Second, and more profoundly, the provision may create a federal obligation to solicit proxies.  The provision expressly requires a vote "[n]ot less frequently than once every 3 years."  This seems to impose a federal obligation to solicit proxies, a significant change in the law.  Currently,  the solicitation of proxies is not required under state law.  While it is required under the rules of the stock exchange, see Rule 402.04(a)(“Actively operating companies are required to solicit proxies for all meetings of shareholders. “), Nasdaq Listint Rule 5620(b), non-exchange traded public companies can avoid the requirement (although they must still distribute an Information Statement under Section 14(c) of the Exchange Act).  See 15 USC 78n(c).  

To the extent proxies must be solicited on a compensation resolution, the proxy rules would likely require the company to solicit proxies on all other matters being voted on at the meeting.  See Rule 14a-4, 17 CFR 240.14a-4 (The proxy card "[s]hall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.").   In short, say on pay establishes a federal obligation of all companies to submit proxies (other than those exempted in the statute, such as controlling companies). 

Finally, we note that the provision provides that say on pay is non-binding and that shareholder action does not create any additional fiduciary obligations.  Because fiduciary duties are a matter of state law, there is nothing in the statute that prevents states from taking into account the requirements of say on pay in determining a board’s fiduciary obligations.  While directors can reject any advisory vote disapproving executive compensation, the rejection, like all board matters, must be consistent with the board’s fiduciary obligations.  As a result, the language in Section 14A notwithstanding, boards will find their fiduciary obligations triggered when they react to shareholder disapproval of executive compensation.            

The Dodd-Frank Wall Street Reform Act and a short Summary of the legislation are posted online.  We have included the "say on pay" provision below.

SEC. 951. SHAREHOLDER VOTE ON EXECUTIVE COMPENSATION DISCLOSURES.

The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting after section 14 (15 7 U.S.C. 78n) the following:

SEC. 14A. SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION.

(a) SEPARATE RESOLUTION REQUIRED.—

(1) IN GENERAL.—Not less frequently than once every 3 years, a proxy or consent or authorization for an annual or other meeting of the shareholders for which the proxy solicitation rules of the Commission require compensation disclosure shall include a separate resolution subject to shareholder vote to approve the compensation of executives, as disclosed pursuant to section 229.402 of title 17, Code of Federal Regulations, or any successor thereto.

(2) FREQUENCY OF VOTE.—Not less frequently than once every 6 years, a proxy or consent

or authorization for an annual or other meeting of the shareholders for which the proxy solicitation rules of the Commission require compensation disclosure shall include a separate resolution subject to shareholder vote to determine whether votes on the resolutions required under paragraph (1) will occur every 1, 2, or 3 years.

(3) EFFECTIVE DATE.—The proxy or consent or authorization for the first annual or other meeting of the shareholders occurring after the end of the 6-month period beginning on the date of enactment of this section shall include—

(A) the resolution described in paragraph (1); and (B) a separate resolution subject to shareholder vote to determine whether votes on the resolutions required under paragraph (1) will occur every 1, 2, or 3 years.

(b) SHAREHOLDER APPROVAL OF GOLDEN PARACHUTE COMPENSATION.—

(1) DISCLOSURE.—

In any proxy or consent solicitation material (the solicitation of which is subject to the rules of the Commission pursuant to subsection (a)) for a meeting of the shareholders occurring after the end of the 6-month period beginning on the date of enactment of this section, at which shareholders are asked to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer, the person making such solicitation shall disclose in the proxy or consent solicitation material, in a clear and simple form in accordance with regulations to be promulgated by the Commission, any agreements or understandings that such person has with any named executive officers of such issuer (or of the acquiring issuer, if such issuer is not the acquiring issuer) concerning any type of compensation (whether present, deferred, or contingent) that is based on or otherwise relates to the acquisition,  merger, consolidation, sale, or other disposition of all or substantially all of the assets of the issuer and the aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of such executive officer.

(2) SHAREHOLDER APPROVAL.—Any proxy or consent or authorization relating to the proxy or consent solicitation material containing the disclosure required by paragraph (1) shall include a separate resolution subject to shareholder vote to approve such agreements or understandings and compensation as disclosed, unless such agreements or understandings have been subject to a shareholder vote under subsection (a).

(c) RULE OF CONSTRUCTION.—The shareholder vote referred to in subsections (a) and (b) shall not be binding on the issuer or the board of directors of an issuer, and may not be construed—

(1) as overruling a decision by such issuer or board of directors;

(2) to create or imply any change to the fiduciary duties of such issuer or board of directors;

(3) to create or imply any additional fiduciary duties for such issuer or board of directors; or

(4) to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.

(d) DISCLOSURE OF VOTES.—Every institutional investment manager subject to section 13(f) shall report at least annually how it voted on any shareholder vote pursuant to subsections (a) and (b), unless such vote is otherwise required to be reported publicly by rule or regulation of the Commission.

(e) EXEMPTION.—The Commission may, by rule or order, exempt an issuer or class of issuers from the requirement under subsection (a) or (b). In determining whether to make an exemption under this subsection, the Commission shall take into account, among other considerations, whether the requirements under subsections (a) and (b) disproportionately burdens small issuers.

Delaware law defines a number of mandatory matters that must be submitted to shareholders.  These include the sale of the business (mergers, dissolution, sale of all or substantially all of the assets), amendments to the charter, and the election of directors. 

We can now add another, gratis of Dodd-Frank:  Executive compensation or so called "say on pay"; (Section 14A of the Exchange Act, 15 USC 78n-A).  The provision, as we will discuss below, is broad.  Unlike other requirements in the DFA, this one applies not just to listed companies but to all companies subject to the proxy rules (companies registered under Section 12(g) with 500 shareholders of record and $10 million in assets).  It represents the first time on a comprehensive basis that shareholders have been given the specific authority to vote on particular matters.

Section 951 of the DFA adds Section 14A to the Exchange Act.  The provision provides that "[n]ot less frequently than once every 3 years shareholders "shall have the right" to approve in "a separate resolution" the compensation of those executives disclosed under Item 402 of Regulation S-K.  The frequency of the resolution (whether every one, two or three years) will be determined by shareholders, with a vote on the issue taken at least every six years.  The section also requires, in some instances, that shareholders be given the right to approve golden parachutes. 

