HomeMy WebLinkAbout11-7681AMERISERV FINANCIAL, INC.,
Petitioner
V.
THOMAS McKEON,
Respondent
IN THE COURT OF COMMON PLEAS OF
CUMBERLAND COUNTY, c-a r
PENNSYLVANIA -
C-)
No. 11 ° 764 C - 4 70
-- o
PETITION TO VACATE OR MODIFY ARBITRATION AWARDS
Petitioner AmeriServ Financial, Inc. requests that this court vacate or modify the
arbitration awards rendered in this matter, pursuant to 42 Pa. Cons. Stat. Ann. § 7341. In support
thereof petitioner states as follows:
PARTIES
1. Petitioner is AmeriServ Financial, Inc. ("AmeriServ"), a bank holding company
headquartered in Johnstown, Pennsylvania.
2. Respondent is Thomas McKeon ("McKeon"), an adult individual with an address
of 305 Clothier Springs Road, Phoenixville, Pennsylvania 19460.
JURISDICTION AND VENUE
3. This Court has jurisdiction over this petition: (1) because this Court is a court of
general jurisdiction and (2) pursuant to 42 Pa. Cons. Stat. Ann. § 7342(b). See Sage v.
Greenspan, 765 A.2d 1139, 1142 (Pa. Super. Ct. 2000) (holding that Section 7342(b) has
consistently been interpreted to require that any challenge to an arbitration award be made in an
appeal to the Court of Common Pleas by the filing of a petition to vacate or modify the
arbitration award within thirty days of the date of the award).
4. Venue is appropriate in Cumberland County, Pennsylvania because the arbitrator
was located in Cumberland County when the stipulations of fact and briefs were submitted to
g?2 .oo P/' a4
a 5-5
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him for the determinations he made in the underlying arbitration. 42 Pa. Cons. Stat. Ann.
§§ 7319(1), 7342(a).
FACTS
On January 22, 2007, AmeriServ and Bruce L. Marra, Janet Marra and McKeon
entered into a stock purchase agreement ("Stock Purchase Agreement"), pursuant to which
AmeriServ purchased 100% of the capital stock of West Chester Capital Advisors, Inc. ("the
Company"). Ameri Serv continues to own 100% of the capital stock of the Company.
6. On March 6, 2007, the Company, AmeriServ, AmeriServ Bank and McKeon
entered into an employment agreement (the "Employment Agreement"), a true and correct copy
of which is attached hereto as Exhibit "A."
7. The Employment Agreement provides for certain severance compensation "[i]n
the event that [McKeon]'s employment is terminated by the Company without Cause and no
Change in Control shall have occurred at the date of such termination ..." [Employment
Agreement, Section 7].
Section 3(b) of the Employment Agreement states: "To the extent the Executive
becomes entitled to and receives the payment and benefits set forth in Section 6 or 7, such
payments and benefits shall constitute liquidated damages for any possible breach of this
Agreement by [AmeriServ], and any of its affiliated companies, and shall represent the
maximum extent of liability therefore that the Executive can claim against any of such entities."
(emphasis added).
9. Moreover, Section 4 of the Employment Agreement details McKeon's
"Employment Period Compensation." Notably, the severance payments provided for in Section
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7 of the Employment Agreement are not included in Section 4. This is because the severance
payments are not compensation for services rendered during McKeon's "employment period."
10. Section 3(e) of the Employment Agreement provides that if McKeon terminates
his employment voluntarily he is not entitled to any severance payments or benefits.
11. On October 3, 2008, the Emergency Economic Stabilization Act of 2008, 12
U.S.C. § 5201 et seq. ("EESA"), was enacted. By the authority granted under the EESA, the
Department of the Treasury established the Troubled Asset Relief Program ("TARP") to
purchase, and to fund commitments to purchase, troubled assets from financial institutions.
12. TARP prohibits a bank that received TARP funds to make any "golden
parachute" payment to certain highly compensated executives.
13. McKeon was a highly compensated executive to which AmeriServ was prohibited
from paying any "golden parachute."
14. A "golden parachute" payment includes "any payment for the departure from a
TARP recipient for any reason, except for payments for services performed or benefits accrued."
See Interim Final Rule, TARP Standards for Compensation and Corporate Governance, 74 Fed.
Reg. 28394, 28408 (June 15, 2009), 31 C.F.R. Part 30, attached hereto as Exhibit "B" (emphasis
added).
