Wall Street Reform: Investor Protection

As with the other provisions of the Wall Street reform bill, there were wins, losses, and some compromises in the process of ironing out the final details of investor protection reform.

Here is how the final Wall Street reform bill addresses investor protection.

What We Won, What We Lost

Fiduciary Duty

  • We won:
    • The SEC has the authority to insist that brokers  have a fiduciary duty to their clients – meaning that your investment advisor will have to give you advice that is best for your portfolio and financial future – not theirs.
  • We compromised:
    • The SEC must first conduct a six month study before issuing rules.

Stronger SEC rules and protections

  • We won:
    • Investor Advocate position at the SEC who will identify the most significant problem areas investors encounter with securities industry practitioners and products and ensure that investor concerns are incorporated into SEC rulemaking decisions.
    • Improved disclosure to investors.  SEC has new authority to test rules or programs by gathering information and communicating with investors and other members of the public.  This type of testing has the very real potential to improve the clarity and usefulness of the disclosures that our securities regulatory scheme relies upon.  The legislation also includes a study of financial literacy and clarifies the SEC’s authority to require disclosure before the purchase of certain investment products.
    • Strengthened  SEC enforcement tools.  This extensive package of new tools includes or clarifies authority for the Commission to
      • bring aiding and abetting cases under all of the securities laws;
      • authorize nationwide service of subpoenas;
      • impose sanctions on individuals who commit violations while associated with a regulated entity but who are no longer associated with that entity; ,
      • go after wrongdoers who harm U.S. investors no matter where the fraud is based or who commit significant acts in furtherance of a fraud within the United States, even if the victims are located elsewhere.
  • We lost:
    • Weakens protections against accounting fraud.  The conference report incorporates three provisions that undermine the Sarbanes-Oxley Act’s protections against accounting fraud by carving exemptions out of the law’s requirement that the financial statement audits of all public companies include an evaluation by the auditor of the company’s internal controls to prevent accounting fraud and promote accurate financial reporting.
    • Equity-indexed annuities oversight loophole. Equity-indexed annuities are exempt from securities regulation and oversight.  Equity-indexed annuities are hybrid products that include elements of both insurance and securities, but are sold primarily as investments. Preventing the SEC from adopting appropriate regulations to supplement state insurance department oversight will deny investors needed protections from one of the most abusively sold products on the market today.

Corporate governance:

  • We won:
    • Proxy access:  The SEC will adopt rules under which shareholders would be able to nominate directors using the company’s proxy
  • We lost: Majority voting for directors of corporate boards— Reformers supported a Senate provision that was taken out of the final bill that would have required directors to be elected by a majority of votes cast to ensure that shareowners’ votes count and make directors more accountable to the company’s owners.

Executive Compensation

  • We won:
    • Say on pay The bill requires  a non-binding shareholder vote, at least once every three years, to approve the compensation of named executive officers at annual or other shareholder meetings for which the SEC requires compensation disclosure, and a non-binding vote, at least once every six years, to determine the frequency of say-on-pay votes. 
    • Disclosure of say-on-pay and golden parachute votes The bill would require certain institutional investors to disclose how they vote with respect to company proposals regarding say-on-pay, frequency of the say-on-pay vote and golden parachute compensation.
    • Shareholder approval of golden parachute compensation The bill includes new disclosure and shareholder approval provisions relating to “golden parachute” arrangements.  Specifically, the bill would mandate disclosure on the proxy of any compensation arrangement with a named executive officer, including the aggregate amount of the potential payments, if the arrangement is based on or related to the M&A transaction.  In addition, the bill would require a non-binding shareholder vote with respect to any such arrangement, unless previously subject to a say-on-pay vote.
    • The Compensation Committee and its Advisors The bill would require compensation committee members to satisfy independence standards to be established by the stock exchanges.  In addition, a compensation committee could engage compensation consultants, legal counsel or other advisers to the compensation committee only after considering factors to be promulgated by the SEC that might affect the independence of such advisers.  Finally, the bill would authorize compensation committees to retain independent advisers and would require the committees to oversee the advisers they retain.
    • Clawbacks.  The bill would require companies to adopt a clawback policy applicable in the event of an accounting restatement due to material noncompliance with financial reporting requirements and providing for the recovery of amounts in excess of what would have been paid under the restated financial statements from any current or former executive who received incentive compensation (including stock options) during the 3-year period preceding the date of the restatement.
    • Additional Disclosure. Additional requirements on proxy disclosures include
      • whether the compensation committee has retained a compensation consultant whether the work of the compensation committee has raised any conflicts of interest,
      • demonstrating the relationship between executive compensation and financial performance,
      • the ratio between the CEO’s compensation and the median compensation of all other employees
      • whether employees or directors may engage in hedging transactions on company stock.
  • We compromised:
    • Earlier versions of the bill required an annual say-on-pay vote.
    • The say-on-pay vote is non-binding