The Conference Report Summary states that these provisions would give “shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy.”

The preemptive effects are clear.  Under Delaware law, at least one Vice Chancellor has noted that say on pay arguably conflicts with Delaware law.  See Leo E. Strine, Jr., Breaking the Corporate Governance Logjam in Washington: Some Constructive Thoughts on a Responsible Path Forward, 63 Bus. Law. 1079 (2008)("Although the issue has not been resolved in Delaware, distinguished scholars have suggested that a bylaw requiring stockholder approval of executive compensation contracts would be at greater risk of invalidation than a bylaw governing the conduct of director elections. n82 Setting the compensation for top executives has long been considered a core managerial function of a board of directors.").  Perhaps but resolution doesn't matter.   Federal law preempts any conflicting state law provisions.  

As we will discuss in the next post, the preemptive effect of say on pay may be much broader than simply allowing shareholders to vote on compensation packages.  It may create a federal obligation to solict proxies.  

The Dodd-Frank Wall Street Reform Act and a short Summary of the legislation are posted online. 

We will have a number of posts on the governance provisions, including the sections that preempt not only state law but the authority of the stock exchange.  The legislation (at least on the Senate side) essentially gives the SEC authority over the voting of uninstructed shares by broker-dealers and the definition of independent director, at least in the context of compensation committees.

We note however, Larry's comment that while none of the provisions "is individually earth-shaking, they cumulatively touch many major aspects of corporate governance formerly left to contract and state law."  He is correct on that point but a couple of points need to be interjected into the debate. 

First, those who argue for contract and private ordering need to establish that this in fact occurs.  Thus, in Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom, we show that with respect to waiver of liability companies, all of the top 100 largest companies except Pepsi had them and all of them waived liability to the furthest extent permitted by law.  In other words, the categorical rule of liability for breach of the duty of care was replaced by a categorical rule of no liability for breach of the duty of care.  There was no private ordering. 

The same is true, for example, with respect to shareholder access (a matter addressed in the legislation).  While in theory companies could use private ordering to give shareholders access to the company's proxy statement, they simply have not.  What exists is a categorical rule denying access.  When the legislation passes and the SEC acts, the new categorical rule will be in favor of access.  But it will not have any impact on private ordering in the area because there isn't any. 

Interestingly, as we will discuss in a future post, the existence of access provisions in the legislation likely came about because of threats by assorted opponents to sue the Agency under a Business Roundtable theory.  In the be careful what you wish for category, the SEC will now emerge with much clearer authority and have less incentive to adopt a rule that is less robust because of fear over legal challenges. 

As for other areas such as majority voting, there has been some private ordering with companies adopting mostly Pfizer style policies that require directors to resign if they do not get a majority of the votes cast.  These provisions are popular not because of the private ordering aspect but because they transfer authority not to shareholders but to the board.  Directors must resign but this merely gives the other directors (including the CEO) the authority to decide whether they want to keep the losing directors. 

In the two instances so far where directors have failed to get a majority and resigned (Pulte and Axcelis), the boards have declined to accept the resignations.  This will be the recurring pattern.  Shareholders typically vote against directors because of unhappiness with the financial condition of the company, something usually attributed one way or another to the actions of the CEO.  With the CEO on the board, he/she will not want to see directors forced off the board because they supported his/her policies.

As for preemption of state law, it is something Delaware has brought on itself.  The courts have relied on a concept of independent directors withough enforcing the definition.  See Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty.  While Caremark indicated the need for a reporting system to the board, cases like Citibank show a resolute refusal by the courts to make the reporting systems meaningful.  A more balanced approach at the state level might have been preferable to federal regulation but federal regulation is preferable to unbalanced regulation at the state level.

So on with the debate and the continued federalization of corporate law.

The legislation contains two sleeper provisions, both of which have been mentioned on this Blog before.  First, the directors on the compensation committee must be independent.  The legislation, however, provides that the Commission with the authority to dictate the definition.  Specifically, Section 952 provides that the Commission "shall require" the exchanges to adopt a definition that requires the consideration of "relevant factors" including "compensatory fees" paid by the company to the director.  In other words, unlike the current approach, fees will matter. 

It is also possible that, by giving the Commission the authority to determine "relevant factors," the Commission will further expand the definition to include other relevant factors.  Thus, the Commission could correct the problem that surfaced in connection with the Black & Decker, Stanley Works merger and require the exchanges to consider material relationships among directors (we will revisit this issue next week).  In short, the definition of independence will fall to the Commission and, as a result, it may become more meaningful.

The second sleeper provision, as noted in an earlier post, the legislation authorizes the Federal Reserve Board to adopt rules that prohibit "excessive" compensation paid to executive officers, directors, employees or principal shareholders of bank holding companies.  This is, in short, substantive regulation of executive compensation.  Moreover, by federalizing the issue, it effectively preempts Delaware.   

We've included the text of the compensation provisions.  The entire act is posted on the DU Corporate Governance web site.

Subtitle E—Accountability and Executive Compensation

SEC. 951. SHAREHOLDER VOTE ON EXECUTIVE COMPENSATION DISCLOSURES.
The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting after section 14 (15
U.S.C. 78n) the following:

SEC. 14A. ANNUAL SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION.

(a) SEPARATE RESOLUTION REQUIRED.—Any proxy or consent or authorization for an annual or other
meeting of the shareholders occurring after the end of the 6-month period beginning on the date of enactment of this section, for which the proxy solicitation rules of the Commission require compensation disclosure, shall include a separate resolution subject to shareholder vote to approve the compensation of executives, as disclosed pursuant to section 229.402 of title 17, Code of Federal Regulations,
or any successor thereto. 

(b) RULE OF CONSTRUCTION.—The shareholder vote referred to in subsection (a) shall not be binding on
the issuer or the board of directors of an issuer, and may not be construed—

(1) as overruling a decision by such issuer or board of directors;
(2) to create or imply any change to the fiduciary duties of such issuer or board of directors;
(3) to create or imply any additional fiduciary
duties for such issuer or board of directors; or
(4) to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.’’.

SEC. 952. COMPENSATION COMMITTEE INDEPENDENCE.
The Securities Exchange Act of 1934 (15 U.S.C. 78 et seq.) is amended by inserting after section 10B, as
added by section 753, the following:

SEC. 10C. COMPENSATION COMMITTEES.

