[Federal Register Volume 73, Number 203 (Monday, October 20, 2008)]
[Rules and Regulations]
[Pages 62205-62210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-24781]


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DEPARTMENT OF THE TREASURY

31 CFR Part 30


Tarp Capital Purchase Program

AGENCY: Domestic Finance, Treasury.

ACTION: Interim final rule.

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SUMMARY: This interim rule, promulgated pursuant to sections 101(a)(1), 
101(c)(5), and 111(b) of the Emergency Economic Stabilization Act of 
2008, Division A of Public Law 110-343 (EESA), provides guidance on the 
executive compensation provisions applicable to participants in the 
Troubled Assets Relief Program (TARP) Capital Purchase Program (CPP). 
Section 111(b) of EESA requires financial institutions from which the 
Department of the Treasury (Treasury) is purchasing troubled assets 
through direct purchases to meet appropriate standards for executive 
compensation and corporate governance. This interim final rule includes 
the following standards for purposes of the CPP: (a) Limits on 
compensation that exclude incentives for senior executive officers 
(SEOs) of financial institutions to take unnecessary and excessive 
risks that threaten the value of the financial institution; (b) 
required recovery of any bonus or incentive compensation paid to a SEO 
based on statements of earnings, gains, or other criteria that are 
later proven to be materially inaccurate; (c) prohibition on the 
financial institution from making any golden parachute payment to any 
SEO; and (d) agreement to limit a claim to a federal income tax 
deduction for certain executive remuneration. These rules generally 
affect financial institutions that participate in the CPP, certain 
employers related to those financial institutions, and their officers.

DATES: Effective Date: These regulations are effective on October 20, 
2008. Comment due date: November 19, 2008.

ADDRESSES: The Treasury requests comments on the topics addressed in 
this interim rule. Comments may be submitted to the Treasury by any of 
the following methods: Submit electronic comments through the federal 
government e-rulemaking portal, http://www.regulations.gov or by e-mail 
to [email protected] or send paper comments in 
triplicate to Executive Compensation Comments, Office of Financial 
Institutions Policy, Room 1418, Department of the Treasury, 1500 
Pennsylvania Avenue, NW., Washington, DC 20220.
    In general, the Treasury will post all comments to http://www.regulations.gov without change, including any business or personal 
information provided such as names, addresses, e-mail addresses, or 
telephone numbers. The Treasury will also make such comments available 
for public inspection and copying in the Treasury's Library, Room 1428, 
Main Department Building, 1500 Pennsylvania Avenue, NW., Washington, DC 
20220, on official business days between the hours of 10 a.m. and 5 
p.m. Eastern Time. You can make an appointment to inspect comments by 
telephoning (202) 622-0990. All comments, including attachments and 
other supporting materials, received are part of the public record and 
subject to public disclosure. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: For further information regarding this 
interim rule, contact the Office of Domestic Finance, the Treasury, at 
(202) 927-6618.

SUPPLEMENTARY INFORMATION: 

I. Background

    This document adds 31 CFR Part 30 under section 111(b) of the 
Emergency Economic Stabilization Act of 2008, Div. A of Public Law No. 
110-343 (EESA) with respect to the Troubled Assets Relief Program 
(TARP) Capital Purchase Program (CPP) established by the Department of 
the Treasury (Treasury) under EESA. Section 101(a) of EESA authorizes 
the Secretary of the Treasury to establish a TARP to ``purchase, and to 
make and fund commitments to purchase, troubled assets from any 
financial institution, on such terms and conditions as are determined 
by the Secretary, and in accordance with this Act and policies and 
procedures developed and published by the Secretary.'' Section 120 of 
EESA provides that the TARP authorities generally terminate on December 
31, 2009, unless extended upon certification by the Secretary of the 
Treasury to Congress, but in no event later than two years from the 
date of enactment of EESA (October 3, 2008)

[[Page 62206]]