15. The Interim Final Rule provides that a payment is "for services performed or
benefits accrued ... only if the pgyment would be made regardless of whether the employee
departs or the change in control event occurs, or if the payment is due upon the departure of the
employee regardless of whether the departure is voluntary or involuntary...." See Interim Final
Rule, § 30.1 (Q-1), at 74 Fed. Reg. 28394, 28408 (emphasis added).
16. In December 2008, AmeriServ received $21,000,000 in financial assistance from
the U.S. Treasury under TARP.
17. On May 3, 2010, the Company terminated McKeon's employment without cause.
18. At the time of the termination, Ameri Serv had not repaid the $21,000,000 in
TARP funds it had received from the U.S. Treasury.
19. Neither the Company, AmeriServ or AmeriServ Bank paid McKeon any of the
amounts described in Subsections 7(a) and (b) of the Employment Agreement, due to the TARP
restrictions on golden parachute payments to highly compensated employees.
20. On or about December 22, 2010, McKeon filed a demand for arbitration with the
American Arbitration Association ("AAA") which commenced an arbitration proceeding (the
"Arbitration").
21. On September 7, 2011, the arbitrator entered an interim award in favor of
McKeon for $178,223.29 plus interest at the statutory rate from June 4, 2010 (the "Interim
Award"). A true and correct copy of the Interim Award is attached hereto as Exhibit "C."
22. The basis for the Interim Award was the arbitrator's finding that the compensation
sought by McKeon was "for services performed or benefits accrued." The arbitrator also found
that the compensation sought by McKeon was a "bonus payment" or a "retention award."
23. The compensation sought by McKeon was not compensation for services
rendered or benefits accrued because the Employment Agreement plainly provides he would not
be entitled to any such compensation if he left AmeriServ voluntarily.
24. The compensation was also not a "bonus payment" or "retention award" under
TARP because McKeon was not entitled to any such compensation if he left AmeriServ
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voluntarily and was not contingent on the completion of a period of future service with
AmeriServ, nor the completion of any project or activity.
25. The arbitrator's decision to grant the Interim Award despite the TARP
prohibitions on golden parachute payments is an irregularity that caused the rendition of an
unjust, inequitable, or unconscionable award.
26. The arbitrator's finding that the compensation sought by McKeon fell "under the
exception for services performed or benefits accrued" was based on a gross error of fact. This
compensation was not due to McKeon "regardless of whether the departure is voluntary or
involuntary." To the contrary, Sections 3(e) and 7 of the Employment Agreement provide that
McKeon is not entitled to severance pay if he voluntarily departed from AmeriServ.
27. The arbitrator's finding that the compensation sought by McKeon was a "bonus
payment" or "retention award" under TARP was also based on a gross error of fact. This
compensation was not due to McKeon if he left AmeriServ voluntarily and was not contigent on
the completion of a period of future service or any project or activity.
28. Under 42 Pa. Cons. Stat. Ann. § 7341, these irregularities caused the unjust and
inequitable result of ordering AmeriServ to violate federal law because AmeriServ is prohibited
by TARP from making the compensation sought by McKeon.
29. On October 6, 2011, the arbitrator entered a final award (the "Final Award") in
favor of McKeon that incorporated the Interim Award in its entirety except as modified by the
Final Award. The Final Award awarded a stipulated amount of attorneys' fees to McKeon and
ordered that the administrative fees and expenses of the American Arbitration Association and
the compensation and expenses of the arbitrator be borne equally by the parties. A true and
correct copy of the Final Award is attached hereto as Exhibit "D."
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30. This petition is filed within thirty days after the delivery of both the notice of the
Interim Award and the notice of the Final Award to AmeriServ.
WHEREFORE, petitioner requests that this Court vacate or modify the arbitrator's
awards due to the irregularities that caused an unjust and inequitable result to petitioner.
Respectfully submitted,
Dated: October 6, 2011 STEVENS & LEE
By ?Ck
G. Thompson Bell, II, Esquire
Attorney ID No. 32649
111 North Sixth Street
P.O. Box 679
Reading, PA 19603-0679
Tel. (610) 478-2203
Fax (610) 478-5610
Attorneys for Petitioner
AmeriServ Financial, Inc.
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AMERISERV FINANCIAL, INC.,
Petitioner
V.
THOMAS McKEON,
Respondent
IN THE COURT OF COMMON PLEAS OF
CUMBERLAND COUNTY,
PENNSYLVANIA
No.
