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15 June 2009
[Federal Register: June 15, 2009 (Volume 74, Number 113)]
[Rules and Regulations]
[Page 28393-28423]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jn09-15]
[[Page 28393]]
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Part III
Department of the Treasury
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31 CFR Part 30
TARP Standards for Compensation and Corporate Governance; Interim Final
Rule
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DEPARTMENT OF THE TREASURY
31 CFR Part 30
RIN 1505-AC09
TARP Standards for Compensation and Corporate Governance
AGENCY: Domestic Finance, Treasury.
ACTION: Interim final rule.
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SUMMARY: This interim final rule, promulgated pursuant to sections
101(a)(1), 101(c)(5), and 111 of the Emergency Economic Stabilization
Act of 2008 (EESA), as amended by the American Recovery and
Reinvestment Act of 2009 (ARRA), provides guidance on the executive
compensation and corporate governance provisions of EESA that apply to
entities that receive financial assistance under the Troubled Asset
Relief Program (TARP). Section 111 of EESA requires entities receiving
financial assistance (TARP recipients) from the Department of the
Treasury (Treasury) to meet appropriate standards for executive
compensation and corporate governance. This interim final rule includes
standards for TARP recipients that implement the provisions of section
111 of EESA, as well as certain additional standards adopted pursuant
to the authority granted the Treasury under section 111(b)(2) to
promulgate such additional standards.
DATES: Effective Date: These regulations are effective on June 15,
2009. Comment due date: August 14, 2009.
ADDRESSES: Treasury invites comments on the topics addressed in this
interim final rule. Comments may be submitted to 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, 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. Treasury will also make such comments available for
public inspection and copying in Treasury's Library, Room 1428,
Department of the Treasury, 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 final rule contact the Office of Domestic Finance, Treasury, at
(202) 927-6618.
SUPPLEMENTARY INFORMATION:
Executive Summary
This Interim Final Rule sets forth the following standards, which
generally apply to all TARP recipients in the programs under the TARP,
subject to certain exceptions for TARP recipients that do not hold
outstanding obligations: (1) Limits on compensation that exclude
incentives for senior executive officers (SEOs) to take unnecessary and
excessive risks that threaten the value of the TARP recipient; (2)
provision for the recovery of any bonus, retention award, or incentive
compensation paid to a SEO or the next twenty most highly compensated
employees based on materially inaccurate statements of earnings,
revenues, gains, or other criteria; (3) prohibition on making any
golden parachute payment to a SEO or any of the next five most highly
compensated employees; (4) prohibition on the payment or accrual of
bonus, retention award, or incentive compensation to SEOs or certain
highly compensated employees, subject to certain exceptions for
payments made in the form of restricted stock; (5) prohibition on
employee compensation plans that would encourage manipulation of
earnings reported by the TARP recipient to enhance an employee's
compensation; (6) establishment of a compensation committee of
independent directors to meet semi-annually to review employee
compensation plans and the risks posed by these plans to the TARP
recipient; (7) adoption of an excessive or luxury expenditures policy;
(8) disclosure of perquisites offered to SEOs and certain highly
compensated employees; (9) disclosure related to compensation
consultant engagement; (10) prohibition on tax gross-ups to SEOs and
certain highly compensated employees; (11) compliance with Federal
securities rules and regulations regarding the submission of a non-
binding resolution on SEO compensation to shareholders; and (12)
establishment of the Office of the Special Master for TARP Executive
Compensation (Special Master) to address the application of these rules
to TARP recipients and their employees. Among the duties and
responsibilities of the Special Master with respect to TARP recipients
of exceptional assistance is to review and approve compensation
payments and compensation structures applicable to the SEOs and certain
highly compensated employees, and to review and approve compensation
structures applicable to certain additional highly compensated
employees. TARP recipients that are not receiving exceptional
assistance may apply to the Special Master for an advisory opinion with
respect to compensation payments and structures. For further discussion
of the Special Master's responsibilities, see section III.B of this
preamble. Finally, this interim final rule also establishes compliance
reporting and recordkeeping requirements regarding the rule's executive
compensation and corporate governance standards. This interim final
rule generally affects TARP recipients, their SEOs, and certain of
their highly compensated employees.
I. Background
In October, 2008, the Department of the Treasury (Treasury)
established the Troubled Asset Relief Program (TARP) under the
Emergency Economic Stabilization Act of 2008, as amended (12 U.S.C.
5021 et seq.) (EESA). EESA provided immediate authority and facilities
that the Secretary of the Treasury (Secretary) could use to restore
liquidity and stability to the financial system. Section 101(a) of EESA
authorizes the Secretary to establish the 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.''
On February 13, 2009, Congress enacted the American Recovery and
Reinvestment Act of 2009 (ARRA), which the President signed into law on
February 17, 2009. Title VII of Division B of the ARRA amended in its
entirety section 111 of EESA. Section 111 of EESA provides that certain
entities that receive financial assistance from Treasury under the TARP
(TARP recipients) will be subject to specified executive compensation
and corporate governance standards to be established by the Secretary.
[[Page 28395]]
II. Previous Rulemaking
A. October 2008 Interim Final Rule
On October 20, 2008, Treasury published in the Federal Register an
interim final rule (73 FR 62205) adding 31 CFR Part 30 under section
111 of EESA (prior to its later amendment by ARRA) (October 2008
Interim Final Rule). The October 2008 Interim Final Rule established
the original executive compensation standards for financial
institutions participating in the Capital Purchase Program (CPP), a
financial stability program implemented under the TARP in October 2008.
These standards generally applied to the senior executive officers
(SEOs) of the CPP participant, that is, the principal executive officer
(PEO), the principal financial officer (PFO), and the three most highly
compensated executive officers in addition to the PEO and the PFO.
Section 111(b)(2)(A) of EESA, prior to the amendment by ARRA,
required ``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.'' With respect to section 111(b)(2)(A),
the October 2008 Interim Final Rule required 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 October 2008
Interim Final Rule required that the compensation committee review (no
more than ninety days after the purchase under the CPP and annually
thereafter) the SEO incentive compensation arrangements with the
financial institution's senior risk officers to ensure that SEOs were
not encouraged to take such risks. The compensation committee was then
required to certify that it had completed those reviews.
Section 111(b)(2)(B) of EESA required ``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.'' With respect to this section, the October 2008
Interim Final Rule required the SEO bonus and incentive compensation
paid while Treasury holds an equity or debt position acquired under the
CPP to be subject to a provision for 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.
Section 111(b)(2)(C) of EESA required ``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.'' In accordance with
this section, the October 2008 Interim Final Rule prohibited a
financial institution from making any golden parachute payment to a SEO
during the period Treasury holds an equity or debt position acquired
under the CPP. The October 2008 Interim Final Rule defined a golden
parachute payment as 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 of compensation.
The October 2008 Interim Final Rule also set forth an additional
standard for executive compensation and corporate governance under the
authority of section 111(b)(1) of EESA. This standard required the
financial institution to forgo any deduction for compensation for
Federal income tax purposes in excess of $500,000 for each SEO that
would not be deductible if section 162(m)(5) of the Internal Revenue
Code (26 U.S.C. 162(m)(5)) applied to the financial institution.
B. Other Guidance
At the same time of the release of the October 2008 Interim Final
Rule, Treasury also published guidance relating to other financial
stability programs under TARP. Treasury Notice 2008-PSSFI addressed the
provisions under section 111(b) of EESA as applicable to financial
institutions participating in programs for systemically significant
failing institutions. Treasury Notice 2008-PSSFI included the same
standards as the October 2008 Interim Final Rule with one exception: It
prohibited the financial institution from making any golden parachute
payment (defined more strictly under Treasury Notice 2008-PSSFI as any
payment made on account of an applicable severance from employment) to
a SEO.
In addition, Treasury issued two notices on executive compensation
requirements applicable to auction programs for purchasing troubled
assets. First, pursuant to section 111(c) of EESA, Notice 2008-TAAP
prohibited any financial institution selling more than $300,000,000 in
troubled assets through an auction program from entering into a new SEO
employment agreement with a golden parachute provision through the
length of the program. Second, I.R.S. Notice 2008-94, addressing
certain tax provisions in section 302 of EESA applicable to SEO
compensation, required financial institutions selling more than
$300,000,000 in troubled assets through an auction program to forgo any
deduction for compensation for Federal income tax purposes in excess of
$500,000 for each SEO under newly added section 162(m)(5) of the
Internal Revenue Code (26 U.S.C. 162(m)(5)) and any deduction for
certain SEO golden parachute payments under newly added section 280G(e)
of the Internal Revenue Code (26 U.S.C. 280G(e)). In addition, I.R.S.
Notice 2008-94 subjected SEOs to a 20-percent excise tax on these
golden parachute payments.
On January 16, 2009, Treasury announced amendments to the October
2008 Interim Final Rule to include reporting and recordkeeping
requirements under the executive compensation standards for the CPP.
However, these amendments were returned from the Federal Register and
never published and, thus, will never be effective.
The provisions of the ARRA and this interim final rule (Interim
Final Rule) supersede the October 2008 Interim Final Rule, Notice 2008-
PSSFI, and Notice 2008-TAAP, for periods for which the ARRA provisions
described in this rule are effective. For a more detailed discussion of
the effective dates, including the effective date of this Interim Final
Rule, see Sec. 30.17 (Q-17) of the Interim Final Rule, and the
discussion of Sec. 30.17 (Q-17) in section III.B of this preamble.
In addition, on February 4, 2009, Treasury issued new guidance on
the executive compensation restrictions under EESA (February 2009
Treasury Guidance). The February 2009 Treasury Guidance provided
financial institutions participating in the TARP with reporting and
recordkeeping guidance, including guidance for compensation committees
in preparing an explanation of how SEO compensation arrangements do not
encourage excessive and unnecessary risk-taking.
For entities participating in an exceptional assistance program
under the TARP, the February 2009 Treasury Guidance proposed to (1)
limit the annual compensation of senior executives to $500,000 other
than
[[Page 28396]]
restricted stock or other similar long-term incentive arrangements; (2)
require the vesting schedule of this restricted stock to be based on
the financial institution's satisfying repayment obligations,
protecting taxpayer interests, and meeting lending and stability
standards; (3) require full disclosure of executive compensation
structure and strategy and a non-binding shareholder resolution
approving or disapproving the structure and strategy; (4) require
provisions for clawback of bonuses and incentive compensation awarded
to SEOs if based on materially inaccurate financial statements or
performance metrics; (5) require provisions for the clawback of bonuses
and incentive compensation awarded to the next twenty executive
officers if based on materially inaccurate financial statements or
performance metrics and the executive officers had knowingly engaged in
providing inaccurate information relating to those financial statements
or performance metrics; (6) limit the payment of any golden parachute
payments to the SEOs and the next five executive officers; (7) prohibit
the payment of any golden parachute payments greater than one year's
compensation to the next twenty-five executive officers; and (8)
provide guidance for boards of directors in adopting a luxury
expenditures policy.
For entities participating in a generally available capital access
program under the TARP, the February 2009 Treasury Guidance proposed to
(1) limit SEO annual compensation to $500,000 with any additional pay
in the form of restricted stock or other similar long-term incentive
arrangements carrying the same restrictions as for entities
participating in an exceptional assistance program; (2) allow entities
to waive this limitation only by disclosure of SEO compensation and, if
requested, a non-binding shareholder resolution on that SEO
compensation; (3) require provisions for clawback of bonuses and
incentive compensation awarded to SEOs if based on materially
inaccurate financial statements or performance metrics; (4) require
provisions for clawback of bonuses and incentive compensation awarded
to the next twenty executive officers if based on materially inaccurate
financial statements or performance metrics and if the executive
officers knowingly engaged in providing inaccurate information relating
to those financial statements or performance metrics; (5) prohibit the
payment of any golden parachute payments greater than one year's
compensation to the SEOs; and (6) provide guidance for boards of
directors in adopting a luxury expenditures policy.
The February 2009 Treasury Guidance provided that the guidelines
would not apply retroactively to existing investments or to previously
announced programs. The February 2009 Treasury Guidance also
anticipated a public comment period before implementation of the
guidelines for generally available capital access programs. Before the
full implementation of the February 2009 Treasury Guidance, Congress
enacted the ARRA. The ARRA prescribes new executive compensation
standards different from the Treasury Guidance (except for the similar
provisions with respect to required clawback provisions and excessive
or luxury expenditures policies), and requires Treasury to establish
these standards by promulgating regulations to implement section 111.
This Interim Final Rule complies with this statutory requirement to
promulgate standards that implement the ARRA provisions, consolidates
all of the executive-compensation-related provisions that are
specifically directed at TARP recipients into a single rule
(superseding all prior rules and guidance), and utilizes the discretion
granted to the Secretary under the ARRA to adopt additional standards,
some of which are adapted from principles set forth in the February
2009 Treasury Guidance.
III. The Interim Final Rule
This Interim Final Rule revises in its entirety 31 CFR Part 30,
which comprises Treasury's regulations implementing section 111 of
EESA.
A. Overview of Statutory Provisions
Generally, section 111 of EESA, as amended by ARRA, imposes
corporate governance and executive compensation requirements on TARP
recipients and requires Treasury to establish certain corporate
governance and executive compensation standards with which TARP
recipients must comply. Section 111 outlines several specific
standards, and requires Treasury to establish these standards by
promulgating regulations. Section 111 also authorizes Treasury to
establish additional standards by regulation.
Section 111(b)(1) of EESA provides that a TARP recipient shall be
subject to the standards established by the Secretary under that
section and the provisions of section 162(m)(5) of the Internal Revenue
Code, as applicable. The October 2008 Interim Final Rule required that
all TARP recipients forgo any deduction for Federal income tax purposes
for compensation that would not be deductible if section 162(m)(5) of
the Internal Revenue Code (26 U.S.C. 162(m)(5)) were to apply to the
TARP recipient. Thus, TARP recipients generally agreed in their
applicable contracts with Treasury under TARP not to claim a deduction
for compensation during a taxable year in excess of $500,000 for a SEO.
This Interim Final Rule does not impose additional tax related
restrictions beyond those that already apply under section 162(m)(5).
However, because these contractual terms are not inconsistent with any
provisions of this Interim Final Rule, the contractual provisions
remain in effect, in accordance with their terms, and accordingly, TARP
recipients continue to be required to forgo the applicable deduction.
See Sec. 30.17 (Q-17), and the discussion of Sec. 30.17 (Q-17) in
section III.B of this preamble. In addition, Treasury anticipates
requiring this condition in any future agreements to provide TARP
assistance.
Section 111(b)(3)(A) requires that Treasury promulgate standards
limiting SEO compensation to exclude incentives for SEOs to take
unnecessary and excessive risks threatening to the TARP recipient's
value.
Section 111(b)(3)(B) requires Treasury to establish standards
mandating that TARP recipients institute a provision to recover any
bonus, retention award, or incentive compensation paid to a SEO and any
of the next twenty most highly compensated employees of the TARP
recipient if the compensation was based on materially inaccurate
statements of earnings, revenues, gains, or other criteria (a provision
sometimes referred to as a ``clawback'').
Section 111(b)(3)(C) requires Treasury to establish standards
prohibiting TARP recipients from making golden parachute payments
(defined in Section 111(a)(2) as any payment for ``departure from a
company for any reason, except for payments for services performed or
benefits accrued'') to a SEO or any of the next five most highly
compensated employees.
Section 111(b)(3)(D) requires Treasury to establish standards
prohibiting TARP recipients from paying or accruing any bonus,
retention award, or incentive compensation to certain highly
compensated employees or SEOs. This prohibition has two exceptions: (1)
TARP recipients can pay or accrue such amounts if the amounts are
payable as long-term restricted stock, provided that the stock does not
fully vest until the repayment of TARP assistance, has a value that is
no greater than one-third of the total annual compensation, and is
subject to such other terms and conditions as the Secretary may
[[Page 28397]]
determine to be in the public interest; and (2) TARP recipients can
make bonus payments required to be paid under written employment
contracts executed on or before February 11, 2009 and determined to be
valid by the Secretary. The number of employees to which this
prohibition applies depends upon the amount of financial assistance
provided to the TARP recipient.
Section 111(b)(3)(E) requires Treasury to establish standards
prohibiting any employee compensation plan that would encourage
manipulation of the reported earnings of the TARP recipient to enhance
the compensation of any of its employees.
Section 111(b)(3)(F) and Section 111(c) require Treasury to mandate
that the TARP recipient establish a compensation committee of its board
of directors comprised entirely of independent members of the board of
directors to meet at least semi-annually to review, discuss, and
evaluate employee compensation plans in light of any assessment of any
risks these plans pose to the TARP recipients. Section 111(c)(3)
provides that the board of directors of a TARP recipient that has no
common or preferred stock registered pursuant to the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.) (Exchange Act) and has
received $25,000,000 or less in financial assistance is required to
carry out the duties of the compensation committee as described above.
Section 111(d) requires a TARP recipient's board of directors to
put in place a company-wide policy regarding excessive or luxury
expenditures, as identified by the Secretary, and that may include
excessive expenditures on entertainment or events, office and facility
renovations, aviation or other transportation services, or other
activities or events that are not reasonable expenditures for staff
development, reasonable performance incentives, or other similar
measures conducted in the normal course of the TARP recipient's
business operations.
Section 111(e) requires that any proxy or consent or authorization
for an annual or other meeting of the TARP recipient shareholders, as
long as any obligation arising from TARP assistance remains
outstanding, permit a separate nonbinding shareholder vote to approve
the compensation of executives, as disclosed pursuant to the
compensation disclosure rules of the Securities and Exchange Commission
(SEC). Section 111(e)(3) directs the SEC to issue any final rules and
regulations necessary to implement this requirement not later than
February 17, 2010.
Section 111(b)(4) requires the chief executive officer and the
chief financial officer of the TARP recipient (or equivalents thereof)
to provide a written certification of compliance with the requirements
of section 111 to the SEC, if the TARP recipient has publicly traded
securities, or to the Secretary, if the TARP recipient does not have
publicly traded securities.
Section 111(f) requires the Secretary to review bonuses, retention
awards, and other compensation paid to SEOs and the next 20 most highly
compensated employees of each TARP recipient before the date of
enactment of the ARRA to determine whether any such payments were
inconsistent with the purposes of section 111 of EESA or TARP or were
otherwise contrary to the public interest, and if such a determination
is made, to seek to negotiate with the TARP recipient and the subject
employee for appropriate reimbursement.
Section 111(h) requires the Secretary to promulgate regulations to
implement section 111.
B. Description of the Interim Final Rule
The major provisions of the Interim Final Rule, to be codified at
31 CFR Part 30, are as follows:
Section 111 specifies executive compensation and corporate
governance standards applicable to TARP recipients. The standards are
written in question and answer format.
Definitions used in the Interim Final Rule are set forth in Sec.
30.1 (Q-1) of the Interim Final Rule. The executive compensation and
corporate governance requirements under the Interim Final Rule apply to
all TARP recipients, defined in section 111(a)(3) as ``any entity that
has received or will receive financial assistance under the financial
assistance provided under the TARP.'' These restrictions will also
generally apply to any entity of which the TARP recipient owns at least
50%, or which owns at least 50% of the TARP recipient, determined using
certain provisions of sections 414(b) and (c) of the Internal Revenue
Code, 26 U.S.C. 414(b) and (c), if those provisions were applied using
a 50% ownership threshold instead of an 80% ownership threshold. In
addition, these restrictions may apply to a related entity if the
primary purpose for the creation or utilization of such entity is to
avoid or evade some or all of the restrictions under section 111. These
requirements generally apply for the period during which any obligation
arising from financial assistance under the TARP remains outstanding
(TARP period), except any period during which the Federal government
only holds warrants to purchase common stock of the TARP recipient. For
TARP recipients that never hold an obligation, however, the more
limited requirements generally apply through the last date of the TARP
purchase authority.
The Interim Final Rule defines financial assistance to include
direct financial transactions between Treasury and private sector
participants in programs under the TARP. Although some determinations
may be fact specific, entities that do not engage in financial
transactions with Treasury as a counterparty generally will not be
deemed to be receiving ``financial assistance.'' As illustration, for
purposes of the Interim Final Rule, financial institutions that sell
preferred stock to Treasury through the Capital Purchase Program are
receiving financial assistance and therefore are TARP recipients
subject to the provisions of the Interim Final Rule. By contrast,
entities that post collateral to and receive loans from the Federal
Reserve Term Asset-Backed Securities Loan Facility (TALF) are not
receiving ``financial assistance provided under the TARP'' and,
therefore, are not TARP recipients under the Interim Final Rule. In the
TALF program, Treasury has posted a subordinated loan to the Federal
Reserve Bank of New York special purpose vehicle (SPV), which accepts
forfeited collateral from TALF lending. Although the SPV has engaged in
a financial transaction with Treasury, Treasury has not interpreted
ARRA to require that the Federal Reserve Bank of New York, as a non-
profit government instrumentality, be deemed to be receiving financial
assistance. Importantly, Federal Reserve banks fulfill their
governmental function by returning their annual profits to Treasury,
which limits the extent to which a transaction with Treasury could be
deemed to be financial assistance.
These requirements apply to SEOs and certain most highly
compensated employees, as defined in Sec. 30.1. Section 30.1 (Q-1) of
the Interim Final Rule bases the determination of the SEOs on the
executive compensation disclosure requirements in Item 402 of
Regulation S-K under the Federal securities laws (17 CFR 229.402),
which generally applies to the PEO, the PFO, and the three most highly
compensated executive officers (other than the PEO and the PFO).
Section 30.1 (Q-1) of the Interim Final Rule bases the identification
of the three most highly compensated executive officers on annual
compensation for the last completed fiscal year and defines annual
compensation as it is determined
[[Page 28398]]
pursuant to Item 402(a) of Regulation S-K under the Federal securities
laws (17 CFR 229.402(a)). To be consistent with the determination of
the three most highly compensated executive officers, Sec. 30.1 (Q-1)
of the Interim Final Rule also defines the most highly compensated
employees according to their annual compensation for the last completed
fiscal year, as it is determined pursuant to Item 402(a) of Regulation
S-K under the Federal securities laws (17 CFR 229.402(a)). However, a
most highly compensated employee may be an employee who is not an
executive officer. The Interim Final Rule does not limit application of
the requirements to executive officers because the ARRA statutory
language refers to most highly compensated employees, rather than most
highly compensated executive officers, and therefore does not limit the
coverage in this manner. A most highly compensated employee does not
include a former employee of the TARP recipient who is not employed by
the TARP recipient on the first day of the fiscal year for which the
determination is being made (as opposed to the preceding fiscal year),
unless such employee is reasonably anticipated to return to employment
with the TARP recipient during the fiscal year.