(the TARP authorities period). Thus, the TARP authorities period is the 
period from October 3, 2008 to December 31, 2009 or, if extended, the 
period from October 3, 2008 to the date so extended, but not later than 
October 3, 2010.
    Section 111 of EESA provides that certain financial institutions 
that sell assets to the Treasury may be subject to specified executive 
compensation standards. In the case of auction purchases from a 
financial institution that has sold assets in an amount that exceeds 
$300 million in the aggregate (including direct purchases), the 
financial institution is prohibited under section 111(c) of EESA from 
entering into any new employment contract with a senior executive 
officer (SEO) that provides a golden parachute to the SEO in the event 
of the SEO's involuntary termination, or in connection with the 
financial institution's bankruptcy filing, insolvency, or receivership. 
This prohibition applies during the TARP authorities period. The 
Treasury has issued separate guidance on this provision (Notice 2008-
TAAP).
    In addition, for auction purchases, section 302 of EESA includes 
tax provisions as amendments to sections 162(m) and 280G of the 
Internal Revenue Code (26 U.S.C. 162(m) and 280G) that address 
compensation paid to certain executive officers employed by financial 
institutions that sell assets under TARP. Section 302(a) of EESA 
amended 26 U.S.C. 162(m) to add a new paragraph (m)(5), which reduces 
the deduction limit to $500,000 in the case of ``executive 
remuneration'' and ``deferred deduction executive remuneration.'' This 
limit applies only to certain employers participating in an auction 
purchase and only for certain taxable years. Employers covered under 26 
U.S.C. 162(m)(5) are not limited to publicly held corporations (nor 
even to corporations). The exception for performance-based compensation 
and certain other exceptions do not apply in the case of executive 
compensation covered under 26 U.S.C. 162(m)(5). The Treasury and the 
Internal Revenue Service have issued guidance on these provisions 
(I.R.S. Notice 2008-94).
    In the case of direct purchases, section 111(b)(1) of EESA requires 
financial institutions to meet appropriate standards for executive 
compensation and corporate governance as set forth by the Secretary of 
the Treasury. These standards apply to the SEOs of the financial 
institutions while the Treasury holds an equity or debt position in the 
financial institution acquired under the CPP. Section 111(b)(2) of EESA 
requires that at least three criteria be satisfied by financial 
institutions from which the Treasury directly purchases troubled assets 
and takes a meaningful equity or debt position. The following describes 
these criteria.
    Section 111(b)(2)(A) of EESA requires ``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.''
    Section 111(b)(2)(B) of EESA requires ``a provision for the 
recovery by the financial institution of any bonus or incentive 
compensation paid to a senior executive officer based on statements of 
earnings, gains, or other criteria that are later proven to be 
materially inaccurate.''
    Section 111(b)(2)(C) of EESA requires ``a prohibition on the 
financial institution making any golden parachute payment to its senior 
executive officer during the period that the Secretary holds an equity 
or debt position in the financial institution.''
    Treasury Notice 2008-PSSFI addresses these provisions under section 
111(b) of EESA as they apply to financial institutions participating in 
programs for systemically significant failing institutions. Further 
guidance will be issued for any additional programs.
    These regulations are being issued as interim final regulations to 
implement the purpose of EESA, which is to provide immediately 
authority and facilities that the Secretary of the Treasury can use to 
restore liquidity and stability to the financial system of the United 
States. Thus, to encourage financial institutions to choose to 
participate in the CPP, these regulations provide those institutions 
with information with respect to the applicable executive compensation 
and corporate governance rules that will apply under the CPP.

