TARP Standards for Compensation and Corporate Governance, 28394-28423 [E9-13868]

Agencies

• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 74, Number 113 (Monday, June 15, 2009)]
[Rules and Regulations]
[Pages 28394-28423]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-13868]



[[Page 28393]]

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Part III





Department of the Treasury





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31 CFR Part 30



TARP Standards for Compensation and Corporate Governance; Interim Final 
Rule

Federal Register / Vol. 74, No. 113 / Monday, June 15, 2009 / Rules 
and Regulations

[[Page 28394]]


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DEPARTMENT OF THE TREASURY

31 CFR Part 30

RIN 1505-AC09


TARP Standards for Compensation and Corporate Governance

AGENCY: Domestic Finance, Treasury.

ACTION: Interim final rule.

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SUMMARY: This interim final rule, promulgated pursuant to sections 
101(a)(1), 101(c)(5), and 111 of the Emergency Economic Stabilization 
Act of 2008 (EESA), as amended by the American Recovery and 
Reinvestment Act of 2009 (ARRA), provides guidance on the executive 
compensation and corporate governance provisions of EESA that apply to 
entities that receive financial assistance under the Troubled Asset 
Relief Program (TARP). Section 111 of EESA requires entities receiving 
financial assistance (TARP recipients) from the Department of the 
Treasury (Treasury) to meet appropriate standards for executive 
compensation and corporate governance. This interim final rule includes 
standards for TARP recipients that implement the provisions of section 
111 of EESA, as well as certain additional standards adopted pursuant 
to the authority granted the Treasury under section 111(b)(2) to 
promulgate such additional standards.

DATES: Effective Date: These regulations are effective on June 15, 
2009. Comment due date: August 14, 2009.

ADDRESSES: Treasury invites comments on the topics addressed in this 
interim final rule. Comments may be submitted to Treasury by any of the 
following methods: Submit electronic comments through the Federal 
government e-rulemaking portal, https://www.regulations.gov or by e-mail 
to executivecompensationcomments@do.treas.gov or send paper comments in 
triplicate to Executive Compensation Comments, Office of Financial 
Institutions Policy, Room 1418, Department of the Treasury, 1500 
Pennsylvania Avenue, NW., Washington, DC 20220.
    In general, Treasury will post all comments to https://www.regulations.gov without change, including any business or personal 
information provided, such as names, addresses, e-mail addresses, or 
telephone numbers. Treasury will also make such comments available for 
public inspection and copying in Treasury's Library, Room 1428, 
Department of the Treasury, 1500 Pennsylvania Avenue, NW., Washington, 
DC 20220, on official business days between the hours of 10 a.m. and 5 
p.m. Eastern Time. You can make an appointment to inspect comments by 
telephoning (202) 622-0990. All comments, including attachments and 
other supporting materials, received are part of the public record and 
subject to public disclosure. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: For further information regarding this 
interim final rule contact the Office of Domestic Finance, Treasury, at 
(202) 927-6618.

SUPPLEMENTARY INFORMATION: 

Executive Summary

    This Interim Final Rule sets forth the following standards, which 
generally apply to all TARP recipients in the programs under the TARP, 
subject to certain exceptions for TARP recipients that do not hold 
outstanding obligations: (1) Limits on compensation that exclude 
incentives for senior executive officers (SEOs) to take unnecessary and 
excessive risks that threaten the value of the TARP recipient; (2) 
provision for the recovery of any bonus, retention award, or incentive 
compensation paid to a SEO or the next twenty most highly compensated 
employees based on materially inaccurate statements of earnings, 
revenues, gains, or other criteria; (3) prohibition on making any 
golden parachute payment to a SEO or any of the next five most highly 
compensated employees; (4) prohibition on the payment or accrual of 
bonus, retention award, or incentive compensation to SEOs or certain 
highly compensated employees, subject to certain exceptions for 
payments made in the form of restricted stock; (5) prohibition on 
employee compensation plans that would encourage manipulation of 
earnings reported by the TARP recipient to enhance an employee's 
compensation; (6) establishment of a compensation committee of 
independent directors to meet semi-annually to review employee 
compensation plans and the risks posed by these plans to the TARP 
recipient; (7) adoption of an excessive or luxury expenditures policy; 
(8) disclosure of perquisites offered to SEOs and certain highly 
compensated employees; (9) disclosure related to compensation 
consultant engagement; (10) prohibition on tax gross-ups to SEOs and 
certain highly compensated employees; (11) compliance with Federal 
securities rules and regulations regarding the submission of a non-
binding resolution on SEO compensation to shareholders; and (12) 
establishment of the Office of the Special Master for TARP Executive 
Compensation (Special Master) to address the application of these rules 
to TARP recipients and their employees. Among the duties and 
responsibilities of the Special Master with respect to TARP recipients 
of exceptional assistance is to review and approve compensation 
payments and compensation structures applicable to the SEOs and certain 
highly compensated employees, and to review and approve compensation 
structures applicable to certain additional highly compensated 
employees. TARP recipients that are not receiving exceptional 
assistance may apply to the Special Master for an advisory opinion with 
respect to compensation payments and structures. For further discussion 
of the Special Master's responsibilities, see section III.B of this 
preamble. Finally, this interim final rule also establishes compliance 
reporting and recordkeeping requirements regarding the rule's executive 
compensation and corporate governance standards. This interim final 
rule generally affects TARP recipients, their SEOs, and certain of 
their highly compensated employees.

I. Background

    In October, 2008, the Department of the Treasury (Treasury) 
established the Troubled Asset Relief Program (TARP) under the 
Emergency Economic Stabilization Act of 2008, as amended (12 U.S.C. 
5021 et seq.) (EESA). EESA provided immediate authority and facilities 
that the Secretary of the Treasury (Secretary) could use to restore 
liquidity and stability to the financial system. Section 101(a) of EESA 
authorizes the Secretary to establish the TARP to ``purchase, and to 
make and fund commitments to purchase, troubled assets from any 
financial institution, on such terms and conditions as are determined 
by the Secretary, and in accordance with this Act and policies and 
procedures developed and published by the Secretary.''
    On February 13, 2009, Congress enacted the American Recovery and 
Reinvestment Act of 2009 (ARRA), which the President signed into law on 
February 17, 2009. Title VII of Division B of the ARRA amended in its 
entirety section 111 of EESA. Section 111 of EESA provides that certain 
entities that receive financial assistance from Treasury under the TARP 
(TARP recipients) will be subject to specified executive compensation 
and corporate governance standards to be established by the Secretary.