(a) INDEPENDENCE OF COMPENSATION COMMITTEES.—

(1) LISTING STANDARDS.—The Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with the requirements of this subsection.

(2) INDEPENDENCE OF COMPENSATION COMMITTEES.—The rules of the Commission under paragraph (1) shall require that each member of the compensation committee of the board of directors of an issuer be—
(A) a member of the board of directors of the issuer; and
(B) independent.

(3) INDEPENDENCE.—The rules of the Commission under paragraph (1) shall require that, in determining the definition of the term ‘independence’ for purposes of paragraph (2), the national securities exchanges and the national securities associations shall consider relevant factors, including—
(A) the source of compensation of a member of the board of directors of an issuer, including any consulting, advisory, or other compensatory fee paid by the issuer to such member of the board of directors; and (B) whether a member of the board of directors of an issuer is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

(4) EXEMPTION AUTHORITY.—The rules of the Commission under paragraph (1) shall permit a national securities exchange or a national securities association to exempt a particular relationship from
the requirements of paragraph (2), with respect to the members of a compensation committee, as the
national securities exchange or national securities association determines is appropriate, taking into
consideration the size of an issuer and any other relevant factors.

(b) INDEPENDENCE OF COMPENSATION CONSULTANTS AND OTHER COMPENSATION COMMITTEE ADVIS15
ERS.—

(1) IN GENERAL.—The compensation committee of an issuer may only select a compensation
consultant, legal counsel, or other adviser to the compensation committee after taking into consideration the factors identified by the Commission under paragraph (2).

(2) RULES.—The Commission shall identify factors that affect the independence of a compensation consultant, legal counsel, or other adviser to a compensation committee of an issuer, including—
(A) the provision of other services to the issuer by the person that employs the compensation consultant, legal counsel, or other adviser;
(B) the amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel, or other adviser, as a percentage of the total revenue of
the person that employs the compensation consultant, legal counsel, or other adviser;
(C) the policies and procedures of the person that employs the compensation consultant, legal counsel, or other adviser that are designed to prevent conflicts of interest;
(D) any business or personal relationship of the compensation consultant, legal counsel,
or other adviser with a member of the compensation committee; and
(E) any stock of the issuer owned by the compensation consultant, legal counsel, or other
adviser.

(c) COMPENSATION COMMITTEE AUTHORITY RELATING TO COMPENSATION CONSULTANTS.—
(1) AUTHORITY TO RETAIN COMPENSATION CONSULTANT.—

(A) IN GENERAL.—The compensation committee of an issuer, in its capacity as a committee of the board of directors, may, in its sole discretion, retain or obtain the advice of a compensation consultant.

(B) DIRECT RESPONSIBILITY OF COMPENSATION COMMITTEE.—The compensation committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of a compensation consultant.

(C) RULE OF CONSTRUCTION.—This paragraph may not be construed—
(i) to require the compensation committee to implement or act consistently with the advice or recommendations of the compensation consultant; or
(ii) to affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of the duties of the compensation committee.

(2) DISCLOSURE.—In any proxy or consent solicitation material for an annual meeting of the
shareholders (or a special meeting in lieu of the annual meeting) occurring on or after the date that is 1 year after the date of enactment of this section, each issuer shall disclose in the proxy or consent
material, in accordance with regulations of the Commission, whether—
(A) the compensation committee of the issuer retained or obtained the advice of a compensation consultant; and
(B) the work of the compensation committee has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.

(d) AUTHORITY TO ENGAGE INDEPENDENT LEGAL COUNSEL AND OTHER ADVISERS.—
(1) IN GENERAL.—The compensation committee of an issuer, in its capacity as a committee
of the board of directors, may, in its sole discretion, retain and obtain the advice of independent legal
counsel and other advisers. 
(2) DIRECT RESPONSIBILITY OF COMPENSATION COMMITTEE.—The compensation committee of
an issuer shall be directly responsible for the appointment, compensation, and oversight of the work
of independent legal counsel and other advisers.
(3) RULE OF CONSTRUCTION.—This subsection may not be construed—

(A) to require a compensation committee to implement or act consistently with the advice
or recommendations of independent legal counsel or other advisers under this subsection; or
(B) to affect the ability or obligation of a compensation committee to exercise its own
judgment in fulfillment of the duties of the compensation committee.

(e) COMPENSATION OF COMPENSATION CONSULTANTS, INDEPENDENT LEGAL COUNSEL, AND OTHER ADVISORS.—Each issuer shall provide for appropriate funding, as determined by the compensation committee in its capacity as a committee of the board of directors, for payment of reasonable compensation—

(1) to a compensation consultant; and
(2) to independent legal counsel or any other adviser to the compensation committee.

(f) COMMISSION RULES.—
(1) IN GENERAL.—Not later than 360 days after the date of enactment of this section, the Commission shall, by rule, direct the national securities exchanges and national securities associations to
prohibit the listing of any security of an issuer that is not in compliance with the requirements of this
section.

(2) OPPORTUNITY TO CURE DEFECTS.—The rules of the Commission under paragraph (1) shall
provide for appropriate procedures for an issuer to have a reasonable opportunity to cure any defects
that would be the basis for the prohibition under paragraph (1), before the imposition of such prohibition.
(3) EXEMPTION AUTHORITY.—

(A) IN GENERAL.—The rules of the Commission under paragraph (1) shall permit a national securities exchange or a national securities association to exempt a category of issuers from the requirements under this section, as the national securities exchange or the national securities association determines is appropriate.

(B) CONSIDERATIONS.—In determining
appropriate exemptions under subparagraph (A), the national securities exchange or the national securities association shall take into account the potential impact of the requirements of this section on smaller reporting issuers.’’.

SEC. 953. EXECUTIVE COMPENSATION DISCLOSURES.
Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n), as amended by this title, is amended by adding at the end the following:

(j) DISCLOSURE OF PAY VERSUS PERFORMANCE.—
The Commission shall, by rule, require each issuer to disclose in the annual proxy statement of the issuer a clear description of any compensation required to be disclosed by the issuer under section 229.402 of title 17, Code of Federal Regulations (or any successor thereto), including information that shows the relationship between executive compensation actually paid and the financial performance
of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. The disclosure under this subsection may in clude a graphic representation of the information required to be disclosed.