II. This Interim Rule

    These interim final regulations provide guidance on the executive 
compensation and corporate governance provisions of section 111(b) of 
EESA with respect to the CPP. They are written in question and answer 
format.
    The regulations clarify that the requirements of section 111(b) of 
EESA apply not only to the financial institution that participates in 
the CPP, but also to any other entity in its controlled group. For this 
purpose, the controlled group rules in section 414(b) and (c) of the 
Internal Revenue Code (26 U.S.C. 414(b) and (c)) apply, but only taking 
into account parent-subsidiary relationships, not brother-sister 
relationships. These tax rules generally base control on an 80-percent 
ownership basis. Thus, these interim regulations apply to controlled 
groups in a manner similar to the executive compensation provisions of 
section 302(a) of EESA, which added 26 U.S.C. 162(m)(5) and 26 U.S.C. 
280G(e) to the Internal Revenue Code, providing special tax treatment 
for executive compensation for employers participating in the TARP. See 
26 U.S.C. 162(m)(5)(B)(iii) and 26 U.S.C. 280G(e)(2)(A).
    The requirements in section 111(b) apply with respect to certain 
executive officers identified in Sec.  30.2 (Q-2) of the regulations. 
The determination of these executive officers is made based on rules 
similar to those set forth in the federal securities laws and generally 
apply to the chief executive officer, the chief financial officer, and 
the three mostly highly compensated executive officers. The three most 
highly compensated executive officers are determined according to the 
requirements in Item 402 of Regulation S-K under the federal securities 
law (17 CFR 229.402) by reference to the total compensation for the 
last completed fiscal year. Until the compensation data for the current 
fiscal year are available, the financial institution should make its 
best efforts to identify the three most highly compensated executive 
officers for the current fiscal year. Analogous rules apply to 
financial institutions that do not have securities registered with the 
Securities and Exchange Commission (SEC) pursuant to the federal 
securities laws.
    With respect to section 111(b)(2)(A) for purposes of participation 
in the CPP, the interim final regulations require the financial 
institution's compensation committee to identify the features in the 
financial institution's SEO incentive compensation arrangements that 
could lead SEOs to take unnecessary and excessive risks that could 
threaten the value of the financial institution. The regulations 
require that the compensation committee review the SEO incentive 
compensation arrangements with the financial institution's senior risk 
officers, or other personnel acting in a similar capacity, to ensure 
that SEOs are not encouraged to take such risks. The regulations 
require such review promptly, and in no case more than 90 days, after 
the purchase under the CPP.
    The regulations also require that the compensation committee meet 
at least annually with the financial institution's senior risk officers 
to discuss and

[[Page 62207]]

review the relationship between the financial institution's risk 
management policies and practices and the SEO incentive compensation 
arrangements.
    In addition, the regulations require the compensation committee to 
certify that it has completed the reviews of the SEO incentive 
compensation arrangements as outlined above. Financial institutions 
with securities registered with the SEC pursuant to the federal 
securities laws should provide these certifications in the Compensation 
Discussion and Analysis required pursuant to Item 402(b) of Regulation 
S-K under the federal securities laws (17 CFR 229.402). Those financial 
institutions that do not have securities registered with the SEC 
pursuant to the federal securities laws are required to provide the 
certifications to their primary regulatory agency.
    With respect to section 111(b)(2)(B) of EESA for purposes of 
participation in the CPP, the interim final regulations provide that 
the SEO bonus and incentive compensation paid during the period that 
the Treasury holds an equity or debt position acquired under the CPP 
must be subject to recovery or ``clawback'' by the financial 
institution if the payments were based on materially inaccurate 
financial statements and any other materially inaccurate performance 
metric criteria. The regulations include a comparison of this 
requirement to section 304 of the Sarbanes-Oxley Act of 2002 (Sarbanes-
Oxley) (Pub. L. 107-204).
    With respect to section 111(b)(2)(C) of EESA for purposes of 
participation in the CPP, the interim final regulations prohibit a 
financial institution from making any golden parachute payment to a SEO 
during the period the Treasury holds an equity or debt position 
acquired under the CPP. The regulations define a golden parachute 
payment in the same way as under 26 U.S.C. 280G as applied with respect 
to new paragraph (e) of 26 U.S.C. 280G, added by section 302(a) of EESA 
relating to golden parachute payments. Thus, a golden parachute payment 
means any payment in the nature of compensation to (or for the benefit 
of) a SEO made on account of an applicable severance from employment to 
the extent the aggregate present value of such payments equals or 
exceeds an amount equal to three times the SEO's base amount. The term 
``base amount'' for a SEO has the meaning set forth in 26 U.S.C. 
280G(b)(3) and 26 CFR 1.280G-1, Q&A-34 (except that references to 
``change in ownership or control'' are treated as referring to an 
``applicable severance from employment'').
    The regulations define an applicable severance from employment as 
any SEO's severance from employment with the financial institution (i) 
by reason of involuntary termination of employment with the financial 
institution or with an entity that is treated as the same employer as 
the financial institution under the controlled group rules or (ii) in 
connection with any bankruptcy filing, insolvency, or receivership of 
the financial institution or of an entity that is treated as the same 
employer as the financial institution under the controlled group rules. 
The regulations define an involuntary termination of employment and set 
forth rules for determining when a payment on account of an applicable 
severance from employment occurs. These rules are substantially the 
same as the standards in IRS Notice 2008-94 regarding new paragraph (e) 
of 26 U.S.C. 280G, and are also generally similar to the pre-existing 
standards under 26 U.S.C. 280G (see 26 CFR 1.280G-1, Q&A-22(a)).
    The regulations include a special rule for cases in which a 
financial institution (target) that has sold troubled assets to the 
Treasury through the CPP is acquired by an entity (acquirer) in an 
acquisition of any form. Under this rule, acquirer does not become 
subject to section 111(b) of EESA merely as a result of the 
acquisition. The rule applies only if the acquirer is not related to 
target and treats target as related if stock or other interests of 
target are treated (under 26 U.S.C. 318(a) other than paragraph (4) 
thereof) as owned by acquirer. With respect to target, any employees of 
target who are SEOs prior to the acquisition will be subject to section 
111(b) of EESA until after the first anniversary following the 
acquisition.
    The regulations set forth an additional standard for executive 
compensation and corporate governance under section 111(b)(1) of EESA. 
Under this standard, the financial institution must agree, as a 
condition to participate in the CPP, that no deduction will be claimed 
for federal income tax purposes for remuneration that would not be 
deductible if 26 U.S.C. 162(m)(5) were to apply to the financial 
institution. For this purpose, during the period that the Treasury 
holds an equity or debt position in the financial institution acquired 
under the CPP: (i) The financial institution (including entities in its 
controlled group) is treated as an ``applicable employer,'' (ii) its 
SEOs are treated as ``covered executives,'' and (iii) any taxable year 
that includes any portion of that period is treated as an ``applicable 
taxable year,'' each as defined in 26 U.S.C. 162(m)(5), except that the 
dollar limitation and the remuneration for the taxable year are 
prorated for the portion of the taxable year that the Treasury holds an 
equity or debt position in the financial institution under the CPP. The 
Secretary has determined that this is an appropriate standard for 
executive compensation for the CPP. This rule only applies for taxable 
years that include the period that the Treasury holds an equity or debt 
position in the financial institution acquired under the CPP. This 
standard applies even though the financial institution is not subject 
to 26 U.S.C. 162(m)(5) and only limits the amount of the deduction that 
may be claimed. Thus, no deduction may be claimed for remuneration 
during a taxable year for compensation in excess of $500,000 for a SEO, 
and the special rules relating to deferred deduction executive 
remuneration would also apply. See I.R.S. Notice 2008-94 for additional 
information regarding the deduction limit under 26 U.S.C. 162(m)(5).