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II. Previous Rulemaking

A. October 2008 Interim Final Rule

    On October 20, 2008, Treasury published in the Federal Register an 
interim final rule (73 FR 62205) adding 31 CFR Part 30 under section 
111 of EESA (prior to its later amendment by ARRA) (October 2008 
Interim Final Rule). The October 2008 Interim Final Rule established 
the original executive compensation standards for financial 
institutions participating in the Capital Purchase Program (CPP), a 
financial stability program implemented under the TARP in October 2008. 
These standards generally applied to the senior executive officers 
(SEOs) of the CPP participant, that is, the principal executive officer 
(PEO), the principal financial officer (PFO), and the three most highly 
compensated executive officers in addition to the PEO and the PFO.
    Section 111(b)(2)(A) of EESA, prior to the amendment by ARRA, 
required ``limits on compensation that exclude incentives for senior 
executive officers of a financial institution to take unnecessary and 
excessive risks that threaten the value of the financial institution 
during the period that the Secretary holds an equity or debt position 
in the financial institution.'' With respect to section 111(b)(2)(A), 
the October 2008 Interim Final Rule required the financial 
institution's compensation committee to identify the features in the 
financial institution's SEO incentive compensation arrangements that 
could lead SEOs to take unnecessary and excessive risks that could 
threaten the value of the financial institution. The October 2008 
Interim Final Rule required that the compensation committee review (no 
more than ninety days after the purchase under the CPP and annually 
thereafter) the SEO incentive compensation arrangements with the 
financial institution's senior risk officers to ensure that SEOs were 
not encouraged to take such risks. The compensation committee was then 
required to certify that it had completed those reviews.
    Section 111(b)(2)(B) of EESA required ``a provision for the 
recovery by the financial institution of any bonus or incentive 
compensation paid to a senior executive officer based on statements of 
earnings, gains, or other criteria that are later proven to be 
materially inaccurate.'' With respect to this section, the October 2008 
Interim Final Rule required the SEO bonus and incentive compensation 
paid while Treasury holds an equity or debt position acquired under the 
CPP to be subject to a provision for recovery or ``clawback'' by the 
financial institution if the payments were based on materially 
inaccurate financial statements or any other materially inaccurate 
performance metric criteria.
    Section 111(b)(2)(C) of EESA required ``a prohibition on the 
financial institution making any golden parachute payment to its senior 
executive officer during the period that the Secretary holds an equity 
or debt position in the financial institution.'' In accordance with 
this section, the October 2008 Interim Final Rule prohibited a 
financial institution from making any golden parachute payment to a SEO 
during the period Treasury holds an equity or debt position acquired 
under the CPP. The October 2008 Interim Final Rule defined a golden 
parachute payment as any payment in the nature of compensation to (or 
for the benefit of) a SEO made on account of an applicable severance 
from employment to the extent the aggregate present value of such 
payments equals or exceeds an amount equal to three times the SEO's 
base amount of compensation.
    The October 2008 Interim Final Rule also set forth an additional 
standard for executive compensation and corporate governance under the 
authority of section 111(b)(1) of EESA. This standard required the 
financial institution to forgo any deduction for compensation for 
Federal income tax purposes in excess of $500,000 for each SEO that 
would not be deductible if section 162(m)(5) of the Internal Revenue 
Code (26 U.S.C. 162(m)(5)) applied to the financial institution.

B. Other Guidance

    At the same time of the release of the October 2008 Interim Final 
Rule, Treasury also published guidance relating to other financial 
stability programs under TARP. Treasury Notice 2008-PSSFI addressed the 
provisions under section 111(b) of EESA as applicable to financial 
institutions participating in programs for systemically significant 
failing institutions. Treasury Notice 2008-PSSFI included the same 
standards as the October 2008 Interim Final Rule with one exception: It 
prohibited the financial institution from making any golden parachute 
payment (defined more strictly under Treasury Notice 2008-PSSFI as any 
payment made on account of an applicable severance from employment) to 
a SEO.
    In addition, Treasury issued two notices on executive compensation 
requirements applicable to auction programs for purchasing troubled 
assets. First, pursuant to section 111(c) of EESA, Notice 2008-TAAP 
prohibited any financial institution selling more than $300,000,000 in 
troubled assets through an auction program from entering into a new SEO 
employment agreement with a golden parachute provision through the 
length of the program. Second, I.R.S. Notice 2008-94, addressing 
certain tax provisions in section 302 of EESA applicable to SEO 
compensation, required financial institutions selling more than 
$300,000,000 in troubled assets through an auction program to forgo any 
deduction for compensation for Federal income tax purposes in excess of 
$500,000 for each SEO under newly added section 162(m)(5) of the 
Internal Revenue Code (26 U.S.C. 162(m)(5)) and any deduction for 
certain SEO golden parachute payments under newly added section 280G(e) 
of the Internal Revenue Code (26 U.S.C. 280G(e)). In addition, I.R.S. 
Notice 2008-94 subjected SEOs to a 20-percent excise tax on these 
golden parachute payments.
    On January 16, 2009, Treasury announced amendments to the October 
2008 Interim Final Rule to include reporting and recordkeeping 
requirements under the executive compensation standards for the CPP. 
However, these amendments were returned from the Federal Register and 
never published and, thus, will never be effective.
    The provisions of the ARRA and this interim final rule (Interim 
Final Rule) supersede the October 2008 Interim Final Rule, Notice 2008-
PSSFI, and Notice 2008-TAAP, for periods for which the ARRA provisions 
described in this rule are effective. For a more detailed discussion of 
the effective dates, including the effective date of this Interim Final 
Rule, see Sec.  30.17 (Q-17) of the Interim Final Rule, and the 
discussion of Sec.  30.17 (Q-17) in section III.B of this preamble.
    In addition, on February 4, 2009, Treasury issued new guidance on 
the executive compensation restrictions under EESA (February 2009 
Treasury Guidance). The February 2009 Treasury Guidance provided 
financial institutions participating in the TARP with reporting and 
recordkeeping guidance, including guidance for compensation committees 
in preparing an explanation of how SEO compensation arrangements do not 
encourage excessive and unnecessary risk-taking.
    For entities participating in an exceptional assistance program 
under the TARP, the February 2009 Treasury Guidance proposed to (1) 
limit the annual compensation of senior executives to $500,000 other 
than

