any portion of subsections (b) 
        through (f).
          (2) Opportunity to cure defects.--The rules of the 
        Commission under paragraph (1) shall provide for 
        appropriate procedures for an issuer to have an 
        opportunity to cure any defects that would be the basis 
        for a prohibition under paragraph (1) before the 
        imposition of such prohibition.
          (3) Exemption authority.--The Commission may exempt 
        certain categories of issuers from the requirements of 
        subsections (b) through (f), where appropriate in view 
        of the purpose of this section. In determining 
        appropriate exemptions, the Commission shall take into 
        account, among other considerations, the potential 
        impact on smaller reporting issuers.
  (b) Independence of Compensation Committees.--
          (1) In general.--Each member of the compensation 
        committee of the board of directors of the issuer shall 
        be independent.
          (2) Criteria.--In order to be considered to be 
        independent for purposes of this subsection, a member 
        of a compensation committee of an issuer may not, other 
        than in his or her capacity as a member of the 
        compensation committee, the board of directors, or any 
        other board committee accept any consulting, advisory, 
        or other compensatory fee from the issuer.
          (3) Exemption authority.--The Commission may exempt 
        from the requirements of paragraph (2) a particular 
        relationship with respect to compensation committee 
        members, where appropriate in view of the purpose of 
        this section.
          (4) Definition.--As used in this section, the term 
        ``compensation committee'' means--
                  (A) a committee (or equivalent body) 
                established by and amongst the board of 
                directors of an issuer for the purpose of 
                determining and approving the compensation 
                arrangements for the executive officers of the 
                issuer; and
                  (B) if no such committee exists with respect 
                to an issuer, the independent members of the 
                entire board of directors.
  (c) Independence Standards for Compensation Consultants and 
Other Committee Advisors.--Any compensation consultant or other 
similar adviser to the compensation committee of any issuer 
shall meet standards for independence established by the 
Commission by regulation.
  (d) Compensation Committee Authority Relating to Compensation 
Consultants.--
          (1) In general.--The compensation committee of each 
        issuer, in its capacity as a committee of the board of 
        directors, shall have the authority, in its sole 
        discretion, to retain and obtain the advice of a 
        compensation consultant meeting the standards for 
        independence promulgated pursuant to subsection (c), 
        and the compensation committee shall be directly 
        responsible for the appointment, compensation, and 
        oversight of the work of such independent compensation 
        consultant. This provision shall not be construed to 
        require the compensation committee to implement or act 
        consistently with the advice or recommendations of the 
        compensation consultant, and shall not otherwise affect 
        the compensation committee's ability or obligation to 
        exercise its own judgment in fulfillment of its duties.
          (2) Disclosure.--In any proxy or consent solicitation 
        material for an annual meeting of the shareholders (or 
        a special meeting in lieu of the annual meeting) 
        occurring on or after the date that is 1 year after the 
        date of enactment of the Corporate and Financial 
        Institution Compensation Fairness Act of 2009, each 
        issuer shall disclose in the proxy or consent material, 
        in accordance with regulations to be promulgated by the 
        Commission whether the compensation committee of the 
        issuer retained and obtained the advice of a 
        compensation consultant meeting the standards for 
        independence promulgated pursuant to subsection (c).
          (3) Regulations.--In promulgating regulations under 
        this subsection or any other provision of law with 
        respect to compensation consultants, the Commission 
        shall ensure that such regulations are competitively 
        neutral among categories of consultants and preserve 
        the ability of compensation committees to retain the 
        services of members of any such category.
  (e) Authority To Engage Independent Counsel and Other 
Advisors.--The compensation committee of each issuer, in its 
capacity as a committee of the board of directors, shall have 
the authority, in its sole discretion, to retain and obtain the 
advice of independent counsel and other advisers meeting the 
standards for independence promulgated pursuant to subsection 
(c), and the compensation committee shall be directly 
responsible for the appointment, compensation, and oversight of 
the work of such independent counsel and other advisers. This 
provision shall not be construed to require the compensation 
committee to implement or act consistently with the advice or 
recommendations of such independent counsel and other advisers, 
and shall not otherwise affect the compensation committee's 
ability or obligation to exercise its own judgment in 
fulfillment of its duties.
  (f) Funding.--Each issuer shall provide for appropriate 
funding, as determined by the compensation committee, in its 
capacity as a committee of the board of directors, for payment 
of compensation--
          (1) to any compensation consultant to the 
        compensation committee that meets the standards for 
        independence promulgated pursuant to subsection (c), 
        and
          (2) to any independent counsel or other adviser to 
        the compensation committee.