The Interim Final Rule defines annual compensation in this manner
for several reasons. Both the ARRA and the original EESA executive
compensation provisions require that the senior executive officers be
determined according to the compensation disclosure requirements under
Federal securities regulations; it would be anomalous to treat the
determination of most highly compensated employee compensation in a
different manner. In addition, the compensation required to be
disclosed under Federal securities regulations more closely reflects
the economic reality of the compensation that the employee actually
earned during the year by reporting compensation regardless of whether
it was includible in income for income tax purposes during that year
(for example, including the value of a stock option, deferred salary
and bonuses when earned) in contrast to annual compensation reported as
Form W-2 compensation, which reflects only compensation that was
includible in income for income tax purposes during the calendar year
regardless of when that compensation was earned (for example, including
income from stock options generally at the time of exercise and
including in income deferred salary and bonuses only when those amounts
are actually paid in a future year). Finally, public companies and
investors are familiar with this SEC total annual compensation
measurement, which was developed through an extensive notice and
comment process and has been in effect since 2006 as part of the SEC's
final revised executive compensation disclosure rule.
Because the most highly compensated employees are determined based
on annual compensation earned in the prior year, the issue has been
raised that a TARP recipient might be able to intentionally cycle
employees in and out of most highly compensated employee status in
alternate years to guarantee periods of complete exclusion for certain
employees from the executive compensation limitations applicable to
most highly compensated employees. Some methods that might mitigate,
though not eliminate, this possibility include identifying the most
highly compensated employees based on an averaging of the preceding two
or three years' annual compensation, or requiring that some or all of
the most highly compensated employees identified for one year remain
subject to the limitations for a prescribed number of additional years,
regardless of their subsequent level of compensation. The Treasury
invites comment on this issue, including on the extent to which
intentional cycling of most highly compensated employee status is
likely to occur given that there is no overall compensation limitation
on most highly compensated employees under the Interim Final Rule,
potential methods of addressing the issue (including the methods
previously mentioned), how such methods would be effective in
deterring, eliminating, or limiting intentional cycling, and the extent
of any additional administrative burdens that the application of such
methods might create.
Section 30.1 (Q-1) of the Interim Final Rule requires that TARP
recipients that are smaller reporting companies, as that term is
defined in Item 10 of Regulation S-K under the Federal securities laws
(17 CFR 229.10), identify five SEOs, even if only three named executive
officers are required to be identified pursuant to Item 402(m) of
Regulation S-K under the Federal securities laws (17 CFR 229.402(m)).
Analogous rules apply to TARP recipients that do not have securities
registered with the SEC pursuant to the Federal securities laws.
Prior to the annual identification of the SEOs, who are typically
identified in the TARP recipient's annual report on Form 10-K or annual
meeting proxy statement, and the most highly compensated employees,
Sec. 30.3 (Q-3) of the Interim Final Rule requires that the TARP
recipient ensure that a potential SEO or most highly compensated
employee comply with the relevant executive compensation and corporate
governance standards.
Several requirements under the Interim Final Rule relate to the
compensation committee of the TARP recipient's board of directors, and
its duties. Pursuant to section 111(b)(3)(A), section 111(b)(3)(E), and
section 111(b)(3)(F), Sec. 30.4 (Q-4) of the Interim Final Rule
requires the TARP recipient to establish a compensation committee
composed of independent members of the board of directors before the
later of ninety days after the closing date of the agreement between
Treasury and the TARP recipient or ninety days after June 15, 2009 to
fulfill a number of duties. Many public company TARP recipients already
maintain compensation committees of independent directors pursuant to
stock exchange listing standards, and Sec. 30.4 (Q-4) of the Interim
Final Rule allows for the continued maintenance of already-established
compensation committees. Section 30.4 (Q-4) of the Interim Final Rule
also, in accordance with section 111(c)(3), provides an exception for
certain private company TARP recipients. Thus, Sec. 30.4 (Q-4) of the
Interim Final Rule allows TARP recipients that have no securities
registered pursuant to the Exchange Act and have received $25,000,000
or less in financial assistance to either establish a compensation
committee of independent directors or to delegate, as appropriate, to
the board of directors the duties of the compensation committee as
described below.
Each TARP recipient faces different material risks given the unique
nature of its business and the markets in which it operates. Thus,
Sec. 30.5 (Q-5) of the Interim Final Rule requires the compensation
committee to discuss, evaluate, and review at least every six months
with senior risk officers SEO compensation plans and employee
compensation plans and the risks these plans pose to the TARP
recipient; identify and limit the features in the SEO compensation
plans that could lead SEOs to take unnecessary and excessive risks that
could threaten the value of the TARP recipient; and identify and limit
any features in the employee compensation plans that pose risks to the
TARP recipient to ensure that the TARP recipient is not unnecessarily
exposed to risks, including any features in these SEO compensation
plans or the employee compensation plans that would encourage behavior
focused on
[[Page 28399]]
short-term results rather than long-term value creation. In addition,
Sec. 30.6 (Q-6) of the Interim Final Rule requires that the
compensation committee discuss, evaluate, and review at least every six
months the terms of each employee compensation plan and identify and
eliminate the features in the plan that could encourage the
manipulation of reported earnings of the TARP recipient to enhance the
compensation of an employee.
Sections 30.4 (Q-4) and 30.7 (Q-7) of the Interim Final Rule
require the compensation committee to provide annually a narrative
description of how it limited the features in (1) SEO compensation
plans that could encourage SEOs to take unnecessary and excessive risks
that could threaten the value of the TARP recipient, including how
these SEO compensation plans do not encourage behavior focused on
short-term results rather than long-term value creation, (2) employee
compensation plans to ensure that the TARP recipient is not
unnecessarily exposed to risks, including how these employee
compensation plans do not encourage behavior focused on short-term
results rather than long-term value creation, and (3) employee
compensation plans that could encourage the manipulation of reported
earnings of the TARP recipient to enhance the compensation of an
employee.
Sections 30.4 (Q-4) and 30.7 (Q-7) of the Interim Final Rule
require that the compensation committee certify annually that it has
completed the reviews of the SEO compensation plans and the employee
compensation plans as outlined above. Section 30.7 (Q-7) of the Interim
Final Rule also provides that TARP recipients with securities
registered with the SEC pursuant to the Federal securities laws must
provide these disclosures and certifications in the Compensation
Committee Report required pursuant to Item 407 of Regulation S-K under
the Federal securities laws (17 CFR 229.407) and to Treasury. Section
30.7 (Q-7) of the Interim Final Rule requires that TARP recipients that
are smaller reporting companies or do not have securities registered
with the SEC pursuant to the Federal securities laws provide the
disclosures and certifications to their primary regulatory agency and
to Treasury.
Pursuant to section 111(b)(3)(B), Sec. 30.8 (Q-8) of the Interim
Final Rule requires a TARP recipient to ensure that any bonus,
retention award, or incentive compensation paid or accrued during the
TARP period to a SEO or one of the next twenty most highly compensated
employees is subject to a provision for recovery or ``clawback'' by the
TARP recipient if the payments or accruals were based on materially
inaccurate financial statements or any other materially inaccurate
performance metric criteria. Section 30.8 (Q-8) of the Interim Final
Rule deems that bonuses, retention awards, and incentive compensation
are paid or accrued to a SEO or any one of the next twenty most highly
compensated employees during the TARP period when the SEO or one of the
next twenty most highly compensated employees obtains a legally binding
right to that payment during the TARP period.
This clawback provision differs from the clawback provision
required under 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 or the
chief financial officer of any bonus, incentive-based, or equity-based
compensation received during the twelve-month period following a
materially non-compliant financial report and any profits from sales of
the company's securities during that period. In contrast, the standard
established under section 111(b)(3)(B) of EESA applies to the three
most highly compensated executive officers and the next twenty most
highly compensated employees in addition to the PEO and the PFO;
applies to both public and private TARP recipients; applies to
retention awards; is not exclusively triggered by a requirement to
prepare an accounting restatement due to material noncompliance of the
issuer as a result of misconduct; 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 calculate bonus payments.
Pursuant to section 111(b)(3)(C), Sec. 30.9 (Q-9) of the Interim
Final Rule prohibits a TARP recipient from making a golden parachute
payment to a SEO or the next five most highly compensated employees
during the TARP period. Under the Interim Final Rule, a golden
parachute payment includes a payment for departure from a TARP
recipient for any reason, other than a payment for services performed
or benefits accrued. Pursuant to the authority granted the Secretary
under section 111(b)(2) and section 111(h), the Interim Final Rule also
treats as a golden parachute payment and amount due upon a change in
control event of the TARP recipient. Section 30.1 (Q-1) of the Interim
Final Rule excludes from the definition of golden parachute payment
qualified retirement plans and similar foreign retirement plans, as
well as payments due to an employee's death or disability and severance
payments required by State statute or foreign law. Given the language
of the ARRA, there is no longer any exception for any amount of a
golden parachute payment, such as was allowed under the October 2008
Interim Final Rule. In addition, a golden parachute payment is treated
as paid at the time of the employee's departure, regardless of when the
amounts are actually paid. Therefore, TARP recipients and employees may
not avoid the restriction by deferring payment of the golden parachute
payment past the end of the TARP period.
Pursuant to section 111(b)(3)(D), Sec. 30.10 (Q-10) of the Interim
Final Rule prohibits a TARP recipient from paying or accruing any
bonus, retention award, or incentive compensation during the TARP
period to certain employees. The TARP recipient's amount of financial
assistance determines the number of employees subject to this
prohibition. This prohibition applies to the most highly compensated
employee of any TARP recipient that has received less than $25,000,000
in financial assistance; to at least the five most highly compensated
employees of any TARP recipient that has received at least $25,000,000
but less than $250,000,000; the SEOs and at least the ten next most
highly compensated employees of any TARP recipient that has received at
least $250,000,000 but less than $500,000,000; and the SEOs and at
least the twenty next most highly compensated employees of any TARP
recipient that has received $500,000,000 or more. Section 30.10 (Q-10)
of the Interim Final Rule states that TARP recipients will be subject
during the TARP period to the bonus limitation requirements based on
the total amount of financial assistance outstanding under the TARP. If
additional financial assistance would result in additional employees
becoming subject to the prohibition, the prohibition on the additional
employees will not be effective until the fiscal year following the
year during which the additional financial assistance is received.
Section 30.1 (Q-1) of the Interim Final Rule includes definitions
of a bonus, incentive compensation or retention award. A bonus means
any payment in addition to any amount payable to an employee for
services performed by the employee at a regular hourly, daily, weekly,
monthly or similar periodic rate. Generally a bonus would not include a
contribution to a
[[Page 28400]]
qualified plan, benefits under a broad-based benefit plan, bona fide
overtime pay, and bona fide and routine expense reimbursements. Section
30.10 (Q-10) contains rules defining when bonuses will be treated as
accruing or paid. Notably, section 30.10 (Q-10) contains an anti-abuse
rule, intending to address circumstances in which a bonus that was not
permitted to accrue during the year an employee was covered by the
bonus limitation is paid to the employee in the subsequent year when
the employee is not covered by the bonus limitation, but is designated
as some other form of payment such as a salary increase or a stock
option grant. In such a case, the payment in the subsequent year may be
recharacterized as a payment of the bonus that was not permitted to
accrue in the previous year.
Section 30.1 (Q-1) of the Interim Final Rule excepts from the
definition of a bonus certain commission compensation for sales to, and
investment management services for, unrelated parties. Many TARP
recipients have broker-dealer, investment advisory, and insurance
divisions, where registered representatives, investment advisors, and
agents typically receive commissions based on the amount of sales of
financial products or the value of assets under management. In this
context, commission payments characteristically are viewed as a
component of base salary rather than bonus compensation. However, fees
earned from sales to entities within the affiliated group, investment
banking, or proprietary trading are not considered commission
compensation and the Interim Final Rule does not except these fees from
the definition of a bonus or incentive compensation.
Section 30.1 (Q-1) of the Interim Final Rule generally defines an
incentive compensation plan by reference to the Federal securities
regulations. However, for purposes of this Interim Final Rule, an
incentive compensation plan also includes a stock option or stock plan,
regardless of whether those plans are subject to performance-based
vesting. The inclusion of these arrangements is consistent with the
statute's classifying the grant of a limited amount of long-term
restricted stock as an exception to the bonus, incentive compensation,
and retention award restrictions.
This inclusion of a stock plan in the definition of an incentive
compensation plan does not restrict the TARP recipient's ability to pay
salary or other permissible payments in the form of stock or other
property, even if the stock is issued pursuant to a stock plan. In
addition, the payment may be made in stock that is subject to holding
periods or transferability restrictions, such as not permitting the
stock to be transferred for a specified number of years, until a
specified event occurs (such as the employee's retirement, or a
specified number of years after an employee's retirement or other
termination of employment), or until certain TARP fund repayment
hurdles are met. However, the payment must still be payment of salary
or another permissible amount. Accordingly, the amount of the future
payment must be denominated in dollars, rather than in a number of
shares. For example, an employee could be entitled to a salary of
$5,000 per week, half payable in cash and half payable in stock valued
at $2,500 on each salary payment date. In addition, as salary, the
stock or other property cannot be subject to a substantial risk of
forfeiture or any requirement of future services (and thus the grant of
such stock will not be treated as a retention award either), as
distinguished from a restriction on transferability. The same analysis
would apply to a grant of a stock unit (such as phantom stock or a
restricted stock unit) with similar characteristics to the salary
payment arrangement described above, in lieu of a grant of the same
number of shares. Accordingly, the stock unit could not be subject to a
substantial risk of forfeiture or other requirement of continued
services, and would be payable at a fixed date in the future (and the
arrangement would otherwise need to comply with the requirements of
section 409A of the Internal Revenue Code (26 U.S.C. 409A)). However,
such a structure generally will not be feasible during 2009 due to the
restrictions under section 409A of the Internal Revenue Code (26 U.S.C.
409A).
Section 30.1 (Q-1) generally defines a retention award as any
payment to an employee that is not payable periodically to an employee
for service performed by the employee at a regular hourly, daily,
weekly, monthly, or similar periodic rate, is contingent on the
completion of a period of future service with the TARP recipient or the
completion of a specific project or other activity of the TARP
recipient, and is not based on the performance of the employee (other
than a requirement that the employee not be separated from employment
for cause) or the business activities or value of the TARP recipient.
Exceptions are provided for a contribution to or payment made from a
qualified plan, or a payment from a benefit plan, overtime pay or
reasonable expense reimbursement. An exception is also made for amounts
accrued under a nonqualified deferred compensation plan, to the extent
the amounts are accrued in the normal course of the employee's service
at the TARP recipient and are not accrued by reason of a material
enhancement of such benefits. An exception is not provided, however,
for awards to new hires, including awards as part of a ``make-whole''
agreement intended to provide a newly hired employee a continuation of
benefits accruing at a prior employer. Such awards are not structurally
materially different from retention awards granted to current
employees, which are intended to be subject to these restrictions.
Pursuant to section 111(b)(3)(D)(i), Sec. 30.10 (Q-10) of the
Interim Final Rule provides two exclusions from this prohibition on the
payment or accrual of bonus, retention award, or incentive
compensation. The TARP recipient is permitted to award long-term
restricted stock to the employees subject to this prohibition. Because
many TARP recipients, especially smaller, family-owned community banks
as well as private financial institutions, would be unwilling or unable
to award restricted stock, Sec. 30.1 (Q-1) of the Interim Final Rule
defines long-term restricted stock to include both restricted stock and
restricted stock units, which can be settled in stock or cash, and
which may be designed to track a specific unit or division within a
TARP recipient.
Section 30.10 (Q-10) of the Interim Final Rule describes the
restrictions imposed upon this stock. Pursuant to section
111(b)(3)(D)(i)(I), Sec. 30.11 (Q-11) of the Interim Final Rule states
that the value of the long-term restricted stock can be no greater than
\1/3\ of the employee's total annual compensation. For purposes of
determining annual compensation under the long-term restricted stock
exception, all equity-based compensation granted will be included in
the calculation only in the year in which it is granted, and will be
included at its total fair market value on the grant date, so all
equity-based compensation granted in fiscal years ending prior to June
15, 2009 will not be included in the calculation of annual
compensation. In determining the value of the long-term restricted
stock grant, the long-term restricted stock will be included in the
calculation only in the year in which the restricted stock is granted,
and will be included at its total fair market value on the grant date.
This calculation of total annual compensation differs from the
calculation used to determine the SEOs and most highly compensated
employees each year, which is
[[Page 28401]]
determined pursuant to Item 402(a) of Regulation S-K under the Federal
securities laws (17 CFR 229.402(a)). This is necessary to avoid a
failure to comply with the Interim Final Rule, for instance, if other
aspects of the employee's annual compensation decrease in a subsequent
year, so that if the grant were included in compensation over multiple
years, the one-third annual compensation limit could be exceeded merely
due to such decrease.
Pursuant to section 111(b)(3)(D)(i)(II), Sec. 30.10 (Q-10) of the
Interim Final Rule states that the excepted long-term restricted stock
must not fully vest until the repayment of all financial assistance by
the TARP recipient. Section 30.10 (Q-10) of the Interim Final Rule
requires that the employee provide services to the TARP recipient for
at least two years after the date of the grant of the long-term
restricted stock to vest in this stock, and prescribes a schedule under
which such stock may become transferable (or in the case of a
restricted stock unit, payable). Specifically, Section 30.10 (Q-10) of
the Interim Final Rule establishes the following schedule, subject to
the further requirements outlined below, for the long-term restricted
stock: For each 25% of total financial assistance repaid, 25% of the
total long-term restricted stock granted may become transferable, until
the final repayment, at which time the remaining long-term restricted
stock may become transferable. Because, in the case of restricted stock
(but not a restricted stock unit), the fair market value of the stock
may be subject to inclusion in income for income tax purposes before
the stock becomes transferable, an exception to the transferability
restriction is provided to the extent necessary to pay the applicable
taxes. Nothing in the Interim Final Rule, however, prohibits vesting
based on longer service periods or additional performance-based
requirements.
Pursuant to section 111(b)(3)(D)(iii), Sec. 30.10 (Q-10) of the
Interim Final Rule also excludes from this prohibition any bonus,
retention award, or incentive compensation payment required to be paid
under a valid written employment contract executed on or before
February 11, 2009 if the employee has a legally binding right under the
contract to this payment. For purposes of determining whether an
employee had a legally binding right to a payment, the Interim Final
Rule uses rules specified in 26 CFR 1.409A-1(b)(1). In addition, the
payment must be made in accordance with the terms of the contract as of
February 11, 2009, such that any amendment to the contract to increase
the amount payable, accelerate any vesting conditions, or otherwise
materially enhance the benefit available to the employee under the
contract will result in the payment being treated as not made under the
employment contract executed on or before February 11, 2009. The waiver
by the employee of any benefits available to the employee under the
terms of the contract will not result in the payment of other benefits
under the contract being treated as made other than under the
employment contract executed on or before February 11, 2009.
Whether an employee has accrued bonus, retention award, or
incentive compensation is determined based on the facts and
circumstances. However, to avoid circumvention of the Interim Final
Rule by merely delaying bonus payments until after the employee is no
longer subject to the prohibition, or granting retroactive service
credits after the employee is no longer subject to the prohibition, if
after the employee is no longer a SEO or most highly compensated
employee, the employee is paid an amount, or provided a legally binding
right to the payment of an amount, based upon services performed or
compensation received during the period the employee was a SEO or most
highly compensated employee, the employee will be treated as having
accrued the amount during the period the employee was a SEO or most
highly compensated employee.
Certain bonus, retention award, or incentive compensation may
relate to a multi-year service period, during some portion of which the
employee is subject to the prohibition and during some portion of which
the employee is not subject to the prohibition. In such circumstances,
the employee will not be treated as having accrued the bonus, retention
award, or incentive compensation during the portion of the service
period the employee was subject to the limitation, if the bonus,
retention award, or incentive compensation is reduced to reflect at
least the portion of the service period that the employee was subject
to the prohibition. However, if the employee is subject to the
prohibition at the time the amount would otherwise be paid, the amount
still may not be paid until the payments to the employee are permitted.
A bonus, a retention award, or incentive compensation that an
employee accrues while the employee is not subject to the prohibition
on accrual or payment and is payable at a time when the employee has
become subject to the prohibition, may not be paid until the employee
is no longer subject to the prohibition. In addition, as part of the
conditions to a TARP recipient's receiving financial assistance under
the TARP set forth in the contract between Treasury and the TARP
recipient, the Federal government may require that certain other bonus,
retention award, or incentive compensation not be paid during a
designated period, such as the period during which the TARP recipient
retains any financial assistance provided under TARP, or until some
other condition related to the TARP recipient's financial health is
satisfied. The issue has arisen as to whether the failure to pay such
bonus, retention award, or incentive compensation would be treated as a
subsequent deferral election that fails to comply with the requirements
of section 409A of the Internal Revenue Code (26 U.S.C. 409A) or
whether it would convert a payment that would otherwise be a short-term
deferral, within the meaning of 26 CFR 1.409A-1(b)(4), into a payment
of deferred compensation that would be subject to the restrictions in
section 409A. Treasury and Internal Revenue Service officials have
advised that the delay of the payment until such time as the recipient
of the payment is no longer subject to the prohibition will not result
in a failure to comply with the requirements of section 409A and will
not result in a payment that otherwise would have been a short-term
deferral being treated as a payment of deferred compensation, so long
as the payment is made promptly following the first date upon which the
payment could be made without violating the terms of the agreement
between the TARP recipient and Treasury and in accordance with the
Interim Final Rule. Accordingly, for purposes of the issuance of a
restricted stock unit intended to qualify as long-term restricted stock
as an exception to the bonus payment limitation, the unit may be
structured with a payment date no later than the later of the end of
the short-term deferral period or the first date upon which the payment
is permissible under these rules and the applicable terms of the
agreement between the TARP recipient and Treasury, and the unit will
not be subject to section 409A provided the payment terms are
satisfied.