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restricted stock or other similar long-term incentive arrangements; (2) 
require the vesting schedule of this restricted stock to be based on 
the financial institution's satisfying repayment obligations, 
protecting taxpayer interests, and meeting lending and stability 
standards; (3) require full disclosure of executive compensation 
structure and strategy and a non-binding shareholder resolution 
approving or disapproving the structure and strategy; (4) require 
provisions for clawback of bonuses and incentive compensation awarded 
to SEOs if based on materially inaccurate financial statements or 
performance metrics; (5) require provisions for the clawback of bonuses 
and incentive compensation awarded to the next twenty executive 
officers if based on materially inaccurate financial statements or 
performance metrics and the executive officers had knowingly engaged in 
providing inaccurate information relating to those financial statements 
or performance metrics; (6) limit the payment of any golden parachute 
payments to the SEOs and the next five executive officers; (7) prohibit 
the payment of any golden parachute payments greater than one year's 
compensation to the next twenty-five executive officers; and (8) 
provide guidance for boards of directors in adopting a luxury 
expenditures policy.
    For entities participating in a generally available capital access 
program under the TARP, the February 2009 Treasury Guidance proposed to 
(1) limit SEO annual compensation to $500,000 with any additional pay 
in the form of restricted stock or other similar long-term incentive 
arrangements carrying the same restrictions as for entities 
participating in an exceptional assistance program; (2) allow entities 
to waive this limitation only by disclosure of SEO compensation and, if 
requested, a non-binding shareholder resolution on that SEO 
compensation; (3) require provisions for clawback of bonuses and 
incentive compensation awarded to SEOs if based on materially 
inaccurate financial statements or performance metrics; (4) require 
provisions for clawback of bonuses and incentive compensation awarded 
to the next twenty executive officers if based on materially inaccurate 
financial statements or performance metrics and if the executive 
officers knowingly engaged in providing inaccurate information relating 
to those financial statements or performance metrics; (5) prohibit the 
payment of any golden parachute payments greater than one year's 
compensation to the SEOs; and (6) provide guidance for boards of 
directors in adopting a luxury expenditures policy.
    The February 2009 Treasury Guidance provided that the guidelines 
would not apply retroactively to existing investments or to previously 
announced programs. The February 2009 Treasury Guidance also 
anticipated a public comment period before implementation of the 
guidelines for generally available capital access programs. Before the 
full implementation of the February 2009 Treasury Guidance, Congress 
enacted the ARRA. The ARRA prescribes new executive compensation 
standards different from the Treasury Guidance (except for the similar 
provisions with respect to required clawback provisions and excessive 
or luxury expenditures policies), and requires Treasury to establish 
these standards by promulgating regulations to implement section 111. 
This Interim Final Rule complies with this statutory requirement to 
promulgate standards that implement the ARRA provisions, consolidates 
all of the executive-compensation-related provisions that are 
specifically directed at TARP recipients into a single rule 
(superseding all prior rules and guidance), and utilizes the discretion 
granted to the Secretary under the ARRA to adopt additional standards, 
some of which are adapted from principles set forth in the February 
2009 Treasury Guidance.

III. The Interim Final Rule

    This Interim Final Rule revises in its entirety 31 CFR Part 30, 
which comprises Treasury's regulations implementing section 111 of 
EESA.

A. Overview of Statutory Provisions

    Generally, section 111 of EESA, as amended by ARRA, imposes 
corporate governance and executive compensation requirements on TARP 
recipients and requires Treasury to establish certain corporate 
governance and executive compensation standards with which TARP 
recipients must comply. Section 111 outlines several specific 
standards, and requires Treasury to establish these standards by 
promulgating regulations. Section 111 also authorizes Treasury to 
establish additional standards by regulation.
    Section 111(b)(1) of EESA provides that a TARP recipient shall be 
subject to the standards established by the Secretary under that 
section and the provisions of section 162(m)(5) of the Internal Revenue 
Code, as applicable. The October 2008 Interim Final Rule required that 
all TARP recipients forgo any deduction for Federal income tax purposes 
for compensation that would not be deductible if section 162(m)(5) of 
the Internal Revenue Code (26 U.S.C. 162(m)(5)) were to apply to the 
TARP recipient. Thus, TARP recipients generally agreed in their 
applicable contracts with Treasury under TARP not to claim a deduction 
for compensation during a taxable year in excess of $500,000 for a SEO. 
This Interim Final Rule does not impose additional tax related 
restrictions beyond those that already apply under section 162(m)(5). 
However, because these contractual terms are not inconsistent with any 
provisions of this Interim Final Rule, the contractual provisions 
remain in effect, in accordance with their terms, and accordingly, TARP 
recipients continue to be required to forgo the applicable deduction. 
See Sec.  30.17 (Q-17), and the discussion of Sec.  30.17 (Q-17) in 
section III.B of this preamble. In addition, Treasury anticipates 
requiring this condition in any future agreements to provide TARP 
assistance.
    Section 111(b)(3)(A) requires that Treasury promulgate standards 
limiting SEO compensation to exclude incentives for SEOs to take 
unnecessary and excessive risks threatening to the TARP recipient's 
value.
    Section 111(b)(3)(B) requires Treasury to establish standards 
mandating that TARP recipients institute a provision to recover any 
bonus, retention award, or incentive compensation paid to a SEO and any 
of the next twenty most highly compensated employees of the TARP 
recipient if the compensation was based on materially inaccurate 
statements of earnings, revenues, gains, or other criteria (a provision 
sometimes referred to as a ``clawback'').
    Section 111(b)(3)(C) requires Treasury to establish standards 
prohibiting TARP recipients from making golden parachute payments 
(defined in Section 111(a)(2) as any payment for ``departure from a 
company for any reason, except for payments for services performed or 
benefits accrued'') to a SEO or any of the next five most highly 
compensated employees.
    Section 111(b)(3)(D) requires Treasury to establish standards 
prohibiting TARP recipients from paying or accruing any bonus, 
retention award, or incentive compensation to certain highly 
compensated employees or SEOs. This prohibition has two exceptions: (1) 
TARP recipients can pay or accrue such amounts if the amounts are 
payable as long-term restricted stock, provided that the stock does not 
fully vest until the repayment of TARP assistance, has a value that is 
no greater than one-third of the total annual compensation, and is 
subject to such other terms and conditions as the Secretary may