VERIFICATION
I, G. Thompson Bell, III, Esquire, hereby verify that I am counsel for petitioner
AmeriServ Financial, Inc., in the above-referenced action; that the averments of fact contained in
this petition are true and correct to the best of my knowledge, information and belief based upon
information provided to me by petitioner AmeriServ Financial, Inc.; and that I make this
verification on behalf of petitioner AmeriServ Financial, Inc. I further verify that it is my
intention to procure and substitute a verification executed by my client once available.
This verification is made subject to the penalties of 18 Pa. C.S.A. §4904, relating
to unworn falsification to authorities.
Dated: October 6, 2011
G. Thompson Bel, III
SL I 11038 53v 1 /007835.00043
EXHIBIT A
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), made as of the 6th day of March, 2007, between
WEST CHESTER CAPITAL ADVISORS, INC., a Pennsylvania corporation (the "Company"),
AMERISERV FINANCIAL, INC, a Pennsylvania corporation ("AFI'I, AMERISERV BANK, a
Pennsylvania bank (the "Bank"), and THOMAS F. MCKEON, an individual (the "Executive")
WITNESSETH:
WHEREAS, the Executive was the owner of 100 shares of the Company; and
WHEREAS, the Executive has heretofore served the Company in various executive
capacities, most recently pursuant to that certain employment contract between the parties which
expired on November 6, 2006; and
WHEREAS, the Executive and the Bank, a wholly-owned subsidiary of AFI, entered into
a Stock Purchase Agreement dated January 22, 2007 (the "Stock Purchase Agreement") under
which the Bank agreed to purchase all of the Executive's shares in the Company; and
WHEREAS, a portion of the purchase price for the shares is payable in two (2)
installments, one of which is due in thirty (30) months after the closing under the Stock Purchase
Agreement and the second of which is due forty-eight months after closing under the Stock
Purchase Agreement; and
WHEREAS, the Company has agreed to employ the Executive as Vice President of the
Company and, as the sole shareholder of the Company, the Bank has agreed to elect the
Executive as a director of the Company;
WHEREAS, the parties desire to enter into a new employment contract, setting forth,
among other things, the respective rights and obligations relating to the Executive's continued
employment by the Company; and
WHEREAS, the Executive is willing to continue his employment relationship with
Company pursuant to the Stock Purchase Agreement and on the terms set forth herein, and the
Company is willing to employ the Executive on such terms.
AGREEMENT:
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. Employment. The Company hereby employs the Executive, and the Executive hereby
accepts employment with Company, on the terms and conditions set forth in this Agreement and
pursuant to the terms and conditions of the Stock Purchase Agreement.
2. Duties of Emnlovee. The Executive shall perform and discharge well and faithfully
such duties as an executive officer of the Company as may be assigned to him from time to time
by the Company's board of directors ("Board of Directors'. The Executive shall be employed
SL I 695652v2/007835.OD043
as the Vice President of the Company and shall, at a minimum, continue to perform services
similar to those heretofore performed by him for the Company. He shall also hold such
additional titles, with such reasonable additional duties, as may be given to him from time to
time by the Board of Directors (and any of the Company's affiliated companies). The Executive
shall report to the President of the Company. Nothing contained herein shall prohibit the Bank
from transferring the ownership of the capital stock of the Company from the Bank to AR or the
AmeriServ Financial Services and Trust Company (the "Trust Company") as permitted by the
terns of the Stock Purchase Agreement. The Executive shall devote his full time, attention and
energies to the business of the Company (and, if relevant, its affiliated companies) and shall not,
during the Employment Period (as defined in Section 3), be employed or involved in any other
business activity, whether or not such activity is pursued for gain, profit or other pecuniary
advantage; provided, however, that this Section 2 shall not be construed as preventing the
Executive from (i) investing his personal assets in no more than 5% of the voting stock of a
public company, (ii) investing his personal assets in nonpublic corporations or businesses that do
not directly or indirectly compete with the Company or any of its affiliated companies, or
(iii) acting as a member of the board of directors of any other corporation or as a member of the
board of trustees of any other organization not in direct or indirect competition with Company or
any of its affiliated companies, so long as such service does not adversely affect his ability to
properly discharge his duties hereunder, or (iv) being involved in any other activity with the prior
approval of the Board of Directors. The Executive's office will be located in West Chester,
Pennsylvania, unless otherwise explicitly agreed to by the Executive until all payments owing
under the Stock Purchase Agreement are paid to the Executive. Furthermore, the Bank agrees to
elect the Executive as a member of the Board of Directors of the Company until all payments
owing under the Stock Purchase Agreement are paid to the Executive.
