Financial CHOICE Act 2.0, What's New?


Rep. Hensarling

An amended version of the Financial CHOICE Act is expected to be introduced in the House of Representatives, according to a Feb. 6 memo authored by Jeb Hensarling (R-TX), Chairman of the Financial Services Committee.

Hensarling’s memo outlines proposed changes to the Financial CHOICE Act (H.R. 5983), which was introduced in the House last year.  Executive compensation experts are keeping a close eye on Financial CHOICE Act developments because the bill proposes to repeal and amend in part executive compensation and corporate governance provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The memo refers to the amended version of the Financial Choice Act as “CHOICE Act 2.0.”

Executive Compensation Provisions Under Dodd-Frank

There is no indication in Hensarling’s memo that additional changes have been proposed in CHOICE Act 2.0 regarding executive compensation provisions under Dodd-Frank. In short, the CHOICE Act 2.0 is expected to repeal and amend the executive compensation provisions of Dodd-Frank as follows:

  • Pay Ratio. Proposal to repeal the section of Dodd-Frank which requires companies to disclose the ratio of pay between CEOs and the median employees. The future of pay ratio disclosure remains uncertain in light of Acting Securities and Exchange Commission Chairman Michael S. Piwowar’s Feb. 6 statement requesting an expedited review of unanticipated challenges to implement the pay ratio disclosure rule.  See related story, SEC Calls Time-Out on Pay Ratio Disclosure
  • Incentive-Based Compensation. Proposal to repeal the provision of Dodd-Frank which requires enhanced disclosure and reporting of incentive-based compensation by covered institutions that provide excessive compensation or that could lead to material financial loss. The future of incentive-based compensation provisions remains uncertain in light of President Trump’s Feb. 3 executive order mandating a Department of the Treasury review of financial regulations, including Dodd-Frank.
  • Hedging. Proposal to repeal the section of Dodd-Frank which requires companies to disclose whether employees or directors can offset any increase in market value of the company’s equity grants as compensation.
  • Say-on-Pay. Proposal to amend the provision of Dodd-Frank which requires companies to hold shareholder votes regarding the approval of executive compensation and how often these votes must occur, also referred to as say-on-frequency.  The current provision requires these votes to occur “not less frequently than once every 3 years,” but the Financial Choice Act proposes to amend the frequency to “each year in which there has been a material change to the compensation. . . .”
  • Clawbacks. Proposal to amend the provision of Dodd-Frank which requires the SEC to direct the national securities exchanges and associations to prohibit the listing of companies that haven’t developed and implemented compensation clawback polices. The Financial CHOICE Act proposes to limit the scope of the clawback rule to current and former executives who had “control or authority” over the company’s financial statements.
  • Pay v. Performance. The future of the pay versus performance provision is uncertain because it isn’t addressed by the Financial CHOICE ACT or Hensarling’s memo. Section 953(a) of Dodd-Frank requires companies to disclose the relationship between executive compensation actually paid and the financial performance of the company. 

Regulatory Uncertainty Continues

This year has kicked off with a flurry of activities that potentially could impact the regulation of executive compensation. The Financial CHOICE Act, if enacted, will impact the SEC’s final and proposed rules to implement the executive compensation provisions of Dodd-Frank.

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