III. Procedural Requirements

Justification for Interim Rulemaking

    This rule is promulgated pursuant to EESA, the purpose of which is 
to immediately provide authority and facilities that the Secretary of 
the Treasury can use to restore liquidity and stability to the 
financial system of the United States. Specifically, this rule 
implements certain provisions of section 111 of EESA, which sets forth 
executive compensation standards for financial institutions that sell 
troubled assets to the Treasury under EESA. The statute provides that 
the Secretary may issue guidance and regulations to carry out these 
provisions and that such guidance and regulations may be effective upon 
issuance.
    In order to encourage financial institutions to choose to 
participate in the CPP, those institutions must have timely and 
reliable information with respect to the applicable executive 
compensation and corporate governance rules that will apply under the 
program. Accordingly, because EESA authorizes section 111 guidance to 
be immediately effective and because of exigencies in the financial 
markets, the Treasury finds that it would be contrary to the public 
interest, pursuant to 5 U.S.C. 553(b)(B), to delay the issuance of this 
rule pending an opportunity for public comment and good cause exists to 
dispense with this requirement. For the same reasons, pursuant to 5 
U.S.C. 553(d)(3), the Treasury has determined that there is good cause 
for the interim final rule to become effective

[[Page 62208]]

immediately upon publication. While this regulation is effective 
immediately upon publication, the Treasury is inviting public comment 
on the regulation during a thirty-day period and will consider all 
comments in developing a final rule.

Regulatory Planning and Review

    The rule does not meet the criteria for a ``significant regulatory 
action'' as defined in Executive Order 12866. Therefore, the regulatory 
review procedures contained therein do not apply.