I Term of Employment. The Executive's employment under this Agreement shall be
for a period (the "Employment period") commencing on the date of this Agreement and ending
on the date that is four years subsequent thereto, provided, however, that such employment
period shall continue after such four year period, until all payments under the Stock Purchase
Agreement have been paid to the Executive. If, on the fourth anniversary date of this Agreement
or such after date that all payments have been made under the Stock Purchase Agreement, unless
a party has given the other party written notice at least 60 days prior to such anniversary date that
such party does not agree to renew this Agreement, the term of this Agreement and the
Employment Period shall be deemed renewed for a term ending one year subsequent to such
fourth anniversary date (with the same procedure for potential additional such extensions
applying annually thereafter), in all cases unless sooner terminated in accordance with Section 5
hereof or one of the following provisions:
(a) Termination for Cause. The Executive's employment under this Agreement may
be terminated at any time during the Employment Period for Cause by action of the Board of
Directors, upon giving notice of such termination to the Executive at least 15 days prior to the
date upon which such termination shall take effect. As used in this Agreement, "Cause" means
any of the following events:
(i) the Executive is convicted of or enters a plea of guilty or polo contendere to a
felony, a crime of falsehood, or a crime involving fraud or moral turpitude, or the actual
incarceration of the Executive for a period of 90 consecutive days;
sLl 695652v21007835.00043 2
(ii) the Executive willfully fails to follow the lawful instructions of the Board of
Directors after his receipt of written notice of such instructions, other than a failure resulting
from the Executive's incapacity because of physical or mental illness;
(iii) the Executive repeatedly fails in any material respect to perform the
reasonable duties required of the Executive under Section 2 after his receipt of written notice of
such failure from the Board of Directors;
(iv) the Executive commits a significant act of personal dishonesty or willful
misconduct toward the Company, any of its affiliated companies, or any of their directors,
officers, employees or customers;
demands (v) any federal or state agency regulating the Company's business orders or office; or in writing that the Executive's employment be terminated or that he be removed from
(vi) the Executive breaches any material provision of this Agreement and fails to
cure such breach (if curable at all) within 30 days after receipt of written notice of such breach
from the Board of Directors.
If the Executive's employment is terminated under the provisions of this Section 3(a), then all of
his rights under Section 4 shall cease as of the effective date of such
however, that he shall nonetheless be paid his accrued but unpaid salary provided,
ary(d
Section 4(a)) to the date of termination, incurred but unreimbursed (determined under
as of the date of termination, and such other amounts and benefits (if any) as he may otherwise enses
be due hereunder and under the Company's (and any of its affiliates,) pension and welfare
benefit plans in which he is then a participant. If the Executive's employment is terminated
under the provisions of this Section 3(a), then the Executive shall not be entitled to any Deferred
Contingent Amount. However, if it is subsequently determined pursuant to any proceeding
brought under Section 9 that the Executive's employment should not have been terminated for
Cause, he shall be entitled to the compensation provided under Section 7 hereof.
(b) Involuntary Termination Without Cause. The Executive's employment under this
Agreement may be terminated at any time during the Employment Period without Cause, by
action of the Board of Directors, upon giving written notice of such termination to the Executive
at least 34 days prior to the date upon which such termination shall take effect. If the ,
Executive's employment is terminated under the provisions of this Section 3(b), then the
Executive shall be entitled to receive the compensation and benefits set forth in Section 6 or
Section 7, whichever shall be applicable. To the extent the Executive becomes entitled to and
receives the payment and benefits set forth in Section 6 or 7, such payments and benefits liquidated damages for any possible breach of this Agreement shall
any of its affiliated companies, and shall represent the maximum extent of liability therefore lthat
the Executive can claim against any of such entities.