SEC. 954. RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION.

Section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) is amended by adding at the end the following:

(h) RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY.—
(1) LISTING STANDARDS.—The Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with the requirements of this subsection.
(2) RECOVERY OF FUNDS.—The rules of the Commission under paragraph (1) shall require each
issuer to develop and implement a policy providing—
(A) for disclosure of the policy of the issuer on incentive-based compensation that is based on financial information required to be reported under the securities laws; and
(B) that, in the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, the issuer will recover from any current or former executive officer of the issuer who received incentive-based compensation (including stock options awarded as compensation) during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement, based on the erroneous data, in excess of what would have been paid to the executive officer under the accounting restatement.

SEC. 955. DISCLOSURE REGARDING EMPLOYEE AND DIRECTOR HEDGING.

Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n), as amended by this title, is amended by adding at the end the following:

(l) DISCLOSURE OF HEDGING BY EMPLOYEES AND DIRECTORS.—The Commission shall, by rule, require each issuer to disclose in the annual proxy statement of the issuer whether any employee or member of the board of directors of the issuer, or any designee of such employee or member, is permitted to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset any decrease in the market value of equity
securities—

(1) granted to the employee or member of the board of directors by the issuer as part of the compensation of the employee or member of the board of directors; or
(2) held, directly or indirectly, by the employee or member of the board of directors.’’.

SEC. 956. EXCESSIVE COMPENSATION BY HOLDING COMPANIES OF DEPOSITORY INSTITUTIONS.

Section 5 of the Bank Holding Company Act of 1956 (12 U.S.C. 1844) is amended by adding at the end thefollowing:

(h) EXCESSIVE COMPENSATION.—
(1) IN GENERAL.—Not later than 180 days after the transfer date established under section 311
of the Restoring American Financial Stability Act of 2010, the Board of Governors shall, by rule, establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding
company that—
(A) provides an executive officer, employee, director, or principal shareholder of the bank holding company with excessive compensation, fees, or benefits; or
(B) could lead to material financial loss to the bank holding company.
(2) CONSIDERATIONS.—In establishing the standards under paragraph (1), the Board of Governors shall take into consideration the compensation standards described in section 39(c) of the Fed19
eral Deposit Insurance Act (12 U.S.C. 1831p–1(c))

Instead, we turn to Senator Dodd's leviathan bill on financial reform.  We take a moment to briefly discuss the corporate governance provisions included in the Bill (the text is below).  They include access (which the SEC almost certainly has the authority to do without the legislation), a provision that requires companies to explain why they have or have not separate the chairman and the CEO positions (the SEC has already done this, more or less), and a requirement for listed companies that directors be elected by majority vote in uncontested elections.

The latter is a disappointment.  These provisions have become common enough, particularly among exchange traded companies.  But the legislation would merely require directors not receiving a majority to resign.  The board would then have the discretion to reject or accept the letter.  As RiskMetrics has noted, somewhere around 100 directors in 2009 did not receive a majority vote and none of them lost their position because of this failure. 

In many cases, companies did not have a majority vote provisions in place.  But where they did (Axcelis and Pulte), the companies did not accept the letters of resignation.  In other words, these provisions do not provide shareholders with any additional rights or protections.  Directors lose but the board doesn't remove them.  The provisions are, therefore, a myth.  For a more in depth discussion of the problems with these provisions, see Majority Voting, Delaware Statutory Reform, and Shareholder Access to the Proxy Statement: A Comment to the Securities and Exchange Commission Real reform would provide that directors who do not receive a majority lose and cannot take office. 

Finally, the Axcelis case illustrated that Delaware will not allow the use of inspection rights to obtain information on the materials considered by the board in deciding not to accept letters of resignation.  There is a serious need for federal law to step in and require disclosure of the information denied under Delaware law.  This legislation may at least address this issue.  It requires companies to make public "together with a discussion of the analysis used in reaching the conclusion, the specific reasons" for declining to accept the letter of resignation.  The value formulation will need to be fleshed out by rulemaking to make certain that companies provide all material information on the matter.

There are also provisions in the Bill that would reform the executive compensation process, including a right of banking agencies to ban excessive compensation.  We have discussed this provision in the past and view it as significant and substantive.  We will return to this subject in a later post.  

The draft legislation is posted on the DU Corporate Governance web site.

SEC. 971. ELECTION OF DIRECTORS BY MAJORITY VOTE IN UNCONTESTED ELECTIONS.
The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting after section 14A, as added by this title, the following:

SEC. 14B. CORPORATE GOVERNANCE.

(a) CORPORATE GOVERNANCE STANDARDS.—
(1) LISTING STANDARDS.—
(A) IN GENERAL.—Not later than 1 year after the date of enactment of this subsection,
the Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance
with any of the requirements of this subsection.

(B) OPPORTUNITY TO COMPLY AND CURE.—The rules established under this para5
graph shall allow an issuer to have an opportunity to come into compliance with the requirements of this subsection, and to cure any defect that would be the basis for a prohibition under subparagraph (A), before the imposition of such prohibition.

(C) AUTHORITY TO EXEMPT.—The Commission may, by rule or order, exempt an issuer from any or all of the requirements of this subsection and the rules issued under this subsection, based on the size of the issuer, the market capitalization of the issuer, the number of shareholders of record of the issuer, or any
other criteria, as the Commission deems necessary and appropriate in the public interest or
for the protection of investors.

(2) COMMISSION RULES ON ELECTIONS.—In an election for membership on the board of directors
of an issuer—
(A) that is uncontested, each director who receives a majority of the votes cast shall be
deemed to be elected;
(B) that is contested, if the number of nominees exceeds the number of directors to be
elected, each director shall be elected by the vote of a plurality of the shares represented at
a meeting and entitled to vote; and
(C) if a director of an issuer receives less than a majority of the votes cast in an
uncontested election—
(i) the director shall tender the resignation of the director to the board of di14
rectors; and
(ii) the board of directors—
(I) shall—

(aa) accept the resignation of the director;

(bb) determine a date on which the resignation will take effect, within a reasonable period of time, as established by the Commission; and

(cc) make the date under item (bb) public within a reason able period of time, as established by the Commission; or

(II) shall, upon a unanimous vote of the board, decline to accept the resignation and, not later than 30 days after the date of the vote (or within such shorter period as the Commission may establish), make public, together with a discussion of the analysis used in reaching the conclusion, the specific reasons that—
(aa) the board chose not to accept the resignation; and
(bb) the decision was in the best interests of the issuer and the shareholders of the issuer.

