We have recently had the opportunity to ask officials with the Treasury Department several questions regarding the new interim final executive compensation rules for TARP recipients.  While answers weren’t available for every questions, the Treasury is aware of some of the open issues associated with the regulations and appears to be diligently at work to address those questions.

The Treasury was quick to admit a technical glitch with regard to the definition of “most highly compensated employees.”  The definitions currently exclude senior executive officers from a determination of the most highly compensated employees.  Accordingly, a technical reading of the regulations would, for example, apply the bonus restrictions for TARP recipients of less than $25 million to the most highly compensated employee who is not an executive officer, creating the absurd result that the CEO could receive a bonus, while the sixth highest paid employee could not.  The Treasury has confirmed that this reading of the regulation, while technically correct, was not intended.  A technical correction is forthcoming, but the Treasury would expect TARP recipients not to pay any bonus to the most highly paid employee (whether or not they are also a senior executive officer) and will not object to bonus payments to the sixth most highly paid employee.

The Treasury has also confirmed that it does not intend for private companies (those without securities registered with the SEC) to be required to comply with the say-on-pay provisions.   The framework for the Treasury’s thoughts appear to be general deferral to the SEC, but with the understanding that the SEC generally does not have regulatory oversight of the proxies of private institutions.  Given the uncertainty in the regulations, further clarification or guidance may be forthcoming.

We did not receive an answer on whether smaller reporting companies will always be required to have at least five individuals designated as Senior Executive Officers.  The definition of senior executive officers for smaller reporting companies (but not for larger reporting companies or private companies) includes the statement that the recipient “must identify at least five SEOs.”  Accordingly, smaller reporting companies may be required to include employees that are not executive officers as Senior Executive Officers, while larger reporting companies and private companies would only determine their Senior Executive Officers out of their pool of executive officers (and therefore may have fewer than five).  This seems to be an absurd result, but may require further guidance from the Treasury

We understand that the Treasury is considering whether to exclude from the definition of “most highly compensated employee” any employee whose total annual compensation is less than $100,000.  If adopted, this limitation would significantly limit the reach of the claw-back and golden parachute payment restrictions for many smaller community banks.  As currently written, the regulations require an institution to claw-back any compensation to the SEOs and the next twenty most highly compensated employees, even if the 20th most highly compensated employee is a teller or administrative assistant.

Finally, we understand that the next order of business for the Treasury Department is to publish guidance on how to submit requests to the newly installed Special Master.  The goal appears to be to permit electronic communication in order to expedite response times.