(c) Retirement or Death. If the Executive retires on or after age 65 or dies, the
Executive's employment under this Agreement shall be deemed terminated as of the date of the
Executive's retirement or death, and all of his rights under Section 4 shall cease as of the date of
SL2 695652v2/007835.00043
such retirement or death; provided, however, that the Executive (or his estate, as applicable) shall
nonetheless be entitled to payment of accrued but unpaid salary (determined under Section 4(a))
to the date of termination, incurred but unreimbursed appropriate business expenses as of the
of termination, and such other amounts and benefits
helMLIer (if any) as he may otherwise be due
and under the Company's (and any of its affiliates') pension and welfare benefit plans
in which he is then a participant. In addition, if the Executive's emploent is the provisions of this Section 3(c) as a result of death, then the Executive shall be ea ader
Deferred Contingent Amount payment determined as follows. The Deferred Contingent Amount
otherwise due thirty months after closing shall be determined as provided in the Stock Purchase
Agreement, except that the amount of gross revenues to be compared to Base Year Revenues
shall be determined by annualizing gross revenues for the year in which the date of death occurs
rather than at thirty months after closing as provided under the Stock Purchase Agreement. The
amount of the Deferred Contingent Amount otherwise due forty-eight months after closing shall
be the amount determined as provided in the Stock Purchase Agreemen ex
revenues shall be determined by annualizing chit that gross
death occurs rather than at forty-eight oths wagross fter closing as provided undeerr thich the date of
he Stock Purchase
Agreement. The total Deferred Contingent Amount nevertheless shall be payable at thirty and
forty-eight months as provided in the Stock Purchase Agreement.
(d) Disabilit . The Executive represents that, to the best of his knowledge, he does
not suffer from any medical condition that will or is likely to cause him to become disabled
during the term of this Agreement. If the Executive is incapacitated by accident, sickness, or
otherwise so as to render him mentally or physically incapable of performing the services
required under Section 2 of this Agreement for a continuous period of 6 months, then, upon the
expiration of such period or at any time thereafter (if such condition persists), by action of the
Board of Directors, the Executive's employment under this Agreement
immediately upon giving the Executive written notice to that effect. If the Execut ve's
employment is terminated under the provisions of this Section 3(d), then all of his rights under
Section 4 shall cease as of the last business day of the week in which such termination occurs;
provided, however, that he shall nonetheless be entitled to payment of accrued but unpaid salary
(determined under Section 4(a)) to the date of termination, incurred but unreimbursed
appropriate business expenses as of the date of termination, and such other amounts and benefits
(if any) as he may otherwise be due hereunder and under the Company's (and any of its
affiliates') pension and welfare benefit plans in which he is then a participant. The Executive
shall be entitled to any remaining installment payments that have not been paid to the Executive
under the Stock Purchase Agreement, including any Contingent Deferred Compensation,
shall be paid at such time and in such amount as provided in the Stock Purchase Agreement.
(e) Volun Thrminati n by the Executive Without Good Reason. The Executive
may voluntarily terminate his employment under this Agreement at any time during the
Period (and without regard to whether such termination may be deemed retirement
for any purpose), by giving written notice of such termination to the Board of Directors at least
30 days prior to the date upon which termination is to take effect. If the Executive terminates his
employment under the provisions of this Section 3(e), then ail of his rights under Section 4 shall
cease as of the date of termination; provided, however, that the Executive shall nonetheless be
entitled to payment of accrued but unpaid salary (determined under Section 4(a)) to the date of
termination, incurred but unreimbursed appropriate business expenses as of the date of
SLl 695652v2/007835.ON43 4
termination, and such other amounts and benefits (if any) as he may otherwise be due hereunder
and under the Company's (and any of its affiliates') pension and welfare benefit plans in which
he is then a participant. If the Executive's employment is terminated under the provisions of this
Section 3(e), then the Executive shall not be entitled to any Deferred Contingent Amount that has
not yet been paid but the Company shall not be able to recover any Deferred Contingent Amount
that has been paid prior to the date of termination.
(0 Exairation of A ement. In the event this Agreement and Executive's
employment hereunder terminate by reason of the expiration of the Employment Period, because
of the failure to renew the Employment Period as provided above in this section, then all of the
Executive's rights under Section 4 shall cease as of the date of expiration; provided, however,
that the Executive shall nonetheless be entitled to payment of accrued but unpaid salary
(determined under Section 4(a)) to the date of termination, incurred but unreimbursed
appropriate business expenses as of the date of termination, and such other amounts and benefits
(if any) as he may otherwise be due hereunder and under the Company's (and any of its
affiliates') pension and welfare benefit plans in which he is then a participant.
