TARP Reform and Limits on Executive Compensation

On January 21, the House passed a bill to reform the Troubled Asset Relief Program (TARP) provisions of the economic bailout.  The TARP Reform and Accountability Act of 2009 (the “Act”) would strengthen accountability, close loopholes, increase transparency, and require the Treasury to take steps toward foreclosure mitigation.  The Senate still needs to vote on the Act.

The TARP reform package calls for restrictions on executives employed by a company that receives funding and more accountability and oversight of companies receiving those funds.  President Obama promised to impose more restrictions on future bailout money to prevent funds used for such things as Wall Street bonuses.  The President stated, “There is lack of accountability and transparency in how we manage some of these programs to stabilize the system.  We have seen reports over the last couple of days about companies that have received taxpayer assistance, then go out and renovate bathrooms or offices and do not manage those dollars appropriately.” 

Section 102 of the Act discusses executive compensation and corporate governance.  If a company accepts TARP funds, the Act applies the most stringent non-tax executive restrictions.  All types of assistance receive the same treatment.  For instance:

· The Act requires the Treasury to prohibit incentives that encourage excessive risks and provides for claw-backs of compensation received based on materially inaccurate statements.

· The Treasury is to prohibit all golden parachute payments for the duration of the investment, and the removal of the de minimus exception  where institutions smaller than $300 million were exempt from golden parachute limitations in auction purchases of troubled assets. 

· The Act also authorizes the Treasury to apply the expanded executive compensation provisions retroactively to current recipients of direct assistance.

· Stricter auto bill rules apply as well.  Specifically, the Act prohibits paying or accruing any bonus or incentive compensation to the twenty-five most highly compensated employees, prohibits any compensation plan that would encourage manipulation of earnings to enhance compensation, and requires divestment of private aircrafts or leases.

· Under the Act, the Treasury shall require any existing or future institution that receives TARP funds to provide no less than quarterly public reporting on its use of the funding.  The Treasury may establish additional reporting and information requirements and must establish mechanisms to ensure appropriate use and compliance with all terms of use of TARP funds as described in the Act.  

· Additionally, the WSJ stated on February 4, 2009, that the President imposed additional restrictions on companies receiving “extraordinary assistance”: A $500,000 cap on senior executive pay, restricted stock vests when the government has been repaid, and executive pay must be subject to nonbinding shareholder resolution.

 As White House spokesman Robert Gibbs stated, “These principles include ensuring that executive compensation is so limited that the American taxpayer can feel confident that any money that is used as a part of the financial stability package doesn’t go to line the pockets of the CEO.”