Regulatory Flexibility Act

    Because no notice of proposed rulemaking is required, this rule is 
not subject to the provisions of the Regulatory Flexibility Act (5 
U.S.C chapter 6).

List of Subjects in 31 CFR Part 30

    Executive compensation, Troubled assets.

0
For the reasons set out in the preamble, Title 31 of the CFR is amended 
as follows:

PART 30--TARP CAPITAL PURCHASE PROGRAM

0
1. Add part 30 to read as follows:

PART 30--TARP CAPITAL PURCHASE PROGRAM

Sec.
30.0 Executive compensation and corporate governance.
30.1 Q-1: To what financial institutions does this part apply?
30.2 Q-2: Who is a senior executive officer (SEO) under section 111 
of EESA?
30.3 Q-3: What actions are necessary for a financial institution 
participating in the CPP to comply with section 111(b)(2)(A) of 
EESA?
30.4 Q-4: How should the financial institution comply with the 
standard under Sec.  30.3 that the compensation committee, or a 
committee acting in a similar capacity, review the SEO incentive 
compensation arrangements to ensure that the SEO incentive 
compensation arrangements do not encourage the SEOs to take 
unnecessary and excessive risks that threaten the value of the 
financial institution?
30.5 Q-5: How should the financial institution comply with the 
certification requirements under Sec.  30.3 of this section?
30.6 Q-6: What actions are necessary for a financial institution 
participating in the CPP to comply with section 111(b)(2)(B) of 
EESA?
30.7 Q-7: How do the standards under section 111(b)(2)(B) of EESA 
differ from section 304 of the Sarbanes-Oxley Act of 2002 (Sarbanes-
Oxley) (Pub. Law No. 107-204)?
30.8 Q-8: What actions are necessary for a financial institution 
participating in the CPP to comply with section 111(b)(2)(C) of 
EESA?
30.9 Q-9: What is a golden parachute payment under section 111(b) of 
EESA?
30.10 Q-10: Are there other conditions that are required under the 
executive compensation and corporate governance standards in section 
111(b)(1) of EESA?
30.11 Q-11: How does section 111(b) of EESA operate in connection 
with an acquisition, merger, or reorganization?

    Authority: Section 111(b) of the Emergency Economic 
Stabilization Act of 2008, Div. A of Public Law 110-343; 122 Stat 
3765.


Sec.  30.0  Executive compensation and corporate governance.

    The following questions and answers reflect the executive 
compensation and corporate governance requirements of section 111(b) of 
the Emergency Economic Stabilization Act of 2008, Div. A of Public Law 
No. 110-343 (EESA) with respect to participation in the Troubled Assets 
Relief Program (TARP) Capital Purchase Program (CPP) established by the 
Treasury thereunder:


Sec.  30.1  Q-1: To what financial institutions does this part apply?

    (a) General rule. This part applies to any financial institution 
that participates in the CPP.
    (b) Controlled group rules. For purposes of section 111(b) of EESA, 
two or more persons who are treated as a single employer under section 
26 U.S.C. 414(b) (employees of a controlled group of corporations) and 
section 26 U.S.C. 414(c) (employees of partnerships, proprietorships, 
etc., that are under common control) are treated as a single employer. 
However, for purposes of section 111(b) of EESA, the rules for brother-
sister controlled groups and combined groups are disregarded (including 
disregarding the rules in section 26 U.S.C. 1563(a)(2) and (a)(3) with 
respect to corporations and the parallel rules that are in section 26 
CFR 1.414(c)-2(c) with respect to other organizations conducting trades 
or businesses). See Sec.  30.11 (Q-11) of this part for special rules 
where a financial institution is acquired.


Sec.  30.2  Q-2: Who is a senior executive officer (SEO) under section 
111 of EESA?