4. Emplovment Period Compensation.
(a) Salary. For services performed by the Executive under this Agreement, the
Company shall initially pay (or cause to be paid to) the Executive a salary, during the
Employment Period or any automatic extension, at the rate of $190,000 per year, payable at the
same times as salaries are payable to other executive officers of the Company. The Company
may, from time to time, increase the Executive's salary (or cause it to be increased), and any and
all such increases shall be deemed to constitute amendments to this Section 4(a) to reflect the
increased amounts, effective as of the dates established for such increases by the Board of
Directors in the resolutions authorizing such increases.
. (b) Incentive Compensation. The Executive shall participate in such bonus programs
as may be maintained from time to time by the Company for him or any group of its executive
officers that includes him. The payment of any such bonuses shall not re duce or otherwise affect
any other obligation of the Company to the Executive provided for in this Agreement. The
Executive shall be entitled to incentive compensation as set forth on Exhibit A.
(c) Other Benefits. The Company will provide the Executive, during the
Employment Period, with insurance, vacation, retirement, and other fringe benefits, including the
ability to participate in the Company's executive benefit programs, which benefits are, in the
aggregate, not less favorable than those received by other executive officers of the Company.
Any or all of such benefits may be provided through one or more plans maintained by AFI or any
affiliate of AFI. The Executive shall be entitled to the same or similar benefits as the Company
is currently providing to its employees at the date immediately prior to this Agreement.
(d) Automobile Allowance. The Executive shall be entitled to the same automobile
lease arrangement and allowance as he was entitled to immediately prior to the date of this
Agreement. The Executive agrees to periodically provide the Company with such information as
it may require with respect to his use of his automobile.
sLI 645652v2/007835.00043 5
(e) Business Expenses. The Company will reimburse the Executive for reasonable,
normal and customary business expenses incurred in connection with his duties hereunder, in
accordance with its employee or executive business expense reimbursement policies from time to
time in effect.
5. Resignation of the Executive for Good Reason.
(a) Termination for Good Reason- Definition of Term. The Executive may resign for
Good Reason at any time during the Employment Period that follows a Change in Control (as
defined in Section 5(b)), as hereinafter set forth. As used in this Agreement, "Good Reason"
means any of the following:
(i) any reduction in title, adverse change in reporting structure or significant
reduction in the Executive's responsibilities or authority, including such responsibilities and
authority as the same may be increased at any time during the term of this Agreement, or the
assignment to the Executive of duties inconsistent with the Executive's status as an executive
officer of the Company; provided, however, that it shall not be deemed to constitute Good
Reason if the Company is merged with the Company after a Change in Control if the Executive
continues to be Vice President of the West Chester Capital Advisors division of the Trust
Company;
(ii) any reassignment of the Executive which reasonably requires the Executive to
move his principal residence more than 20 miles;
(iii) any reduction in the Executive's annual base salary as in effect on the date
hereof or as the same may be increased from time to time;
(iv) any failure of the Company to directly or indirectly provide the Executive
with benefits at least as favorable as those enjoyed by the Executive under any of the retirement,
life insurance, medical, health and accident, disability and other employee benefit plans of the
Company in which the Executive participated at the time of the Change in Control, or the taking
of any action that would materially reduce any of such benefits in effect at the time of the
Change in Control, unless such reduction is part of a reduction applicable to all or substantially
all employees of the Company or its successor;
(v) any material breach of this Agreement of any nature whatsoever on the part of
the Company or any of its affiliated companies.
At the option of the Executive, exercisable by the Executive within 90 days after the occurrence
of the event constituting Good Reason, the Executive may resign from employment under this
Agreement by a notice in writing (the "Notice of Termination") delivered to the Company (or its
successor) and the provisions of Section 6 shall thereupon apply.