Pursuant to section 111(d), Sec. 30.12 (Q-12) of the Interim Final
Rule requires that the board of directors of the TARP recipient adopt
an excessive or luxury expenditures policy, file this policy with
Treasury, and post the text of this policy on its Internet Web site, if
the TARP recipient maintains a company Web site, before the later of
ninety days after the closing date of the
[[Page 28402]]
agreement between Treasury and the TARP recipient or ninety days after
June 15, 2009. Section 30.1 (Q-1) of the Interim Final Rule defines an
excessive or luxury expenditures policy to require the inclusion of
standards to ensure appropriate review and approval of potentially
excessive and luxury expenditures. Section 30.1 (Q-1) of the Interim
Final Rule requires that the policy (1) Identify the types and
categories of expenses prohibited or requiring prior approval; (2)
adopt approval procedures for those expenses requiring prior approval;
(3) mandate PEO and PFO certification of the prior approval of any
expenditures requiring the prior approval of any SEO, other similar
executive officers, or the board of directors; (4) mandate prompt
internal reporting of any violation of this policy; and (5) mandate
accountability for adherence to this policy.
Section 30.12 (Q-12) of the Interim Final Rule requires that the
board of directors of each TARP recipient determine what are excessive
and luxury expenditures and establish a set of requirements specific to
the TARP recipient under this policy. This is similar to the method by
which public companies adopted a code of ethics under section 406 of
Sarbanes-Oxley. Under the Federal securities regulations promulgated
under section 406 of Sarbanes-Oxley (17 CFR 229.406), the SEC presented
a general framework for a code of ethics, but the public company itself
was required to adopt standards specific to the company using this
general framework as a guide.
Pursuant to section 111(e), TARP recipients are required to permit
a nonbinding shareholder resolution on SEO compensation as provided
pursuant to the compensation disclosure rules under the Federal
securities laws. Section 111(e) authorizes the SEC to promulgate any
necessary final rules or regulations relating to this requirement. The
Interim Final Rule requires TARP recipients to comply with any SEC
guidance, rules, or regulations promulgated with respect to section
111(e).
Pursuant to section 111(h), and section 111(b)(2), the Secretary is
authorized to establish additional executive compensation and corporate
governance standards. The Secretary has determined to adopt four
additional standards. First, Sec. 30.11(a) (Q-11) of the Interim Final
Rule requires that TARP recipients receiving exceptional financial
assistance submit for approval the compensation payments and
compensation structures of the SEO and most highly compensated
employees subject to the bonus payment limitation, and the compensation
structures of all other executive officers and 100 most highly
compensated employees, for approval by the Office of the Special Master
for TARP Executive Compensation. However, if a TARP recipient limits
the annual compensation for any executive who is not a SEO or a most
highly compensated employee subject to the bonus limitation provision
to $500,000, with any additional compensation in long-term restricted
stock, the compensation structure is not required to be submitted for
approval. For this purpose, annual compensation and the value of the
long-term restricted stock are determined in the same manner as
provided in the long-term stock exception in Sec. 30.10 (Q-10) of the
Interim Final Rule.
Second, Sec. 30.11(b) (Q-11) of the Interim Final Rule requires a
TARP recipient to disclose to Treasury and its primary Federal
regulator annually any perquisites whose total value exceeds $25,000
for any employee who is subject to the limitations on bonus payments.
TARP recipients are required to identify the amount and nature of the
perquisites and disclose a justification for offering these
perquisites. Existing Federal securities regulations require public
companies only to identify for any of the top five executive officers
or members of the boards of directors the type of perquisite if the
total value of all perquisites exceeds $10,000 for an individual
officer or director; and the value of any perquisite if the value
exceeds the greater of $25,000 or 10% of the total amount of
perquisites for an individual officer or director.
Third, Sec. 30.11(c) (Q-11) of the Interim Final Rule requires a
TARP recipient to disclose to Treasury and its primary Federal
regulator annually whether the TARP recipient, the board, or the
compensation committee has engaged a compensation consultant and all
types of services the compensation consultant or any of its affiliates
has provided to the TARP recipient, the board, or the compensation
committee during the past three years, including any ``benchmarking''
or comparisons employed to identify certain percentile levels of
compensation (for example, other peer group companies used for
benchmarking and a justification for using these companies, and the
lowest percentile level of other companies' employee compensation
considered for compensation proposals). Existing Federal securities
regulations require only that public companies identify compensation
consultants and their role in setting executive and director
compensation; whether the compensation committee directly engages the
compensation consultant; the nature and scope of the compensation
consultant's assignment; and the material elements of the compensation
consultant's duties under the engagement.
Fourth, Sec. 30.11(d) (Q-11) of the Interim Final Rule prohibits
TARP recipients from providing tax gross-ups or other reimbursements
for the payment of taxes to any of the SEOs and next twenty most highly
compensated employees relating to severance payments, perquisites, or
any other form of compensation. Existing Federal securities regulations
require only that public companies disclose ``gross-ups'' or other
reimbursements to the SEOs for the payment of taxes. The Interim Final
Rule excludes from this prohibition certain international tax
equalization arrangements intended to compensate an employee for
certain different taxes on account of an overseas assignment.
Section 30.14 (Q-14) of the Interim Final Rule includes a special
rule for cases in which a TARP recipient (target) is acquired by an
entity (acquirer) that is not a TARP recipient in an acquisition of any
form. Under this rule, the acquirer does not become subject to section
111 of EESA as a result of the acquisition. In addition, the employees
of the target who are SEOs or most highly compensated employees subject
to section 111 immediately prior to the acquisition who continue
employment with the acquirer will no longer be subject to section 111
of EESA after the acquisition. However, if the primary purpose of the
acquisition is to avoid or evade application of section 111 of EESA,
then the acquirer will be treated as a TARP recipient. For purposes of
determining the affected employees, the principal executive officer and
the principal financial officer of the post-acquisition acquirer are
treated as SEOs. For purposes of identifying the most highly
compensated employees, the acquirer employees and the pre-acquisition
target employees who are employed at the acquirer (or anticipated to be
employed at the acquirer) are aggregated and their most highly
compensated employee status determined based upon the compensation
earned during the most recently completed fiscal year at either the
pre-acquisition acquirer or target, as appropriate.
Pursuant to section 111(b)(4), Sec. 30.15 (Q-15) of the Interim
Final Rule establishes a compliance reporting regime relating to the
executive compensation requirements set forth in the Interim Final
Rule. The Interim Final Rule requires that the PEO and the
[[Page 28403]]
PFO of the TARP recipient provide the following certifications within
ninety days of the completion of each fiscal year any part of which is
a TARP period: (1) The compensation committee has met at least every
six months during the prior fiscal year with the senior risk officers
of the TARP recipient to discuss and evaluate SEO compensation plans
and employee compensation plans and the risks these plans pose to the
TARP recipient; (2) the compensation committee has identified and
limited the features in the SEO compensation plans that could lead SEOs
to take unnecessary or excessive risks that could threaten the value of
the TARP recipient, has identified any features in the employee
compensation plans that pose risks to the TARP recipient, and has
limited those features to ensure that the TARP recipient is not
unnecessarily exposed to risks; (3) the compensation committee has
reviewed at least every six months the terms of each employee
compensation plan and identified and limited the features in the plan
that could encourage the manipulation of reported earnings of the TARP
recipient to enhance the compensation of an employee; (4) the
compensation committee will certify to these reviews; (5) the
compensation committee will provide a narrative description of how it
limited the features in (i) SEO compensation plans that could lead SEOs
to take unnecessary and excessive risks that could threaten the value
of the TARP recipient, (ii) employee compensation plans to ensure that
the TARP recipient is not unnecessarily exposed to risks, and (iii)
employee compensation plans that could encourage the manipulation of
reported earnings of the TARP recipient to enhance the compensation of
an employee; (6) the TARP recipient has required that all bonuses,
retention awards, and incentive compensation of the SEOs and next
twenty most highly compensated employees be subject to a provision for
recovery or ``clawback'' by the TARP recipient if the payments were
based on materially inaccurate financial statements or any other
materially inaccurate performance metric criteria; (7) the TARP
recipient has prohibited any golden parachute payment to the SEOs and
the next five most highly compensated employees; (8) the TARP recipient
has limited bonuses, retention awards, and incentive compensation paid
to or accrued by employees to whom the bonus payment limitation
applies; (9) for a TARP recipient that has securities registered with
the SEC under the Federal securities laws, it will permit a non-binding
shareholder resolution on the SEO compensation disclosures provided
under the Federal securities laws in accordance with any guidance,
rules, and regulations promulgated by the SEC; (10) the TARP recipient
has adopted and maintains an excessive or luxury expenditures policy
and has provided this policy to Treasury in each case in accordance
with the requirements under the Interim Final Rule; (11) the TARP
recipient will disclose the amount, nature, and justification for the
offering of any perquisites whose total value exceeds $25,000 for each
of the employees subject to the bonus payment limitations; (12) the
TARP recipient will disclose whether the TARP recipient, the board, or
the compensation committee has engaged a compensation consultant, and
the services the compensation consultant or any affiliate provided;
(13) the TARP recipient has prohibited any tax gross-ups on
compensation to the SEOs and the next twenty most highly compensated
employees; (14) the TARP recipient has substantially complied with any
compensation requirements set forth in the agreement between the TARP
recipient and the Treasury, as may have been amended; (15) certain
employees named in the certification are the SEOs and most highly
compensated employees for the current fiscal year based on their
compensation during the prior fiscal year; and (16) the officer
certifying understands that a knowing and willful false or fraudulent
statement made in connection with the certification may be punished by
fine, imprisonment, or both (See, for example 18 U.S.C. 1001). In
addition, the PEO and the PFO of a TARP recipient receiving exceptional
financial assistance must certify that the TARP recipient has either
limited annual compensation to $500,000 (excluding grants of long-term
restricted stock but including certain pension benefits and deferred
compensation accruals otherwise excluded from annual compensation) for
any executive officer or one of the 100 most highly compensated
employees who is not subject to the bonus payment limitations and has
or will pay any additional compensation in the form of long-term
restricted stock, or to the extent not so limited the TARP recipient
has had the compensation structure of those employees approved by the
Office of the Special Master for TARP Executive Compensation.
Section 30.15 (Q-15) of the Interim Final Rule requires that TARP
recipients that have securities registered with the SEC pursuant to the
Federal securities laws provide these certifications on Exhibit 99.1 in
their annual report on Form 10-K and to Treasury, and that a TARP
recipient that does not have securities registered with the SEC under
the Federal securities laws provide these certifications to its primary
regulatory agency and to Treasury. The TARP recipient must also
preserve appropriate documentation and records to substantiate each
certification for no less than six years after the date of the
certification, the first two years in an easily accessible place, and
must furnish promptly to Treasury any documentation and records
requested by Treasury.
Section 30.15 (Q-15) of the Interim Final Rule also affirms that
any individual or entity making or providing false information or
certifications to Treasury pursuant to the Interim Final Rule or as
required pursuant to this part may be subject to the criminal penalties
under title 18 of the U.S. Code or other provision of Federal law.
To comply with EESA Section 111 and this Interim Final Rule, TARP
recipients generally will need to modify compensation structures. For a
small number of TARP recipients--those receiving exceptional
assistance--the new compensation structures and compensation payments
for SEOs and the most highly paid employees are subject to review and
approval by the Office of the Special Master for TARP Executive
Compensation (described below). In other instances, TARP recipients may
find it helpful to have guidance as to how the rules apply to their
particular circumstances, or confirmation that their modified
compensation arrangements are compliant. In addition, under section
111(f), the Secretary is charged with reviewing bonuses, retention
awards, and other compensation paid before February 17, 2009 to SEOs
and the next twenty most highly compensated employees, and is required
to determine whether any such payments were inconsistent with the
purposes of EESA section 111 or the TARP, or were otherwise contrary to
the public interest.
To conduct these reviews most efficiently, and to ensure that the
rules are applied consistently and equitably, this Interim Final Rule
establishes an Office of the Special Master for TARP Executive
Compensation (Special Master). As described in Section 30.16 (Q-16) of
the Interim Final Rule, the Special Master will be appointed by, and
serve at the pleasure of, the Secretary. The Secretary may remove the
Special Master without notice,
[[Page 28404]]
without cause, and before the naming of any successor Special Master.
The scope of the Special Master's authority and responsibility is
limited to compensation and corporate governance matters under section
111 with respect to TARP recipients, and the Special Master has no
authority to provide guidance or review any submissions with respect to
matters other than compensation and corporate governance matters under
section 111, or to provide guidance or review any submissions with
respect to compensation or corporate governance matters of employers
that are not TARP recipients. The Secretary has delegated to the
Special Master the authority to (1) interpret the application of the
restrictions on executive compensation and corporate governance
requirements for TARP recipient employees under EESA, these
regulations, and any other applicable guidance, to specific facts and
circumstances; (2) administer section 111(f) of EESA, which requires
the Secretary to review bonuses, retention awards, and other
compensation paid before February 17, 2009 to employees of each entity
receiving TARP assistance, to determine whether any such payments were
inconsistent with the purposes of EESA section 111 or the TARP, or
otherwise contrary to the public interest, and which further requires
that, if the Secretary makes such a determination, the Secretary seek
to negotiate with the TARP recipient and the employee for appropriate
reimbursements to the Federal Government with respect to compensation
or bonuses; (3) approve compensation payments to, and compensation
structures for, certain employees of TARP recipients receiving
exceptional financial assistance; (4) provide opinions, as requested or
otherwise as appropriate, regarding payments to, or compensation
structures for, other employees of TARP recipients; and (5) perform
such other duties as the Secretary may delegate from time to time to
the Special Master relating to executive compensation issues under the
TARP, including the specific application of any terms or conditions in
a contract between the Treasury and a TARP recipient. Section 30.16 (Q-
16) also outlines a set of principles that the Special Master is
required to follow in conducting these reviews.
Treasury requests comments on potential procedures and terms under
which employees may return compensation to the TARP recipient or the
TARP recipient may reimburse Treasury either for compensation paid that
the Special Master has determined is inconsistent with the purposes of
EESA section 111 or the TARP, or otherwise contrary to the public
interest, or for compensation that was paid contrary to the
requirements of EESA section 111 and this Interim Final Rule.
Section 30.17 (Q-17) of the Interim Final Rule states that the
standards under the Interim Final Rule are effective upon June 15,
2009, except with respect to certain sections of the ARRA amendments
that were effective immediately upon enactment of the statute (for
example, amended section 111(d) requiring a nonbinding shareholder vote
on executive compensation). Accordingly, the bonus payment limitations
under the Interim Final Rule will not apply to bonuses, retention
awards, and incentive compensation paid or accrued by TARP recipients
or their employees prior to June 15, 2009, and the enhanced golden
parachute prohibition will not apply to amounts paid prior to June 15,
2009. In addition, as discussed above, the bonus payment limitations
under the Interim Final Rule will not apply to bonuses, retention
awards, and incentive compensation required to be paid pursuant to a
written employment contract executed on or before February 11, 2009 (a
grandfathered arrangement), that is paid on or after June 15, 2009.
However, the Special Master may provide an advisory opinion on either
or both of these categories of payments, stating whether such payments
are consistent with ARRA or EESA, or otherwise contrary to the public
interest, under the same standards applied to the Special Master's
review of compensation paid to certain employees prior to the enactment
date of ARRA, and may seek reimbursement of such payments where
appropriate. Finally, the Special Master will take into account any
payment made prior to June 15, 2009, or any payment made or that may be
made pursuant to a grandfathered arrangement, as part of the Special
Master's review of the compensation payments and structures required to
be approved by the Special Master for certain employees of TARP
recipients receiving exceptional assistance, and for any advisory
opinion the Special Master may issue with respect to a compensation
structure for, or compensation payment to, a TARP recipient employee.
In addition, for the period before June 15, 2009, the provisions of
the October 2008 Interim Final Rule, Notice 2008-PSSFI, and Notice
2008-TAAP, remained in effect. Subject to ARRA and this Interim Final
Rule, all contractual provisions to which a TARP recipient agreed prior
to the enactment of ARRA or the publication of this Interim Final Rule
also continue in effect.
IV. Procedural Requirements
Justification for Interim Rulemaking
The Interim Final Rule is promulgated pursuant to EESA, as amended,
which immediately provides for authority and facilities that the
Secretary can use to restore liquidity and stability to the financial
system of the United States. Specifically, the Interim Final Rule
implements certain provisions of section 111 of EESA, which directs
Treasury to establish executive compensation and corporate governance
standards for entities receiving financial assistance under the TARP.
To encourage entities to choose or continue to participate in the
TARP, those entities must have timely and reliable information with
respect to the applicable executive compensation and corporate
governance rules that apply under the TARP. Accordingly, because of
exigencies in the financial markets, 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 the Interim Final 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), Treasury has
determined that there is good cause for the Interim Final Rule to
become effective immediately upon publication. While the Interim Final
Rule is effective immediately upon publication, Treasury is inviting
public comment on the Interim Final Rule during a sixty-day period and
will consider all comments in developing a final rule.
Regulatory Planning and Review
The Interim Final Rule is designated as a ``significant regulatory
action'' as defined in Executive Order 12866. The agency has not
prepared a regulatory impact analysis consistent with the OMB Circular
A-4 that examines the likely benefits and costs associated with this
interim rule. The agency plans to prepare such analysis when it
promulgates a final rule that will supersede this rulemaking.
Regulatory Flexibility Act
Because no notice of proposed rulemaking is required, the Interim
Final Rule is not subject to the provisions of the Regulatory
Flexibility Act (5 U.S.C chapter 6).
Paperwork Reduction Act
The information collection contained in the Interim Final Rule has
been submitted to the Office of Management
[[Page 28405]]
and Budget (OMB) under the Paperwork Reduction Act (44 U.S.C. 35) and
OMB approval is pending. Under the Paperwork Reduction Act, an agency
may not conduct or sponsor, and an individual is not required to
respond to, a collection of information unless it displays a valid OMB
control number. Comments on the collection of information should be
sent to the Desk Officer for the Department of Treasury, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Washington, DC 20503 (or by e-mail to oira_submission@omb.eop.gov)
with a copy to Executive Compensation Comments, Office of Financial
Institutions Policy, Room 1418, Department of the Treasury, 1500
Pennsylvania Avenue, NW., Washington, DC 20220.
List of Subjects in 31 CFR Part 30
Executive compensation, Troubled assets.
0
Accordingly, under the authority of 12 U.S.C. 5221, for the reasons set
out in the preamble, Treasury amends 31 CFR Subtitle A by revising part
30 to read as follows:
PART 30--TARP STANDARDS FOR COMPENSATION AND CORPORATE GOVERNANCE
Sec.
30.0 Executive compensation and corporate governance.
30.1 Q-1: What definitions apply in this part?
30.2 Q-2: To what entities does this part apply?
30.3 Q-3: How are the SEOs and the most highly compensated employees
identified for purposes of compliance with this part?
30.4 Q-4: What actions are necessary for a TARP recipient to comply
with the standards established under sections 111(b)(3)(A),
111(b)(3)(E), 111(b)(3)(F) and 111(c) of EESA (evaluation of
employee plans and potential to encourage excessive risk or
manipulation of earnings)?
30.5 Q-5: How does a TARP recipient comply with the requirements
under Sec. 30.4 (Q-4) of this part that the compensation committee
discuss, evaluate, and review the SEO compensation plans and other
employee compensation plans to ensure that the SEO compensation
plans do not encourage the SEOs to take unnecessary and excessive
risks that threaten the value of the TARP recipient, or that the
employee compensation plans pose unnecessary risks to the TARP
recipient?
30.6 Q-6: How does a TARP recipient comply with the requirement
under Sec. 30.4 (Q-4) of this part that the compensation committee
discuss, evaluate, and review the employee compensation plans to
ensure that these plans do not encourage the manipulation of
reported earnings of the TARP recipient to enhance the compensation
of any of the TARP recipient's employees?
30.7 Q-7: How does a TARP recipient comply with the certification
and disclosure requirements under Sec. 30.4 (Q-4) of this part?
30.8 Q-8: What actions are necessary for a TARP recipient to comply
with the standards established under section 111(b)(3)(B) of EESA
(the ``clawback'' provision requirement)?
30.9 Q-9: What actions are necessary for a TARP recipient to comply
with the standards established under section 111(b)(3)(C) of EESA
(the prohibition on golden parachute payments)?
30.10 Q-10: What actions are necessary for a TARP recipient to
comply with section 111(b)(3)(D) of EESA (the limitation on bonus
payments)?
30.11 Q-11: Are TARP recipients required to meet any other standards
under the executive compensation and corporate governance standards
in section 111 of EESA?
30.12 Q-12: What actions are necessary for a TARP recipient to
comply with section 111(d) of EESA (the excessive or luxury
expenditures policy requirement)?
30.13 Q-13: What actions are necessary for a TARP recipient to
comply with section 111(e) of EESA (the shareholder resolution on
executive compensation requirement)?
30.14 Q-14: How does section 111 of EESA operate in connection with
an acquisition, merger, or reorganization?
30.15 Q-15: What actions are necessary for a TARP recipient to
comply with the certification requirements of section 111(b)(4) of
EESA?
30.16 Q-16: What is the Office of the Special Master for TARP
Executive Compensation, and what are its powers, duties and
responsibilities?
30.17 Q-17: How do the effective date provisions apply with respect
to the requirements under section 111 of EESA?
Authority: 12 U.S.C. 5221; 31 U.S.C. 321.
Sec. 30.0 Executive compensation and corporate governance.
The following questions and answers reflect the executive
compensation and corporate governance requirements of section 111 of
the Emergency Economic Stabilization Act of 2008, as amended (12 U.S.C.
5221) (EESA), with respect to participation in the Troubled Assets
Relief Program (TARP) established by the Department of the Treasury
(Treasury) thereunder.
Sec. 30.1 Q-1: What definitions apply in this part?
Affiliate. The term ``affiliate'' means an ``affiliate'' as that
term is defined in Rule 405 of the Securities Act of 1933 (17 CFR
230.405).
