S. 3049 - February 26, 2010

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111th CONGRESS
2d Session

S. 3049

To give shareholders a vote on executive pay, to hold executives accountable for failure or fraud, to structure executive pay to encourage the long-term viability of companies, and for other purposes.

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IN THE SENATE OF THE UNITED STATES

February 26, 2010

Mr. Menendez introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs

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A BILL

To give shareholders a vote on executive pay, to hold executives accountable for failure or fraud, to structure executive pay to encourage the long-term viability of companies, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

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SECTION 1. Short title.

This Act may be cited as the “Corporate Executive Accountability Act of 2010”.

SEC. 2. Shareholder votes on executive pay.

(a) Shareholder votes on executive pay.—Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) is amended by adding at the end the following new subsection:

“(i) Annual Shareholder Approval of Executive Compensation.—

“(1) ANNUAL VOTE.—Any proxy or consent or authorization (the solicitation of which is subject to the rules of the Commission pursuant to subsection (a)) for an annual meeting of the shareholders to elect directors (or a special meeting in lieu of such meeting) where proxies are solicited in respect of any security registered under section 12 occurring on or after the date that is 6 months after the date on which final rules are issued under paragraph (4), shall provide for a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the Commission's compensation disclosure rules for named executive officers (which disclosure shall include the compensation committee report, the compensation discussion and analysis, the compensation tables, and any related materials, to the extent required by such rules). The shareholder vote shall not be binding on the issuer or the board of directors and shall not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board, nor shall such vote be construed to restrict or limit the ability of shareholders to make proposals for inclusion in such proxy materials related to executive compensation.

“(2) SHAREHOLDER APPROVAL OF GOLDEN PARACHUTE COMPENSATION.—

“(A) DISCLOSURE.—In any proxy or consent solicitation material (the solicitation of which is subject to the rules of the Commission pursuant to subsection (a)) for a meeting of the shareholders occurring on or after the date that is 6 months after the date on which final rules are issued under paragraph (4), at which shareholders are asked to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer, the person making such solicitation shall disclose in the proxy or consent solicitation material, in a clear and simple form in accordance with regulations to be promulgated by the Commission, any agreements or understandings that such person has with any named executive officers of such issuer (or of the acquiring issuer, if such issuer is not the acquiring issuer) concerning any type of compensation (whether present, deferred, or contingent) that is based on or otherwise relates to the acquisition, merger, consolidation, sale, or other disposition of all or substantially all of the assets of the issuer and the aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of such executive officer.

“(B) SHAREHOLDER APPROVAL.—Any proxy or consent or authorization relating to the proxy or consent solicitation material containing the disclosure required by subparagraph (A) shall provide for a separate shareholder vote to approve such agreements or understandings and compensation as disclosed, unless such agreements or understandings have been subject to a shareholder vote under paragraph (1). A vote by the shareholders shall not be binding on the issuer or the board of directors of the issuer or the person making the solicitation and shall not be construed as overruling a decision by any such person or issuer, nor to create or imply any additional fiduciary duty by any such person or issuer.

“(3) DISCLOSURE OF VOTES.—Every institutional investment manager subject to section 13(f) shall report at least annually how it voted on any shareholder vote pursuant to paragraph (1) or (2) of this section, unless such vote is otherwise required to be reported publicly by rule or regulation of the Commission.

“(4) RULEMAKING.—Not later than 6 months after the date of enactment of this Act, the Commission shall issue final rules to implement this subsection.”.

(b) Disclosure requirements.—

(1) IN GENERAL.—The Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)—

(A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;

(B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and

(C) the ratio of the amount described in paragraph (1) to the amount described in paragraph (2).

(2) TOTAL COMPENSATION.—For purposes of this subsection, the total compensation of an employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of this Act.

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SEC. 3. Executive accountability for failure or fraud.

(a) Clawback.—

(1) SECURITIES EXCHANGE ACT OF 1934.—Section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) is amended by adding at the end the following:

“(h) Clawback policy.—

“(1) LISTING STANDARDS.—The Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with the requirements of this subsection.

“(2) RECOVERY OF FUNDS.—The rules of the Commission under paragraph (1) shall require each issuer to develop and implement a policy providing that, in the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, the issuer shall—

“(A) recover from any current or former employee of the issuer who received incentive-based compensation (including stock options awarded as compensation) based on the erroneous data, an amount equal to the difference between the amount actually paid to the employee and the amount that would have been paid to the employee under the accounting restatement; and

“(B) disclose, together with the accounting restatement—

“(i) a list of any bonuses or stock sales by the employees of the issuer that are affected by the accounting restatement, including the amounts of such bonuses or stock sales; and

“(ii) the extent to which the employees of the issuer have repaid any amounts under subparagraph (A).”.

(2) SARBANES-OXLEY ACT OF 2002.—Section 304 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7243) is amended—

(A) in subsection (a)—

(i) in the matter preceding paragraph (1), by striking “, as a result of misconduct,”;

(ii) in paragraph (1), by striking “12-month” and inserting “2-year”; and

(iii) in paragraph (2), by striking “12-month” and inserting “2-year”; and

(B) by adding at the end the following:

“(c) Commencement of action by Commission.—If the chief executive officer or the chief financial officer of the issuer has not made a reimbursement required under this section before the expiration of the 90-day period beginning on the date on which the accounting restatement occurs, the Commission may commence an action on behalf of the issuer to recover any funds that the chief executive officer or the chief financial officer is required to reimburse under subsection (a).

