Executive Compensation-IRS Issues Guidance on TARP Rules For Executive Compensation and Corporate Governance

The IRS has issued interim final rules, under the Emergency Economic Stabilization Act of 2008, as amended (“EESA”), which provide guidance on the provisions of EESA pertaining to executive compensation and corporate governance, for financial institutions and other entities that receive financial assistance under the Troubled Asset Relief Program (“TARP”).

The interim final rules include the following limits, provisions and requirements which generally apply to all TARP recipients (subject to certain exceptions for TARP recipients that do not hold outstanding obligations):

— limits on compensation which encourage the senior executive officer (“SEO”) to take unnecessary and excessive risks that threaten the value of the TARP recipient;

— provisions 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;

— a prohibition on making any golden parachute payment to a SEO or any of the next five most highly compensated employees;

–a prohibition on the payment or accrual of any bonus, retention award or incentive compensation to a SEO or certain highly compensated employees (subject to certain exceptions for payments made in the form of restricted stock);

–a prohibition on employee compensation plans that would encourage manipulation of earnings reported by the TARP recipient to enhance an employee’s compensation;

— the 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;

–the adoption of an excessive or luxury expenditures policy;

–the disclosure of perquisites offered to a SEO and certain highly compensated employees;

–a disclosure related to compensation consultant engagements;

–a prohibition on tax gross-ups to a SEO and certain highly compensated employees;

–rules on compliance with federal securities law regarding the submission of a non-binding resolution on SEO compensation to shareholders;

–the establishment of certain reporting and recordkeeping requirements regarding the foregoing compensation and corporate governance standards; and

–the establishment of the Office of the Special Master for TARP Executive Compensation, to address the application of the foregoing limits, provisions and requirements.

The interim final rules are effective as of June 15, 2009, except as they apply to certain statutory provisions with an earlier effective date, as explained in the preamble accompanying the rules. They replace certain earlier IRS guidance on EESA rules applying to TARP recipients (i.e., interim final rules issued in October, 2008, Notice 2008-PSSFI and Notice 2008-TAAP), as of the dates set forth in the rules and the accompanying preamble. The interim final rules and preamble are here.