SEC. 972. PROXY ACCESS.
(a) PROXY ACCESS.—Section 14(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(a)) is amended—
(1) by inserting ‘‘(1)’’ after ‘‘(a)’’; and
(2) by adding at the end the following:
(2) The rules and regulations prescribed by the Commission under paragraph (1) may include—

(A) a requirement that a solicitation of proxy, consent, or authorization by (or on behalf of) an
issuer include a nominee submitted by a shareholder to serve on the board of directors of the issuer; and
(B) a requirement that an issuer follow a certain procedure in relation to a solicitation described
in subparagraph (A).
(b) REGULATIONS.—The Commission may issue rules permitting the use by shareholders of proxy solicitation materials supplied by an issuer of securities for the purpose of nominating individuals to membership on the board of directors of the issuer, under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors.

SEC. 973. DISCLOSURES REGARDING CHAIRMAN AND CEO STRUCTURES.

Section 14B of the Securities Exchange Act of 1934, as added by section 971, is amended by adding at the end the following:

(b) DISCLOSURES REGARDING CHAIRMAN AND CEO STRUCTURES.—Not later than 180 days after the date of enactment of this subsection, the Commission shall issue rules that require an issuer to disclose in the annual proxy sent to investors the reasons why the issuer has chosen—

(1) the same person to serve as chairman of the board of directors and chief executive officer (or
in equivalent positions); or

(2) different individuals to serve as chairman of the board of directors and chief executive officer
(or in equivalent positions of the issuer).

Encouraging Observations: The Good Guys and Gals
The most encouraging observation is that there appear to be several Senators, House Members, and a President who are concerned about repeating the mistakes of the past. 

1. Senate: There are some very engaged Senators and staffers on the Banking Committee who want to prevent future financial crises. The one who stands out is Senator Jeff Merkley (and his fabulous staffer, Andy Green) from Oregon. A close second is Senator Kohl from Wisconsin, due to his stellar staffer, Harry Stein.
2. House Legislation: I am encouraged that the House did pass by a vote of 223- 202, H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009. Quite simply, there are at least 223 people looking out for the taxpaying middle class. The general topics this bill covers were identified earlier in this series.  You might want to see who supported this bill. Here’s the roll call for the vote. It is worth noting that there was not a single Republican “aye” vote and there were 27 Democrats who voted “no.” There were nine who did not vote at all. If you want to know the name of your Representative in the House, check here. 
3. House Hearings on Executive Pay: Moreover, at the House Financial Services Committee hearing on “Compensation in the Financial Industry,” many in attendance (at least one Republican and at least a half dozen Democrats) were very concerned about the way Wall Street is using the bailouts and back-door subsidies to the record of $140 billion in bonuses for 2009. One expert witness noted that some banks that received bailout funding (TARP) returned the money even though it lead to a decline in stock value. The implication is that the CEOs of those banks did this so that they would be able to make more money personally at the expense of their own shareholders.
4. Obama “Volcker Rule”: It was encouraging that the President heard the message that the public is frustrated with the slow progress on financial regulatory restoration, and though not as expansive as one would hope, the proposal does require action to be taken to help prevent the gambling and speculation at too-big-to-fail banks to avoid another massive economic crisis.

Causes for Concern

1. Taxpayers to Fund the Next Bailouts: I am not kidding you. It is true. The Senate plan is for taxpayers to fund the next bailout. In some Orwellian double speak, we heard from both Warner's and Corker's staff that no one wants another bailout, but that the funding to resolve a failing giant bank will come from the Treasury, capped to some degree, but open for Congress to increase the funding.
2. The Warner- Corker Bankruptcy Approach: As noted in detail in an earlier part in this series, bankruptcy instead of pre-funded receivership-type resolution is (1) not new; (2) not a resolution; and (3) not the free market approach, but just another taxpayer funded bailout.
3. Lack of Preventative Measures:  It was alarming to hear the staffer for Tennessee Senator Bob Corker (R) inform us that no preventative regulation was needed other than some transparency, and that she doubted that we would ever again have a situation where another large financial institution became insolvent. This was stated in the context of questions we raised about funding a resolution. In other words, this reflects a view, perhaps of her boss, Senator Corker, that transparency and the presence of more regulators with oversight (such as the Fed’s current oversight of investment banks that are now bank holding companies) would be enough to prevent a future debt-fueled asset bubble.
4. Power of the Big Banking Lobby: It was extremely distressing to find out that the lead Democratic Senator on the systemic risk/too-big-to-fail legislation appears more committed to satisfying the big banks than taxpayers, consumers, or the 5,000 community banks. This was evident, as noted above, when his lead legislative aid chose to meet with the President of the American Bankers Association instead of keeping the appointment with us. Indeed, the  banks may be okay with the ban on proprietary trading because they can easily get around the ban, according to former Goldman Managing Director, Nomi Prins.
5. The Obama proposal freezes firms as they are, but does not address their existing scope, scale, concentration or interconnectedness. Finally, many of the important measures for improving corporate governance (including shareholder empowerment), enhancing consumer protection, ending predatory lending, reforming credit rating agencies, creating transparency in the asset-backed securities markets, requiring registration of advisers of hedge funds, and other private pools, are not being addressed in the Senate. They are outside of the Warner-Corker team's scope or the President’s proposal. And, many excellent suggestions such as those by SAFER, Shareowners.org, and AFR are relevant and not yet being considered.

Open Questions

The Volcker Rule: The president declared that “Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.” There seems to be uncertainty as to what qualifies as “proprietary trading for their own profit, unrelated to serving their customers.” That might appropriately include all trading activities other those under which the bank has a “fiduciary duty." Expect this definitional space to be where the lobbying begins.

Defensive Posture: Darlene Rosenkoetter was mostly answering our questions, not inquisitive, not engaged in thinking through the issues. Obviously a smart person, it appeared she was only behaving this way because she was in defensive mode.

Don’t Re-Invent the Wheel – Use the House Bill Model for Too Big to Fail Banks: Dana mentioned Kanjorski's approach in the House bill and said that it made sure the burden didn't fall on the taxpayer.