           *       *       *       *       *       *       *


                                PROXIES

  Sec. 14. (a) * * *

           *       *       *       *       *       *       *

  (i) Annual Shareholder Approval of Executive Compensation.--
          (1) Annual vote.--Any proxy or consent or 
        authorization (the solicitation of which is subject to 
        the rules of the Commission pursuant to subsection (a)) 
        for an annual meeting of the shareholders to elect 
        directors (or a special meeting in lieu of such 
        meeting) where proxies are solicited in respect of any 
        security registered under section 12 occurring on or 
        after the date that is 6 months after the date on which 
        final rules are issued under paragraph (4), shall 
        provide for a separate shareholder vote to approve the 
        compensation of executives as disclosed pursuant to the 
        Commission's compensation disclosure rules for named 
        executive officers (which disclosure shall include the 
        compensation committee report, the compensation 
        discussion and analysis, the compensation tables, and 
        any related materials, to the extent required by such 
        rules). The shareholder vote shall not be binding on 
        the issuer or the board of directors and shall not be 
        construed as overruling a decision by such board, nor 
        to create or imply any additional fiduciary duty by 
        such board, nor shall such vote be construed to 
        restrict or limit the ability of shareholders to make 
        proposals for inclusion in such proxy materials related 
        to executive compensation.
          (2) Shareholder approval of golden parachute 
        compensation.--
                  (A) Disclosure.--In any proxy or consent 
                solicitation material (the solicitation of 
                which is subject to the rules of the Commission 
                pursuant to subsection (a)) for a meeting of 
                the shareholders occurring on or after the date 
                that is 6 months after the date on which final 
                rules are issued under paragraph (4), at which 
                shareholders are asked to approve an 
                acquisition, merger, consolidation, or proposed 
                sale or other disposition of all or 
                substantially all the assets of an issuer, the 
                person making such solicitation shall disclose 
                in the proxy or consent solicitation material, 
                in a clear and simple form in accordance with 
                regulations to be promulgated by the 
                Commission, any agreements or understandings 
                that such person has with any named executive 
                officers of such issuer (or of the acquiring 
                issuer, if such issuer is not the acquiring 
                issuer) concerning any type of compensation 
                (whether present, deferred, or contingent) that 
                is based on or otherwise relates to the 
                acquisition, merger, consolidation, sale, or 
                other disposition of all or substantially all 
                of the assets of the issuer and the aggregate 
                total of all such compensation that may (and 
                the conditions upon which it may) be paid or 
                become payable to or on behalf of such 
                executive officer.
                  (B) Shareholder approval.--Any proxy or 
                consent or authorization relating to the proxy 
                or consent solicitation material containing the 
                disclosure required by subparagraph (A) shall 
                provide for a separate shareholder vote to 
                approve such agreements or understandings and 
                compensation as disclosed, unless such 
                agreements or understandings have been subject 
                to a shareholder vote under paragraph (1). A 
                vote by the shareholders shall not be binding 
                on the issuer or the board of directors of the 
                issuer or the person making the solicitation 
                and shall not be construed as overruling a 
                decision by any such person or issuer, nor to 
                create or imply any additional fiduciary duty 
                by any such person or issuer.
          (3) Disclosure of votes.--Every institutional 
        investment manager subject to section 13(f) shall 
        report at least annually how it voted on any 
        shareholder vote pursuant to paragraphs (1) or (2) of 
        this section, unless such vote is otherwise required to 
        be reported publicly by rule or regulation of the 
        Commission.
          (4) Rulemaking.--Not later than 6 months after the 
        date of the enactment of the Corporate and Financial 
        Institution Compensation Fairness Act of 2009, the 
        Commission shall issue final rules to implement this 
        subsection.
          (5) Exemption authority.--The Commission may exempt 
        certain categories of issuers from the requirements of 
        this subsection, where appropriate in view of the 
        purpose of this subsection. In determining appropriate 
        exemptions, the Commission shall take into account, 
        among other considerations, the potential impact on 
        smaller reporting issuers.