    (a) General definition. A SEO means a ``named executive officer'' 
as defined in Item 402 of Regulation S-K under the federal securities 
laws (17 CFR 229.402) who:
    (1) Is employed by a financial institution that is participating in 
the CPP while the Treasury holds an equity or debt position acquired 
under the CPP; and
    (2)(i) Is the principal executive officer (PEO) (or person acting 
in a similar capacity) of such financial institution (or, in the case 
of a controlled group, of the parent entity);
    (ii) The principal financial officer (PFO) (or person acting in a 
similar capacity) of such financial institution (or, in the case of a 
controlled group, of the parent entity); or
    (iii) One of the three most highly compensated executive officers 
of such financial institution (or the financial institution's 
controlled group) other than the PEO or the PFO.
    (b) Determination of three most highly compensated executive 
officers. For financial institutions with securities registered with 
the Securities and Exchange Commission (SEC) pursuant to the federal 
securities law, the three most highly compensated executive officers 
are determined according to the requirements in Item 402 of Regulation 
S-K under the federal securities laws (17 CFR 229.402). The term 
``executive officer'' has the same meaning as defined in Rule 3b-7 of 
the Securities Exchange Act of 1934 (Exchange Act) (17 CFR 240.3b-7). 
For purposes of determining the three most highly compensated executive 
officers, compensation is determined as it is in Item 402 of Regulation 
S-K to include total compensation for the last completed fiscal year 
without regard to whether the compensation is includible in the 
executive officer's gross income. Until the compensation data for the 
current fiscal year are available, the financial institution should 
make its best efforts to identify the three most highly compensated 
executive officers for the current fiscal year.
    (c) Application to private employers. Rules analogous to the rules 
in paragraphs (a) and (b) of this section apply to financial 
institutions that are not subject to the federal securities laws, 
rules, and regulations, including financial institutions that do not 
have securities registered with the SEC pursuant to the federal 
securities laws.


Sec.  30.3  Q-3: What actions are necessary for a financial institution 
participating in the CPP to comply with section 111(b)(2)(A) of EESA?

    (a) In order to comply with section 111(b)(2)(A) of EESA for 
purposes of participation in the CPP, a financial institution must 
comply with the following rules:
    (1) Promptly, and in no case more than 90 days, after the purchase 
under the CPP, the financial institution's compensation committee, or a 
committee acting in a similar capacity, must review the SEO incentive

[[Page 62209]]

compensation arrangements with such financial institution's senior risk 
officers, or other personnel acting in a similar capacity, to ensure 
that the SEO incentive compensation arrangements do not encourage SEOs 
to take unnecessary and excessive risks that threaten the value of the 
financial institution;
    (2) Thereafter, the compensation committee, or a committee acting 
in a similar capacity, must meet at least annually with senior risk 
officers, or individuals acting in a similar capacity, to discuss and 
review the relationship between the financial institution's risk 
management policies and practices and the SEO incentive compensation 
arrangements; and
    (3) The compensation committee, or a committee acting in a similar 
capacity, must certify that it has completed the reviews of the SEO 
incentive compensation arrangements required under paragraphs (a)(1) 
and (2) of this section.
    (b) These rules apply while the Treasury holds an equity or debt 
position acquired under the CPP.


Sec.  30.4  Q-4: How should the financial institution comply with the 
standard under Sec.  30.3 that the compensation committee, or a 
committee acting in a similar capacity, review the SEO incentive 
compensation arrangements to ensure that the SEO incentive compensation 
arrangements do not encourage the SEOs to take unnecessary and 
excessive risks that threaten the value of the financial institution?

    Because each financial institution faces different material risks 
given the unique nature of its business and the markets in which it 
operates, the compensation committee, or a committee acting in a 
similar capacity, should discuss with the financial institution's 
senior risk officers, or other personnel acting in a similar capacity, 
the risks (including long-term as well as short-term risks) that such 
financial institution faces that could threaten the value of the 
financial institution. The compensation committee, or a committee 
acting in a similar capacity, should identify the features in the 
financial institution's SEO incentive compensation arrangements that 
could lead SEOs to take such risks. Any such features should be limited 
in order to ensure that the SEOs are not encouraged to take risks that 
are unnecessary or excessive.


Sec.  30.5  Q-5: How should the financial institution comply with the 
certification requirements under Sec.  30.3?