Prevention: Dana asked what the Corker-Warner team was doing about leverage, capital requirements and other preventative measures. Shockingly, Darlene said that the prevention plan was to have better disclosure and more people watching. She also indicated that they would never need to use the resolution authority due to this type of prevention sans any operational changes. This seemed uncanny.

Volcker Rule: She said that she had read about Volker/Obama, but indicated we'd have to see how it all fit in, in light of Massachusetts. However, she agreed that the discount window should not be open for those who engage in proprietary trading.

Warner-Corker Plan:  Darlene described the current state of the Warner-Corker legislative plan. The focus is on how to deal with too big to fail firms that start to fail. The concept would be to put them into bankruptcy first and possibly as a last resort resolution (i.e. receivership) by the government – similar to how the FDIC takes care of insolvent depository institutions. She explained that the decision whether a financial holding company would be sent the resolution pathway would be made within 24 hours after filing for bankruptcy. The deciders would be a panel from treasury, the President, and 2/3 of some other entity.  All firms would as a first step file, then the deciders would determine if the entity was systemically important. If so, it would go into resolution and out of bankruptcy. I had heard a different version of this elsewhere, that the criterion would be whether the firm was truly insolvent. This other source indicated that the “systemically important” test would happen upon bankruptcy filing – ie. If systemically important, then the special panel convenes to determine whether it’s insolvent. I’d also heard that it would not be a special panel, but instead a special court.

Community Banks: Rene of the ICBA made clear that they want a pre-funded receivership type resolution managed by the FDIC rather than bankruptcy for too-big-to-fail firms.

Who Pays?  Darlene did not know what the funding mechanism would be in a Chapter 11 scenario but did know a lot about funding for the receivership type solution. She said it would be ex-post by Treasury and that the US would get senior priority. We had a focused discussion about pre-funding. She explained the concern was moral hazard, but we pointed out that post-funding also creates an equal hazard.  She claimed there was bipartisan support for post funding. We pointed out that the American people don't want it another bailout even if there’s bipartisan support for it.

Proprietary Trading: As Senator Merkley had only 15 minutes (before leaving for a press conference), we addressed what interested him. This was proprietary trading. He wanted to understand how this was central to the financial crisis. Merkley commented that the banks were having a good quarter due to their prop trading desks, but "what goes up, comes down." Clearly this was on his mind given the President’s emphasis in his “Volcker Rule” announcement that morning on ending proprietary trading at commercial banks. Andy had a very thoughtful perspective on how to categorize prop trading. In our discussion we added that it went beyond asset classes to also be risk due to the amount of leverage used and the liquidity problems -- using short term borrowing to finance long term assets. Andy also asked about the fire walls between the businesses wondering how that would work.

Too Big To Fail: Andy also asked questions about the benefits of a breaking up the banks (separating commercial banking from investment banking and restoring Glass-Steagall) as compared to the crisis management of  bankruptcy for insolvent financial holding companies. We made the same points about bankruptcy as compared to an FDIC-type resolution authority as we did above: It’s not new, it’s not a resolution and it’s really a bailout (if it’s not prefunded by the firms).

Bankruptcy vs. Receivership – the Warner-Corker Approach: We responded to the Warner-Corker plan of a presumption that too-big-to-fail insolvent firms would go through bankruptcy. The plan has been pitched as “not a bailout”. We disagreed with this positioning. We expressed concerns about the bankruptcy option along the following lines:

1. Not new: We already have Chapter 11 (restructuring). That's what Lehman did. Didn't work out so well and in fact create more market instability, asset prices collapsing and credit freezing. This is not a solution, it's a smokescreen. The time consuming aspects and the complexity make it a poor solution for handling failing systemically important institutions.
2. Not a resolution -- Resolution implies finality and a smooth, successful transition of a firm so that it does not damage the broader system and economy. In fact, 1 in 8 bankruptcies that start as restructurings do not result in a rehabilitated firm.
3. Not a free market solution -- In order for a chapter 11 to happen at all (as opposed to converting to a liquidation), bridge financing -- called DIP (debtor-in-possession) financing is needed. Firms that don't get it, fail. In good market conditions, there are lenders willing to do this in order to get priority. In a situation like Lehman (or GM), this did not exist. So, under this plan, would the US government provide the bridge financing? Isn't that a bailout?
4. Moral Hazard: CEOs get to stay in control and delay for another 180 days (at least) while they figure out a reorganization plan -- they get an exclusive.  With resolution by the FDIC, they  are pushed aside and not in control. This creates an incentive to not face reality when things look bad. Consider Dick Fuld in Sorkins’ Too Big to Fail. That is a case study in moral hazard and denial.
5. Creates more consolidation and more too big to fail institutions. Consider (as documented in Sorkin's TBTF) all of the mergers and deals that came about as the investment banks bargained in the shadow of bankruptcy. No one is going to do any kind of helpful lending to a firm in a death spiral unless they get something -- often a big piece of ownership or a full merger and control. So, it's either taxpayer funded financing or  private funding and more consolidation.
6. Forum Shopping: Bankruptcy courts are not uniform in their treatment.

Other Issues/Securitization: Jane discussed the erosion of capital due to the mark-to-market accounting applied to traditional banking (as opposed to trading where it is appropriate).  She also discussed the Bank Holding Company Act of 1956, the One Bank Holding Company Act of 1970. This came up because Andy voiced concerns (that others had raised) re the failure of the S&Ls after the monetary control act eliminated Reg Q.

International Competition:  He was very interested in the problem of international competition. Will the UBS of the world crush the US banks if the Volcker rule becomes law? 

Less Engagement: Unlike the first two meetings where the staff proactively began the discussion with pointed questions and were very prepared to engage in this issues, Michele made clear that she was either not authorized to say much or that she was not knowledgeable of the details. The person who was supposed to meet with us, as noted above, decided to instead meet with the president of the American Bankers Association, the lobbying group for big banks.

Draft Language Expected by end of February: When asked how far along they were and whether Warner was open for input she quoted Warner’s Republican counterpart, Corker as saying in the Congressional Quarterly: "We don’t have a deal until we have a deal." That said, she indicated that Corker-Warner were pretty far along in the process and would have a draft by the end of February and a mark-up in March. She also made clear that the go-it-alone approach Dodd initially attempted was a non-starter.

