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Incoming SEC Oversight Chair Will Focus on Executive Compensation and Hedge
Funds
With the Democrats having retaken control of the House of
Representatives, Rep. Barney Frank (D-MA) is poised to become chairman of the
House Financial Services Committee in the 110th Congress. From his record as the
committee's ranking member, Frank is expected to focus on executive compensation
and hedge fund issues. He is also a strong advocate for the proper
implementation of the Fair Fund provisions of the Sarbanes-Oxley Act.
Frank introduced a bill that would allow shareholders to
approve their company's executive compensation. The Protection Against Executive
Compensation Abuse Act, H.R. 4291, would also allow for a company policy for
recapturing any form of incentive compensation, such as when the company pays
bonuses or grants stock options to executives for meeting performance targets,
only to later learn that the numbers were inaccurate and must be restated. The
bill would require that shareholders separately approve any additional
"golden parachute" compensation for top executives that coincides with
the sale or purchase of substantial company assets. This provision is designed
to empower shareholders to protect themselves from senior management's natural
conflict of interest when negotiating an agreement to buy or sell a company
while simultaneously negotiating a personal compensation package.
The bill would require that companies include on their Web
sites clear and simple disclosures on the company's compensation filings made to
the SEC. Rather than forcing shareholders to regularly monitor and decipher what
Frank called the SEC's "arcane" EDGAR database, shareholders could get
this information on the company's Web site.
Frank is also interested in hedge fund regulation. He was
instrumental in getting the House to pass a bill directing the President's
Working Group on Financial Markets to conduct a study and report to Congress on
the hedge fund industry. The Hedge Fund Study Act, H.R. 6079, has the support of
House leaders and represents an effort by Congress to learn more about both the
risks and benefits of hedge funds in light of their explosive growth. The bill
has been received in the Senate. In order to become law, it would have to be
passed by the Senate during the upcoming lame duck session of Congress. One
topic that must be analyzed in the study is the growth of pension funds that
invest in hedge funds. Frank, noting his concern about the interface between
pension funds and hedge funds, vowed to deal with the issue further next year.
Frank also has introduced H.R. 5712 to authorize the
registration and monitoring of hedge funds, effectively reversing a recent
federal appeals court decision declaring arbitrary an SEC rule requiring hedge
funds to register with the SEC if they have more than 14 clients and manage a
specific amount of assets. The bill would give the SEC clear authority to
require registration and monitoring. The Investment Advisers Act exempts from
registration investment advisers with fewer than 15 clients. In Goldstein v.
SEC, the appeals panel rejected the SEC's suggestion of counting the investors
in the hedge fund as clients of the fund's adviser in order to exceed the
14-client limit. Frank's bill would authorize the SEC to interpret the term
"client" to require the registration of advisers to funds that have
more than 15 investors.
Frank has also shown interest in the proper implementation
of the Fair Fund provisions of Sarbanes-Oxley, which provided a new tool to help
the SEC return lost money to investors harmed by corporate wrongdoing. Frank
released a report by the Government Accountability Office that reviewed the
efforts of the SEC and the CFTC to track and manage the collection and
distribution of civil fines and ill-gotten gains from corporate wrongdoers.
While the GAO report determined that the SEC has made progress in more
effectively managing its collection of penalties and disgorgement funds, and has
successfully used the Fair Fund to collect money to help investors harmed by
corporate misdeeds, the agency has encountered difficulties in expeditiously
returning these funds to investors.
Frank called on the SEC to continue to focus on improving
its administration of the Fair Fund and asked the Commission to identify
additional legislative reforms to improve the implementation of the Fair Fund.
He believes that the SEC needs to find ways to turn the Fair Fund into a more
effective mechanism for returning funds to wronged investors given the
limitations of the law and the difficulties of identifying those injured by
securities fraud. If the SEC needs additional statutory reforms to protect
innocent investors, Frank stands ready to consider such changes.
James Hamilton
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