(b) Change in Control Defined. As used in this Agreement, "Change in Control"
means a change of control of AFI of a nature that would be required to be reported in response to
the instructions for Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as enacted and in force on the date hereof,
6
SLI 695552v2/007835.00043
whether or not AFI is then subject to such reporting requirement; provided, however, that,
without limitation, a Change in Control shall, in any event, be deemed to have occurred if-
W any "Person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, except for any of the Company's employee benefit plans, or any entity holding
the Company's voting securities for, or pursuant to, the terms of any such plan (or any trust
forming a part thereof) (the "Benefit Plan(s)'), or the Bank, hereafter related to any of them), is or becomes the benefici owner direccttly or indirectly, f
AFI's securities representing 19.9% or more of the combined voting
outstanding securities other than pursuant to a transaction described in Clause ?Ibeow;
(ii) a binding written agreement is executed (and, if legally required, approved by
AFFs shareholders) providing for a sale, exchange, transfer or other dision of all of the assets of AR to another entity, except to an entity controlled atthentime directly o ally
indirectly by AFI or a business entity affiliated with AFI;
(iii) the shareholder(s) of AR approve a merger, consolidation, or other
reorganization of AFI, unless;
(A) under the terms of the agreement approved by AFI's shareholder(s)
Providing for such merger, consolidation or reorganization, the shareholder(s) of AR
immediately before such merger, consolidation or reorganization, will o
immediately following such merger, consolidation or reorganization will
least Sd 1 /o of the n?ctiy
combined voting power of the outstanding voting securities of the corporation resulting from
such merger, consolidation or reorganization (the "Surviving Corporation'l in substantially
same proportion as their ownership of the voting securities immediately before such mergerthe
consolidation or reorganization (such proportion determined without regard to any cash vs. stock
election, on the part of such shareholder(s), in the transaction); and
(B) under the terms of the agreement approved by AFI's shareholder(s)
Providing for such merger, consolidation or reorganization, the individuals who were members
of the Board of Directors immediately prior to the execution of such agreement will constitute at
least 51 % of the members of the board of directors of the Surviving Corporation after such
merger, consolidation or reorganization; and
(C) based on the terms of the agreement approved by AFI's shareholder(s)
Providing for such merger, consolidation or reorganization, no Person (other than (1) AFI or any
subsidiary of API, (2) any Benefit Plan, (3) the Surviving Corporation or an subsidi
Surviving Corporation, or (4) any Person who, immediate) Y arY of the
y prior to such merger,
or reorganization had direct or indirect beneficial ownership
of 19.9% or more of the thendation
outstanding voting securities of AFT) will have beneficial ownership of 19.9% or more of the
combined voting power of the Surviving Corporation's then outstanding voting securities; or
(iv) the occurrence of any other event which is irrevocably designated as a
"change in control" for purposes of this Agreement by resolution adopted by a majority of the
then non-employee directors (or if none, all of the directors) of AFI.
S L 1 695652 VMD7835.00043
6. Rights in Event of Termination of Employment After (`hange rn Control. In the event
that Executive resigns from employment for Good Reason following a Change in Control, e
delivery of a Notice of Termination to the Company, or Executive's employment is terminated
by the Company without Cause upon or after a Change in Control, Executive shall be entitled to
receive the amounts and benefits set forth in this section.
(a) Current Compensation at Termination. For a period of the
from the date of termination of em to greater of one year
p yment or the remaining term of this Agreement, Executive
shall be paid his Current Compensation at Termination.
(i) For purposes of this section, the term "Current Compensation at Termination
means the sun' of (A) the greatest of the Executive's base salary as of the te
employment (or prior to any reduction thereof resulting in Good Reason four resif Nation of
any of the three immediately preceding calendar years, and equal to and for
(B) a dollar amount e equa to the
highest of the awards Executive received as bonuses (including deferred bonuses) in any of the
three calendar years preceding the year in which the termination of employment occurs.
(u) Amounts required to be paid to Executive under this Section 6(a) shall be paid
in a lump sum within 30 days following the date of termination of employment.
(b) Benefits. For a period of one year from the date of termination of employment,
Executive shall receive a continuation of all life, medical insurance and other welfare benefits
(other than disability insurance) in effect with respect to Executive during the two calendar years
prior to his termination of employment, or, if the Company cannot provide such benefits (or
cause them to be provided) because Executive is no longer an employee, periodic dollar amounts
equal to the after-tax cost to Executive of obtaining such periodic benefits (or substantially
similar benefits), less any amounts he was actually paying prior to termination. At the election of the Company, the arn?oouunt reqfor uisre to be paid b ythis tely
Section 6(b) may be paid as a lump sum equal to the Company's good faith estimate of the
present value of such benefits.
(c) Remaining payments, The Executive shall be entitled to any remaining
installment payments that have not been paid to the Executive under the Stock Purchase
Agreement, including any Contingent Deferred Compensation without adjustment.