Annual compensation. (1) General rule. The term ``annual
compensation'' means, except as otherwise explicitly provided in this
part, the dollar value for total compensation for the applicable fiscal
year as determined pursuant to Item 402(a) of Regulation S-K under the
Federal securities laws (17 CFR 229.402(a)). Accordingly, for this
purpose the amounts required to be disclosed pursuant to paragraph
(c)(2)(viii) of Item 402(a) of Regulation S-K (actuarial increases in
pension plans and above market earnings on deferred compensation) are
not required to be included in annual compensation.
(2) Application to private TARP recipients. For purposes of
determining annual compensation, a TARP recipient that does not have
securities registered with the SEC pursuant to the Federal securities
laws must follow the requirements set forth in paragraph (1) of this
definition.
ARRA. The term ``ARRA'' means the American Recovery and
Reinvestment Act of 2009 (Pub. L. 111-5).
Benefit plan. The term ``benefit plan'' means any plan, contract,
agreement or other arrangement that is an ``employee welfare benefit
plan'' as that term is defined in section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended (29 U.S.C. 1002(1)),
or other usual and customary plans such as dependent care, tuition
reimbursement, group legal services or cafeteria plans; provided,
however, that this term does not include:
(1) Any plan that is a deferred compensation plan; or
(2) Any severance pay plan, whether or not nondiscriminatory, or
any other arrangement that provides for payment of severance benefits
to eligible employees upon voluntary termination for good reason,
involuntary termination, or termination under a window program as
defined in 26 CFR 1.409A-1(b)(9)(vi).
Bonus. The term ``bonus'' means any payment in addition to any
amount payable to an employee for services performed by the employee at
a regular hourly, daily, weekly, monthly, or similar periodic rate.
Such term generally does not include payments to or on behalf of an
employee as contributions to any qualified retirement plan (as defined
in section 4974(c) of the Internal Revenue Code (26 U.S.C. 4974(c)),
benefits under a broad-based benefit plan, bona fide overtime pay, or
bona fide and routine expense reimbursements. In addition, provided
that the rate of commission is pre-established and reasonable, and is
applied consistently to the sale of substantially similar goods or
services, commission compensation will not be treated as a bonus. For
this purpose, a
[[Page 28406]]
bonus may include a contribution to, or other increase in benefits
under, a nonqualified deferred compensation plan, regardless of when
the actual payment will be made under the plan. A bonus may also
qualify as a retention award or as incentive compensation.
Bonus payment. For purposes of this part, except where otherwise
noted, the term ``bonus payment'' includes a payment that is, or is in
the nature of, a bonus, incentive compensation, or retention award.
Whether a payment is a bonus payment, or whether the right to a payment
is a right to a bonus payment, is determined based upon all the facts
and circumstances, and a payment may be a bonus payment regardless of
the characterization of such payment by the TARP recipient or the
employee. For purposes of this part, a bonus payment may include the
forgiveness of a loan or other amount that otherwise may be required to
be paid by the employee to the employer.
Commission compensation. (1) Definition. The term ``commission
compensation'' means:
(i) Compensation or portions of compensation earned by an employee
consistent with a program in existence for that type of employee as of
February 17, 2009, if a substantial portion of the services provided by
this employee consists of the direct sale of a product or service to an
unrelated customer, these sales occur frequently and in the ordinary
course of business of the TARP recipient (but not a specified
transaction, such as an initial public offering or sale or acquisition
of a specified entity or entities), the compensation paid by the TARP
recipient to the employee consists of either a portion of the purchase
price for the product or service sold to the unrelated customer or an
amount substantially all of which is calculated by reference to the
volume of sales to the unrelated customers, and payment of the
compensation is either contingent upon the TARP recipient receiving
payment from the unrelated customer for the product or service or, if
applied consistently to all similarly situated employees, is contingent
upon the closing of the sales transaction and such other requirements
as may be specified by the TARP recipient before the closing of the
sales transaction with the unrelated customer;
(ii) Compensation or portions of compensation earned by an employee
that meet the requirements of paragraph (1)(i) of this definition
except that the transaction occurs with a related customer, provided
that substantial sales from which commission compensation arises are
made, or substantial services from which commission compensation arises
are provided, to unrelated customers by the service recipient, the
sales and service arrangement and the commission arrangement with
respect to the related customer are bona fide, arise from the service
recipient's ordinary course of business, and are substantially the
same, both in term and in practice, as the terms and practices
applicable to unrelated customers to which individually or in the
aggregate substantial sales are made or substantial services provided
by the service recipient; or
(iii) Compensation or portions of compensation earned by an
employee consistent with a program in existence for that type of
employee as of February 17, 2009, if a substantial portion of the
services provided by this employee to the TARP recipient consists of
sales of financial products or other direct customer services with
respect to unrelated customer assets or unrelated customer asset
accounts that are generally intended to be held indefinitely (and not
customer assets intended to be used for a specific transaction, such as
an initial public offering, or sale or acquisition of a specified
entity or entities), the unrelated customer retains the right to
terminate the customer relationship and may move or liquidate the
assets or asset accounts without undue delay (which may be subject to a
reasonable notice period), the compensation consists of a portion of
the value of the unrelated customer's overall assets or asset account
balance, an amount substantially all of which is calculated by
reference to the increase in the value of the overall assets or account
balance during a specified period, or both, or is calculated by
reference to a contractual benchmark (such as a securities index or
peer results), and the value of the overall assets or account balance
and commission compensation is determined at least annually. For
purposes of this definition, a customer is treated as an unrelated
customer if the person would not be treated as related to the TARP
recipient under 26 CFR 1.409A-1(f)(2)(ii) and the person would not be
treated as providing management services to the TARP recipient under 26
CFR 1.409A-1(f)(2)(iv).
(2) Examples. The following examples illustrate the provisions of
paragraph (1) of this definition:
Example 1. Employee A is an employee of TARP recipient. Among
TARP recipient's businesses is the sale of life insurance policies,
and TARP recipient buys and sells such policies frequently as part
of its ordinary course of business. Employee A's primary duties
consist of selling life insurance policies to customers unrelated to
the TARP recipient. Under a commission program existing for all TARP
Recipient employees selling life insurance policies as of February
17, 2009, Employee A is entitled to receive an amount equal to 75%
of the total first year's premium paid by an unrelated customer to
whom Employee A has sold a life insurance policy. The payments to
Employee A under the program constitute commission compensation.
Example 2. The same facts as Example 1, except that under the
program, the rate of commission increases to 80% of the total first
year's premium paid by a customer once Employee A has sold $10
million in policies in a year. Provided that 80% is a reasonable
commission, the payments to Employee A under the program constitute
commission compensation.
Example 3. Employee B is an employee of TARP recipient. Among
TARP recipient's businesses is the investment management of
unrelated customer asset accounts, and TARP recipient provides such
services routinely and in the ordinary course of business. Employee
B's primary duties as an employee consist of managing the
investments of the asset accounts of specified unrelated customers
who have deposited amounts with the TARP recipient. Under a program
in existence on February 17, 2009, Employee B is entitled to receive
an amount equal to 1% of the aggregate account balances of the
assets under management, as determined each December 31. The
payments to Employee B constitute commission compensation.
Example 4. TARP recipient employs Employee C. As part of
Employee C's duties, Employee C is responsible for specified aspects
of any acquisition of an unrelated entity by TARP Recipient. As part
of an acquisition in 2009, Employee C is entitled to 1% of the
purchase price if and when the transaction closes. Regardless of
whether such an arrangement was customary or established under a
specific program as of February 17, 2009, the amount is not
commission compensation because the compensation relates to a
specified transaction, in this case the purchase of the entity.
Accordingly, the compensation is incentive compensation.
Example 5. TARP recipient employs Employee D. As part of
Employee D's duties, Employee D is responsible for managing the
initial public offerings of securities of unrelated customers of
TARP recipient. As part of an initial public offering in 2009,
Employee D is entitled to 1% of the purchase price if and when the
initial public offering closes. Regardless of whether such an
arrangement was customary or established under a specific program as
of February 17, 2009, the amount is not commission compensation
because the compensation relates to a specified transaction, in this
case the initial public offering. Accordingly, the compensation is
incentive compensation.
Compensation means all remuneration for employment, including but
not limited to salary, commissions, tips, welfare benefits,
[[Page 28407]]
retirement benefits, fringe benefits and perquisites.
Compensation committee. (1) General rule. The term ``compensation
committee'' means a committee of independent directors, whose
independence is determined pursuant to Item 407(a) of Regulation S-K
under the Federal securities laws (17 CFR 229.407(a)).
(2) Application to private TARP recipients. For purposes of
determining director independence, a TARP recipient that does not have
securities registered with the SEC pursuant to the Federal securities
laws must follow the requirements set forth in Item 407(a)(1)(ii) of
Regulation S-K under the Federal securities laws (17 CFR
229.407(a)(1)(ii)).
Compensation structure. The term ``compensation structure'' means
the characteristics of the various forms of total compensation that an
employee receives or may receive, including the amounts of such
compensation or potential compensation relative to the amounts of other
types of compensation or potential compensation, the amounts of such
compensation or potential compensation relative to the total
compensation over the relevant period, and how such various forms of
compensation interrelate to provide the employee his or her ultimate
total compensation. These characteristics include, but are not limited
to, whether the compensation is provided as salary, short-term
incentive compensation, or long-term incentive compensation, whether
the compensation is provided as cash compensation, equity-based
compensation, or other types of compensation (such as executive
pensions, other benefits or perquisites), and whether the compensation
is provided as current compensation or deferred compensation.
Deferred compensation plan. The term ``deferred compensation plan''
means
(1) Any plan, contract, agreement, or other arrangement under which
an employee voluntarily elects to defer all or a portion of the
reasonable compensation, wages, or fees paid for services rendered
which otherwise would have been paid to the employee at the time the
services were rendered (including a plan that provides for the
crediting of a reasonable investment return on such elective
deferrals), provided that the TARP recipient either:
(i) Recognizes a compensation expense and accrues a liability for
the benefit payments according to GAAP; or
(ii) Segregates or otherwise sets aside assets in a trust which may
only be used to pay plan and other benefits, except that the assets of
this trust may be available to satisfy claims of the TARP recipient's
creditors in the case of insolvency; or
(2) A nonqualified deferred compensation or supplemental retirement
plan, other than an elective deferral plan established by a TARP
recipient:
(i) Primarily for the purpose of providing benefits for a select
group of directors, management, or highly compensated employees in
excess of the limitations on contributions and benefits imposed by
sections 415, 401(a)(17), 402(g) or any other applicable provision of
the Internal Revenue Code (26 U.S.C. 415, 401(a)(17), 402(g)); or
(ii) Primarily for the purpose for providing supplemental
retirement benefits or other deferred compensation for a select group
of directors, management or highly compensated employees (excluding
severance payments).
EESA. The term ``EESA'' means the Emergency Economic Stabilization
Act of 2008, as amended.
Employee. The term ``employee'' means an individual serving as a
servant in the conventional master-servant relationship as understood
by the common-law agency doctrine. In general, a partner of a
partnership, a member of a limited liability company, or other similar
owner in a similar type of entity, will not be treated as an employee
for this purpose. However, to the extent that the primary purpose for
the creation or utilization of such partnership, limited liability
company, or other similar type of entity is to avoid or evade any or
all of the requirements of section 111 of EESA or these regulations
with respect to a partner, member or other similar owner, the partner,
member or other similar owner will be treated as an employee. In
addition, a personal service corporation or similar intermediary
between the TARP recipient and an individual providing services to the
TARP recipient will be disregarded for purposes of determining whether
such individual is an employee of the TARP recipient.
Employee compensation plan. The term ``employee compensation plan''
means ``plan'' as that term is defined in Item 402(a)(6)(ii) of
Regulation S-K under the Federal securities laws (17 CFR
229.402(a)(6)(ii)), but only any employee compensation plan in which
two or more employees participate and without regard to whether an
executive officer participates in the employee compensation plan.
Exceptional financial assistance. The term ``exceptional financial
assistance'' means any financial assistance provided under the Programs
for Systemically Significant Failing Institutions, the Targeted
Investment Program, the Automotive Industry Financing Program, and any
new program designated by the Secretary as providing exceptional
financial assistance.
Excessive or luxury expenditures. The term ``excessive or luxury
expenditures'' means excessive expenditures on any of the following to
the extent such expenditures are not reasonable expenditures for staff
development, reasonable performance incentives, or other similar
reasonable measures conducted in the normal course of the TARP
recipient's business operations:
(1) Entertainment or events;
(2) Office and facility renovations;
(3) Aviation or other transportation services; and
(4) Other similar items, activities, or events for which the TARP
recipient may reasonably anticipate incurring expenses, or reimbursing
an employee for incurring expenses.
Excessive or luxury expenditures policy. The term ``excessive or
luxury expenditures policy'' means written standards applicable to the
TARP recipient and its employees that address the four categories of
expenses set forth in the definition of ``excessive or luxury
expenditures'' (entertainment or events, office and facility
renovations, aviation or other transportation services, and other
similar items, activities or events), and that are reasonably designed
to eliminate excessive and luxury expenditures. Such written standards
must:
(1) Identify the types or categories of expenditures which are
prohibited (which may include a threshold expenditure amount per item,
activity, or event or a threshold expenditure amount per employee
receiving the item or participating in the activity or event);
(2) Identify the types or categories of expenditures for which
prior approval is required (which may include a threshold expenditure
amount per item, activity, or event or a threshold expenditure amount
per employee receiving the item or participating in the activity or
event);
(3) Provide reasonable approval procedures under which an
expenditure requiring prior approval may be approved;
(4) Require PEO and PFO certification that the approval of any
expenditure requiring the prior approval of any SEO, any executive
officer of a substantially similar level of responsibility, or the TARP
recipient's board of directors (or
[[Page 28408]]
a committee of such board of directors), was properly obtained with
respect to each such expenditure;
(5) Require the prompt internal reporting of violations to an
appropriate person or persons identified in this policy; and
(6) Mandate accountability for adherence to this policy.
Executive officer. The term ``executive officer'' means an
``executive officer'' as that term is defined in Rule 3b-7 of the
Securities Exchange Act of 1934 (Exchange Act) (17 CFR 240.3b-7).
Financial assistance. (1) Definition. The term ``financial
assistance'' means any funds or fund commitment provided through the
purchase of troubled assets under the authority granted to Treasury
under section 101 of EESA or the insurance of troubled assets under the
authority granted to Treasury under section 102 of EESA, provided that
the term ``financial assistance'' does not include any loan
modification under sections 101 and 109 of EESA. A change in the form
of previously received financial assistance, such as a conversion of
convertible preferred stock to common stock, is not treated as new or
additional financial assistance.
(2) Examples. The following examples illustrate the provisions of
paragraph (1) of this definition:
Example 1. Company A sells $500,000,000 of preferred stock to
Treasury through the Capital Purchase Program. Company A has
received financial assistance.
Example 2. Company B posts collateral to and receives a loan
from the Federal Reserve special purpose vehicle under the Term
Asset-Backed Security Loan Facility program. Company B has neither
sold troubled assets to Treasury, nor insured troubled assets
through Treasury, and therefore has not received financial
assistance.
Example 3. LP C is a limited partnership established for the
purpose of participating in the Public Private Investment Program.
LP C has a general partner (GP) that makes management decisions on
behalf of LP C. A limited liability company controlled by an
affiliate of GP (LLC partner) raises $55,000,000 from twenty
investors, with each investing equal shares, joins LP C as a limited
partner, and invests those funds for a 55% equity interest in LP C.
LP C sells a $45,000,000 equity interest to Treasury. LP C, at the
direction of the GP, will buy and sell securities as investments and
manage those investments. LP C will contract for investment advice
from an investment advisor that is an affiliate of GP. LP C has
received financial assistance. LLC partner has received financial
assistance because it is treated as the same employer as LP C
according to the standards set forth in paragraph (1)(ii) of the
definition of ``TARP recipient''. The investors in the LLC partner
have not received financial assistance because they are not treated
as the same employer as LP C according to the standards set forth in
paragraph (1)(ii) of the definition of ``TARP recipient''. GP is not
an employee of LP C pursuant to the definition of ``employee'' in
this rule, and is not treated as the same employer as LP C according
to the standards set forth in paragraph (1)(ii) of the definition of
``TARP recipient''. The investment advisor-contractor to LP C has
not received financial assistance. Entities that sell securities to
or buy securities from LP C have neither sold troubled assets to
Treasury nor insured troubled assets through Treasury, and therefore
have not received financial assistance.
Example 4. Company D, a servicer of mortgage loans or mortgaged-
backed securities, issues a financial instrument to Treasury's
financial agent in which Company D commits to modify mortgages it is
servicing consistent with guidelines established by Treasury under
the Home Affordable Modification Program. Treasury, through its
financial agent, commits to pay up to $800,000,000 in incentive
payments and credit enhancements for Company E's commitment to
modify mortgages. Company E has not received financial assistance.
GAAP. The term ``GAAP'' means U.S. generally accepted accounting
principles.
Golden parachute payment. (1) General rule. The term ``golden
parachute payment'' means any payment for the departure from a TARP
recipient for any reason, or any payment due to a change in control of
the TARP recipient or any entity that is included in a group of
entities treated as one TARP recipient, except for payments for
services performed or benefits accrued. For this purpose, a change in
control includes any event that would qualify as a change in control
event as defined in 26 CFR 1.280G-1, Q&A-27 through Q&A-29 or as a
change in control event as defined in 26 CFR 1.409A-3(i)(5)(i). For
this purpose, a golden parachute payment includes the acceleration of
vesting due to the departure or the change in control event, as
applicable. A golden parachute payment is treated as paid at the time
of departure or change in control event, and is equal to the aggregate
present value of all payments made for a departure or a change in
control event (including the entire aggregate present value of the
payment if the vesting period was not otherwise completed but was
accelerated due to departure, regardless of whatever portion of the
required vesting period the employee had completed). Thus, a golden
parachute payment may include a right to amounts actually payable after
the TARP period.
(2) Exclusions. For purposes of this part, a golden parachute
payment does not include any of the following:
(i) Any payment made pursuant to a pension or retirement plan which
is qualified (or is intended within a reasonable period of time to be
qualified) under section 401 of the Internal Revenue Code (26 U.S.C.
401) or pursuant to a pension or other retirement plan which is
governed by the laws of any foreign country;
(ii) Any payment made by reason of the departure of the employee
due to the employee's death or disability; or
(iii) Any severance or similar payment which is required to be made
pursuant to a State statute or foreign law (independent of any terms of
a contract or other agreement) which is applicable to all employers
within the appropriate jurisdiction (with the exception of employers
that may be exempt due to their small number of employees or other
similar criteria).
(3) Payments for services performed or benefits accrued. (i)
General rules. Except as otherwise provided for payments made under a
deferred compensation plan or a benefit plan in paragraph (4) of this
definition, a payment made, or a right to a payment arising under a
plan, contract, agreement, or other arrangement (including the
acceleration of any vesting conditions) is for services performed or
benefits accrued only if the payment was made, or the right to the
payment arose, for current or prior services to the TARP recipient
(except that an appropriate allowance may be made for services for a
predecessor employer). Whether a payment is for services performed or
benefits accrued is determined based on all the facts and
circumstances. However, a payment, or a right to a payment, generally
will be treated as a payment for services performed or benefits accrued
only if the payment would be made regardless of whether the employee
departs or the change in control event occurs, or if the payment is due
upon the departure of the employee, regardless of whether the departure
is voluntary or involuntary (other than reasonable restrictions, such
as the forfeiture of the right to a payment for an involuntary
departure for cause, but not restrictions relating to whether the
departure was a voluntary departure for good reason or subsequent to a
change in control).
(ii) Examples. The following examples illustrate the general rules
in paragraph (3)(i) of this definition:
Example 1. Employee A is a SEO of Entity B at all relevant
times. On September 1, 2007, Employee A received a stock
appreciation right granting him the right to appreciation on the
underlying shares that would vest 25% for every twelve months of
continued services. Under the terms of the grant, the stock
appreciation right would be immediately exercised and payable upon
termination of employment. Entity B
[[Page 28409]]
becomes a TARP recipient in December 2008. On September 1, 2009,
Entity B involuntarily terminates Employee A, at which time Employee
A receives a payment equal to the post-September 1, 2007
appreciation on 50% of the shares under the stock appreciation right
(the portion of the shares that had vested before the termination of
employment). The payment is treated as a payment for services
performed and does not constitute a golden parachute payment.
Example 2. The facts are the same as the facts in Example 1,
except that under Employee A's employment agreement, Employee A is
entitled to accelerate vesting if Employee A is terminated
involuntarily other than for cause. If Entity B pays Employee A the
post-September 1, 2007 appreciation on 100% of the shares under the
stock appreciation right, the portion of the payment representing
the additional 50% accelerated vesting due to the termination of
employment would not be for services performed and would be a golden
parachute payment.
(4) Payments from benefit plans and deferred compensation plans. A
payment from a benefit plan or a deferred compensation plan is treated
as a payment for services performed or benefits accrued only if the
following conditions are met:
(i) The plan was in effect at least one year prior to the
employee's departure;
(ii) The payment is made pursuant to the plan and is made in
accordance with the terms of the plan as in effect no later than one
year before the departure and in accordance with any amendments to the
plan during this one year period that do not increase the benefits
payable hereunder;
(iii) The employee has a vested right, as defined under the
applicable plan document, at the time of the departure or the change in
control event (but not due to the departure or the change in control
event) to the payments under the plan;
(iv) Benefits under the plan are accrued each period only for
current or prior service rendered to the TARP recipient (except that an
appropriate allowance may be made for service for a predecessor
employer);
(v) Any payment made pursuant to the plan is not based on any
discretionary acceleration of vesting or accrual of benefits which
occurs at any time later than one year before the departure or the
change in control event; and
(vi) With respect to payments under a deferred compensation plan,
the TARP recipient has previously recognized compensation expense and
accrued a liability for the benefit payments according to GAAP or
segregated or otherwise set aside assets in a trust which may only be
used to pay plan benefits, except that the assets of this trust may be
available to satisfy claims of the TARP recipient's creditors in the
case of insolvency and payments pursuant to the plan are not in excess
of the accrued liability computed in accordance with GAAP.