    (a) Certification. The compensation committee, or a committee 
acting in a similar capacity, of the financial institution must provide 
the certifications required by Sec.  30.3 (Q-3) stating that it has 
reviewed, with such financial institution's senior risk officers, the 
SEO incentive compensation arrangements to ensure that the incentive 
compensation arrangements do not encourage SEOs to take unnecessary and 
excessive risks. Providing a statement similar to the following and in 
the manner provided in paragraphs (b) and (c) of this section, as 
applicable, would satisfy this standard: ``The compensation committee 
certifies that it has reviewed with senior risk officers the SEO 
incentive compensation arrangements and has made reasonable efforts to 
ensure that such arrangements do not encourage SEOs to take unnecessary 
and excessive risks that threaten the value of the financial 
institution.''
    (b) Location. For financial institutions with securities registered 
with the SEC pursuant to the federal securities law, the compensation 
committee, or a committee acting in a similar capacity, should provide 
this certification in the Compensation Discussion and Analysis required 
pursuant to Item 402(b) of Regulation S-K under the federal securities 
laws (17 CFR 229.402).
    (c) Application to private financial institutions. The rules 
provided in this section are also applicable to financial institutions 
that are not subject to the federal securities laws, rules, and 
regulations, including financial institutions that do not have 
securities registered with the SEC pursuant to the federal securities 
laws. A private financial institution should file the certification of 
the compensation committee, or a committee acting in a similar 
capacity, with its primary regulatory agency.


Sec.  30.6  Q-6: What actions are necessary for a financial institution 
participating in the CPP to comply with section 111(b)(2)(B) of EESA?

    In order to comply with section 111(b)(2)(B) of EESA for purposes 
of participation in the CPP, a financial institution must require that 
SEO bonus and incentive compensation paid during the period that the 
Treasury holds an equity or debt position acquired under the CPP are 
subject to recovery or ``clawback'' by the financial institution if the 
payments were based on materially inaccurate financial statements or 
any other materially inaccurate performance metric criteria.


Sec.  30.7  Q-7: How do the standards under section 111(b)(2)(B) of 
EESA differ from section 304 of the Sarbanes-Oxley Act of 2002 
(Sarbanes-Oxley) (Pub. Law No. 107-204)?

    Section 304 of Sarbanes-Oxley requires the forfeiture by a public 
company's chief executive officer and the chief financial officer of 
any bonus, incentive-based compensation, or equity-based compensation 
received and any profits from sales of the company's securities during 
the twelve-month period following a materially non-compliant financial 
report. Section 111(b)(2)(B) of EESA differs from section 304 of 
Sarbanes-Oxley in several ways. The standard under section 111(b)(2)(B) 
of EESA: Applies to the three most highly compensated executive 
officers in addition to the PEO and the PFO; applies to both public and 
private financial institutions; is not exclusively triggered by an 
accounting restatement; does not limit the recovery period; and covers 
not only material inaccuracies relating to financial reporting but also 
material inaccuracies relating to other performance metrics used to 
award bonuses and incentive compensation.


Sec.  30.8  Q-8: What actions are necessary for a financial institution 
participating in the CPP to comply with section 111(b)(2)(C) of EESA?

    In order to comply with section 111(b)(2)(C) of EESA for purposes 
of participation in the CPP, a financial institution must prohibit any 
golden parachute payment to a SEO during the period the Treasury holds 
an equity or debt position acquired under the CPP.


Sec.  30.9  Q-9: What is a golden parachute payment under section 
111(b) of EESA?

    (a) Definition. As provided under 26 U.S.C. 280G(e), a ``golden 
parachute payment'' means any payment in the nature of compensation to 
(or for the benefit of) a SEO made on account of an applicable 
severance from employment to the extent the aggregate present value of 
such payments equals or exceeds an amount equal to three times the 
SEO's base amount. The term ``base amount'' for a SEO has the meaning 
set forth in 26 U.S.C. 280G(b)(3) and 26 CFR 1.280G-1, Q&A-34, except 
that references to ``change in ownership or control'' are treated as 
referring to an ``applicable severance from employment.''
    (b) Applicable severance from employment. (1) Definition. An 
applicable severance from employment means any SEO's severance from 
employment with the financial institution.