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determine to be in the public interest; and (2) TARP recipients can 
make bonus payments required to be paid under written employment 
contracts executed on or before February 11, 2009 and determined to be 
valid by the Secretary. The number of employees to which this 
prohibition applies depends upon the amount of financial assistance 
provided to the TARP recipient.
    Section 111(b)(3)(E) requires Treasury to establish standards 
prohibiting any employee compensation plan that would encourage 
manipulation of the reported earnings of the TARP recipient to enhance 
the compensation of any of its employees.
    Section 111(b)(3)(F) and Section 111(c) require Treasury to mandate 
that the TARP recipient establish a compensation committee of its board 
of directors comprised entirely of independent members of the board of 
directors to meet at least semi-annually to review, discuss, and 
evaluate employee compensation plans in light of any assessment of any 
risks these plans pose to the TARP recipients. Section 111(c)(3) 
provides that the board of directors of a TARP recipient that has no 
common or preferred stock registered pursuant to the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.) (Exchange Act) and has 
received $25,000,000 or less in financial assistance is required to 
carry out the duties of the compensation committee as described above.
    Section 111(d) requires a TARP recipient's board of directors to 
put in place a company-wide policy regarding excessive or luxury 
expenditures, as identified by the Secretary, and that may include 
excessive expenditures on entertainment or events, office and facility 
renovations, aviation or other transportation services, or other 
activities or events that are not reasonable expenditures for staff 
development, reasonable performance incentives, or other similar 
measures conducted in the normal course of the TARP recipient's 
business operations.
    Section 111(e) requires that any proxy or consent or authorization 
for an annual or other meeting of the TARP recipient shareholders, as 
long as any obligation arising from TARP assistance remains 
outstanding, permit a separate nonbinding shareholder vote to approve 
the compensation of executives, as disclosed pursuant to the 
compensation disclosure rules of the Securities and Exchange Commission 
(SEC). Section 111(e)(3) directs the SEC to issue any final rules and 
regulations necessary to implement this requirement not later than 
February 17, 2010.
    Section 111(b)(4) requires the chief executive officer and the 
chief financial officer of the TARP recipient (or equivalents thereof) 
to provide a written certification of compliance with the requirements 
of section 111 to the SEC, if the TARP recipient has publicly traded 
securities, or to the Secretary, if the TARP recipient does not have 
publicly traded securities.
    Section 111(f) requires the Secretary to review bonuses, retention 
awards, and other compensation paid to SEOs and the next 20 most highly 
compensated employees of each TARP recipient before the date of 
enactment of the ARRA to determine whether any such payments were 
inconsistent with the purposes of section 111 of EESA or TARP or were 
otherwise contrary to the public interest, and if such a determination 
is made, to seek to negotiate with the TARP recipient and the subject 
employee for appropriate reimbursement.
    Section 111(h) requires the Secretary to promulgate regulations to 
implement section 111.

B. Description of the Interim Final Rule

    The major provisions of the Interim Final Rule, to be codified at 
31 CFR Part 30, are as follows:
    Section 111 specifies executive compensation and corporate 
governance standards applicable to TARP recipients. The standards are 
written in question and answer format.
    Definitions used in the Interim Final Rule are set forth in Sec.  
30.1 (Q-1) of the Interim Final Rule. The executive compensation and 
corporate governance requirements under the Interim Final Rule apply to 
all TARP recipients, defined in section 111(a)(3) as ``any entity that 
has received or will receive financial assistance under the financial 
assistance provided under the TARP.'' These restrictions will also 
generally apply to any entity of which the TARP recipient owns at least 
50%, or which owns at least 50% of the TARP recipient, determined using 
certain provisions of sections 414(b) and (c) of the Internal Revenue 
Code, 26 U.S.C. 414(b) and (c), if those provisions were applied using 
a 50% ownership threshold instead of an 80% ownership threshold. In 
addition, these restrictions may apply to a related entity if the 
primary purpose for the creation or utilization of such entity is to 
avoid or evade some or all of the restrictions under section 111. These 
requirements generally apply for the period during which any obligation 
arising from financial assistance under the TARP remains outstanding 
(TARP period), except any period during which the Federal government 
only holds warrants to purchase common stock of the TARP recipient. For 
TARP recipients that never hold an obligation, however, the more 
limited requirements generally apply through the last date of the TARP 
purchase authority.
    The Interim Final Rule defines financial assistance to include 
direct financial transactions between Treasury and private sector 
participants in programs under the TARP. Although some determinations 
may be fact specific, entities that do not engage in financial 
transactions with Treasury as a counterparty generally will not be 
deemed to be receiving ``financial assistance.'' As illustration, for 
purposes of the Interim Final Rule, financial institutions that sell 
preferred stock to Treasury through the Capital Purchase Program are 
receiving financial assistance and therefore are TARP recipients 
subject to the provisions of the Interim Final Rule. By contrast, 
entities that post collateral to and receive loans from the Federal 
Reserve Term Asset-Backed Securities Loan Facility (TALF) are not 
receiving ``financial assistance provided under the TARP'' and, 
therefore, are not TARP recipients under the Interim Final Rule. In the 
TALF program, Treasury has posted a subordinated loan to the Federal 
Reserve Bank of New York special purpose vehicle (SPV), which accepts 
forfeited collateral from TALF lending. Although the SPV has engaged in 
a financial transaction with Treasury, Treasury has not interpreted 
ARRA to require that the Federal Reserve Bank of New York, as a non-
profit government instrumentality, be deemed to be receiving financial 
assistance. Importantly, Federal Reserve banks fulfill their 
governmental function by returning their annual profits to Treasury, 
which limits the extent to which a transaction with Treasury could be 
deemed to be financial assistance.
    These requirements apply to SEOs and certain most highly 
compensated employees, as defined in Sec.  30.1. Section 30.1 (Q-1) of 
the Interim Final Rule bases the determination of the SEOs on the 
executive compensation disclosure requirements in Item 402 of 
Regulation S-K under the Federal securities laws (17 CFR 229.402), 
which generally applies to the PEO, the PFO, and the three most highly 
compensated executive officers (other than the PEO and the PFO). 
Section 30.1 (Q-1) of the Interim Final Rule bases the identification 
of the three most highly compensated executive officers on annual 
compensation for the last completed fiscal year and defines annual 
compensation as it is determined

[[Page 28398]]