Bankruptcy vs. Receivership: We discussed the bankruptcy default/resolution plan. She said that any financing of the failing firm would be capped and then Congress would have to authorize the additional funding. She said Warner does not want another bailout, but Jerry pointed out this looks like a "backdoor bailout" if it is funded ex post. We also made the points identified above from the Merkley meeting.

Community Banks: Rene (from the community bankers association) made clear that ICBA wants an FDIC type resolution process that is clear and wants authority consolidated at the FDIC.

Prevention: Jerry also discussed the need for preventative measures -- i..e there is concern that all they've focused on is the resolution/TBTF issues and not the leverage restrictions etc. that are part of the Volcker Rule.

Don’t Re-Invent the Wheel – Use the House Bill Model for Too Big to Fail Banks: AFR (Dana) mentioned the Kanjorski amendment and the wisdom in benefiting from the other chamber. See previous part of the series for more details.

Meeting with Harry Stein, Staff for Wisconsin Senator Herb Kohl (D)

Massachusetts Senate Election: The meeting began with Harry describing the financial reform legislation as being in a "weird holding pattern due to Massachusetts"- meaning Tuesday's special election of Scott Brown. However, he added that Senator Dodd had already been committed to a non-partisan bill.
 
The “Volcker Rule”: We next discussed what we knew of the "Volcker Rule". Harry had not read the full news story yet, though knew generally about it. He was interested in details. AFR briefed him on the key points: reducing size and complexity, ending proprietary trading (and hedge fund ownership) at commercial banks, leverage limits, limiting growth through new cap on liabilities.  He remarked that this was not a Glass-Steagall separation. We also noted that it seemed that non-depository institutions would not have access to the discount window.

Derivatives: Harry suggested there was consensus on exchange-trading and central clearing of standard derivatives. But, he was also very interested in opposing points of view. He had heard that end-users preferred over-the-counter (OTC) because they would not need to post collateral/margin. AFR mentioned that some end users were actually in favor of the exchange/clearing plan.  I raised the possibility of an outright ban on naked credit default swaps (where the buyer does not own the underlying debt instrument – or reference credit – that is insured). I  also mentioned the Henry Hu/Bernard Black article about the problems in bankruptcy when a creditor owns both CDS (betting/hoping the entity will default) and is also on the creditors' committee and has an incentive to run the firm into the ground instead of rehabilitation.

Don’t Re-Invent the Wheel – Use the House Bill Model for Too Big to Fail Banks: AFR (Dana) mentioned the Kanjorski amendment and the wisdom in benefiting from the other chamber. This amendment, introduced by Paul Kanjorski (D, 11^th District of Pennsylvania), which passed the Committee on November 18^th   was part of the final bill approved by the house in December (HR 4173).  This would empower regulators to take precautionary measures concerning “too big to fail” financial institutions before they fail. This would include the power to preemptively break up big banks. This power to examine and break up such banks would rest with the Financial Services Oversight Council (instead of the Fed). Unlike the original house bill, this would consider not just size and scale to be critical factors, but also interconnectedness and concentration.

Resolution Authority (Bankruptcy vs. Receivership): We turned to the topic of resolution authority and the questions: who does resolution and how is it done. This led to a discussion of the Warner-Corker plan. We challenged the idea that bankruptcy was really (1) new; (2) a resolution and (3) a free-market solution as opposed to a back door bailout. (More on this below).

Credit Rating Agencies: Next, we discussed credit rating agencies and mentioned the "public option" plan endorsed by shareowners.org.

Leverage Restrictions: We talked about leverage restrictions only being meaningful if the accounting is honest, including getting short-term borrowing (commercial paper, repurchase agreements etc.) on balance sheets.

Battle in the White House:
According to my around-the-Capitol sources, the President named his approach after economic adviser and former Federal Reserve Chair, Paul Volcker after a fierce debate in the White House. The winners included Paul Volcker and Vice President Joe Biden. The losers included Lawrence Summers (former Treasury Secretary and current Director of President Obama’s National Economic Council) and Tim Geithner (current Treasury Secretary). As per many news sources leading up to the announcement, Paul Volcker has been advocating that we break up the too-big-to-fail banks. Many on both ends of the political spectrum agree with Volcker. Consider the ultra-conservative Wall Street Journal editorial page’s endorsement of breaking up the banks, as well as progressive thinkers.

Causes of the Economic Crisis and the Bailout Remembered
 Frustrated that Wall Street was “still operating under the same rules that led to its near collapse,” President Obama remembered the causes of the crisis.

“This economic crisis began as a financial crisis, when banks and financial institutions took huge, reckless risks in pursuit of quick profits and massive bonuses.  When the dust settled, and this binge of irresponsibility was over, several of the world's oldest and largest financial institutions had collapsed, or were on the verge of doing so.  Markets plummeted, credit dried up, and jobs were vanishing by the hundreds of thousands each month. We were on the precipice of a second Great Depression. "

"To avoid this calamity, the American people -- who were already struggling in their own right -- were forced to rescue financial firms facing crises largely of their own creation.  And that rescue, undertaken by the previous administration, was deeply offensive but it was a necessary thing to do, and it succeeded in stabilizing the financial system and helping to avert that depression.”

The Volcker Rule itself (as explained in his speech):

“Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.  If financial firms want to trade for profit, that's something they're free to do.  Indeed, doing so –- responsibly –- is a good thing for the markets and the economy.  But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people."

"In addition, as part of our efforts to protect against future crises, I'm also proposing that we prevent the further consolidation of our financial system.  There has long been a deposit cap in place to guard against too much risk being concentrated in a single bank.  The same principle should apply to wider forms of funding employed by large financial institutions in today's economy.  The American people will not be served by a financial system that comprises just a few massive firms.  That's not good for consumers; it's not good for the economy.” (emphasis added)

Limiting Access to Cheap Money Through the Federal Reserve Discount Window

The President also addressed blocking non-depository institutions from access to cheap money through the Federal Reserve:  “Our government provides deposit insurance and other safeguards and guarantees to firms that operate banks.  We do so because a stable and reliable banking system promotes sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression. 