[[Page 62210]]

    (i) By reason of involuntary termination of employment with the 
financial institution or with an entity that is treated as the same 
employer as the financial institution under Sec.  30.1 (Q-1) of this 
part; or
    (ii) In connection with any bankruptcy filing, insolvency, or 
receivership of the financial institution or of an entity that is 
treated as the same employer as the financial institution under Sec.  
30.1 (Q-1) of this part.
    (2) Involuntary termination. (i) An involuntary termination from 
employment means a termination from employment due to the independent 
exercise of the unilateral authority of the employer to terminate the 
SEO's services, other than due to the SEO's implicit or explicit 
request to terminate employment, where the SEO was willing and able to 
continue performing services. An involuntary termination from 
employment may include the financial institution's failure to renew a 
contract at the time such contract expires, provided that the SEO was 
willing and able to execute a new contract providing terms and 
conditions substantially similar to those in the expiring contract and 
to continue providing such services. In addition, a SEO's voluntary 
termination from employment constitutes an involuntary termination from 
employment if the termination from employment constitutes a termination 
for good reason due to a material negative change in the SEO's 
employment relationship. See 26 CFR 1.409A-1(n)(2).
    (ii) A severance from employment by a SEO is by reason of 
involuntary termination even if the SEO has voluntarily terminated 
employment in any case where the facts and circumstances indicate that 
absent such voluntary termination the financial institution would have 
terminated the SEO's employment and the SEO had knowledge that he or 
she would be so terminated.
    (c) Payments on account of an applicable severance from employment. 
(1) Definition. A payment on account of an applicable severance from 
employment means a payment that would not have been payable if no 
applicable severance from employment had occurred (including amounts 
that would otherwise have been forfeited if no applicable severance 
from employment had occurred) and amounts that are accelerated on 
account of the applicable severance from employment. See 26 CFR 1.280G-
1, Q&A-24(b), for rules regarding the determination of the amount that 
is on account of an acceleration.
    (2) Excluded amounts. Payments on account of an applicable 
severance from employment do not include amounts paid to a SEO under a 
tax qualified retirement plan.


Sec.  30.10  Q-10: Are there other conditions that are required under 
the executive compensation and corporate governance standards in 
section 111(b)(1) of EESA?

    The financial institution must agree, as a condition to participate 
in the CPP, that no deduction will be claimed for federal income tax 
purposes for remuneration that would not be deductible if 26 U.S.C. 
162(m)(5) were to apply to the financial institution. For this purpose, 
during the period that the Treasury holds an equity or debt position in 
the financial institution acquired under the CPP:
    (a) The financial institution (including entities in its controlled 
group) is treated as an ``applicable employer,''
    (b) Its SEOs are treated as ``covered executives,'' and
    (c) Any taxable year that includes any portion of that period is 
treated as an ``applicable taxable year,'' each as defined in 26 U.S.C. 
162(m)(5), except that the dollar limitation and the remuneration for 
the taxable year are prorated for the portion of the taxable year that 
the Treasury holds an equity or debt position in the financial 
institution under the CPP.


Sec.  30.11  Q-11: How does section 111(b) of EESA operate in 
connection with an acquisition, merger, or reorganization?

    (a) Special rules for acquisitions, mergers, or reorganizations. In 
the event that a financial institution (target) that had sold troubled 
assets to the Treasury through the CPP is acquired by an entity that is 
not related to target (acquirer) in an acquisition of any form, 
acquirer will not become subject to section 111(b) of EESA merely as a 
result of the acquisition. For this purpose, an acquirer is related to 
target if stock or other interests of target are treated (under 26 
U.S.C. 318(a) other than paragraph (4) thereof) as owned by acquirer. 
With respect to the target, any employees of target who are SEOs prior 
to the acquisition will be subject to section 111(b)(2)(C) of EESA 
until after the first anniversary following the acquisition.

    (b) Example. In 2008, financial institution A sells $100 million 
of troubled assets to the Treasury through the CPP. In January 2009, 
financial institution B, which is not otherwise subject to section 
111(b) of EESA, acquires financial institution A in a stock purchase 
transaction, with the result that financial institution A becomes a 
wholly owned subsidiary of financial institution B. Based on the 
rules in paragraph (a) of this Sec.  30.11 (Q-11), the SEOs of 
financial institution B are not subject to section 111(b) of EESA 
solely as a result of the acquisition of financial institution A in 
January 2009. The SEOs of financial institution A at the time of the 
acquisition are subject to section 111(b)(2)(C) of EESA until 
January 2010, the first anniversary following the acquisition.

    Dated: October 14, 2008.
Neel Kashkari,
Interim Assistant Secretary for Financial Stability.
 [FR Doc. E8-24781 Filed 10-15-08; 11:15 am]
BILLING CODE 4810-25-P