Gross-up. The term ``gross-up'' means any reimbursement of taxes
owed with respect to any compensation, provided that a gross-up does
not include a payment under a tax equalization agreement, which is an
agreement, method, program, or other arrangement that provides payments
intended to compensate an employee for some or all of the excess of the
taxes actually imposed by a foreign jurisdiction on the compensation
paid by the TARP recipient to the employee over the taxes that would be
imposed if the compensation were subject solely to U.S. Federal, State,
and local income tax, or some or all of the excess of the U.S. Federal,
State, and local income tax actually imposed on the compensation paid
by the TARP recipient to the employee over the taxes that would be
imposed if the compensation were subject solely to taxes in the
applicable foreign jurisdiction, provided that the payment made under
such agreement, method, program, or other arrangement may not exceed
such excess and the amount necessary to compensate for the additional
taxes on the amount paid under the agreement, method, program, or other
arrangement.
Incentive compensation. The term ``incentive compensation'' means
compensation provided under an incentive plan.
Incentive plan. (1) Definition. The term ``incentive plan'' means
an ``incentive plan'' as that term is defined in Item 402(a)(6)(iii) of
Regulation S-K under the Federal securities laws (17 CFR
229.402(a)(6)(iii)), and any plan providing stock or options as defined
in Item 402(a)(6)(i) of Regulation S-K under the Federal securities
laws (17 CFR 229.402(a)(6)(i)) or other equity-based compensation such
as restricted stock units or stock appreciation rights, except for the
payment of salary or other permissible payments in stock, stock units,
or other property as described in paragraph (2) of this definition. An
incentive plan does not include the payment of salary, but does include
an arrangement under which an employee would earn compensation in the
nature of a commission, unless such compensation qualifies as
commission compensation (as defined above). Accordingly, an incentive
plan includes an arrangement under which an employee receives
compensation only upon the completion of a specified transaction, such
as an initial public offering or sale or acquisition of a specified
entity or entities, regardless of how such compensation is measured.
For examples, see the definition of ``commission compensation,'' above.
An incentive plan, or a grant under an incentive plan, may also qualify
as a bonus or a retention award.
(2) Salary or other permissible payments paid in property. The term
``incentive plan'' does not include an arrangement under which an
employee receives salary or another permissible payment in property,
such as TARP recipient stock, provided that such property is not
subject to a substantial risk of forfeiture (as defined in 26 CFR 1.83-
3(c)) or other future period of required services, the amount of the
payment is determinable as a dollar amount through the date such
compensation is earned (for example, an agreement that salary payments
will be made in stock equal to the value of the cash payment that would
otherwise be due), and the amount of stock or other property accrues at
the same time or times as the salary or other permissible payments
would otherwise be paid in cash. The term ``incentive plan'' also does
not include an arrangement under which an employee receives a
restricted stock unit that is analogous to TARP recipient stock, that
otherwise meets the requirements of the previous sentence. For this
purpose, a unit is analogous to stock if the unit is based upon stock
of the TARP recipient, or is applied as if the applicable entity,
division, or other unit were a corporation with one class of stock and
the number of units of stock granted is determined based on a fixed
percentage of the overall value of this corporation, and the term
``TARP recipient stock'' with respect to a particular employee
recipient means the stock of a corporation (or the entity, division, or
other unit the value of which forms the basis for the unit) that is an
``eligible issuer of service recipient stock'' under 26 CFR 1.409A-
1(b)(5)(iii)(E) (applied by analogy to non-corporate entities).
(3) Examples. The following examples illustrate the provisions of
paragraph (2) of this definition.
Example 1. Employee is an employee of TARP recipient. For 2010,
TARP recipient agrees to pay a salary of $15,000, payable monthly.
At each salary payment date Employee will receive a $10,000 payment
in cash, and be transferred a number of shares of common stock of
TARP recipient equal to $5,000 divided by the fair market value of a
share of common stock on the salary payment date. The arrangement is
for the payment of salary, and is not an incentive plan.
Example 2. Same facts as Example 1, except that pursuant to a
valid elective deferral election, Employee elects to defer
[[Page 28410]]
20% of each salary payment into a nonqualified deferred compensation
plan. At each salary payment date Employee will receive an $8,000
payment in cash, be transferred a number of shares of common stock
of TARP recipient equal to $4,000 divided by the fair market value
of a share of common stock on the salary payment date, and a $3,000
contribution to an account under a nonqualified deferred
compensation plan. The arrangement is for the payment of salary, and
is not an incentive plan.
Example 3. Employee is an employee of TARP recipient. For 2010,
TARP recipient agrees to pay a salary of $15,000, payable monthly.
At each salary payment date, Employee will receive a $10,000 payment
in cash, and accrue a right to a number of shares of common stock of
TARP recipient equal to $5,000 divided by the fair market value of a
share of common stock on the salary payment date. At the end of the
year, TARP recipient will transfer the total number of accrued
shares to Employee, subject to a multi-year holding period (a
restriction that the shares may not be transferred or otherwise
disposed of by Employee for a specified number of years). If
Employee's employment with the TARP recipient terminates during the
holding period, the termination will not affect the duration or
application of the holding period or Employee's right to retain the
shares and to transfer or otherwise dispose of them at the end of
the holding period. The arrangement is for the payment of salary,
and is not an incentive plan. The arrangement would also be for the
payment of salary, and not an incentive plan, if the arrangement
provided that the holding period was to last until the later of a
specified time period or a specified time following Employee's
retirement or other termination of employment.
Example 4. Employee is an employee of TARP recipient. For 2010,
TARP recipient agrees to pay a salary of $15,000, payable monthly.
At each salary payment date, Employee will receive a $10,000 payment
in cash, and accrue a right to a contribution to an account equal to
$5,000 divided by the fair market value of a share on the salary
payment date. The account balance will be subject to notional gains
and losses based on the investment return on TARP recipient common
stock. The amount will be payable upon the last day of the second
year immediately following the year the services are performed. The
arrangement is for the payment of salary, and is not an incentive
plan. However, the arrangement generally will provide deferred
compensation for purposes of section 409A of the Internal Revenue
Code.
Internal Revenue Code. The term ``Internal Revenue Code'' means the
Internal Revenue Code of 1986, as amended.
Long-term restricted stock. The term ``long-term restricted stock''
means restricted stock or restricted stock units that include the
following features:
(1) The restricted stock or restricted stock units are issued with
respect to common stock of the TARP recipient. For this purpose, a
restricted stock unit includes a unit that is payable, or may be
payable, in cash or stock, provided that the value of the payment is
equal to the value of the underlying stock. With respect to a specified
division or other unit within a TARP recipient or a TARP recipient that
is not a stock corporation, a unit analogous to common stock may be
used. For this purpose, a unit is analogous to common stock if applied
as if the entity, division, or other unit were a corporation with one
class of common stock and the number of units of common stock granted
is determined based on a fixed percentage of the overall value of this
corporation. Notwithstanding the foregoing, with respect to a
particular employee recipient, the corporation the stock of which is
utilized (or the entity, division, or other unit the value of which
forms the basis for the unit) must be an ``eligible issuer of service
recipient stock'' under 26 CFR 1.409A-1(b)(5)(iii)(E) (applied by
analogy to non-corporate entities).
(2) The restricted stock or restricted stock unit may not become
transferable (as defined in 26 CFR 1.83-3(d)), or payable as applied to
a restricted stock unit, at any time earlier than permitted under the
following schedule (except as necessary to reflect a merger or
acquisition of the TARP recipient):
(i) 25% of the shares or units granted at the time of repayment of
25% of the aggregate financial assistance received.
(ii) An additional 25% of the shares or units granted (for an
aggregate total of 50% of the shares or units granted) at the time of
repayment of 50% of the aggregate financial assistance received.
(iii) An additional 25% of the shares or units granted (for an
aggregate total of 75% of the shares or units granted) at the time of
repayment of 75% of the aggregate financial assistance received.
(iv) The remainder of the shares or units granted at the time of
repayment of 100% of the aggregate financial assistance received.
(3) Notwithstanding the foregoing, in the case of restricted stock
for which the employee does not make an election under section 83(b) of
the Internal Revenue Code (26 U.S.C. 83(b)), at any time beginning with
the date upon which the stock becomes substantially vested (as defined
in 26 CFR 1.83-3(b)) and ending on December 31 of the calendar year
including that date, a portion of the restricted stock may be made
transferable as may reasonably be required to pay the Federal, State,
local, or foreign taxes that are anticipated to apply to the income
recognized due to this vesting, and the amounts made transferable for
this purpose shall not count toward the percentages in the schedule
above.
(4) The employee must be required to forfeit the restricted stock
or restricted stock unit if the employee does not continue performing
substantial services for the TARP recipient for at least two years from
the date of grant, other than due to the employee's death or
disability, or a change in control event (as defined in 26 CFR 1.280G-
1, Q&A-27 through Q&A-29 or as defined in 26 CFR 1.409A-3(i)(5)(i))
with respect to the TARP recipient before the second anniversary of the
date of grant.
(5) Nothing in paragraphs (1), (2), (3), and (4) of this definition
is intended to prevent the placement on such restricted stock or
restricted stock unit of any additional restrictions, conditions, or
limitations that are not inconsistent with the requirements of these
paragraphs.
Most highly compensated employee. (1) In general. The term ``most
highly compensated employee'' means the employee of the TARP recipient,
other than the SEOs of the TARP recipient, whose annual compensation is
determined to be the highest among all employees of the TARP recipient,
provided that, for this purpose, a former employee who is no longer
employed as of the first day of the relevant fiscal year of the TARP
recipient is not a most highly compensated employee unless it is
reasonably anticipated that such employee will return to employment
with the TARP recipient during such fiscal year.
(2) Application to new entities. For an entity that is created or
organized in the same year that the entity becomes a TARP recipient, a
most highly compensated employee for the first year includes the person
that the TARP recipient determines will be the most highly compensated
employee for the next year based upon a reasonable, good faith
determination of the projected annual compensation of such person
earned during that year. This determination must be made as of the
later of the date the entity is created or organized or the date the
entity becomes a TARP recipient, and must be made only once. However, a
person need not yet be an employee to be treated as a most highly
compensated employee, if it is reasonably anticipated that the person
will become an employee of the TARP recipient during the first year.
Obligation. (1) Definition. The term ``obligation'' means a
requirement for, or an ability of, a TARP recipient to repay financial
assistance received from Treasury, as provided in the terms of the
applicable financial instrument and related agreements, through the
[[Page 28411]]
repayment of a debt obligation or the redemption or repurchase of an
equity security, but not including warrants to purchase common stock of
the TARP recipient.
(2) Examples. The following examples illustrate the provisions of
paragraph (1) of this definition.
Example 1. TARP recipient sells $500 million of preferred stock
to Treasury, and provides warrants to Treasury for the purchase of
$75 million of common stock. The TARP recipient has an ability to
redeem the preferred stock and thus maintains an outstanding
obligation to Treasury.
Example 2. Same facts as Example 1, except that TARP recipient
redeems the $500 million of preferred stock, so that Treasury holds
only the $75 million of warrants to purchase common stock
outstanding. TARP recipient does not maintain an outstanding
obligation to Treasury.
Example 3. TARP recipient sells $120 million of securities
backed by Small Business Administration-guaranteed loans to Treasury
through the Consumer and Business Lending initiative, and provides
warrants to Treasury for the purchase of $10 million of common
stock. Because the TARP recipient does not as a result of this
transaction owe a debt obligation or have a requirement or right to
redeem or repurchase an equity security (other than the warrants to
purchase common stock provided to the Treasury), the TARP recipient
does not have an outstanding obligation to Treasury as a result of
this transaction.
PEO. The term ``PEO'' means the principal executive officer or an
employee acting in a similar capacity.
Perquisite. The term ``perquisite'' means a ``perquisite or other
personal benefit'' the amount of which is required to be included in
the amount reported under Item 402(c)(2)(ix)(A) of Regulation S-K under
the Federal securities laws (17 CFR 229.402(c)(2)(ix)(A)) (Column (i)
of the Summary Compensation Table (All Other Compensation)), modified
to also include any such perquisite or other personal benefit provided
to a most highly compensated employee subject to Sec. 30.11(b) (Q-11).
PFO. The term ``PFO'' means the principal financial officer or an
employee acting in a similar capacity.
Primary regulatory agency. The term ``primary regulatory agency''
means the Federal regulatory agency that has primary supervisory
authority over the TARP recipient. For a TARP recipient that is a
State-chartered bank that does not have securities registered with the
SEC pursuant to the Federal securities laws, the primary regulatory
agency is the TARP recipient's primary Federal banking regulator. If a
TARP recipient is not subject to the supervision of a Federal
regulatory agency, the term ``primary regulatory agency'' means the
Treasury.
Repayment. The term ``repayment'' means satisfaction of an
obligation.
Retention award. (1) General definition. The term ``retention
award'' means any payment to an employee, other than a payment of
commission compensation, a payment made pursuant to a pension or
retirement plan which is qualified (or is intended within a reasonable
period of time to be qualified) under section 401 of the Internal
Revenue Code (26 U.S.C. 401), a payment made pursuant to a benefit
plan, or a payment of a fringe benefit, overtime pay, or reasonable
expense reimbursement that:
(i) Is not payable periodically to an employee for services
performed by the employee at a regular hourly, daily, weekly, monthly,
or similar periodic rate (or would not be payable in such manner absent
an elective deferral election);
(ii) Is contingent on the completion of a period of future service
with the TARP recipient or the completion of a specific project or
other activity of the TARP recipient; and
(iii) Is not based on the performance of the employee (other than a
requirement that the employee not be separated from employment for
cause) or the business activities or value of the TARP recipient.
(2) New hires. With respect to newly hired employees, a payment
that will be made only if the new hire continues providing services for
a specified period generally constitutes a retention award. For
example, a signing bonus that must be repaid unless the newly hired
employee completes a certain period of service is a retention award.
Similarly, a ``make-whole'' agreement under which a newly hired
employee is provided benefits intended to make up for benefits foregone
at his former employer, where these new benefits are subject to a
continued service period vesting requirement (such as a continuation of
the vesting period at the former employer), is a retention award.
(3) Deferred compensation plans. Whether a benefit under a deferred
compensation plan that is subject to a service vesting period is a
retention award depends on all the facts and circumstances. However, to
the extent an employee continues to accrue, or becomes eligible to
accrue, a benefit under a plan the benefits under which have not been
materially enhanced for a significant period of time prior to the
employee becoming an SEO or most highly compensated employee (including
through expansion of the eligibility for such plan), the benefits
accrued generally will not be a retention award. However, to the extent
the plan is amended to materially enhance the benefits provided under
the plan or to make such employee eligible to participate in such plan,
and such benefits are subject to a requirement of a continued period of
service, such an amendment generally will be a retention award.
SEC. The term ``SEC'' means the U.S. Securities and Exchange
Commission.
Senior executive officer or SEO. (1) General definition. The term
``senior executive officer'' or ``SEO'' means a ``named executive
officer'' as that term is determined pursuant to Instruction 1 to Item
402(a)(3) of Regulation S-K under the Federal securities laws (17 CFR
229.402(a)) who is an employee of the TARP recipient.
(2) Application to smaller reporting company. A TARP recipient that
is a smaller reporting company must identify SEOs pursuant to paragraph
(1) of this definition. Such a TARP recipient must identify at least
five SEOs, even if only three named executive officers are provided in
the disclosure pursuant to Item 402(m)(2) of Regulation S-K under the
Federal securities laws (17 CFR 229.402(m)(2)), provided that no
employee must be identified as a SEO if the employee's total annual
compensation does not exceed $100,000 as defined in Item 402(a)(3)(1)
of Regulation S-K under the Federal securities laws (17 CFR
229.402(a)(3)(1)).
(3) Application to private TARP recipients. A TARP recipient that
does not have securities registered with the SEC pursuant to the
Federal securities laws must identify SEOs in accordance with rules
analogous to the rules in paragraph (1) of this definition.
SEO compensation plan. The term ``SEO compensation plan'' means
``plan'' as that term is defined in Item 402(a)(6)(ii) of Regulation S-
K under the Federal securities laws (17 CFR 229.402(a)(6)(ii)), but
only with regard to a SEO compensation plan in which a SEO
participates.
Senior risk officer. The term ``senior risk officer'' means a
senior risk executive officer or employee acting in a similar capacity.
Smaller reporting company. The term ``smaller reporting company''
means a ``smaller reporting company'' as that term is defined in Item
10(f) of Regulation S-K under the Federal securities laws (17 CFR
229.10(f)).
Sunset date. The term ``sunset date'' means the date on which the
authorities provided under EESA section 101 and 102 terminate, pursuant
to EESA section
[[Page 28412]]
120, taking into account any extensions pursuant to EESA section
120(b).
TARP. The term ``TARP'' means the Troubled Asset Relief Program,
established pursuant to EESA.
TARP fiscal year. The term ``TARP fiscal year'' means a fiscal year
of a TARP recipient, or the portion of a fiscal year of a TARP
recipient, that is also a TARP period.
TARP period. The term ``TARP period'' means the period beginning
with the TARP recipient's receipt of any financial assistance and
ending on the last date upon which any obligation arising from
financial assistance remains outstanding (disregarding any warrants to
purchase common stock of the TARP recipient that the Treasury may
hold).
TARP recipient. (1) General definition. The term ``TARP recipient''
means
(i) Any entity that has received or holds a commitment to receive
financial assistance; and
(ii) Any entity that would be treated as the same employer as an
entity receiving financial assistance based on the rules in sections
414(b) and 414(c) of the Internal Revenue Code (26 U.S.C. 414(b) or
(c)), but modified by substituting ``50%'' for ``80%'' in each place it
appears in section 414(b) or 414(c) and the accompanying regulations.
However, for purposes of applying the aggregation rules to determine
the applicable employer, the rules for brother-sister controlled groups
and combined groups are disregarded (including disregarding the rules
in section 1563(a)(2) and (a)(3) of the Internal Revenue Code (26
U.S.C. 1563(a)(2) and (a)(3)) with respect to corporations and the
parallel rules that are in 26 CFR 1.414(c)-2(c) with respect to other
organizations conducting trades or businesses).
(2) Certain excluded entities. Neither any entity receiving funds
under TARP pursuant to section 109 of EESA nor any Federal Reserve bank
as that term is used in the Federal Reserve Act (12 U.S.C. 221 et seq.)
will be treated as a TARP recipient subject to section 111 of EESA and
any rules and regulations promulgated thereunder.
(3) Anti-abuse rule. Notwithstanding paragraph (1) of this
definition, the term ``TARP recipient'' means any entity that has
received, or holds a commitment to receive, financial assistance; and
any entity related to such TARP recipient to the extent that the
primary purpose for the creation or utilization of such entity is to
avoid or evade any or all of the requirements of section 111 of EESA or
these regulations.
Treasury. The term ``Treasury'' means the U.S. Department of the
Treasury.
Valid employment contract. The term ``valid employment contract''
means a written employment contract that is:
(1)(i) A material contract as determined pursuant to Item
601(b)(10)(iii)(A) of Regulation S-K under the Federal securities laws
(17 CFR 229.601(b)(10)(iii)(A)); or
(ii) A contract that would be deemed a material contract as
determined pursuant to Item 601(b)(10)(iii) of Regulation S-K under the
Federal securities laws (17 CFR 229.601(b)(10)(iii)), but for the fact
that the material contract relates to one or more employee who is not
an executive officer; and
(2) Is enforceable under the law of the applicable jurisdiction.
Sec. 30.2 Q-2: To what entities does this part apply?
This part applies to any TARP recipient, provided that the
requirements of sections 111(b) (portions of Sec. 30.4 (Q-4), Sec.
30.5 (Q-5) and Sec. 30.7 (Q-7), as applicable, Sec. 30.6 (Q-6), and
Sec. 30.8 (Q-8) through Sec. 30.11 (Q-11), and Sec. 30.15 (Q-15)),
and section 111(e) (Sec. 30.13 (Q-13)) apply only during the period
during which any obligation to the Federal government arising from
financial assistance provided under the TARP remains outstanding. The
requirements of section 111(c) (including portions of Sec. 30.4 (Q-4),
Sec. 30.5 (Q-5) and Sec. 30.7 (Q-7), as applicable) and section
111(d) (Sec. 30.12 (Q-12)) apply through the later of the last day of
the period during which any obligation to the Federal government
arising from financial assistance provided under the TARP remains
outstanding for TARP recipients with an obligation, or the last day of
the TARP recipient's fiscal year including the sunset date for a TARP
recipient that has never had an obligation. For this purpose, an
obligation includes the ownership by the Federal government of common
stock of a TARP recipient.
Sec. 30.3 Q-3: How are the SEOs and most highly compensated employees
identified for purposes of compliance with this part?
(a) Identification. The SEOs for a year are the ``named executive
officers'' who are employees and are identified in the TARP recipient's
annual report on Form 10-K or annual meeting proxy statement for that
year (reporting the SEOs' compensation for the immediately preceding
year). These employees are considered the SEOs throughout that entire
year. For purposes of the standards in this part applicable to the most
highly compensated employees, the determination of whether an employee
is a most highly compensated employee in a current fiscal year looks
back to the annual compensation for the last completed fiscal year
without regard to whether the compensation is includible in the
employee's gross income for Federal income tax purposes.
(b) Compliance. Regardless of when during the current fiscal year
the TARP recipient determines the SEOs or the most highly compensated
employees, the TARP recipient must ensure that any of the SEOs or
employees potentially subject to the requirements in this part for the
current fiscal year complies with the requirements in this part as
applicable.
Sec. 30.4 Q-4: What actions are necessary for a TARP recipient to
comply with the standards established under sections 111(b)(3)(A),
111(b)(3)(E), 111(b)(3)(F) and 111(c) of EESA (evaluation of employee
plans and potential to encourage excessive risk or manipulation of
earnings)?
