The Community Development Capital Initiative (CDCI) is a program of the U.S. Department of the Treasury. Using returned funds from the Troubled Assets Relief Program (TARP) to support the continued viability, growth and expansion of CDFI-certified depository institutions, CDCI will make low-interest secondary capital deposits in CDFI-certified community development credit unions and community develoment banks.
Since CDCI authority comes from the original TARP legislation, awards made through this program are also subject to TARP regulations, including restrictions and disclosures on executive compensation. Below is a summary of executive compensation under TARP's Capital Purchase Program (CPP).
We do not believe these regulations will be problematic for credit unions, and may not even apply in most cases. While we cannot give legal guidance, we can encourage you to read the provisions thoroughly - copied below for your convenience - and let us know if there are any provisions which cause concern or need further clarification. The Federation will work with Treasury to ensure that all issues are addressed and questions answered to the extent possible.
The full legislative language for the Capital Purchase Program is available by clicking here.
Credit Unions with executive compensation and corporate governance compliance questions, are encouraged to email: firstname.lastname@example.org.
Please note: We have been told that Treasury prefers specific questions over general open ended ones.
Summary of Capital Purchase Program Rules and Regulations Under the Troubled Assets Relief Program 1
Following are the four basic executive compensation requirements under CPP, each of which is derived from counterparts in the EESA §§111 and 302. These provisions are set forth in the Interim Final Rule announcing CPP published at 73 Federal Register 62005, as noted in footnote 3 of this column. It should be noted that different time periods apply to different requirements under the EESA.
1. Prohibition of Risky Incentives. Reflecting §111(b)(2)(A) of the EESA, financial institutions participating in CPP must agree to “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.” According to the Interim Final Rule, this standard requires the compensation committee of the financial institution to review incentive compensation plans for SEOs to ensure that these plans do not encourage unnecessary and excessive risks, and then to certify to having done so in the company’s Compensation Discussion and Analysis required under Item 402(b) of Regulation S-K.
Comment on Risky Incentive Prohibition: CPP, like its statutory source, the EESA §111(b)(2)(A), gives considerable discretion to corporations’ compensation committees to assess whether their own companies’ plans meet the EESA standard, and therefore the extent of this provision’s impact will depend on how strictly compensation committees interpret it and how aggressively the government enforces it. In many cases, compensation committees may be reluctant to subject SEOs to different incentive standards than non-SEOs. In some cases, this may incline compensation committees to make an interpretation that is more “liberal” (that is, favoring SEOs) as to an incentive in order to avoid subjecting its SEOs to a standard different from that applicable to other executives participating in the same incentive program.
On the other hand, some compensation committees may take the opposite approach, modifying incentive standards not only for senior executives but for other executives as well.
2. Clawback of Bonuses Based on Mistaken Financial Statements. Section 111(b)(2)(B) of the EESA provides that a financial institution participating in CPP is to recover “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.” This provision is reflected in §30.6 (Q-6) of the Interim Final Rule.
Comment on Clawback of Bonuses Based on Mistaken Financial Statements: While similar to the clawback provision in §304 of Sarbanes-Oxley, this provision has several significant differences, including its application not only to the CEO and CFO but also to the three other most highly compensated officers as reported under SEC proxy statement rules; also, it applies to both public and private companies.
3. No Golden Parachute Payment Permitted. Section 111(b)(2)(C) of the EESA provides that a financial institution participating in CPP is prohibited from making “any golden parachute payment” to a senior executive officer “during the period that the secretary holds an equity or debt position in the financial institution.” This provision is reflected in §§30.8 and 30.9 (Q-8 and Q-9) of the Interim Final Rule.
Comment to No-Golden-Parachute-Payment Provision: Even though limited to covered termination payments in excess of 2.99 times the “base amount,” this provision will no doubt have a significant “bite” in the case of many SEO severances from participating financial institutions. As just noted, the period for which the no-golden-parachute-payment restriction applies is the period for which the Treasury continues to hold preferred stock and/or other assets acquired from the financial institution (which could be a significant period of time). A question might exist if a termination payment in excess of the golden parachute limit, 2.99 times the “base amount,” was agreed to during the period the Treasury holds such stock and/or other assets, with its becoming payable only after such period has expired.
Comment: Severance (“Golden Parachute Payment”) versus Deferred Compensation. CPP’s golden parachute rule does not appear to prevent deferred compensation per se, even if that compensation exceeds 2.99 times the executive’s base amount and is paid out upon any termination (not just on an involuntary termination).
For example, if, instead of a traditional severance plan, a company had a deferred compensation program in which contributions by the employer become fully vested in the executive at the end of that period and pursuant to which the full amount was paid upon termination of employment, whether voluntary, involuntary, due to death or due to disability, such a payment does not appear to be a payment “on account of . . . [an] applicable severance from employment.” Code §280G(e)(1)(B) as amended by the EESA §302(b). “Applicable severance from employment” is defined as including an involuntary termination but none of the other terminations listed above. Code §280G(e)(2)(B) as amended by the EESA §302(b). If, on the other hand, the Treasury did not agree with this position, a financial institution might provide for the deferred compensation to be paid in any event on a fixed date such as five years from the date awarded to the executive.
4. $500,000 Limit on Deductible Compensation. Finally, a financial institution participating in CPP must agree not to claim a federal tax deduction for compensation of a covered executive in excess of $500,000 during taxable years that fall within the period that the Treasury holds equity or other assets acquired pursuant to CPP. (Again, as noted in footnote 12, the applicable period under the EESA §302(a) (adding new Code §162(m)(5)), except for purposes of CPP, is the period during which the Treasury has its authorities as granted under the EESA §101(a).)
Comment on $500,000 Limit on Deductible Compensation: As in the case of current §162(m) requirements (which, absent an the EESA situation, continue to provide for a $1 million deductibility cap (not $500,000) on nonperformance based compensation), at least some employers subject to the new the EESA requirements will decide to forgo the deduction rather than cut back the compensation of its covered executives.
Special Note as to Parachute Payment under New Code §280G(e) as added by the EESA §302(b). As noted above, the EESA §302(b) introduces a new concept, a severance payment (unrelated to a change in control) be treated as a “golden parachute” for purpose of the EESA. The EESA §302(b), by inserting a new Code §280G(e), causes a loss of deduction for “parachute payments” in excess of the 2.99 times the “base amount” safe harbor coming within new Code §280G(e) (just as Code §280G has in the past taken away a deduction for “excess parachute payments” in connection with changes in control) and results in an excise tax under Code §4999 of 20 percent on the executive receiving or otherwise becoming entitled to such excess parachute payments. As noted above, the same “safe harbor” concept (2.99 times the “base amount”) would appear to apply in determining a “golden parachute” tax status under Code §280G(e) without regard to individual agreements with financial institutions, whether under CPP or PSSFI (the other EESA program presently contemplating such individual agreements with financial institutions).
1 Harvard Law School Forum on Corporate Governance and Financial Regulation: http://blogs.law.harvard.edu/corpgov/2008/11/21/eesa-limits-on-executive-pay-at-affected-institutions/, originally appearing in the New York Law Journal on November 14, 2008.