US Energy and the Dodd-Frank Act

US energy markets face a new regulatory framework arising from the failings of the financial sector. Trading costs will rise, threatening liquidity.

However, many key elements of the Wall Street Transparency and Accountability Act have been passed on to regulators. Their true nature will emerge only with time.

The Act does little to streamline oversight activities, while the biggest problem may prove to be 'regulatory creep'.

The House of Representatives quickly approved the legislation, but it stalled in the Senate where a super-majority is required to avoid filibuster.

After considerable maneuvering, the bill passed on July 15 as the Wall Street Transparency and Accountability Act of 2010, requiring only the signature of President Barack Obama to become law.

Many superlatives have been used to describe the Act:  historic, all encompassing, groundbreaking, etc., but it is far too early to judge its long-term impact.

This is because many, if not most, of the key elements have been delegated to regulators to work out over the next year. The Act only provides an outline.

The US Chamber of Commerce counts over 350 rules and regulations plus dozens of studies that regulators will be required to craft.
 

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"). In addition to changes affecting financial service companies, the Act includes a number of corporate governance and executive compensation provisions that apply to all publicly traded companies (subject to exemptions for smaller issuers). The Act requires the SEC to adopt rules implementing various provisions, and many of the new corporate governance and executive compensation requirements may be in effect for the 2011 proxy season. An important change from earlier versions of the Act is that it does not require public companies to adopt a majority voting standard for uncontested director elections.

Proxy Access
The Act explicitly authorizes the SEC to adopt rules requiring companies to include in their proxy statements nominees submitted by shareholders, subject to the terms and conditions that the SEC determines are in the interests of shareholders and that protect investors. The Act provides that the SEC may adopt exemptions from the proxy access requirements, such as for small issuers.

Say on Pay
At least once every three years, companies must include a non-binding shareholder vote to approve executive compensation disclosures in proxy statements. Shareholders also must vote at least once every six years to determine whether the say-on-pay proposal will be considered every year, or every second or third year. The say-on-pay requirements become effective six months after the date of enactment of the Act. The Act provides that the SEC may adopt exemptions from the say-on-pay vote requirements, such as for small issuers. Unless the SEC adopts rules dealing with this issue, issuers other than companies who received TARP funds will be required to file preliminary proxy materials with the SEC due to the inclusion of say-on-pay votes in their proxy statements.

Golden Parachute Vote in Connection with Acquisitions
If shareholders vote on an acquisition, a merger, a consolidation, or a proposed sale or other disposition of all or substantially all of a company's assets, then the company that is soliciting proxies must include in its proxy statement a separate, non-binding shareholder vote on "golden parachute" compensation, which includes any agreements or understandings the company has with any of its named executive officers (or, if the company is not the acquiring company, with the acquiring company) concerning any type of compensation based on or otherwise relating to the transaction that may be paid or become payable to the named executive officer and on the aggregate total of all such compensation payable to or on behalf of the executive officer. The compensation covered includes present, deferred and contingent compensation. No separate vote is required, however, if the agreements or understandings were previously subject to a say-on-pay vote.

These provisions become effective for shareholder meetings held after six months from enactment of the Act. The Act provides that the SEC may adopt exemptions from the golden parachute vote requirements, such as for small issuers.
 

Click here for a PDF of the Securities Alert - Dodd-Frank Act Mandates New Corporate Governance and Executive Compensation Requirements.

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