(a) General rule. To comply with the standards established under
sections 111(b)(3)(A), 111(b)(3)(E), 111(b)(3)(F) and 111(c) of EESA, a
TARP recipient must establish a compensation committee by the later of
ninety days after the closing date of the agreement between the TARP
recipient and Treasury or September 14, 2009, and maintain a
compensation committee during the remainder of the TARP period. If a
compensation committee is already established before the later of the
closing date or September 14, 2009, the TARP recipient must maintain
its compensation committee. During the remainder of the TARP period
after the later of ninety days after the closing date of the agreement
between the TARP recipient and Treasury or September 14, 2009, the
compensation committee must:
(1) Discuss, evaluate, and review at least every six months with
the TARP recipient's senior risk officers the SEO compensation plans to
ensure that the SEO compensation plans do not encourage SEOs to take
unnecessary and excessive risks that threaten the value of the TARP
recipient;
(2) Discuss, evaluate, and review with senior risk officers at
least every six months employee compensation plans in light of the
risks posed to the TARP recipient by such plans and how to limit such
risks;
(3) Discuss, evaluate, and review at least every six months the
employee compensation plans of the TARP recipient to ensure that these
plans do not encourage the manipulation of
[[Page 28413]]
reported earnings of the TARP recipient to enhance the compensation of
any of the TARP recipient's employees;
(4) At least once per TARP recipient fiscal year, provide a
narrative description of how the SEO compensation plans do not
encourage the SEOs to take unnecessary and excessive risks that
threaten the value of the TARP recipient, including how these SEO
compensation plans do not encourage behavior focused on short-term
results rather than long-term value creation, the risks posed by
employee compensation plans and how these risks were limited, including
how these employee compensation plans do not encourage behavior focused
on short-term results rather than long-term value creation, and how the
TARP recipient has ensured that the employee compensation plans do not
encourage the manipulation of reported earnings of the TARP recipient
to enhance the compensation of any of the TARP recipient's employees;
and
(5) Certify the completion of the reviews of the SEO compensation
plans and employee compensation plans required under paragraphs (a)(1),
(2), and (3) of this section.
(b) Exclusion of TARP recipients with no employees or no affected
employees. For any period during which a TARP recipient has no
employees, or has no SEO or compensation plan subject to the review
process, the TARP recipient is not subject to the requirements of
paragraph (a) of this section.
(c) Application to private TARP recipients. The rules provided in
paragraph (a) of this section are also applicable to TARP recipients
that do not have securities registered with the SEC pursuant to the
Federal securities laws. A TARP recipient that does not have securities
registered with the SEC pursuant to the Federal securities laws and has
received $25,000,000 or less in financial assistance is subject to
paragraph (a) of this section, except that, in lieu of establishing and
maintaining a compensation committee, such a TARP recipient is
permitted to ensure that all the members of the board of directors
carry out the duties of the compensation committee as described in
paragraph (a) of this section. However, such a TARP recipient will be
required to establish and maintain a compensation committee satisfying
the requirements of paragraph (a) of this section for the first fiscal
year following a fiscal year during which the TARP recipient either
registers securities with the SEC pursuant to the Federal securities
laws or has received more than $25,000,000 in financial assistance, and
during subsequent years of the TARP period.
(d) Application to TARP recipients that have never had an
outstanding obligation. For TARP recipients that have never had an
outstanding obligation, only paragraphs (a)(2), (a)(4), (a)(5) (but for
the narrative and certification requirements of (a)(4) and (a)(5),
applied only to the requirements of paragraph (a)(2)), (b) and (c) of
this Sec. 30.4 (Q-4) shall apply.
Sec. 30.5 Q-5: How does a TARP recipient comply with the requirements
under Sec. 30.4 (Q-4) of this part that the compensation committee
discuss, evaluate, and review the SEO compensation plans and employee
compensation plans to ensure that the SEO compensation plans do not
encourage the SEOs to take unnecessary and excessive risks that
threaten the value of the TARP recipient, or that the employee
compensation plans do not pose unnecessary risks to the TARP recipient?
At least every six months, the compensation committee must discuss,
evaluate, and review with the TARP recipient's senior risk officers any
risks (including long-term as well as short-term risks) that the TARP
recipient faces that could threaten the value of the TARP recipient.
The compensation committee must identify the features in the TARP
recipient's SEO compensation plans that could lead SEOs to take these
risks and the features in the employee compensation plans that pose
risks to the TARP recipient, including any features in the SEO
compensation plans and the employee compensation plans that would
encourage behavior focused on short-term results and not on long-term
value creation. The compensation committed is required to limit these
features to ensure that the SEOs are not encouraged to take risks that
are unnecessary or excessive and that the TARP recipient is not
unnecessarily exposed to risks.
Sec. 30.6 Q-6: How does a TARP recipient comply with the requirement
under Sec. 30.4 (Q-4) of this part that the compensation committee
discuss, evaluate, and review the employee compensation plans to ensure
that these plans do not encourage the manipulation of reported earnings
of the TARP recipient to enhance the compensation of any of the TARP
recipient's employees?
The compensation committee must discuss, evaluate, and review at
least every six months the terms of each employee compensation plan and
identify and eliminate the features in these plans that could encourage
the manipulation of reported earnings of the TARP recipient to enhance
the compensation of any employee.
Sec. 30.7 Q-7: How does a TARP recipient comply with the
certification and disclosure requirements under Sec. 30.4 (Q-4) of
this part?
(a) Certification. The compensation committee must provide the
certifications required by Sec. 30.4 (Q-4) of this part stating that
it has reviewed, with the TARP recipient's senior risk officers, the
SEO compensation plans to ensure that these plans do not encourage SEOs
to take unnecessary and excessive risks, the employee compensation
plans to limit any unnecessary risks these plans pose to the TARP
recipient, and the employee compensation plans to eliminate any
features of these plans that would encourage the manipulation of
reported earnings of the TARP recipient to enhance the compensation of
any employee. For any period during which no obligation arising from
financial assistance provided under the TARP remains outstanding, the
requirements under this paragraph shall be modified to be consistent
with Sec. 30.4(d) (Q-4(d)). Providing a statement similar to the
following and in the manner provided in paragraphs (c) and (d) of this
section, as applicable, would satisfy this standard: ``The compensation
committee certifies that:
(1) It has reviewed with senior risk officers the senior executive
officer (SEO) compensation plans and has made all reasonable efforts to
ensure that these plans do not encourage SEOs to take unnecessary and
excessive risks that threaten the value of [identify TARP recipient];
(2) It has reviewed with senior risk officers the employee
compensation plans and has made all reasonable efforts to limit any
unnecessary risks these plans pose to the [identify TARP recipient];
and
(3) It has reviewed the employee compensation plans to eliminate
any features of these plans that would encourage the manipulation of
reported earnings of [identify TARP recipient] to enhance the
compensation of any employee.''
(b) Disclosure. At least once per TARP recipient fiscal year, the
compensation committee must provide a narrative description identifying
each SEO compensation plan and explaining how the SEO compensation plan
does not encourage the SEOs to take unnecessary and excessive risks
that threaten the value of the TARP recipient. The compensation
committee must also identify each employee compensation plan, explain
how any unnecessary risks posed by the employee compensation plan have
been limited, and further explain how the employee
[[Page 28414]]
compensation plan does not encourage the manipulation of reported
earnings to enhance the compensation of any employee.
(c) Location. For TARP recipients with securities registered with
the SEC pursuant to the Federal securities law, the compensation
committee must provide these certifications and disclosures in the
Compensation Committee Report required pursuant to Item 407(e) of
Regulation S-K under the Federal securities laws (17 CFR 229.407(e))
and to Treasury. These disclosures must be provided in the Compensation
Committee Report for any disclosure pertaining to any fiscal year any
portion of which is a TARP period (for a TARP recipient with an
obligation), or for any disclosure pertaining to any fiscal year
including a date on or before the sunset date (for a TARP recipient
that has never had an obligation). Within 120 days of the completion of
a fiscal year during any part of which is a TARP period (for a TARP
recipient with an obligation), or the completion of a fiscal year
including a date on or before the sunset date (for a TARP recipient
that has never had an obligation), a TARP recipient that is a smaller
reporting company must provide the certifications of the compensation
committee to its primary regulatory agency and to Treasury.
(d) Application to private TARP recipients. The rules provided in
paragraphs (a), (b), and (c) of this section are also applicable to
TARP recipients that do not have securities registered with the SEC
pursuant to the Federal securities laws. Within 120 days of the
completion of the fiscal year during any part of which is a TARP period
(for a TARP recipient with an obligation), or the completion of a
fiscal year including a date on or before the sunset date (for a TARP
recipient that has never had an obligation), a private TARP recipient
must provide the certification of the compensation committee (or board
of directors, as applicable under Sec. 30.4 (Q-4)) to its primary
regulatory agency and to Treasury.
Sec. 30.8 Q-8: What actions are necessary for a TARP recipient to
comply with the standards established under section 111(b)(3)(B) of
EESA (the ``clawback'' provision requirement)?
To comply with the standards established under section 111(b)(3)(B)
of EESA, a TARP recipient must ensure that any bonus payment made to a
SEO or the next twenty most highly compensated employees during the
TARP period is subject to a provision for recovery or ``clawback'' by
the TARP recipient if the bonus payment was based on materially
inaccurate financial statements (which includes, but is not limited to,
statements of earnings, revenues, or gains) or any other materially
inaccurate performance metric criteria. Whether a financial statement
or performance metric criteria is materially inaccurate depends on all
the facts and circumstances. However, for this purpose, a financial
statement or performance metric criteria shall be treated as materially
inaccurate with respect to any employee who knowingly engaged in
providing inaccurate information (including knowingly failing to timely
correct inaccurate information) relating to those financial statements
or performance metrics. Otherwise, with respect to a performance
criteria, whether the inaccurate measurement of the performance or
inaccurate application of the performance to the performance criteria
is material depends on whether the actual performance or accurate
application of the actual performance to the performance criteria is
materially different from the performance required under the
performance criteria or the inaccurate application of the actual
performance to the performance criteria. The TARP recipient must
exercise its clawback rights except to the extent it demonstrates that
it is unreasonable to do so, such as, for example, if the expense of
enforcing the rights would exceed the amount recovered. For the purpose
of this section, a bonus payment is deemed to be made to an individual
when the individual obtains a legally binding right to that payment.
Sec. 30.9 Q-9: What actions are necessary for a TARP recipient to
comply with the standards established under section 111(b)(3)(C) of
EESA (the prohibition on golden parachute payments)?
(a) Prohibition on golden parachute payments. To comply with the
standards established under section 111(b)(3)(C) of EESA, a TARP
recipient must prohibit any golden parachute payment to a SEO and any
of the next five most highly compensated employees during the TARP
period. A golden parachute payment is treated as paid at the time of
departure and is equal to the aggregate present value of all payments
made for a departure. Thus, a golden parachute payment during the TARP
period may include a right to amounts actually payable after the TARP
period.
(b) Examples. The following examples illustrate the provisions of
paragraph (a) of this section:
Example 1. Employee A is a SEO of a TARP recipient. Employee A
is entitled to a payment of three times his annual compensation upon
an involuntary termination of employment or voluntary termination of
employment for good reason, but such amount is not payable unless
and until the TARP period expires with respect to TARP recipient.
Employee A terminates employment during the TARP period. Because,
for purposes of the prohibition on golden parachute payments, the
payment is made at the time of departure, Employee A may not obtain
the right to the payment upon the termination of employment.
Example 2. Employee B involuntarily terminated employment on
July 1, 2008, at which time Employee B was a SEO of a financial
institution. Employee B's employment agreement provided that if
Employee B were involuntarily terminated or voluntarily terminated
employment for good reason, Employee B would be entitled to a series
of five equal annual payments. After the first payment, but before
any subsequent payment, the entity became a TARP recipient. Because,
for purposes of the prohibition on golden parachute payments, all of
the five payments are deemed to have occurred at termination of
employment and because, in this case, termination of employment
occurred before the beginning of the applicable TARP period, the
payment of the four remaining payments due under the agreement will
not violate the requirements of this section.
Sec. 30.10 Q-10: What actions are necessary for a TARP recipient to
comply with section 111(b)(3)(D) of EESA (the limitations on bonus
payments)?
(a) General rule. To comply with section 111(b)(3)(D) of EESA,
pursuant to the schedule under paragraph (b) of this section and
subject to the exclusions under paragraph (e) of this section, a TARP
recipient must prohibit the payment or accrual of any bonus payment
during the TARP period to or by the employees identified pursuant to
paragraph (b) of this section.
(b)(1) Schedule. The prohibition required under paragraph (a) of
this section applies as follows to:
(i) The most highly compensated employee of any TARP recipient
receiving less than $25,000,000 in financial assistance;
(ii) At least the five most highly compensated employees of any
TARP recipient receiving $25,000,000 but less than $250,000,000 in
financial assistance;
(iii) The SEOs and at least the ten next most highly compensated
employees of any TARP recipient receiving $250,000,000 but less than
$500,000,000 in financial assistance; and
(iv) The SEOs and at least the twenty next most highly compensated
employees of any TARP recipient receiving $500,000,000 or more in
financial assistance.
(2) Changes in level of financial assistance. The determination of
which
[[Page 28415]]
schedule in paragraph (b) of this section is applicable to a TARP
recipient during the TARP period is determined by the gross amount of
all financial assistance provided to the TARP recipient, valued at the
time the financial assistance was received. Whether a TARP recipient's
financial assistance has increased during a fiscal year to the point in
the schedule under paragraph (b) of this section that the SEOs or a
greater number of the most highly compensated employees will be subject
to the requirements under paragraph (a) of this section is determined
as of the last day of the TARP recipient's fiscal year, and the
increase in coverage is effective for the subsequent fiscal year.
(3) Application to first year of financial assistance. For
employers who become TARP recipients after June 15, 2009, the bonus
payment limitation provision under this paragraph (b) does not apply to
bonus payments paid or accrued by TARP recipients or their employees
before the first date of the TARP period. Certain bonus payments may
relate to a service period beginning before and ending after the first
date of the TARP period. In these circumstances, the employee will not
be treated as having accrued the bonus payment on or after the first
date of the TARP period if the bonus payment is reduced to reflect at
least the portion of the service period that occurs on or after the
first date of the TARP period. However, if the employee is a SEO or
most highly compensated employee at the time the amount would otherwise
be paid, the bonus payment amount as reduced in accordance with the
previous sentence still may not be paid until such time as bonus
payments to that employee are permitted.
(c) Accrual. (1) General rule. Whether an employee has accrued a
bonus payment is determined based on the facts and circumstances. An
accrual may include the granting of service credit (whether toward the
calculation of the benefit or any vesting requirement) or credit for
the compensation received (or that otherwise would have been received)
during the period the employee was subject to the restriction under
paragraph (a) of this section. For application of this rule to the
fiscal year including June 15, 2009, see Sec. 30.17 (Q-17).
(2) Payments or accruals after the employee is no longer a SEO or
most highly compensated employee. If after the employee is no longer a
SEO or most highly compensated employee, the employee is paid a bonus
payment or provided a legally binding right to a bonus payment that is
based upon services performed or compensation received during the
period the employee was a SEO or most highly compensated employee, the
employee will be treated as having accrued such bonus payment during
the period the employee was a SEO or most highly compensated employee.
For example, if the employee is retroactively granted service credit
under an incentive plan (whether for vesting or benefit calculation
purposes) for the period in which the employee was a SEO or most highly
compensated employee, the employee will be treated as having accrued
that benefit during the period the employee was a SEO or most highly
compensated employee.
(3) Multi-year service periods. Certain bonus payments may relate
to a multi-year service period, during some portion of which the
employee is a SEO or most highly compensated employee subject to
paragraph (a) of this section, and during some portion of which the
employee is not. In these circumstances, the employee will not be
treated as having accrued the bonus payment during the period the
employee was a SEO or most highly compensated employee if the bonus
payment is at least reduced to reflect the portion of the service
period that the employee was a SEO or most highly compensated employee.
If the employee is a SEO or most highly compensated employee at the
time the net bonus payment amount after such reduction would otherwise
be paid, the amount still may not be paid until such time as bonus
payments to that employee are permitted.
(d) Examples. The following examples illustrate the rules of
paragraphs (a) through (c) of this section:
Example 1. Employee A is a SEO of a TARP recipient in 2010, but
not in 2011. The TARP recipient maintains an annual bonus program,
generally paying bonus payments in March of the following year.
Employee A may not be paid a bonus payment in 2010 (for services
performed in 2009 or any other year). In addition, Employee A may
not be paid a bonus payment in 2011 to the extent such bonus payment
is based on services performed in 2010.
Example 2. Same facts as in Example 1, provided further that
Employee A receives a salary increase for 2011. The salary increase
equals the same percentage as similarly situated executive officers,
with an additional percentage increase which, over the course of
twelve months, equals the bonus that would have been payable to
Employee A in 2011 (for services performed in 2010), except for
application of paragraph (a) of this section. Under these facts and
circumstances, the additional percentage increase will be treated as
a bonus payment accrued in 2010 and Employee A may not be paid this
bonus payment.
Example 3. Same facts as in Example 1, provided further that on
March 1, 2011, Employee A is granted a stock option under the TARP
recipient stock incentive plan with a value approximately equal to
the bonus that would have been payable to Employee A in 2011 (for
services performed in 2010), except for application of paragraph (a)
of this section. Other similarly situated employee not covered by
the bonus limitation for 2010 do not receive such a grant. Under
these facts and circumstances, the stock option grant will be
treated as a bonus payment accrued in 2010 and will not be permitted
to be paid to Employee A.
Example 4. Employee B is not a SEO or a most highly compensated
employee of a TARP recipient during 2009. On July 1, 2009, Employee
B is granted the right to a bonus payment of $50,000 if Employee B
is employed by the TARP recipient through July 1, 2011 (two years).
Employee B is a SEO of a TARP recipient during 2010, but is not a
SEO or a most highly compensated employee of the TARP recipient
during 2011. Employee B is employed by the TARP recipient on July 1,
2011. Thus, Employee B was a SEO or most highly compensated employee
during one-half of the two-year required service period. Provided
that Employee B is paid not more than half of the otherwise payable
bonus payment, or $25,000, Employee B will not be treated as having
accrued a bonus payment while Employee B was a SEO or a most highly
compensated employee.
(e) Exclusions--(1) Long-term restricted stock--(i) General rule.
The TARP recipient is permitted to award long-term restricted stock to
the employees whose compensation is limited according to the schedule
under paragraph (b) of this section, provided that the value of this
grant may not exceed one third of the employee's annual compensation as
determined for that fiscal year (that is, not using the look-back
method for the prior year). For purposes of this paragraph, in
determining an employee's annual compensation, all equity-based
compensation granted in fiscal years ending after June 15, 2009 will
only be included in the calculation in the year in which it is granted
at its total fair market value on the grant date, and all equity-based
compensation granted in fiscal years ending prior to June 15, 2009 will
not be included in the calculation of annual compensation for any
subsequent fiscal year. For purposes of this paragraph, in determining
the value of the long-term restricted stock grant, the long-term
restricted stock granted in accordance with this paragraph will only be
included in the calculation in the year in which the restricted stock
is granted at its total fair market value on the grant date.
(ii) Example. During 2008, Employee A receives compensation of
$1 million salary and a $1,200,000 long-term restricted stock grant
subject to a three-year vesting period. During 2009, Employee A
received
[[Page 28416]]
compensation of $1 million salary and no grant of long-term
restricted stock. During 2010, Employee A receives compensation of
$600,000 salary and a $300,000 long-term restricted stock grant
subject to a three-year vesting period. Under the general SEC
compensation disclosure rules used to define annual compensation in
Sec. 30.1 (Q-1) of this part, the compensation related to the long-
term restricted stock grants would be allocated over the vesting
period. Assume for this purpose, that for 2010, $400,000 of the 2008
long-term restricted stock grant is allocated as compensation, and
$100,000 of the 2010 long-term restricted stock grant is allocated
as compensation, so that the total annual compensation is $1,100,000
($600,000 salary + $400,000 + $100,000). However, for purposes of
determining Employee A's annual compensation to apply the limit on
the value of the long-term restricted stock that may be granted to
Employee A in 2010, the entire $300,000 value of the 2010 grant is
included but the $400,000 value attributed to the 2008 grant is
excluded. Accordingly, Employee A's adjusted annual compensation is
$900,000 ($1,100,000 - $100,000 + $300,000 - $400,000). In addition,
the entire fair market value of the 2010 long-term restricted stock
grant is included for purposes of determining whether the limit has
been exceeded. Because the $300,000 adjusted value of the long-term
restricted stock grant does not exceed one-third of the $900,000
adjusted annual compensation, the grant complies with paragraph
(e)(1)(i).
(2) Legally binding right under valid employment contracts--(i)
General rule. The prohibition under paragraph (a) of this section does
not apply to bonus payments required to be paid under a valid
employment contract if the employee had a legally binding right under
the contract to a bonus payment as of February 11, 2009. For purposes
of determining whether an employee had a legally binding right to a
bonus payment, see 26 CFR 1.409A-1(b)(i). In addition, the bonus
payment must be made in accordance with the terms of the contract as of
February 11, 2009 (which may include application of an elective
deferral election under a qualified retirement plan or a nonqualified
deferred compensation plan), such that any subsequent amendment to the
contract to increase the amount payable, accelerate any vesting
conditions, or otherwise materially enhance the benefit available to
the employee under the contract will result in the bonus payment being
treated as not made under the employment contract executed on or before
February 11, 2009. However, amendment of a valid employment contract
executed on or before February 11, 2009 under which an employee has a
legally binding right to a bonus payment to reduce the amount of the
bonus payment or to enhance or include service-based or performance-
based vesting requirements or holding period requirements will not
result in this treatment. The amended employment contract would still
be deemed a valid employment contract and the employee would still be
treated as having a legally binding right to the bonus payment under
the original employment contract. The TARP recipient and the employees
of the TARP recipient should be cognizant of the restrictions under
section 409A of the Internal Revenue Code (26 U.S.C. 409A) in the case
of an amendment described in the preceding sentence.
(ii) Examples. The following examples illustrate the provisions of
this paragraph (2).
Example 1. TARP recipient sponsors a written restricted stock
unit plan. Under the plan, restricted stock units are traditionally
granted each July 1, and are subject to a three-year vesting
requirement. Employee A, a SEO of TARP recipient, received grants on
July 1, 2007, July 1, 2008, and July 1, 2009. The July 1, 2007 and
July 1, 2008 grants are excluded from the limitation on payments,
because although the awards were subject to a continuing service
vesting requirement, Employee A retained a legally binding right to
the restricted stock units as of February 11, 2009. However,
regardless of the fact that the restricted stock unit program was in
existence on February 11, 2009, Employee A did not retain a legally
binding right to a restricted stock unit for 2009 as of February 11,
2009, but rather obtained the legally binding right only when the
restricted stock unit was granted on July 1, 2009. Accordingly, the
July 1, 2009 grant is subject to the limitation and is not permitted
to be accrued or paid (unless such grant complies with the exception
for certain grants of long-term restricted stock).