pursuant to Item 402(a) of Regulation S-K under the Federal securities 
laws (17 CFR 229.402(a)). To be consistent with the determination of 
the three most highly compensated executive officers, Sec.  30.1 (Q-1) 
of the Interim Final Rule also defines the most highly compensated 
employees according to their annual compensation for the last completed 
fiscal year, as it is determined pursuant to Item 402(a) of Regulation 
S-K under the Federal securities laws (17 CFR 229.402(a)). However, a 
most highly compensated employee may be an employee who is not an 
executive officer. The Interim Final Rule does not limit application of 
the requirements to executive officers because the ARRA statutory 
language refers to most highly compensated employees, rather than most 
highly compensated executive officers, and therefore does not limit the 
coverage in this manner. A most highly compensated employee does not 
include a former employee of the TARP recipient who is not employed by 
the TARP recipient on the first day of the fiscal year for which the 
determination is being made (as opposed to the preceding fiscal year), 
unless such employee is reasonably anticipated to return to employment 
with the TARP recipient during the fiscal year.
    The Interim Final Rule defines annual compensation in this manner 
for several reasons. Both the ARRA and the original EESA executive 
compensation provisions require that the senior executive officers be 
determined according to the compensation disclosure requirements under 
Federal securities regulations; it would be anomalous to treat the 
determination of most highly compensated employee compensation in a 
different manner. In addition, the compensation required to be 
disclosed under Federal securities regulations more closely reflects 
the economic reality of the compensation that the employee actually 
earned during the year by reporting compensation regardless of whether 
it was includible in income for income tax purposes during that year 
(for example, including the value of a stock option, deferred salary 
and bonuses when earned) in contrast to annual compensation reported as 
Form W-2 compensation, which reflects only compensation that was 
includible in income for income tax purposes during the calendar year 
regardless of when that compensation was earned (for example, including 
income from stock options generally at the time of exercise and 
including in income deferred salary and bonuses only when those amounts 
are actually paid in a future year). Finally, public companies and 
investors are familiar with this SEC total annual compensation 
measurement, which was developed through an extensive notice and 
comment process and has been in effect since 2006 as part of the SEC's 
final revised executive compensation disclosure rule.
    Because the most highly compensated employees are determined based 
on annual compensation earned in the prior year, the issue has been 
raised that a TARP recipient might be able to intentionally cycle 
employees in and out of most highly compensated employee status in 
alternate years to guarantee periods of complete exclusion for certain 
employees from the executive compensation limitations applicable to 
most highly compensated employees. Some methods that might mitigate, 
though not eliminate, this possibility include identifying the most 
highly compensated employees based on an averaging of the preceding two 
or three years' annual compensation, or requiring that some or all of 
the most highly compensated employees identified for one year remain 
subject to the limitations for a prescribed number of additional years, 
regardless of their subsequent level of compensation. The Treasury 
invites comment on this issue, including on the extent to which 
intentional cycling of most highly compensated employee status is 
likely to occur given that there is no overall compensation limitation 
on most highly compensated employees under the Interim Final Rule, 
potential methods of addressing the issue (including the methods 
previously mentioned), how such methods would be effective in 
deterring, eliminating, or limiting intentional cycling, and the extent 
of any additional administrative burdens that the application of such 
methods might create.
    Section 30.1 (Q-1) of the Interim Final Rule requires that TARP 
recipients that are smaller reporting companies, as that term is 
defined in Item 10 of Regulation S-K under the Federal securities laws 
(17 CFR 229.10), identify five SEOs, even if only three named executive 
officers are required to be identified pursuant to Item 402(m) of 
Regulation S-K under the Federal securities laws (17 CFR 229.402(m)). 
Analogous rules apply to TARP recipients that do not have securities 
registered with the SEC pursuant to the Federal securities laws.
    Prior to the annual identification of the SEOs, who are typically 
identified in the TARP recipient's annual report on Form 10-K or annual 
meeting proxy statement, and the most highly compensated employees, 
Sec.  30.3 (Q-3) of the Interim Final Rule requires that the TARP 
recipient ensure that a potential SEO or most highly compensated 
employee comply with the relevant executive compensation and corporate 
governance standards.
    Several requirements under the Interim Final Rule relate to the 
compensation committee of the TARP recipient's board of directors, and 
its duties. Pursuant to section 111(b)(3)(A), section 111(b)(3)(E), and 
section 111(b)(3)(F), Sec.  30.4 (Q-4) of the Interim Final Rule 
requires the TARP recipient to establish a compensation committee 
composed of independent members of the board of directors before the 
later of ninety days after the closing date of the agreement between 
Treasury and the TARP recipient or ninety days after June 15, 2009 to 
fulfill a number of duties. Many public company TARP recipients already 
maintain compensation committees of independent directors pursuant to 
stock exchange listing standards, and Sec.  30.4 (Q-4) of the Interim 
Final Rule allows for the continued maintenance of already-established 
compensation committees. Section 30.4 (Q-4) of the Interim Final Rule 
also, in accordance with section 111(c)(3), provides an exception for 
certain private company TARP recipients. Thus, Sec.  30.4 (Q-4) of the 
Interim Final Rule allows TARP recipients that have no securities 
registered pursuant to the Exchange Act and have received $25,000,000 
or less in financial assistance to either establish a compensation 
committee of independent directors or to delegate, as appropriate, to 
the board of directors the duties of the compensation committee as 
described below.
    Each TARP recipient faces different material risks given the unique 
nature of its business and the markets in which it operates. Thus, 
Sec.  30.5 (Q-5) of the Interim Final Rule requires the compensation 
committee to discuss, evaluate, and review at least every six months 
with senior risk officers SEO compensation plans and employee 
compensation plans and the risks these plans pose to the TARP 
recipient; identify and limit the features in the SEO compensation 
plans that could lead SEOs to take unnecessary and excessive risks that 
could threaten the value of the TARP recipient; and identify and limit 
any features in the employee compensation plans that pose risks to the 
TARP recipient to ensure that the TARP recipient is not unnecessarily 
exposed to risks, including any features in these SEO compensation 
plans or the employee compensation plans that would encourage behavior 
focused on

[[Page 28399]]

