(MarketWatch) - Democratic lawmakers on a key committee on Tuesday
approved a package of legislation opposed by most Republicans that would
impose restrictions on the pay of top executives and give shareholders a
vote on executive compensation.
The House Financial
Services Committee approved a bundle of pay provisions by 40-28,
including a measure that requires corporate compensation committees to
be made up of independent directors.
The bill, most of which
goes along with an Obama administration proposal released earlier this
month, requires the Securities and Exchange Commission to set up new
governance consulting rules, such as a measure to safeguard the
independence of compensation consultants hired by corporate pay
The package also has a
controversial provision -- not part of the White House proposal - that
would require federal regulators to prohibit "certain compensation"
structures at large financial institutions if they could have a "serious
adverse effect on financial stability."
It would also require
federal regulators to write rules requiring financial institutions to
disclose their incentive-based pay plans for executives and employees.
The federal regulators would then determine if the pay packages are
"aligned with sound risk management."
The provision, opposed by GOP lawmakers on the committee, comes partly
in response to concerns earlier this year about certain American
International Group Inc. employees who received large bonuses despite
the troubled insurer's $190 billion government bailout.
Lawmakers expect to vote
on the legislation, H.R. 3269, later Tuesday afternoon.
The executive-pay effort
is part of a larger multi-part endeavor on Capitol Hill to reform bank
and securities regulation in response to the financial crisis. Frank
expects the full House to vote on the measure later this week.
He expects it to be
packaged together with other regulatory reform initiatives considered in
both the House and Senate in the fall.
Rep. Spencer Bachus,
R-Ala, the committee's ranking member, took issue with the fact that
Frank called for a vote on the legislation without having a hearing on
the specific details of the bill. He took issue with the provision that
would require federal regulators to prohibit pay packages at large
financial institutions if they could have an adverse impact on the
corporation or the markets, calling the measure "unprecedented."
"We've not heard from
regulators on how they would enforce this, how they would set up a
regulatory scheme for this, we haven't heard from compensation experts
about it," Bachus said.
Steve Balsam, a professor
at Temple University in Philadelphia, said he worried that any rules
written by a bank regulator to limit incentive-based pay packages of
financial institutions could have the unintended consequence of limiting
important investments that could be considered risky, but are necessary
to drive creative innovation in operating businesses.
"Treasury bills aren't
risky, but what if all financial institutions invested in T-bills to
meet risk rules," Balsam said. "There would be no money to go into
Balsam also responded to
concerns about how portfolio managers at AIG received bonuses to create
complex insurance derivatives instruments many considered a key
contributor to the financial crisis. He said the kind of managers that
created these instruments would find another kind of derivatives that
may be more risky with an alternative incentive package.
Say-on-pay and small
The package also included
a provision that would give the SEC the authority to exempt smaller
public institutions from the package of measures, including the
proposal, known as "say on pay," where shareholders would have the
authority to a non-binding vote on corporate executive compensation.
The measure would also
exempt private companies that have publicly issued debt from the
Vote disclosures for
hedge funds, labor-backed pension funds
A provision introduced by
Rep. Mary Jo Kilroy, D-Ohio, was approved that would require hedge funds
and other institutional investors with more than $100 million in assets
to disclose how they vote on executive compensation.
Mutual funds are required
by the SEC to disclose how they vote on pay and other provisions, but
hedge funds and public pension funds are not required to disclose their
Rep. Patrick McHenry, R-N.C.,
backed the amendment, saying he supported it because he would like
greater disclosure about how labor-backed public pension funds vote on
"Hold pension funds
accountable for how they are voting," McHenry said.