Meredith Cross, the director of the SEC’s Division of Corporation Finance, testified before the House Committee on Financial Services on September 24 about the agency’s plans for implementing the executive compensation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Committee also heard testimony from officials from the Federal Reserve Board and the Federal Deposit Insurance Corporation, Martin Baily with the Brookings Institution, and Darla Stuckey with the Society of Corporate Secretaries and Governance Professionals.

Section 951 of the Dodd-Frank Act requires a shareholder advisory say-on-pay vote on executive compensation at all companies that are subject to the SEC’s proxy rules. The votes must be held at least once very three years. A separate advisory vote must be held at least every six years on whether the say-on-pay resolution will be presented every one, two or three years.

Any proxy statement seeking shareholder approval of a merger or a similar transaction must disclose, and must seek a shareholder advisory vote to approve, the compensation related to the transaction unless the transaction was already the subject of a say-on-pay vote. Institutional investment managers that are subject to 1934 Act Section 13(f) must report at least annually on how they voted on any of the required votes.

Cross noted that the Dodd-Frank Act did not specify a deadline for these rulemaking initiatives, but the SEC’s goal is to adopt final rules in time for the 2011 proxy season.

Section 957 of the Act requires the national securities exchanges to amend their rules to prohibit brokers from voting uninstructed shares on the election of directors, executive compensation or any other significant matters as determined by the SEC. Cross advised that the SEC previously approved changes to the New York Stock Exchange rules to prohibit broker voting of uninstructed shares in director elections. The SEC also approved NYSE rules that prohibit broker voting on all executive compensation matters, which include the say-on-pay votes. The SEC expects to consider corresponding rules by the other national securities exchanges in the near future.

Section 952 of the Act requires the SEC to adopt rules to mandate new listing standards for the independence of compensation committee directors and to establish new disclosure requirements and conflict of interest standards in connection with the hiring of compensation consultants. The rules must be adopted within 360 days from the date of enactment of the Dodd-Frank Act. Cross said the rules should be proposed for comment soon.

Section 953 requires the SEC to amend its executive compensation disclosure requirements to require companies to disclose information about the relationship between executive pay and company performance. Companies will also have to disclose the total annual compensation of the chief executive officer, the median annual total compensation of all other employees and the ratio between the two amounts. Rep. Patrick McHenry (R-NC) noted that some have characterized this provision as a logistical nightmare.

Cross said that in drafting rules under Section 953, the staff will try to address the difficulties the requirement will pose for large, multinational firms. If the staff runs into problems, it will return to Congress for assistance. Committee Chair Barney Frank (D-MA) noted that the provision was added by the Senate. He offered to revise the language if necessary.

Section 955 requires the SEC to adopt amendments to require companies to disclose in their annual meeting proxy materials whether any employee or director is permitted to purchase financial instruments designed to hedge against any decrease in the market value of equity securities granted as part of their compensation.

Section 954 requires rules mandating changes to the listing standards to require companies to implement and disclose clawback policies for recovering incentive-based pay from current and former executive officers during any three-year period that precedes any accounting restatement due to material non-compliance with the financial reporting requirements. The Act does not specify deadlines for these three sections, but Cross said the SEC’s goal is to publish rule proposals by July 2011

The SEC is also working to implement Section 956 which requires that the agency work with other federal regulators to develop joint regulations or guidelines applicable to covered financial institutions, which include SEC-registered broker-dealers and investment advisers with assets of $1 billion or more. Cross said this is a new role for the SEC. The rules or guidelines relate to the structures of incentive-based compensation and prohibit incentive-based payment arrangements which regulators believe may encourage inappropriate risks. The rules will be comparable to the standards applicable to insured depository institutions. The Act requires that the rules or guidelines be adopted no later than nine months after the enactment of the Dodd-Frank Act.