short-term results rather than long-term value creation. In addition, 
Sec.  30.6 (Q-6) of the Interim Final Rule requires that the 
compensation committee discuss, evaluate, and review at least every six 
months the terms of each employee compensation plan and identify and 
eliminate the features in the plan that could encourage the 
manipulation of reported earnings of the TARP recipient to enhance the 
compensation of an employee.
    Sections 30.4 (Q-4) and 30.7 (Q-7) of the Interim Final Rule 
require the compensation committee to provide annually a narrative 
description of how it limited the features in (1) SEO compensation 
plans that could encourage SEOs to take unnecessary and excessive risks 
that could threaten the value of the TARP recipient, including how 
these SEO compensation plans do not encourage behavior focused on 
short-term results rather than long-term value creation, (2) employee 
compensation plans to ensure that the TARP recipient is not 
unnecessarily exposed to risks, including how these employee 
compensation plans do not encourage behavior focused on short-term 
results rather than long-term value creation, and (3) employee 
compensation plans that could encourage the manipulation of reported 
earnings of the TARP recipient to enhance the compensation of an 
employee.
    Sections 30.4 (Q-4) and 30.7 (Q-7) of the Interim Final Rule 
require that the compensation committee certify annually that it has 
completed the reviews of the SEO compensation plans and the employee 
compensation plans as outlined above. Section 30.7 (Q-7) of the Interim 
Final Rule also provides that TARP recipients with securities 
registered with the SEC pursuant to the Federal securities laws must 
provide these disclosures and certifications in the Compensation 
Committee Report required pursuant to Item 407 of Regulation S-K under 
the Federal securities laws (17 CFR 229.407) and to Treasury. Section 
30.7 (Q-7) of the Interim Final Rule requires that TARP recipients that 
are smaller reporting companies or do not have securities registered 
with the SEC pursuant to the Federal securities laws provide the 
disclosures and certifications to their primary regulatory agency and 
to Treasury.
    Pursuant to section 111(b)(3)(B), Sec.  30.8 (Q-8) of the Interim 
Final Rule requires a TARP recipient to ensure that any bonus, 
retention award, or incentive compensation paid or accrued during the 
TARP period to a SEO or one of the next twenty most highly compensated 
employees is subject to a provision for recovery or ``clawback'' by the 
TARP recipient if the payments or accruals were based on materially 
inaccurate financial statements or any other materially inaccurate 
performance metric criteria. Section 30.8 (Q-8) of the Interim Final 
Rule deems that bonuses, retention awards, and incentive compensation 
are paid or accrued to a SEO or any one of the next twenty most highly 
compensated employees during the TARP period when the SEO or one of the 
next twenty most highly compensated employees obtains a legally binding 
right to that payment during the TARP period.
    This clawback provision differs from the clawback provision 
required under section 304 of the Sarbanes-Oxley Act of 2002 (Sarbanes-
Oxley) (Pub. Law No. 107-204). Section 304 of Sarbanes-Oxley requires 
the forfeiture by a public company's chief executive officer or the 
chief financial officer of any bonus, incentive-based, or equity-based 
compensation received during the twelve-month period following a 
materially non-compliant financial report and any profits from sales of 
the company's securities during that period. In contrast, the standard 
established under section 111(b)(3)(B) of EESA applies to the three 
most highly compensated executive officers and the next twenty most 
highly compensated employees in addition to the PEO and the PFO; 
applies to both public and private TARP recipients; applies to 
retention awards; is not exclusively triggered by a requirement to 
prepare an accounting restatement due to material noncompliance of the 
issuer as a result of misconduct; does not limit the recovery period; 
and covers not only material inaccuracies relating to financial 
reporting but also material inaccuracies relating to other performance 
metrics used to calculate bonus payments.
    Pursuant to section 111(b)(3)(C), Sec.  30.9 (Q-9) of the Interim 
Final Rule prohibits a TARP recipient from making a golden parachute 
payment to a SEO or the next five most highly compensated employees 
during the TARP period. Under the Interim Final Rule, a golden 
parachute payment includes a payment for departure from a TARP 
recipient for any reason, other than a payment for services performed 
or benefits accrued. Pursuant to the authority granted the Secretary 
under section 111(b)(2) and section 111(h), the Interim Final Rule also 
treats as a golden parachute payment and amount due upon a change in 
control event of the TARP recipient. Section 30.1 (Q-1) of the Interim 
Final Rule excludes from the definition of golden parachute payment 
qualified retirement plans and similar foreign retirement plans, as 
well as payments due to an employee's death or disability and severance 
payments required by State statute or foreign law. Given the language 
of the ARRA, there is no longer any exception for any amount of a 
golden parachute payment, such as was allowed under the October 2008 
Interim Final Rule. In addition, a golden parachute payment is treated 
as paid at the time of the employee's departure, regardless of when the 
amounts are actually paid. Therefore, TARP recipients and employees may 
not avoid the restriction by deferring payment of the golden parachute 
payment past the end of the TARP period.
    Pursuant to section 111(b)(3)(D), Sec.  30.10 (Q-10) of the Interim 
Final Rule prohibits a TARP recipient from paying or accruing any 
bonus, retention award, or incentive compensation during the TARP 
period to certain employees. The TARP recipient's amount of financial 
assistance determines the number of employees subject to this 
prohibition. This prohibition applies to the most highly compensated 
employee of any TARP recipient that has received less than $25,000,000 
in financial assistance; to at least the five most highly compensated 
employees of any TARP recipient that has received at least $25,000,000 
but less than $250,000,000; the SEOs and at least the ten next most 
highly compensated employees of any TARP recipient that has received at 
least $250,000,000 but less than $500,000,000; and the SEOs and at 
least the twenty next most highly compensated employees of any TARP 
recipient that has received $500,000,000 or more. Section 30.10 (Q-10) 
of the Interim Final Rule states that TARP recipients will be subject 
during the TARP period to the bonus limitation requirements based on 
the total amount of financial assistance outstanding under the TARP. If 
additional financial assistance would result in additional employees 
becoming subject to the prohibition, the prohibition on the additional 
employees will not be effective until the fiscal year following the 
year during which the additional financial assistance is received.
    Section 30.1 (Q-1) of the Interim Final Rule includes definitions 
of a bonus, incentive compensation or retention award. A bonus means 
any payment in addition to any amount payable to an employee for 
services performed by the employee at a regular hourly, daily, weekly, 
monthly or similar periodic rate. Generally a bonus would not include a 
contribution to a

[[Page 28400]]