“(d) Action by shareholders.—

“(1) IN GENERAL.—A shareholder of an issuer may commence an action on behalf of the issuer in any district court of the United States to recover any funds the chief executive officer or the chief financial officer is required to reimburse under subsection (a), if—

“(A) the Commission does not commence an action under subsection (c) before the expiration of the 120-day period following the date on which the accounting restatement occurs; and

“(B) the chief executive officer or the chief financial officer of the issuer has not made a reimbursement required under this section as of the date on which the action is commenced.

“(2) STAY OF ACTIONS.—If more than 1 shareholder of an issuer commences an action under this subsection with respect to the same accounting restatement, a district court shall stay all actions commenced by the shareholders, except for the action commenced by the shareholder that owns the greatest number of shares of the issuer.”.

(b) Shareholder approval of severance agreements.—The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting after section 10A the following:

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“SEC. 10B. Severance agreements tied to performance.

“(a) Commission rules.—

“(1) IN GENERAL.—Not later than 270 days after the date of enactment of this subsection, the Commission shall, by rule, direct each national securities exchange and national securities association to prohibit the listing of any security of an issuer that is not in compliance with the requirements of any portion of subsection (b).

“(2) OPPORTUNITY TO CURE.—The rules issued under paragraph (1) shall provide for appropriate procedures for an issuer to have an opportunity to cure any defects that would be the basis for such a prohibition before the imposition of such prohibition.

“(3) CONSIDERATIONS.—The rules issued under paragraph (1) shall be implemented with due regard for contracts in existence on the date of enactment of this subsection.

“(b) Severance agreements tied to performance.—The board of directors of an issuer, or a committee of such board of directors, may not enter into an agreement providing for severance payments to a senior executive officer who is terminated for cause, as determined by the board of directors.

“(c) Termination for cause.—For purposes of this section, the term ‘for cause’, when used with respect to the termination of a senior executive officer of an issuer, means termination due to—

“(1) the willful and continued failure of the senior executive officer to perform substantially the duties of the senior executive officer with respect to the issuer, unless such failure is due to incapacity resulting from a physical or mental illness of the senior executive officer;

“(2) the willful unapproved absenteeism of the senior executive officer, unless such absenteeism is due to a temporary or permanent disability of the senior executive officer;

“(3) the senior executive officer willfully engaging in misconduct that the board of directors of the issuer reasonably believes does or may materially adversely affect the business or operations of the issuer;

“(4) a material breach of an employment agreement by the senior executive officer;

“(5) misconduct by the senior executive officer that is of such a serious or substantial nature that a reasonable likelihood exists that the misconduct would materially injure the reputation of the issuer or a subsidiary of the issuer if the senior executive officer were to remain employed by the issuer;

“(6) harassment or discrimination by the senior executive officer against the employees, customers, or vendors of the issuer, in violation of the policies of the issuer;

“(7) the misappropriation of funds or assets of the issuer by the senior executive officer for personal use;

“( the willful violation of the policies or standards of business conduct of the issuer, as determined in good faith by the board of directors of the issuer;

“(9) the disclosure of confidential information by the senior executive officer in violation of the written policies of the issuer that is demonstrably injurious to the issuer;

“(10) the conviction of the senior executive officer for, or a plea of guilty or nolo contendere made by the senior executive officer to, a charge of commission of a felony; or

“(11) any other action that the board of directors of the issuer determines is detrimental or injurious to the issuer or the shareholders of the issuer.”.

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SEC. 4. Limitations on equity compensation of executive officers.

Section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) is amended by adding at the end the following:

“(j) Equity compensation of executive officers.—

“(1) DEFINITIONS.—For purposes of this subsection—

“(A) the term ‘award of equity compensation’ means an award of share-based compensation; and

“(B) the term ‘executive officer’ has the same meaning as in section 240.3b–7 of title 17, Code of Federal Regulations, or any successor thereto.

“(2) LISTING STANDARDS.—The Commission shall, by rule, direct each national securities exchange and registered securities association to prohibit the listing of any security of an issuer that does not comply with the requirements of this subsection.

“(3) LIMITATIONS ON EQUITY COMPENSATION OF EXECUTIVE OFFICERS.—The rules of the Commission under paragraph (2) shall prohibit an executive officer or member of the board of directors of an issuer who receives an award of equity compensation from selling more than—

“(A) 20 percent of the shares that the executive officer or member of the board of directors is entitled to receive during the first year following the vesting of the award;

“(B) 40 percent of the shares that the executive officer or member of the board of directors is entitled to receive during the second year following the vesting of the award, less any shares sold under subparagraph (A);

“(C) 60 percent of the shares that the executive officer or member of the board of directors is entitled to receive during the third year following the vesting of the award, less any shares sold under subparagraphs (A) and (B); and

“(D) 80 percent of the shares that the executive officer or member of the board of directors is entitled to receive during the fourth year following the vesting of the award, less any shares sold under subparagraphs (A) through (C).

“(4) VESTING.—For purposes of this subsection, an award of equity compensation vests on the date on which the right of the individual who receives the award to receive or retain shares under the award is no longer contingent on satisfaction of a condition relating to the service or performance of the individual.”.

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