On July 1, 2009, the SEC proposed a rule to implement the “Say-on-Pay” provisions contained in the TARP executive compensation restrictions.

The proposal would add a new Exchange Act Rule 14a-20, which would require TARP recipient to provide a separate shareholder vote to approve the compensation of their executives, as disclosed under Item 402 of Regulation S-K, in their proxy solicitations for an annual meeting at which directors are to be elected.  In addition, a TARP recipient would be required to explain the general effect of the vote, such as whether the vote is non-binding.

The SEC is not dictating the specific language, form of resolution, or proxy disclosure that a TARP recipient must use to provide shareholders with a “Say-on-Pay.”  However, footnote 14 to the Proposing Release contains an important caveat:

“However, as stated in Section 111(e)(1) of the EESA, the vote must be to approve “the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material).” We believe that a vote to approve a proposal on a different subject matter, such as a vote to approve only compensation policies and procedures, would not satisfy the requirements of Section 111(e)(1) of the EESA or proposed Rule 14a-20.”

The proposed rule also (i) continues to require that TARP recipients submit a preliminary proxy statement for potential SEC review; and (ii) confirms that TARP recipients that qualify as smaller reporting companies under the SEC disclosure framework may rely on the smaller reporting company disclosure requirements, and are therefore not required to provide a Compensation Discussion & Analysis.