Example 2. TARP recipient sponsors an annual bonus program
documented in a written plan. Under the bonus program, the board of
directors retains the discretion to eliminate or reduce the bonus of
any employee in the bonus pool. Employees B and C, both SEOs, are in
the bonus pool for 2008. On January 15, 2009, the compensation
committee determines the bonuses to which the employees of the
division in which Employee B works are entitled, and awards Employee
B a $10,000 bonus payable on June 1. Employee B has a legally
binding right to the bonus as of February 11, 2009 and payment of
the bonus is not subject to the limitation. However, as of February
11, 2009, the board of directors has not met to determine which
employees of the division in which Employee C works will be entitled
to a bonus or the amount of such bonus. Accordingly, Employee C did
not have a legally binding right to a bonus as of February 11, 2009
and may be subject to the bonus payment limitation.
Example 3. TARP recipient sponsors a written stock option plan
under which stock options may be granted to SEOs designated by the
compensation committee. Designations and grants typically occur at a
meeting in August of every year, and no meeting occurred in 2009
before August. Regardless of the existence of the general plan, no
SEO had a legally binding right to a stock option grant for 2009 as
of February 11, 2009 because no grants had been made under the plan.
Accordingly, any 2009 grant will be subject to the limitation and is
not permitted to be made.
Example 4. Employee D is an SEO of a TARP recipient. Under
Employee D's written employment agreement executed before February
11, 2009, Employee D is entitled to the total of whatever bonuses
are made available to Employee E and Employee F. As of February 11,
2009, Employee E had a legally binding right to a $100,000 bonus.
Employees E and F are never at any time SEOs or highly compensated
employees subject to the limitation. As of February 11, 2009,
Employee F had no legally binding right to a bonus, but was eligible
to participate in a bonus pool and was ultimately awarded a bonus of
$50,000. As of February 11, 2009, Employee D had a legally binding
right to a $100,000 bonus, so that bonus is not subject to the
limitation. However, as of February 11, 2009, Employee D did not
have a legally binding right to the additional $50,000 bonus, so
that bonus is subject to the bonus payment limitation and, if not
paid before June 15, 2009 is not permitted to be paid.
(f) Application to private TARP recipients. The rules set forth in
this section are also applicable to TARP recipients that do not have
securities registered with the SEC pursuant to the Federal securities
laws.
Sec. 30.11 Q-11: Are TARP recipients required to meet any other
standards under the executive compensation and corporate governance
standards in section 111 of EESA?
(a) Approval of compensation payments to, and compensation
structures for, certain employees of TARP recipients receiving
exceptional financial assistance. For any period during which a TARP
recipient is designated as a TARP recipient that has received
exceptional financial assistance, the TARP recipient must obtain the
approval by the Special Master of all compensation payments to, and
compensation structures for, SEOs and most highly compensated employees
subject to paragraph (b) of Sec. 30.10 (Q-10). TARP recipients that
receive exceptional financial assistance must also receive approval by
the Special Master for all compensation structures for other employees
who are executive officers (as defined under the Securities and
Exchange Act, Rule 3b-7) or one of the 100 most highly compensated
employees of a TARP recipient receiving exceptional assistance (or
both), who are not subject to the bonus limitations under Sec. 30.10
(Q-10). For this purpose, compensation payments and compensation
structures
[[Page 28417]]
may include awards or other rights to compensation which an employee
has already received but not yet been paid or, in some instances, fully
accrued. Accordingly, the Special Master has the authority to require
that such compensation payments or compensation structures be altered
to meet the standards set forth in Sec. 30.16 (Q-16). However, this
approval requirement is not applicable to payments that are not subject
to paragraph (a) of Sec. 30.10 (Q-10) due to the application of
paragraph (e)(2) of Sec. 30.10 (Q-10) or the effective date provisions
of Sec. 30.17 (Q-17), though the Special Master will take such
payments into account in reviewing the compensation structure and
amounts payable, as applicable, that are subject to review.
Notwithstanding any of the foregoing, approval is not required with
respect to an employee not subject to the bonus payment limitations to
the extent that the employee's annual compensation, as modified in
Sec. 30.16 (Q-16) to include certain deferred compensation and pension
accruals but to disregard any grant of long-term restricted stock, is
limited to $500,000 or less, and any further compensation is provided
in the form of long-term restricted stock. For details, see Sec. 30.16
(Q-16).
(b) Perquisite disclosure--(1) General rule. TARP recipients must
annually disclose during the TARP period any perquisite whose total
value for the TARP recipient's fiscal year exceeds $25,000 for each of
the SEOs and most highly compensated employees that are subject to
paragraph (a) of Sec. 30.10 (Q-10). TARP recipients must provide a
narrative description of the amount and nature of these perquisites,
the recipient of these perquisites, and a justification for offering
these perquisites (including a justification for offering the
perquisite, and not only for offering the perquisite with a value that
exceeds $25,000). Such disclosure must be provided within 120 days of
the completion of a fiscal year any part of which is a TARP period.
(2) Location. A TARP recipient must provide this disclosure to
Treasury and to its primary regulatory agency.
(c) Compensation consultant disclosure--(1) General rule. The
compensation committee of the TARP recipient must provide annually a
narrative description of whether the TARP recipient, the board of
directors of the TARP recipient, or the compensation committee has
engaged a compensation consultant; and all types of services, including
non-compensation related services, the compensation consultant or any
of its affiliates has provided to the TARP recipient, the board, or the
compensation committee during the past three years, including any
``benchmarking'' or comparisons employed to identify certain percentile
levels of compensation (for example, entities used for benchmarking and
a justification for using these entities and the lowest percentile
level proposed for compensation). Such disclosure must be provided
within 120 days of the completion of a fiscal year any part of which is
a TARP period.
(2) Application to TARP recipients not required to maintain
compensation committees. For those TARP recipients not required to
establish and maintain compensation committees under Sec. 30.4(c) (Q-
4), the board of directors must provide the disclosure under Sec.
30.4(c)(1).
(3) Location. A TARP recipient must provide this disclosure to
Treasury and to its primary regulatory agency.
(d) Prohibition on gross-ups. Except as explicitly permitted under
this part, TARP recipients are prohibited from providing (formally or
informally) gross-ups to any of the SEOs and next twenty most highly
compensated employees during the TARP period. For this purpose,
providing a gross-up includes providing a right to a payment of such a
gross-up at a future date, for example a date after the TARP period.
Sec. 30.12 Q-12: What actions are necessary for a TARP recipient to
comply with section 111(d) of EESA (the excessive or luxury
expenditures policy requirement)?
To comply with section 111(d) of EESA, by the later of ninety days
after the closing date of the agreement between the TARP recipient and
Treasury or September 14, 2009, the board of directors of the TARP
recipient must adopt an excessive or luxury expenditures policy,
provide this policy to Treasury and its primary regulatory agency, and
post the text of this policy on its Internet Web site, if the TARP
recipient maintains a company Web site. After adoption of the policy,
the TARP recipient must maintain the policy during the remaining TARP
period (if the TARP recipient has an obligation), or through the last
day of the TARP recipient's fiscal year including the sunset date (if
the TARP recipient has never had an obligation). If, after adopting an
excessive or luxury expenditures policy, the board of directors of the
TARP recipient makes any material amendments to this policy, within
ninety days of the adoption of the amended policy, the board of
directors must provide the amended policy to Treasury and its primary
regulatory agency and post the amended policy on its Internet Web site,
if the TARP recipient maintains a company Web site. This disclosure
must continue through the TARP period (if the TARP recipient has an
obligation), or through the last day of the TARP recipient's fiscal
year that includes the sunset date (if the TARP recipient has never had
an obligation).
Sec. 30.13 Q-13: What actions are necessary for a TARP recipient to
comply with section 111(e) of EESA (the shareholder resolution on
executive compensation requirement)?
(a) General rule. As provided in section 111(e) of EESA, any proxy
or consent or authorization for an annual or other meeting of the
shareholders of any TARP recipient that occurs during the TARP period
must permit a separate shareholder vote to approve the compensation of
executives, as required to be disclosed pursuant to the Federal
securities laws (including the compensation discussion and analysis,
the compensation tables, and any related material). To meet this
standard, a TARP recipient must comply with any rules, regulations, or
guidance promulgated by the SEC.
Sec. 30.14 Q-14: How does section 111 of EESA operate in connection
with an acquisition, merger, or reorganization?
(a) Special rules for acquisitions, mergers, or reorganizations. In
the event that a TARP recipient (target) is acquired by an entity that
is not an affiliate of the target (acquirer) in an acquisition of any
form, including a purchase of substantially all of the assets of the
target, such that the acquirer after the transaction would have been
treated as a TARP recipient if the target had received the TARP funds
immediately after the transaction, acquirer will not become subject to
section 111 of EESA merely as a result of the acquisition. If the
acquirer is not subject to section 111 of EESA immediately after the
transaction, then any employees of the acquirer immediately after the
transaction (including target employees who were SEOs or most highly
compensated employees immediately prior to the transaction and became
acquirer employees as a result of the transaction) will not be subject
to section 111 of EESA.
(b) Anti-abuse rule. Notwithstanding the provisions of paragraph
(a) of this section, if the primary purpose of a transaction involving
the acquisition, in any form, of a TARP recipient is to avoid or evade
the application of any of the requirements of section 111 of EESA, the
acquirer will be treated as a TARP recipient immediately upon such
acquisition. In such a case, the SEOs
[[Page 28418]]
and the most highly compensated employees to whom any of the
requirements of section 111 of EESA and this Interim Final Rule apply
shall be redetermined as of the date of the acquisition. The
redetermined SEOs and most highly compensated employees of the post-
acquisition acquirer shall consist of the PEO and PFO of the post-
acquisition acquirer, plus the applicable number of next most highly
compensated employees determined by aggregating the post-acquisition
employees of the acquirer (to include the pre-acquisition employees of
the target employed by the acquirer, or anticipated to be employed by
the acquirer), and ranking such employees in order of compensation for
the immediately preceding fiscal year of the pre-acquisition target or
pre-acquisition acquirer, as appropriate. In the case of an asset
acquisition, the entity or entities to whom the target's assets are
transferred shall be treated as the direct recipient of the financial
assistance for purposes of determining which other related entities are
treated, in the aggregate, as the TARP recipient under the definition
of ``TARP recipient'' in Sec. 30.1 (Q-1).
Sec. 30.15 Q-15: What actions are necessary for a TARP recipient to
comply with certification requirements of section 111(b)(4) of EESA?
(a) Certification Requirements--(1) General. To comply with section
111(b)(4) of EESA, the PEO and the PFO of the TARP recipient must
provide the following certifications with respect to the compliance of
the TARP recipient with section 111 of EESA as implemented under this
part:
(2) First Fiscal Year Certification. (i) Within ninety days of the
completion of the first annual fiscal year of the TARP recipient any
portion of which is a TARP period, the PEO and the PFO of the TARP
recipient must provide certifications similar to the model provided in
appendix A to this section.
(ii) If the first annual fiscal year of a TARP recipient any
portion of which is a TARP period ends within thirty days after the
closing date of the applicable agreement between the TARP recipient and
Treasury, the TARP recipient shall have an additional sixty days
beginning on the day after the end of the fiscal year during which it
can establish the compensation committee, if not already established,
and during which the compensation committee shall meet with senior risk
officers to discuss, review, and evaluate the SEO compensation plans
and employee compensation plans in accordance with Sec. 30.4 (Q-4) of
this part. The certifications of the PEO and the PFO of the TARP
recipient must be amended to reflect the timing of the establishment
and reviews of the compensation committee.
(3) Years Following First Fiscal Year Certification. Within ninety
days of the completion of each TARP fiscal year of the TARP recipient
after the first TARP fiscal year, the PEO and the PFO of the TARP
recipient must provide a certification similar to the model provided in
Appendix B to this section.
(4) Location. A TARP recipient with securities registered with the
SEC pursuant to the Federal securities law must provide these
certifications as an exhibit (pursuant to Item 601(b)(99)(i) of
Regulation S-K under the Federal securities laws (17 CFR
229.601(b)(99)(i)) to the TARP recipient's annual report on Form 10-K
and to Treasury. To the extent that the PEO or the PFO of the TARP
recipient is unable to provide any of these certifications in a timely
manner, the PEO or the PFO must provide Treasury an explanation of the
reason such certification has not been provided. These certifications
are in addition to the compensation committee certifications required
by Sec. 30.5 (Q-5) of this part.
(5) Application to private TARP recipients. The rules provided in
this section are also applicable to TARP recipients that do not have
securities registered with the SEC pursuant to the Federal securities
laws, except the certifications under paragraphs (a)(2)(x) and
(a)(3)(x) of this section are not required. A private TARP recipient
must provide these certifications to its primary regulatory agency and
to Treasury.
(6) Application to TARP recipients that have never had an
obligation. For those TARP recipients that have never had an
obligation, the PEO and PFO must provide the certifications pursuant to
this paragraph (a) only with respect to the requirements applicable to
a TARP recipient that has never had an obligation (generally certain
compensation committee reviews of employee compensation plans and the
issuance of, and compliance with, an excessive or luxury expenses
policy).
(b) Recordkeeping requirements. The TARP recipient must preserve
appropriate documentation and records to substantiate each
certification required under paragraph (a) of this section for a period
of not less than six years after the date of the certification, the
first two years in an easily accessible place. The TARP recipient must
furnish promptly to Treasury legible, true, complete, and current
copies of the documentation and records that are required to be
preserved under paragraph (b) of this section that are requested by any
representative of Treasury.
(c) Penalties for making or providing false or fraudulent
Statements. Any individual or entity that provides information or makes
a certification to Treasury pursuant to the Interim Final Rule or as
required pursuant to 31 CFR Part 30 may be subject to 18 U.S.C. 1001,
which generally prohibits the making of any false or fraudulent
statement in a matter within the jurisdiction of the Federal
government. Upon receipt of information indicating that any individual
or entity has violated any provision of title 18 of the U.S. Code or
other provision of Federal law, Treasury shall refer such information
to the Department of Justice and the Special Inspector General for the
Troubled Asset Relief Program.
Appendix A to Sec. 30.15--Model Certification for First Fiscal Year
Certification
``I, [identify certifying individual], certify, based on my
knowledge, that:
(i) The compensation committee of [identify TARP recipient] has
discussed, reviewed, and evaluated with senior risk officers at
least every six months during the period beginning on the later of
the closing date of the agreement between the TARP recipient and
Treasury or June 15, 2009 and ending with the last day of the TARP
recipient's fiscal year containing that date, senior executive
officer (SEO) compensation plans and employee compensation plans and
the risks these plans pose to [identify TARP recipient];
(ii) The compensation committee of [identify TARP recipient] has
identified and limited during the period beginning on the later of
the closing date of the agreement between the TARP recipient and
Treasury or June 15, 2009 and ending with the last day of the TARP
recipient's fiscal year containing that date, the features in the
SEO compensation plans that could lead SEOs to take unnecessary and
excessive risks that could threaten the value of [identify TARP
recipient] and identified any features in the employee compensation
plans that pose risks to [identify TARP recipient] and limited those
features to ensure that [identify TARP recipient] is not
unnecessarily exposed to risks;
(iii) The compensation committee has reviewed at least every six
months during the period beginning on the later of the closing date
of the agreement between the TARP recipient and Treasury or June 15,
2009 and ending with the last day of the TARP recipient's fiscal
year containing that date, the terms of each employee compensation
plan and identified the features in the plan that could encourage
the manipulation of reported earnings of [identify TARP recipient]
to enhance the compensation of an employee and has limited those
features;
[[Page 28419]]
(iv) The compensation committee of [identify TARP recipient]
will certify to the reviews of the SEO compensation plans and
employee compensation plans required under (i) and (iii) above;
(v) The compensation committee of [identify TARP recipient] will
provide a narrative description of how it limited during any part of
the most recently completed fiscal year that included a TARP period
the features in
(A) SEO compensation plans that could lead SEOs to take
unnecessary and excessive risks that could threaten the value of
[identify TARP recipient];
(B) Employee compensation plans that unnecessarily expose
[identify TARP recipient] to risks; and
(C) Employee compensation plans that could encourage the
manipulation of reported earnings of [identify TARP recipient] to
enhance the compensation of an employee;
(vi) [Identify TARP recipient] has required that bonus payments,
as defined in the regulations and guidance established under section
111 of EESA (bonus payments), of the SEOs and twenty next most
highly compensated employees be subject to a recovery or
``clawback'' provision during any part of the most recently
completed fiscal year that was a TARP period if the bonus payments
were based on materially inaccurate financial statements or any
other materially inaccurate performance metric criteria;
(vii) [Identify TARP recipient] has prohibited any golden
parachute payment, as defined in the regulations and guidance
established under section 111 of EESA, to an SEO or any of the next
five most highly compensated employees during the period beginning
on the later of the closing date of the agreement between the TARP
recipient and Treasury or June 15, 2009 and ending with the last day
of the TARP recipient's fiscal year containing that date;
(viii) [Identify TARP recipient] has limited bonus payments to
its applicable employees in accordance with section 111 of EESA and
the regulations and guidance established thereunder during the
period beginning on the later of the closing date of the agreement
between the TARP recipient and Treasury or June 15, 2009 and ending
with the last day of the TARP recipient's fiscal year containing
that date, [for recipients of exceptional assistance: and has
received or is in the process of receiving approvals from the Office
of the Special Master for TARP Executive Compensation for
compensation payments and structures as required under the
regulations and guidance established under section 111 of EESA, and
has not made any payments inconsistent with those approved payments
and structures];
(ix) The board of directors of [identify TARP recipient] has
established an excessive or luxury expenditures policy, as defined
in the regulations and guidance established under section 111 of
EESA, has provided this policy to Treasury and its primary
regulatory agency, and [identify TARP recipient] and its employees
have complied with this policy during the period beginning on the
later of the closing date of the agreement between the TARP
recipient and Treasury or June 15, 2009 and ending with the last day
of the TARP recipient's fiscal year containing that date, and that
any expenses requiring approval of the board of directors, a
committee of the board of directors, an SEO, or an executive officer
with a similar level of responsibility, were properly approved;
(x) [Identify TARP recipient] will permit a non-binding
shareholder resolution in compliance with any applicable Federal
securities rules and regulations on the disclosures provided under
the Federal securities laws related to SEO compensation paid or
accrued during the period beginning on the later of the closing date
of the agreement between the TARP recipient and Treasury or June 15,
2009 and ending with the last day of the TARP recipient's fiscal
year containing that date;
(xi) [Identify TARP recipient] will disclose the amount, nature,
and justification for the offering during the period beginning on
the later of the closing date of the agreement between the TARP
recipient and Treasury or June 15, 2009 and ending with the last day
of the TARP recipient's fiscal year containing that date of any
perquisites, as defined in the regulations and guidance established
under section 111 of EESA, whose total value exceeds $25,000 for
each employee subject to the bonus payment limitations identified in
paragraph (vii);
(xii) [Identify TARP recipient] will disclose whether [identify
TARP recipient], the board of directors of [identify TARP
recipient], or the compensation committee of [TARP recipient] has
engaged during the period beginning on the later of the closing date
of the agreement between the TARP recipient and Treasury or June 15,
2009 and ending with the last day of the TARP recipient's fiscal
year containing that date, a compensation consultant; and the
services the compensation consultant or any affiliate of the
compensation consultant provided during this period;
(xiii) [Identify TARP recipient] has prohibited the payment of
any gross-ups, as defined in the regulations and guidance
established under section 111 of EESA, to the SEOs and the next
twenty most highly compensated employees during the period beginning
on the later of the closing date of the agreement between the TARP
recipient and Treasury or June 15, 2009 and ending with the last day
of the TARP recipient's fiscal year containing that date;
(xiv) [Identify TARP recipient] has substantially complied with
all other requirements related to employee compensation that are
provided in the agreement between [identify TARP recipient] and
Treasury, including any amendments;
(xv) The following employees are the SEOs and the twenty next
most highly compensated employees for the current fiscal year and
the most recently completed fiscal year, with the non-SEOs ranked in
order of level of annual compensation starting with the greatest
amount: [identify name, title, and employer of each SEO and most
highly compensated employee]; and
(xvi) I understand that a knowing and willful false or
fraudulent statement made in connection with this certification may
be punished by fine, imprisonment, or both. (See, for example, 18
U.S.C. 1001.)''
