20 October 2008
[Federal Register: October 20, 2008 (Volume 73, Number 203)]
[Rules and Regulations]
[Page 62205-62210]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20oc08-8]
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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 executivecompensationcomments@do.treas.gov 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
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