           *       *       *       *       *       *       *


                            DISSENTING VIEWS

    Lavish executive compensation packages for CEOs who have 
underperformed and failed to deliver shareholder value have 
contributed to a growing public perception that corporate 
boards have not fulfilled their fiduciary responsibility to set 
executives' pay in a way that aligns the incentives of those 
executives with the interests of shareholders. This perception 
undermines confidence in corporate America, and unfairly taints 
the vast majority of U.S. companies that adhere to sound 
corporate governance practices in determining the compensation 
of CEOs and other senior management. The huge losses suffered 
by large financial institutions in recent years and the need 
for the government to inject billions of taxpayer dollars into 
several before on the issue of excessive executive 
compensation.
    H.R. 3269 purports to address these excesses by mandating 
that all publicly-traded companies registered with the U.S. 
Securities and Exchange Commission (SEC) provide shareholders 
the opportunity to cast a non-binding advisory vote on 
executive compensation as disclosed in the corporate proxy 
statement. It would also require proxy statements related to a 
corporate merger or acquisition to include a clear and simple 
disclosure of any new ``golden parachute'' plans, or severance 
pay arrangements whereby top executives receive extra 
compensation when the corporation is merged with or acquired by 
another firm. The legislation further mandates a separate, non-
binding shareholder vote on these ``golden parachute'' 
compensation arrangements. The legislation directs all public 
companies to have compensation committees comprised of 
independent directors and requires the SEC to issue 
independence standards for compensation consultants to the 
board of directors. Finally, as detailed further below, the 
legislation grants the Federal financial regulators broad 
powers to prohibit incentive-based compensation for all 
employees of financial institutions over a certain size in the 
United States.
    While Republicans share the outrage of our constituents 
over instances in which corporate CEOs have been richly 
rewarded for failure, we strongly believe that H.R. 3269 is the 
wrong solution. By empowering government bureaucrats to sit in 
judgment of the ``incentive-based'' compensation of every 
employee at thousands of financial institutions across the 
country, the bill represents another example of a ``command and 
control'' approach to economic policy that runs counter to 
America's free market traditions.
    Section 4 of the legislation would require the overwhelming 
majority of U.S. financial institutions (including but not 
limited to banks, credit unions, broker-dealers, and investment 
advisors) to disclose incentive-based compensation 
arrangements, and authorize Federal regulators to control and 
dictate all incentive-based compensation agreements for all 
employees of those firms, in order to prevent compensation 
arrangements that encourage ``inappropriate risks'' that 
``threaten the safety and soundness'' of individual financial 
institutions or ``have serious adverse effects on economic 
conditions or financial stability.'' The bill would grant 
broad, vague and undefined powers to Federal regulators to 
determine if incentive-based compensation structures at 
financial institutions are ``aligned with sound risk 
management,'' ``structured to account for the time horizon of 
risks,'' and ``meet other criteria [the regulators] determine 
to be appropriate to reduce unreasonable incentives to take 
undue risks.''
    As introduced, H.R. 3269 would have subjected every 
financial institution--regardless of size, regardless of 
whether it is publicly traded, and regardless of whether it 
played any role in the financial turmoil of the recent past--to 
this unprecedented level of government micro-management of 
basic business practices. Only through the efforts of Financial 
Services Committee Republicans was language authored by Mr. 
Hensarling added to the bill during Committee consideration to 
exempt financial institutions with less than $1 billion in 
assets from these requirements.
    In evaluating the bill's provisions to give shareholders an 
advisory vote on executive compensation, it is important to 
keep in mind that corporations are representative--not direct--
democracies, and mandating shareholder votes on core 
operational issues such as compensation levels risks 
undermining corporate boards' ability to exercise independent 
judgment on behalf of all of the corporation's shareholders. 
Evidence suggests that if shareholders are granted a non-
binding compensation vote, some will use the new power to push 
their own political and social agendas that may well conflict 
with the interests of the majority of shareholders. Because 
this bill explicitly states that no shareholder proxy rights 
are prejudiced by the non-binding executive compensation vote, 
it could also spur frivolous litigation if corporate boards 
reject or refuse to abide by the results of the shareholder 
vote.
    Republican Members of the Committee voted almost 
unanimously for a commonsense alternative, offered by Mr. 
Garrett, which no Democratic Member of the Committee supported. 
Republicans hope to offer a similar version during 
consideration in the House. The Garrett substitute replaced the 
annual ``say-on-pay'' provision with a triennial, nonbinding 
shareholder vote on executive compensation, which is a forward-
looking vote that strengthens shareholder rights. Annual votes 
on executive pay packages are inappropriate because most 
executive compensation agreements are for terms of more than 
one year. Moreover, requiring annual ``say on pay'' votes makes 
it impossible for public and private pension and retirement 
funds--which hold the stock of thousands of companies in their 
portfolios--to adequately fulfill their fiduciary duties to 
their investors by performing comprehensive evaluations of all 
the compensation packages for all the companies in which they 
hold equity securities. In a July 20, 2009 letter to the SEC, 
the pension fund for the United Brotherhood of Carpenters and 
Joiners union warned that proposals to mandate annual ``say on 
pay'' votes for all public companies would be ``irresponsible, 
undermining executive compensation reform efforts and the 
voting responsibilities of institutional investors.'' Finally, 
the Republican alternative struck the provisions of Section 4 
(described above) establishing a new government role in 
regulating compensation, both executive and non-executive, at 
every financial institution in America with more than $1 
billion in assets.
    The Committee on Financial Services ordered H.R. 3269 
favorably reported without holding a single legislative hearing 
to examine its far-reaching effects on corporate governance and 
employee compensation practices, despite two written requests 
from Committee Republicans demanding such a hearing. 
Republicans believe that the House should reject this ill-
considered legislation and send it back to the Committee on 
Financial Services for a more thorough review of its potential 
unintended consequences.

                                   Spencer Bachus.
                                   Leonard Lance.
                                   J. Gresham Barrett.
                                   Peter T. King.
                                   Patrick T. McHenry.
                                   Ron Paul.
                                   Lynn Jenkins.
                                   Christopher Lee.
                                   Randy Neugebauer.
                                   Frank D. Lucas.
                                   Ed Royce.
                                   Scott Garrett.
                                   Jeb Hensarling.
                                   Adam H. Putnam.
                                   Thomas Price.
                                   K. Marchant.
                                   Michele Bachmann.
                                   Erik Paulsen.
                                   John Campbell.
                                   Mike Castle.
                                   Donald Manzullo.

                                  
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