qualified plan, benefits under a broad-based benefit plan, bona fide 
overtime pay, and bona fide and routine expense reimbursements. Section 
30.10 (Q-10) contains rules defining when bonuses will be treated as 
accruing or paid. Notably, section 30.10 (Q-10) contains an anti-abuse 
rule, intending to address circumstances in which a bonus that was not 
permitted to accrue during the year an employee was covered by the 
bonus limitation is paid to the employee in the subsequent year when 
the employee is not covered by the bonus limitation, but is designated 
as some other form of payment such as a salary increase or a stock 
option grant. In such a case, the payment in the subsequent year may be 
recharacterized as a payment of the bonus that was not permitted to 
accrue in the previous year.
    Section 30.1 (Q-1) of the Interim Final Rule excepts from the 
definition of a bonus certain commission compensation for sales to, and 
investment management services for, unrelated parties. Many TARP 
recipients have broker-dealer, investment advisory, and insurance 
divisions, where registered representatives, investment advisors, and 
agents typically receive commissions based on the amount of sales of 
financial products or the value of assets under management. In this 
context, commission payments characteristically are viewed as a 
component of base salary rather than bonus compensation. However, fees 
earned from sales to entities within the affiliated group, investment 
banking, or proprietary trading are not considered commission 
compensation and the Interim Final Rule does not except these fees from 
the definition of a bonus or incentive compensation.
    Section 30.1 (Q-1) of the Interim Final Rule generally defines an 
incentive compensation plan by reference to the Federal securities 
regulations. However, for purposes of this Interim Final Rule, an 
incentive compensation plan also includes a stock option or stock plan, 
regardless of whether those plans are subject to performance-based 
vesting. The inclusion of these arrangements is consistent with the 
statute's classifying the grant of a limited amount of long-term 
restricted stock as an exception to the bonus, incentive compensation, 
and retention award restrictions.
    This inclusion of a stock plan in the definition of an incentive 
compensation plan does not restrict the TARP recipient's ability to pay 
salary or other permissible payments in the form of stock or other 
property, even if the stock is issued pursuant to a stock plan. In 
addition, the payment may be made in stock that is subject to holding 
periods or transferability restrictions, such as not permitting the 
stock to be transferred for a specified number of years, until a 
specified event occurs (such as the employee's retirement, or a 
specified number of years after an employee's retirement or other 
termination of employment), or until certain TARP fund repayment 
hurdles are met. However, the payment must still be payment of salary 
or another permissible amount. Accordingly, the amount of the future 
payment must be denominated in dollars, rather than in a number of 
shares. For example, an employee could be entitled to a salary of 
$5,000 per week, half payable in cash and half payable in stock valued 
at $2,500 on each salary payment date. In addition, as salary, the 
stock or other property cannot be subject to a substantial risk of 
forfeiture or any requirement of future services (and thus the grant of 
such stock will not be treated as a retention award either), as 
distinguished from a restriction on transferability. The same analysis 
would apply to a grant of a stock unit (such as phantom stock or a 
restricted stock unit) with similar characteristics to the salary 
payment arrangement described above, in lieu of a grant of the same 
number of shares. Accordingly, the stock unit could not be subject to a 
substantial risk of forfeiture or other requirement of continued 
services, and would be payable at a fixed date in the future (and the 
arrangement would otherwise need to comply with the requirements of 
section 409A of the Internal Revenue Code (26 U.S.C. 409A)). However, 
such a structure generally will not be feasible during 2009 due to the 
restrictions under section 409A of the Internal Revenue Code (26 U.S.C. 
409A).
    Section 30.1 (Q-1) generally defines a retention award as any 
payment to an employee that is not payable periodically to an employee 
for service performed by the employee at a regular hourly, daily, 
weekly, monthly, or similar periodic rate, is contingent on the 
completion of a period of future service with the TARP recipient or the 
completion of a specific project or other activity of the TARP 
recipient, and is not based on the performance of the employee (other 
than a requirement that the employee not be separated from employment 
for cause) or the business activities or value of the TARP recipient. 
Exceptions are provided for a contribution to or payment made from a 
qualified plan, or a payment from a benefit plan, overtime pay or 
reasonable expense reimbursement. An exception is also made for amounts 
accrued under a nonqualified deferred compensation plan, to the extent 
the amounts are accrued in the normal course of the employee's service 
at the TARP recipient and are not accrued by reason of a material 
enhancement of such benefits. An exception is not provided, however, 
for awards to new hires, including awards as part of a ``make-whole'' 
agreement intended to provide a newly hired employee a continuation of 
benefits accruing at a prior employer. Such awards are not structurally 
materially different from retention awards granted to current 
employees, which are intended to be subject to these restrictions.
    Pursuant to section 111(b)(3)(D)(i), Sec.  30.10 (Q-10) of the 
Interim Final Rule provides two exclusions from this prohibition on the 
payment or accrual of bonus, retention award, or incentive 
compensation. The TARP recipient is permitted to award long-term 
restricted stock to the employees subject to this prohibition. Because 
many TARP recipients, especially smaller, family-owned community banks 
as well as private financial institutions, would be unwilling or unable 
to award restricted stock, Sec.  30.1 (Q-1) of the Interim Final Rule 
defines long-term restricted stock to include both restricted stock and 
restricted stock units, which can be settled in stock or cash, and 
which may be designed to track a specific unit or division within a 
TARP recipient.
    Section 30.10 (Q-10) of the Interim Final Rule describes the 
restrictions imposed upon this stock. Pursuant to section 
111(b)(3)(D)(i)(I), Sec.  30.11 (Q-11) of the Interim Final Rule states 
that the value of the long-term restricted stock can be no greater than 
\1/3\ of the employee's total annual compensation. For purposes of 
determining annual compensation under the long-term restricted stock 
exception, all equity-based compensation granted will be included in 
the calculation only in the year in which it is granted, and will be 
included at its total fair market value on the grant date, so all 
equity-based compensation granted in fiscal years ending prior to June 
15, 2009 will not be included in the calculation of annual 
compensation. In determining the value of the long-term restricted 
stock grant, the long-term restricted stock will be included in the 
calculation only in the year in which the restricted stock is granted, 
and will be included at its total fair market value on the grant date. 
This calculation of total annual compensation differs from the 
calculation used to determine the SEOs and most highly compensated 
employees each year, which is

[[Page 28401]]

