Friday, July 17, 2009

Investor Protection Act, Part of Broader Financial Reg. Reform, Takes Shape; Draft Legis. Released on Say-On-Pay, Comp Committees, Hedge Funds, More

Yesterday, the U.S. Treasury Department delivered to Congress draft legislation on say-on-pay and independent compensation committees. This action follows the release earlier this week of draft legislation enhancing certain powers of the SEC. All of the aforementioned sections of draft legislation and potentially others to come are organized under Title IX of the broader financial regulatory reform bill; Title IX is called: Additional Improvements to Financial Markets Regulation, aka The Investor Protection Act of 2009.

A separate section of draft legislation released by Treasury earlier this week would require registration of hedge funds and other private investment funds, add related record-keeping and examination requirements, and require the SEC to share certain information with other regulatory agencies to assess potential systemic risk posed by the funds. These provisions currently appear under Title IV of the broader financial regulatory reform bill; Title IV is The Private Fund Investment Advisers Registration Act of 2009.

Highlights of the draft Investor Protection Act and Private Fund Investment Advisers Registration Act follow, based on sections of draft legislation released so far, and Treasury's related Fact Sheets.

Title IX - Investor Protection Act of 2009
Subtitle A - Disclosure (draft legislation, contains Subtitles A and B) Fact sheet.

SEC. 911. Investor Advisory Committee Established. [NOTE: I can hear a representative of this committee answering the phone: 'Section 911, what's your investor advisory emergency?'] This section of the legislation would make SEC's recently formed Investor Advisory Committee - formed with a finite life in accordance with the Federal Advisory Committee Act, and slated to hold its first meeting July 27 - a permanent advisory committee.

SEC 912. Clarification of the Commission's Authority to Engage in Consumer Testing. [NOTE: Broc Romanek observed in TheCorporateCounsel.net blog earlier this week: "Consumers? I think they mean investors? The SEC's stated mission is investor protection and I don't recall the term "consumer" being mentioned in any of the existing statutes that give the SEC some sort of authority nor any of the agency's rules and regulations."]

SEC. 913. Establishment of a Fiduciary Duty for Brokers, Dealers, and Investment Advisers, and Harmonization of the Regulation of Brokers, Dealers, and Investment Advisers.

SEC. 914. Clarification of Commission Authority to Require Investor Disclosures Before Purchase of Investment Company Shares. [Note: this section would require additional disclosures TO investors, not FROM investors, prior to their purchase of funds.]
Subtitle B - Enforcement and Remedies (draft legislation, contains Subtitles A and B) Fact sheet.

SEC. 921. Authority to Restrict Mandatory Pre-Dispute Arbitration.

SEC. 922, 923, 924. Whistleblower Protection (and related Conforming Amendments, Implementation and Transition Provisions) [Note: although entitled whistleblower 'protection,' this section mainly provides the SEC with the authority to establish funds to pay whistleblowers whose information/analysis leads to enforcement actions for securities law violations generally, expanding on what is currently referred to as the 'bounty' program which offers payment in certain instances to those who provided information leading to charges of insider trading. As noted in this Fact Sheet: "This authority will encourage insiders and others with strong evidence of securities law violations to bring that evidence to the SEC and improve its ability to enforce the securities laws. The Administration supports the creation of this fund using monies that the SEC collects from enforcement actions that are not otherwise distributed to investors."]

SEC. 925. Collateral Bars

SEC. 926, 927. Aiding and Abetting Authority Under the Securities Act and the Investment Company Act (and related Authority to Impose Penalties for Aiding and Abetting Violations of the Investment Advisers Act).

Subtitle D - Executive Compensation (draft legislation)

SEC. 941. Shareholder Vote on Executive Compensation Disclosures. Fact Sheet states this section of the legislation would require a non-binding annual shareholder vote on compensation for all public companies. All public companies will be required to include a non-binding shareholder vote on executive compensation as disclosed in the proxy for any annual meeting held after December 15, 2009. The disclosures that would be subject to the say-on-pay vote include tables summarizing salary, bonuses, stock and option awards and total compensation for senior executive officers, as well as summaries of golden parachute and pension compensation and a narrative explanation of the board's compensation decisions.

SEC. 942. Compensation Committee Independence. Fact Sheet states this section of the legislation would require (1) members of compensation committees to meet exacting new standards for independence, just as Sarbanes-Oxley did for members of audit committees (2) compensation consultants and legal counsel hired by the compensation committee must be independent from management , and (3) compensation committees will be given the authority and funding to hire independent compensation consultants, outside counsel, and other advisers who can help ensure that the committee bargains for pay packages in the best interests of shareholders. If the compensation committee decides not to use its own compensation consultant, it will be required to explain that decision to shareholders.

Title IV - Private Fund Investment Advisers Registration Act of 2009 (draft legislation). Fact Sheet states this section of the legislation would require (1) advisers to private investment funds to register with the SEC, (2) all investment funds advised by an SEC-registered investment adviser be subject to recordkeeping requirements; requirements with respect to disclosures to investors, creditors, and counterparties; and regulatory reporting requirements - including substantial regulatory reporting requirements with respect to the assets, leverage, and off-balance sheet exposure of their advised private funds (3) the SEC to conduct regular examinations of such funds to monitor compliance with these requirements and assess potential risk. In addition, the SEC would share the disclosure reports received from funds with the Federal Reserve and the Financial Services Oversight Council. This information would help determine whether systemic risk is building up among hedge funds and other private pools of capital, and could be used if any of the funds or fund families are so large, highly leveraged, and interconnected that they pose a threat to our overall financial stability and should therefore be supervised and regulated as Tier 1 Financial Holding Companies.

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