"But these privileges were not created to bestow banks operating hedge funds or private equity funds with an unfair advantage.  When banks benefit from the safety net that taxpayers provide –- which includes lower-cost capital –- it is not appropriate for them to turn around and use that cheap money to trade for profit.  And that is especially true when this kind of trading often puts banks in direct conflict with their customers' interests."

"The fact is, these kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong.  We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest.  And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses.”

House Reform Bill Passed in December
In December of 2009, the full House of Representatives passed by a vote of 223- 202, H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009. The bill, if ultimately enacted, would among other things: (1) create the Consumer Financial Protection Agency, (2) establish an inter-agency financial stability oversight council, (3) authorize a dissolution (receivership) authority and process for shutting down “too big to fail institutions” before they cause harm – and this would be prefunded through fees assessed on financial firms, (4) give shareholders an advisory vote on pay (“say on pay”), access to the proxy, a vote on merger related golden parachutes, requirements for certain institutional investors to disclose how they voted on these matters and allows regulators to ban risky compensation practices, (5) strengthen SEC powers to protect investors in light of the Madoff scandal, (6) regulate derivatives by requiring standard swaps (between dealers and major swap participants) to be traded and cleared on an exchange or electronic platform, (7) prohibit predatory lending and reform mortgages, (8) reform credit rating agencies, (9) require advisers to hedge funds and other “private” pools of capital to register as advisers, and (10) create an office of insurance.

Reform is Currently Stalled in the Senate
The reform effort has stalled  in the Senate. In November, Senator Dodd introduced the Restoring American Financial Stability Act of 2009. Dodd received tremendous push back within 48 hours. He then was forced to start over completely with a fully bi-partisan process. He established four different teams. Each team had a Democratic and Republican Senator. Each team was given a different topic to address. Some topics were preventative, others crisis management. The only team that had made meaningful progress is being lead by Virginia Senator Warner (D) and Tennessee Senator Corker (R). The Corker-Warner team owns the topic “too big to fail/systemic risk.”  The Corker-Warner plan appears to have no preventative measures. This (and the Brown victory-kick-in-the-pants) undoubtedly motivated President Obama to speak up on Thursday.

This Corker-Warner approach is described in the Wall Street Journal: “It would create a ‘presumption’  that large, failing financial companies would have to go through a new bankruptcy process. This is different than what the White House proposed, which would give the government immediate control to put large, failing firms through a government-controlled resolution. The Warner/Corker deal would give the government the option to still put failing firms through a government-structured resolution, but they would have to clear hurdles first and it would be a bit more complicated.”

Based upon our discussions (detailed later in the series), this seems to be the Emperor's New Clothes approach as it authorizes another taxpayer funded bailout.

Ten Steps for Restoring Financial Stability:
Beyond the action in the House, Senate and White House, there are other reforms being discussed, including on the SAFER and AFR websites. A useful top 10 list can be found with the shareowners.org recommendations. Shareowners’ ten steps are: (1) “Break up financial institutions that are too big to fail"; (2) “Split commercial and investment banking"; (3) “Create a public-option rating agency"; (4) “Restrict investment banks’ and hedge funds’ access to pension and retirement assets without investors’ approval"; (5) “Restrict Wall Street firms from listing as public companies"; (6) “Bring transparency to the dark corners of the financial markets"; (7) “Strengthen corporate governance and regulatory oversight"; (8) “Clarify and enforce the duties and responsibilities of financial intermediaries"; (9) Protect consumers of financial products; and (10) “Simplify financial market structure.” This is a terrific list. I would also add some concepts I identified in a recent paper entitled Enablers of Exuberance: The Legal Acts and Omissions that Facilitated the Global Financial Crisis. That was a preliminary paper with a limited scope and I have more ideas that will find their way into a book I’m writing on this subject. For full disclosure, in addition to being a participant in SAFER, I am also a member of shareowners.org.

Additionally, after the massive up front and back door bailouts of the banking system (see Nomi Prins chart detailing the bailouts and subsidies), there is now what’s known as an “implicit guarantee” of giant banks. Because there is an expectation that the government will bailout these giant banks in the future due to their interconnectedness, their sheer size and the bad consequences of letting Lehman fail, these big banks can borrow money from private counterparties more cheaply than they should. This fuels growth and makes them even bigger. Thus one goal of the legislative reform is that “too big to fail” should mean “too big to exist.”  And, those who want to restore financial stability have also targeted the role of compensation systems in creating perverse incentives for short term, debt-fueled speculation and illusory short-term gains at the expensive of both long-term shareholder value and the stability of the entire financial system. This is but a very general overview, not a comprehensive list.

Perfect Timing
The visit was planned the prior week and was not a result of: (a) Scott Brown’s stunning victory in the Tuesday Massachusetts Senate election, (b) President Obama’s announcement on Thursday of a plan to get tough on the banks, the “Volcker Rule” ; (c) the Supreme Court’s 5-4 decision Thursday in Citizens United, to strike down the limits on corporate political spending; or (d) Friday’s House Financial Services Committee Hearings on “Compensation in the Financial Industry,” where witnesses included two corporate governance gurus and one Nobel Laureate  (Nell Minow, Lucian Bebchuk and Joseph Stiglitz.)  However, it was an astonishingly intense two days to be in Washington as a result of all four events.

Senate Meetings Arranged by Americans for Financial Reform
The meetings were arranged by the leadership at Washington-based Americans for Financial Reform (AFR), a coalition of over 200 organizations, including AARP, NAACP, Center for Responsible Lending, AFL-CIO and many others. Dana Chasin of AFR joined us in our meetings. Rene Rappaport of the Independent Community Bankers Association (ICBA), representing 5,000 community banks attended two of our meetings. Ellen Taverna of NACAA attended one.

SAFER
SAFER stands for Economists’ Committee for Stable, Accountable, Fair and Efficient Financial Reform. SAFER was founded in September of 2009 and “is a focal point, clearinghouse and coordinating mechanism for progressive economists and analysts to gather and present their views on financial re-regulation and reform.” SAFER participants and contributors are identified here . You might recognize SAFER participant Rob Johnson as the co-author with Arianna Huffington of the “Move Your Money” project. In addition to publishing a variety of policy notes and policy briefs, SAFER participants’ views have appeared widely in venues including the New York Times, the Huffington Post, the Nation and the Real News Network. SAFER members have also testified before Congress.