Financial CHOICE Act - Proposed Legislation

Posted by Aon Hewitt on May 18, 2017 10:12:21 PM

A House Committee recently passed the Financial CHOICE Act of 2017, and the bill will likely advance to a full House vote in coming weeks.  This bill, a revision of one begun last year, addresses financial regulatory reform and the repeal or modification of significant parts of the Dodd–Frank Wall Street Reform and Consumer Protection Act.  The Financial CHOICE Act has prompted representatives to discuss topics such as pay ratios, proxy ballots, shareholder proposal thresholds and proxy advisor registration.

Many observers believe that the Financial CHOICE Act in its current form is unlikely to make it through the Senate, where there is a view that the bill goes too far and there is a narrower Republican majority, which might necessitate something more bipartisan. Previously, many observers believed moderate Senate Democrats facing 2018 elections might support limited financial reform efforts, but recent events on Capitol Hill appear to have made that less likely.  Separately, the Treasury Department is compiling recommendations on financial regulatory reform that are expected to be issued by early June, and it is not known how such recommendations will compare to the provisions of the Financial CHOICE Act. 

Many of the bill’s provisions relate to banking and the Consumer Financial Protection Bureau, and a range of other topics, but others address executive compensation and corporate governance matters, including the following:

  • Repeal CEO pay ratio disclosure. The bill introduced in the House would repeal the Dodd-Frank requirement that companies disclose the ratio of the annual total pay of the CEO to the annual total pay of the median employee, beginning in 2018.  This requirement has been very unpopular in the business community.
  • Repeal hedging policy disclosure. The bill would eliminate Dodd-Frank’s requirement that companies disclose their policy on hedging in company securities by directors and officers. Rules in this area have been proposed by the SEC but never adopted.
  • Limit clawback policies. The bill would limit the Dodd-Frank clawback rule to current and former officers who had “control or authority over the financial reporting that resulted in the accounting restatement.”
  • Pay vs. performance disclosure. The bill does not address this provision of Dodd-Frank, which contains a requirement that companies disclose a comparison of their stock price performance and their executive compensation.  It would remain intact.
  • Repeal the requirements regarding enhanced disclosure of incentive-based compensation at covered financial institutions. The bill repeals the Dodd-Frank requirement for enhanced disclosure of incentive-based compensation for covered financial institutions.
  • Amend the frequency of say on pay votes. The bill would amend the frequency of say on pay votes to be each year in which there has been a material change to executive compensation.
  • Require proxy advisory firms like ISS and Glass Lewis to register with the SEC and to provide companies with a chance to review and comment on draft recommendations. The bill would require proxy advisory firms to disclose the procedures and methodologies used to develop voting recommendations, policies to manage conflicts of interest with their consulting business, and other items. Such firms would also certify that they have the resources to provide advice based on accurate information.
  • Set shareholder proposal thresholds. The bill would require that, in order to submit a shareholder proposal, a shareholder would have to own 1% of the shares outstanding for three years.  This would be a significant hurdle at large companies.
  • Prohibit companies from using a universal proxy ballot. The bill would prohibit the SEC from requiring that companies use a universal proxy ballot, which would leave the current system where management provides one proxy ballot and separate ballots from shareholder proponents in place.

There are numerous other provisions of the draft Financial CHOICE Act, including ones that deal with the process of rulemaking by the SEC, capital raising, requirements applicable to emerging growth companies, and repeals of the conflict minerals and resource extraction rules.

It is unclear what path the Financial CHOICE Act will take, in light of the differences in the Senate, though many commentators believe that it at least represents the opening bid in a dialogue that will continue for some time. As such, it seems that any new provisions, changes or repeals – including any repeal of Dodd-Frank’s CEO pay ratio – are unlikely to be effective in time for the 2018 proxy season.

Contact us if you would like more information on the Financial CHOICE Act or on any other corporate governance issue.

 

Topics: Corporate Governance

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