determined pursuant to Item 402(a) of Regulation S-K under the Federal 
securities laws (17 CFR 229.402(a)). This is necessary to avoid a 
failure to comply with the Interim Final Rule, for instance, if other 
aspects of the employee's annual compensation decrease in a subsequent 
year, so that if the grant were included in compensation over multiple 
years, the one-third annual compensation limit could be exceeded merely 
due to such decrease.
    Pursuant to section 111(b)(3)(D)(i)(II), Sec.  30.10 (Q-10) of the 
Interim Final Rule states that the excepted long-term restricted stock 
must not fully vest until the repayment of all financial assistance by 
the TARP recipient. Section 30.10 (Q-10) of the Interim Final Rule 
requires that the employee provide services to the TARP recipient for 
at least two years after the date of the grant of the long-term 
restricted stock to vest in this stock, and prescribes a schedule under 
which such stock may become transferable (or in the case of a 
restricted stock unit, payable). Specifically, Section 30.10 (Q-10) of 
the Interim Final Rule establishes the following schedule, subject to 
the further requirements outlined below, for the long-term restricted 
stock: For each 25% of total financial assistance repaid, 25% of the 
total long-term restricted stock granted may become transferable, until 
the final repayment, at which time the remaining long-term restricted 
stock may become transferable. Because, in the case of restricted stock 
(but not a restricted stock unit), the fair market value of the stock 
may be subject to inclusion in income for income tax purposes before 
the stock becomes transferable, an exception to the transferability 
restriction is provided to the extent necessary to pay the applicable 
taxes. Nothing in the Interim Final Rule, however, prohibits vesting 
based on longer service periods or additional performance-based 
requirements.
    Pursuant to section 111(b)(3)(D)(iii), Sec.  30.10 (Q-10) of the 
Interim Final Rule also excludes from this prohibition any bonus, 
retention award, or incentive compensation payment required to be paid 
under a valid written employment contract executed on or before 
February 11, 2009 if the employee has a legally binding right under the 
contract to this payment. For purposes of determining whether an 
employee had a legally binding right to a payment, the Interim Final 
Rule uses rules specified in 26 CFR 1.409A-1(b)(1). In addition, the 
payment must be made in accordance with the terms of the contract as of 
February 11, 2009, such that any amendment to the contract to increase 
the amount payable, accelerate any vesting conditions, or otherwise 
materially enhance the benefit available to the employee under the 
contract will result in the payment being treated as not made under the 
employment contract executed on or before February 11, 2009. The waiver 
by the employee of any benefits available to the employee under the 
terms of the contract will not result in the payment of other benefits 
under the contract being treated as made other than under the 
employment contract executed on or before February 11, 2009.
    Whether an employee has accrued bonus, retention award, or 
incentive compensation is determined based on the facts and 
circumstances. However, to avoid circumvention of the Interim Final 
Rule by merely delaying bonus payments until after the employee is no 
longer subject to the prohibition, or granting retroactive service 
credits after the employee is no longer subject to the prohibition, if 
after the employee is no longer a SEO or most highly compensated 
employee, the employee is paid an amount, or provided a legally binding 
right to the payment of an amount, based upon services performed or 
compensation received during the period the employee was a SEO or most 
highly compensated employee, the employee will be treated as having 
accrued the amount during the period the employee was a SEO or most 
highly compensated employee.
    Certain bonus, retention award, or incentive compensation may 
relate to a multi-year service period, during some portion of which the 
employee is subject to the prohibition and during some portion of which 
the employee is not subject to the prohibition. In such circumstances, 
the employee will not be treated as having accrued the bonus, retention 
award, or incentive compensation during the portion of the service 
period the employee was subject to the limitation, if the bonus, 
retention award, or incentive compensation is reduced to reflect at 
least the portion of the service period that the employee was subject 
to the prohibition. However, if the employee is subject to the 
prohibition at the time the amount would otherwise be paid, the amount 
still may not be paid until the payments to the employee are permitted.
    A bonus, a retention award, or incentive compensation that an 
employee accrues while the employee is not subject to the prohibition 
on accrual or payment and is payable at a time when the employee has 
become subject to the prohibition, may not be paid until the employee 
is no longer subject to the prohibition. In addition, as part of the 
conditions to a TARP recipient's receiving financial assistance under 
the TARP set forth in the contract between Treasury and the TARP 
recipient, the Federal government may require that certain other bonus, 
retention award, or incentive compensation not be paid during a 
designated period, such as the period during which the TARP recipient 
retains any financial assistance provided under TARP, or until some 
other condition related to the TARP recipient's financial health is 
satisfied. The issue has arisen as to whether the failure to pay such 
bonus, retention award, or incentive compensation would be treated as a 
subsequent deferral election that fails to comply with the requirements 
of section 409A of the Internal Revenue Code (26 U.S.C. 409A) or 
whether it would convert a payment that would otherwise be a short-term 
deferral, within the meaning of 26 CFR 1.409A-1(b)(4), into a payment 
of deferred compensation that would be subject to the restrictions in 
section 409A. Treasury and Internal Revenue Service officials have 
advised that the delay of the payment until such time as the recipient 
of the payment is no longer subject to the prohibition will not result 
in a failure to comply with the requirements of section 409A and will 
not result in a payment that otherwise would have been a short-term 
deferral being treated as a payment of deferred compensation, so long 
as the payment is made promptly following the first date upon which the 
payment could be made without violating the terms of the agreement 
between the TARP recipient and Treasury and in accordance with the 
Interim Final Rule. Accordingly, for purposes of the issuance of a 
restricted stock unit intended to qualify as long-term restricted stock 
as an exception to the bonus payment limitation, the unit may be 
structured with a payment date no later than the later of the end of 
the short-term deferral period or the first date upon which the payment 
is permissible under these rules and the applicable terms of the 
agreement between the TARP recipient and Treasury, and the unit will 
not be subject to section 409A provided the payment terms are 
satisfied.
    Pursuant to section 111(d), Sec.  30.12 (Q-12) of the Interim Final 
Rule requires that the board of directors of the TARP recipient adopt 
an excessive or luxury expenditures policy, file this policy with 
Treasury, and post the text of this policy on its Internet Web site, if 
the TARP recipient maintains a company Web site, before the later of 
ninety days after the closing date of the

[[Page 28402]]

agreement between Treasury and the TARP recipient or ninety days after 
June 15, 2009. Section 30.1 (Q-1) of the Interim Final Rule defines an 
excessive or luxury expenditures policy to require the inclusion of 
standards to ensure appropriate review and approval of potentially 
excessive and luxury expenditures. Section 30.1 (Q-1) of the Interim 
Final Rule requires that the policy (1) Identify the types and 
categories of expenses prohibited or requiring prior approval; (2) 
adopt approval procedures for those expenses requiring prior approval; 
(3) mandate PEO and PFO certification of the prior approval of any 
expenditures requiring the prior approval of any SEO, other similar 
executive officers, or the board of directors; (4) mandate prompt 
internal reporting of any violation of this policy; and (5) mandate 
accountability for adherence to this policy.
    Section 30.12 (Q-12) of the Interim Final Rule requires that the 
board of directors of each TARP recipient determine what are excessive 
and luxury expenditures and establish a set of requirements specific to 
the TARP recipient under this policy. This is similar to the method by 
which public companies adopted a code of ethics under section 406 of 
Sarbanes-Oxley. Under the Federal securities regulations promulgated 
under section 406 of Sarbanes-Oxley (17 CFR 229.406), the SEC presented 
a general framework for a code of ethics, but the public company itself 
was required to adopt standards specific to the company using this 
general framework as a guide.
    Pursuant to section 111(e), TARP recipients are required to permit 
a nonbinding shareholder resolution on SEO compensation as provided 
pursuant to the compensation disclosure rules under the Federal 
securities laws. Section 111(e) authorizes the SEC to promulgate any 
necessary final rules or regulations relating to this requirement. The 
Interim Final Rule requires TARP recipients to comply with any SEC 
guidance, rules, or regulations promulgated with respect to section 
111(e).
    Pursuant to section 111(h), and section 111(b)(2), the Secretary is 
authorized to establish additional executive compensation and corporate 
governance standards. The Secretary has determined to adopt four 
additional standards. First, Sec.  30.11(a) (Q-11) of the Interim Final 
Rule requires that TARP recipients receiving exceptional financial 
assistance submit for approval the compensation payments and 
compensation structures of the SEO and most highly compensated 
employees subject to the bonus payment limitation, and the compensation 
structures of all other executive officers and 100 most highly 
compensated employees, for approval by the Office of the Special Master 
for TARP Executive Compensation. However, if a TARP recipient limits 
the annual compensation for any executive who is not a SEO or a most 
highly compensated employee subject to the bonus limitation provision 
to $500,000, with any additional compensation in long-term restricted 
stock, the compensation structure is not required to be submitted for 
approval. For this purpose, annual compensation and the value of the 
long-term restricted stock are determined in the same manner as 
provided in the long-term stock exception in Sec.  30.10 (Q-10) of the 
Interim Final Rule.
    Second, Sec.  30.11(b) (Q-11) of the Interim Final Rule requires a 
TARP recipient to disclose to Treasury and its primary Federal 
regulator annually any perquisites whose total value exceeds $25,000 
for any employee who is subject to the limitations on bonus payments. 
TARP recipients are required to identify the amount and nature of the 
perquisites and disclose a justification for offering these 
perquisites. Existing Federal securities regulations require public 
companies only to identify for any of the top five executive officers 
or members of the boar