Appendix B to Sec. 30.15--Model Certification for Years Following
First Fiscal Year Certification
``I, [identify certifying individual], certify, based on my
knowledge, that:
(i) The compensation committee of [identify TARP recipient] has
discussed, reviewed, and evaluated with senior risk officers at
least every six months during any part of the most recently
completed fiscal year that was a TARP period, senior executive
officer (SEO) compensation plans and employee compensation plans and
the risks these plans pose to [identify TARP recipient];
(ii) The compensation committee of [identify TARP recipient] has
identified and limited during any part of the most recently
completed fiscal year that was a TARP period the features in the SEO
compensation plans that could lead SEOs to take unnecessary and
excessive risks that could threaten the value of [identify TARP
recipient] and identified any features in the employee compensation
plans that pose risks to [identify TARP recipient] and limited those
features to ensure that [identify TARP recipient] is not
unnecessarily exposed to risks;
(iii) The compensation committee has reviewed at least every six
months during any part of the most recently completed fiscal year
that was a TARP period the terms of each employee compensation plan
and identified the features in the plan that could encourage the
manipulation of reported earnings of [identify TARP recipient] to
enhance the compensation of an employee and has limited these
features that would encourage the manipulation of reported earnings
of [identify TARP recipient];
(iv) The compensation committee of [identify TARP recipient]
will certify to the reviews of the SEO compensation plans and
employee compensation plans required under (i) and (iii) above;
(v) The compensation committee of [identify TARP recipient] will
provide a narrative description of how it limited during any part of
the most recently completed fiscal year that was a TARP period the
features in
(A) SEO compensation plans that could lead SEOs to take
unnecessary and excessive risks that could threaten the value of
[identify TARP recipient];
(B) Employee compensation plans that unnecessarily expose
[identify TARP recipient] to risks; and
(C) Employee compensation plans that could encourage the
manipulation of reported earnings of [identify TARP recipient] to
enhance the compensation of an employee;
(vi) [Identify TARP recipient] has required that bonus payments
to SEOs or any of the next twenty most highly compensated employees,
as defined in the regulations and guidance established under section
111 of EESA (bonus payments), be subject to a recovery or
``clawback'' provision during any part of the most recently
completed fiscal year that was a TARP period if the bonus payments
were based on materially inaccurate financial statements or any
other
[[Page 28420]]
materially inaccurate performance metric criteria;
(vii) [Identify TARP recipient] has prohibited any golden
parachute payment, as defined in the regulations and guidance
established under section 111 of EESA, to a SEO or any of the next
five most highly compensated employees during any part of the most
recently completed fiscal year that was a TARP period;
(viii) [Identify TARP recipient] has limited bonus payments to
its applicable employees in accordance with section 111 of EESA and
the regulations and guidance established thereunder during any part
of the most recently completed fiscal year that was a TARP period
[for recipients of exceptional assistance] and has received or is in
the process of receiving approvals from the Office of the Special
Master for TARP Executive Compensation for compensation payments and
structures as required under the regulations and guidance
established under section 111 of EESA, and has not made any payments
inconsistent with those approved payments and structures;
(ix) [Identify TARP recipient] and its employees have complied
with the excessive or luxury expenditures policy, as defined in the
regulations and guidance established under section 111 of EESA,
during any part of the most recently completed fiscal year that was
a TARP period, and that any expenses requiring approval of the board
of directors, a committee of the board of directors, an SEO, or an
executive officer with a similar level of responsibility, were
properly approved;
(x) [Identify TARP recipient] will permit a non-binding
shareholder resolution in compliance with any applicable Federal
securities rules and regulations on the disclosures provided under
the Federal securities laws related to SEO compensation paid or
accrued during any part of the most recently completed fiscal year
that was a TARP period;
(xi) [Identify TARP recipient] will disclose the amount, nature,
and justification for the offering during any part of the most
recently completed fiscal year that was a TARP period of any
perquisites, as defined in the regulations and guidance established
under section 111 of EESA, whose total value exceeds $25,000 for for
each employee subject to the bonus payment limitations identified in
paragraph (viii);
(xii) [Identify TARP recipient] will disclose whether [identify
TARP recipient], the board of directors of [identify TARP
recipient], or the compensation committee of [identify TARP
recipient] has engaged during any part of the most recently
completed fiscal year that was a TARP period a compensation
consultant; and the services the compensation consultant or any
affiliate of the compensation consultant provided during this
period;
(xiii) [Identify TARP recipient] has prohibited the payment of
any gross-ups, as defined in the regulations and guidance
established under section 111 of EESA, to the SEOs and the next
twenty most highly compensated employees during any part of the most
recently completed fiscal year that was a TARP period;
(xiv) [Identify TARP recipient] has substantially complied with
all other requirements related to employee compensation that are
provided in the agreement between [identify TARP recipient] and
Treasury, including any amendments;
(xv) The following employees are the SEOs and the twenty most
highly compensated employees for the current fiscal year, with the
non-SEOs ranked in order of level of annual compensation starting
with the greatest amount: [identify name, title, and employer of
each SEO]; and
(xvi) I understand that a knowing and willful false or
fraudulent statement made in connection with this certification may
be punished by fine, imprisonment, or both. (See, for example 18
U.S.C. 1001.)''
Sec. 30.16 Q-16: What is the Office of the Special Master for TARP
Executive Compensation, and what are its powers, duties and
responsibilities?
(a) The Office of the Special Master for TARP Executive
Compensation. The Secretary of the Treasury shall establish the Office
of the Special Master for TARP Executive Compensation (Special Master).
The Special Master shall serve at the pleasure of the Secretary, and
may be removed by the Secretary without notice, without cause, and
prior to the naming of any successor Special Master. The Special Master
shall have the following powers, duties and responsibilities:
(1) Interpretative authority. The Special Master shall have
responsibility for interpreting section 111 of EESA, these regulations,
and any other applicable guidance, to determine how the requirements
under section 111 of EESA, these regulations, and any other applicable
guidance, apply to particular facts and circumstances. Accordingly, the
Special Master shall make all determinations, as required, as to the
meaning of such guidance and whether such requirements have been met in
any particular circumstances. In addition, a TARP recipient or a TARP
recipient employee may submit a request, in accordance with paragraph
(c)(3) of this section, for an advisory opinion with respect to the
requirements under section 111 of EESA, these regulations and any other
applicable guidance.
(2) Review of prior payments to employees. Section 111(f) of EESA
provides that the Secretary shall review bonuses, retention awards, and
other compensation paid before February 17, 2009, to employees of each
entity receiving TARP assistance before February 17, 2009, to determine
whether any such payments were inconsistent with the purposes of
section 111 of EESA or TARP, or otherwise contrary to the public
interest. Section 111(f) of EESA provides that, if the Secretary makes
such a determination, the Secretary shall seek to negotiate with the
TARP recipient and the subject employee for appropriate reimbursements
to the Federal Government with respect to compensation or bonuses. The
Special Master shall have the responsibility for administering these
provisions, including the identification of the payments that are
inconsistent with the purposes of EESA or TARP, or otherwise contrary
to the public interest, and the Special Master shall have
responsibility for the negotiation with the TARP recipient and the
subject employee for appropriate reimbursements to the Federal
Government with respect to compensation or bonuses. The Special Master
shall make this determination by application of the principles outlined
in paragraph (b) of this section. The Special Master's administration
of these provisions may provide for the scope of review by the Special
Master of a payment, including a limited review or no review, depending
on the payment amount, the type of payment, the overall compensation
earned by the employee during the relevant period, a combination
thereof, or such other factors as the Special Master may determine,
where the Special Master determines that such factors demonstrate that
such payments are not, or are highly unlikely to be, inconsistent with
the purposes of section 111 of EESA or TARP, or otherwise contrary to
the public interest, or that renegotiation of such payments is not in
the public interest. The Special Master may request in writing any
information from TARP recipients necessary to carry out the review of
prior compensation required under section 111(f) of EESA. TARP
recipients must submit any requested information to the Special Master
within 30 days of the request.
(3) Approval of certain payments to employees of TARP recipients
receiving exceptional financial assistance. (i) SEOs and most highly
compensated employees. The Special Master shall determine whether the
compensation structure for each SEO or most highly compensated employee
of a TARP recipient receiving exceptional assistance, including the
amounts payable or potentially payable under such compensation
structure, will or may result in payments that are inconsistent with
the purposes of section 111 of EESA or TARP, or are otherwise contrary
to the public interest. The Special Master shall make such
determinations by applying the principles outlined in paragraph (b) of
this section, subject to the requirement
[[Page 28421]]
that the compensation structure and payments satisfy the applicable
limitations under Sec. 30.10 (Q-10). This requirement shall apply to
any compensation accrued or paid during any period the SEO or most
highly compensated employee is subject to the limitations under Sec.
30.10 (Q-10). Initial requests for such approval must be submitted no
later than August 14, 2009. The Special Master's administration of
these provisions may provide for the Special Master's scope of review,
including a limited review or no review, of a portion of a compensation
structure or payment depending on the amount of such payments, the type
of such payments, the overall compensation earned by the employee
during the relevant period, a combination thereof, or such other
factors as the Special Master determines, if the Special Master has
determined that such factors demonstrate that such payments are not, or
are highly unlikely to be, inconsistent with the purposes of section
111 of EESA or TARP, or otherwise contrary to the public interest. The
Special Master shall issue a determination within 60 days of the
receipt of a substantially complete submission. The TARP recipient must
make a further request for approval to the extent the compensation
structure for any SEO or most highly compensated employee, including
the amounts that are or may be payable, for any SEO or highly
compensated employee is materially modified. In reviewing compensation
structures and compensation payments for any period subject to Special
Master review, the Special Master may take into account other
compensation structures and other compensation earned, accrued or paid,
including such compensation and compensation structures that are not
subject to the restrictions of Section 111 of EESA pursuant to section
111(b)(3)(D)(iii) (see Sec. 30.10(e)(2) (Q-30.10(e)(2) (certain
legally binding rights under valid written employment contracts)), and
amounts that were accrued or paid prior to June 15, 2009 and are
therefore not subject to review by the Special Master.
(ii) Other executive officers and most highly compensated
employees. With respect to any employee who is either an executive
officer (as defined under the Securities and Exchange Act Rule 3b-7) or
one of the 100 most highly compensated employees of a TARP recipient
receiving exceptional assistance (or both), who is not subject to the
bonus limitations under Sec. 30.10 (Q-10), the Special Master shall
determine whether the compensation structure for such employees will or
may result in payments that are inconsistent with the purposes of
section 111 of EESA or TARP, or are otherwise contrary to the public
interest. The Special Master shall make such determination through
application of the principles outlined in paragraph (b) of this
section. With respect to the scope of the required review, the Special
Master shall determine only whether the compensation arrangements are
adequately structured, and is not required to rule with respect to the
amounts that are or may be payable thereunder. However, the TARP
recipient may also request an advisory opinion with respect to the
amounts that are or may be payable, which the Special Master may
provide in his sole discretion. Notwithstanding the foregoing, if the
total annual compensation to an employee complies with the rules
applicable to an SEO under Sec. 30.10 (Q-10) applied without any
limits on the grant of long-term restricted stock, and the annual
compensation other than long-term restricted stock does not exceed
$500,000 (or for 2009, $500,000 prorated to reflect the remaining
portion of 2009 after June 15, 2009), the compensation structure will
automatically be deemed to meet the requirements and no prior approval
by the Special Master will be required. For purposes of the $500,000
limit, in determining annual compensation, all equity-based
compensation granted in fiscal years ending after June 15, 2009 will be
included in the calculation only in the year in which they are granted
at their total fair market value on the grant date and all equity-based
compensation granted in fiscal years ending prior to June 15, 2009 will
not be included in the calculation of annual compensation. In addition,
solely for purposes of applying the limit (and not for purposes of
identifying the most highly compensated employees), the term annual
compensation includes amounts required to be disclosed under paragraph
(viii) of Item 402(a) of Regulation S-K of the Federal securities laws
(change in the actuarial present value of benefits under a pension plan
and above-market earnings on deferred compensation). The Special
Master's administration of these provisions may provide for limited or
no review of a portion of a compensation structure by the Special
Master depending on the amount of potential payments, the type of such
payments, the overall compensation earned by the employee during the
relevant period, a combination thereof, or such other factors as the
Special Master determines, where the Special Master has determined that
such factors demonstrate that such payments are not, or are highly
unlikely to be, inconsistent with the purposes of section 111 of EESA
or TARP, or otherwise contrary to the public interest. Initial requests
for such approval must be submitted no later than 120 days after
publication of the final rule. Separate requests need not be submitted
for each individual covered employee, but should be submitted for
identified groups of employees subject to the same compensation
structures to the extent possible as long as sufficient detail
regarding individual compensation awards are provided as necessary to
evaluate such employee's compensation structure. The Special Master
shall issue a determination within 60 days of the receipt of a
substantially complete submission. The TARP recipient must make a
further request for approval to the extent the compensation structure,
including the amounts that are or may be payable, for any executive
officer is materially amended. In reviewing compensation structures for
any period subject to Special Master review, the Special Master may
take into account other compensation structures and other compensation
earned, accrued or paid, including such compensation and compensation
structures that are not subject to the restrictions of Section 111 of
EESA pursuant to section 111(b)(3)(D)(iii) (see Sec. 30.10(e)(2) (Q-
30.10(e)(2) (certain legally binding rights under valid written
employment contracts)), and amounts that were accrued or paid prior to
June 15, 2009 and are therefore not subject to review by the Special
Master.
(iii) Period from June 15, 2009 through final determination. For
the period from June 15, 2009 through the date of the Special Master's
final determination, the TARP recipient will be treated as complying
with this section if, with respect to employees covered by paragraph
(a)(3)(i) of this section, the TARP recipient continues to pay
compensation to such employees in accordance with the terms of
employment as of June 14, 2009 to the extent otherwise permissible
under this Interim Final Rule (for example, continued salary payments
but not any bonus payments) and if, with respect to employees covered
by paragraph (a)(3)(ii) of this section, the TARP recipient continues
to pay compensation to such employees under the compensation structure
established as of June 14, 2009, and if in addition the TARP recipient
promptly complies
[[Page 28422]]
with any modifications that may be required by the Special Master's
final determination. However, the Special Master may take into account
the amounts paid to an employee during such period in determining the
appropriate compensation amounts and compensation structures, as
applicable, for the remainder of the year.
(4) Advisory opinions on compensation structures or compensation
payments to employees of TARP recipients. A TARP recipient or TARP
recipient employee may request an advisory opinion from the Special
Master as to whether a compensation structure is, or will or may result
in payments that are, inconsistent with the purposes of EESA or TARP,
or otherwise contrary to the public interest. In addition, the Special
Master may become aware of compensation structures or payments at any
TARP recipient for which it may be useful to provide an advisory
opinion as to whether such structure or payments meets this standard.
Accordingly, the Special Master shall have the authority to render
advisory opinions upon request or at the Special Master's initiative,
as to whether a compensation structure is, or will or may result in
payments to an employee that are inconsistent with the purposes of
section 111 of EESA or TARP, or otherwise contrary to the public
interest, or whether a compensation payment made, or to be made, was or
will be inconsistent with the purposes of section 111 of EESA or TARP,
or otherwise contrary to the public interest. If the Special Master
renders an adverse opinion, the Special Master shall have the authority
to seek to negotiate with the TARP recipient and the subject employee
for appropriate reimbursements to the TARP recipient or the Federal
government. Any advisory opinion shall reflect the Special Master's
application of the principles outlined in paragraph (b) of this
section. The Special Master shall not be required to render an advisory
opinion in every instance, but may do so only where the Special Master
deems appropriate and feasible in the context of the Special Master's
other responsibilities. In any case, the Special Master shall render an
opinion, or affirmatively decline to render an advisory opinion, within
60 days of the receipt of a substantially complete submission. The
Special Master shall not be required to explain any decision to decline
to render an advisory opinion.
(5) Other designated duties and powers. The Special Master shall
have such other duties and powers related to the application of
compensation issues arising in the administration of EESA or TARP as
the Secretary or the Secretary's designate may delegate to the Special
Master, including, but not limited to, the interpretation or
application of contractual provisions between the Federal government
and a TARP recipient as those provisions relate to the compensation
paid to, or accrued by, an employee of such TARP recipient.
(b) Determination of whether compensation is inconsistent with the
purposes of section 111 of EESA or TARP or is otherwise contrary to the
public interest--(1) Principles. In reviewing a compensation structure
or a compensation payment to determine whether it is inconsistent with
the purposes of section 111 of EESA or TARP or is otherwise contrary to
the public interest, the Special Master shall apply the principles
enumerated below. The principles are intended to be consistent with
sound compensation practices appropriate for TARP recipients, and to
advance the purposes and considerations described in EESA sections 2
and 103, including the maximization of overall returns to the taxpayers
of the United States and providing stability and preventing disruptions
to financial markets. The Special Master has discretion to determine
the appropriate weight or relevance of a particular principle depending
on the facts and circumstances surrounding the compensation structure
or payment under consideration, such as whether a payment occurred in
the past or is proposed for the future, the role of the employee within
the TARP recipient, the situation of the TARP recipient within the
marketplace and the amount and type of financial assistance provided.
To the extent that two or more principles may appear inconsistent in a
particular situation, the Special Master will determine the relative
weight to be accorded each principle. In the case of any review of
payments already made under paragraph (c)(2) of this section, or of any
rights to bonuses, awards, or other compensation already granted, the
Special Master shall apply these principles by considering the facts
and circumstances at the time the compensation was granted, earned, or
paid, as appropriate.
(i) Risk. The compensation structure should avoid incentives to
take unnecessary or excessive risks that could threaten the value of
the TARP recipient, including incentives that reward employees for
short-term or temporary increases in value, performance, or similar
measure that may not ultimately be reflected by an increase in the
long-term value of the TARP recipient. Accordingly, incentive payments
or similar rewards should be structured to be paid over a time horizon
that takes into account the risk horizon so that the payment or reward
reflects whether the employee's performance over the particular service
period has actually contributed to the long-term value of the TARP
recipient.
(ii) Taxpayer return. The compensation structure, and amount
payable where applicable, should reflect the need for the TARP
recipient to remain a competitive enterprise, to retain and recruit
talented employees who will contribute to the TARP recipient's future
success, and ultimately to be able to repay TARP obligations.
(iii) Appropriate allocation. The compensation structure should
appropriately allocate the components of compensation such as salary,
short-term and long-term incentives, as well as the extent to which
compensation is provided in cash, equity or other types of compensation
such as executive pensions, other benefits, or perquisites, based on
the specific role of the employee and other relevant circumstances,
including the nature and amount of current compensation, deferred
compensation, or other compensation and benefits previously paid or
awarded. The appropriate allocation may be different for different
positions and for different employees, but generally, in the case of an
executive or other senior level position a significant portion of the
overall compensation should be long-term compensation that aligns the
interest of the employee with the interests of shareholders and
taxpayers.
(iv) Performance-based compensation. An appropriate portion of the
compensation should be performance-based over a relevant performance
period. Performance-based compensation should be determined through
tailored metrics that encompass individual performance and/or the
performance of the TARP recipient or a relevant business unit taking
into consideration specific business objectives. Performance metrics
may relate to employee compliance with relevant corporate policies. In
addition, the likelihood of meeting the performance metrics should not
be so great that the arrangement fails to provide an adequate incentive
for the employee to perform, and performance metrics should be
measurable, enforceable, and actually enforced if not met. The
appropriate allocation and the appropriate performance metrics may be
[[Page 28423]]
different for different positions and for different employees, but
generally a significant portion of total compensation should be
performance-based compensation, and generally that portion should be
greater for positions that exercise higher levels of responsibility.
(v) Comparable structures and payments. The compensation structure,
and amount payable where applicable, should be consistent with, and not
excessive, taking into account compensation structures and amounts for
persons in similar positions or roles at similar entities that are
similarly situated, including, as applicable, entities competing in the
same markets and similarly situated entities that are financially
distressed or that are contemplating or undergoing reorganization.
(vi) Employee contribution to TARP recipient value. The
compensation structure, and amount payable where applicable, should
reflect the current or prospective contributions of an employee to the
value of the TARP recipient, taking into account multiple factors such
as revenue production, specific expertise, compliance with company
policy and regulation (including risk management), and corporate
leadership, as well as the role the employee may have had with respect
to any change in the financial health or competitive position of the
TARP recipient.
(2) Further guidance. The Secretary reserves the discretion to
modify or amend the foregoing principles through notice, announcement
or other generally applicable guidance, provided that such guidance
shall apply only prospectively from its date of publication and shall
not provide a basis for reconsideration of a determination of the
Special Master, except as the Special Master deems appropriate in light
of such modification or amendment.
(c) Special Master determinations-- (1) Initial determinations. The
Special Master shall provide an initial determination in writing,
within 60 days of the receipt of a substantially complete submission,
setting forth the facts and analysis that formed the basis for the
determination. The TARP recipient shall have 30 days to request in
writing that the Special Master reconsider the initial determination.
The request for reconsideration must specify a factual error or
relevant new information not previously considered, and must
demonstrate that such error or lack of information resulted in a
material error in the initial determination. The Special Master must
provide a final determination in writing within 30 days, setting forth
the facts and analysis that formed the basis for the determination. If
a TARP recipient does not request reconsideration within 30 days, the
initial determination shall be treated as a final determination.
(2) Final determinations. In the case of any final determination
that the TARP recipient is required to receive, the final determination
of the Special Master shall be final and binding and treated as the
determination of the Treasury.
(3) Advisory Opinions. An advisory opinion of the Special Master
shall not be binding upon any TARP recipient or employee, but may be
relied upon by a TARP recipient or employee if the advisory opinion
applies to the TARP recipient and the employee and the TARP recipient
and employee comply in all respects with the advisory opinion.
(d) Submissions to the Special Master--(1) Submission procedures.
Submissions to the Special Master may be made under such procedures as
the Special Master shall determine. The Special Master may reserve the
right to request further information at any time and a submission shall
not be treated as substantially complete unless the Special Master has
so designated.
(2) Disclosure procedures. Materials submitted to the Special
Master and the initial and final determinations of the Special Master
are subject to disclosure under the standards provided in the Freedom
of Information Act (FOIA, (5 U.S.C. 552 et seq.)). In addition, the
final determinations of the Special Master shall be disclosed to the
public. The Special Master shall promulgate procedures for ensuring
that disclosed materials have been subject to appropriate redaction to
protect personal privacy, privileged or confidential commercial or
financial information or other appropriate redactions permissible under
the FOIA, which may include a procedure for the person or entity making
the submission to request redactions and to review and request
reconsideration of any proposed redactions before such redacted
materials are released.
Sec. 30.17 Q-17: How do the effective date provisions apply with
respect to the requirements under section 111 of EESA?
(a) General rule. The requirements under this part with respect to
sections 111(b), 111(c), 111(d) and 111(f) are effective upon June 15,
2009. The guidance under this part with respect to those sections
supersedes any previous guidance applicable to a TARP recipient to the
extent that guidance is inconsistent with those requirements, but
supersedes that guidance only as of June 15, 2009. To the extent
previous contractual provisions are not inconsistent with ARRA or the
guidance under this part, those contractual provisions remain in effect
and continue to apply in accordance with their terms.
(b) Bonus payment limitation. The bonus payment limitation
provision under Sec. 30.10 (Q-10) of this part does not apply to bonus
payments paid or accrued by TARP recipients or their employees before
June 15, 2009. Certain bonus payments may relate to a service period
beginning before and ending after June 15, 2009. In these
circumstances, the employee will not be treated as having accrued the
bonus payment on or after June 15, 2009 if the bonus payment is at
least reduced to reflect the portion of the service period that occurs
after June 15, 2009. If the employee is an SEO or most highly
compensated employee at the time the net bonus payment after such
reduction would otherwise be paid, the amount still may not be paid
until such time as bonus payments to that employee are permitted.
Andrew Mayock,
Executive Secretary.
[FR Doc. E9-13868 Filed 6-12-09; 8:45 am]
BILLING CODE 4810-25-P