(d) Matters Relating to Certain Federal Excise Tax. In the event that the amounts and
benefits payable under this Agreement, added _
otherwise become payable to the Executive by the Company and anntr and benefits which may
such that he would become subject to the excise tax provisions of Section 4999 of the Internare
al
Revenue Code of 1986, as amended (the "Code") for any reason, the payments and benefits
described in Sections 6(a) and (b) shall be reduced b such
p p e may be
necessary to avoid application of Code Section 4999 to the Executive amount
reduction(s), unless otherwise provided or permitted by Code Section 409A and to the extent
required under the circumstances, (i) welfare benefits under Subsection
(ii) deferred compensation plan benefits (other than benefits deemed to be (b) all be such and reduced
dedfirst'
under this Agreement) shall be reduced second, (iii) equity and quasi-equity compensation
SLl 693652v2/007835.00043 8
benefits shall be reduced third, (iv) other benefits, except Subsection (a) payments, reduced fourth, and (v) Subsection (a) payments shall be reduced fifth. } P yments, shall be
of any (e) No Mitt ation or Qffset. Executive shall not be required to mitigate the amount
payment or benefit provided for in this section by seeking employment to
shall any amount or benefit g P yment or otherwise, nor
provided for in this section be subject to offset for compensation
received from other employers unrelated to the Company.
7. Ri is in Event of Termination of Em to ent Without Cause in Absence of k e
in Control. In the event that Executi
Cause an ve's employment is terminated by the Com
and no Change in Control shall have occurred at the date of such termination, Executive
hall be entitled to receive the amounts and benefits set forth in this section.
(a) Current Compensation at Termination. For a period of one year from the date of
termination of employment, Executive shall be paid his Current Compensation at Termination.
(i) For purposes of this section, the term "Current Compensation at Termination"
means the sum of (A) Executive's base salary as of the date of termination of em to
prior to any reduction thereof preceding termination of employment), and (B) a dollar amo mount
equal to the average of the awards Executive received as bonuses (including deferred bonuses)
for each of the three calendar years preceding the year in which the termination of employment
occurs.
(ii) Amounts required to be paid to Executive under this Section 6(a) shall be paid
in a lump sum within 30 days following the date of termination of employment.
(b) Benefits. For a period of one year from the date of termination of employment
Executive shall receive a continuation of all life, medical insurance and other welfare benefits
(other than disability insurance) in effect with respect to Executive during the two calendar years
prior to his termination of employment, or, if the Company cannot provide such benefits (or
cause them to be provided) because Executive is no longer an employee, periodic dollar amounts
equal to the after-tax cost to Executive of obtaining such periodic benefits (or substantially
similar benefits), less any amount he was actually Paying to termination. At the election of the Company, himself for such benefits immediately
Section 7(b) may be paid as a lump sum equal to the Company's good faith estimate of the this
present value of such benefits.
(e) R=¢ Payments. The Executive shall be entitled to any remaining
installment payments that have not been paid to the Executive under the Stock Purchase
Agreement, including any Contingent Deferred Compensation without adjustment.
(d) Subsequent Application of Code Section 4999. In the event payments or benefits
are made or provided under this Section 7 and, thereafter, an event occurs that causes such
payments or benefits to become subject to Code Section 4999, the payments and benefits
otherwise to be provided under this Section 7 shall immediately become subject to the limitation
of Section 6(d) and thereafter be limited prospectively on a pro rata basis or in such other
manner as is determined by the Board of Directors in good faith. To the extent payments and
SL] 695652%,ZW7835.00043 9
benefits in excess of the limitation imposed by Code Sections 28OG and 4999 have been
provided as of the date this subsection is determined to be applicable, the Executive shall remit,
in cash within 30 days of written demand b the Co
relevant applicable federal rate to the date of repayment the excess amount plus interest at the
payment and all future payments and benefits
shall terminate,
(e) No Mitigation or Offset. Executive shall not be required to mitigate the amount
of any payment or benefit provided for in this section b see
by king employment or otherwise, nor
shall any amount or benefit provided for in this section be subject to offset for compensation
received from other employers unrelated to the Company.
8. Covenant Not In 'AMte- Non-Solicitation of Customers and Em to ees:
Confidential Information.
(a) Covenant Not to Compete-Nor-Solicitation. The Executive hereby
acknowledges and recognizes the highly competitive nature of the business of the Company (and
its affiliated companies, if any) and accordingly, so long as the Executive has received payment
of the Deferred Contingent Amount under the Stock Purchase A
that, during and for the applicable Agreement as scheduled, agrees
period set forth in Section 8(c) hereof, the Executive shall not:
(i) be engaged, directly or indirectly, either for his own account or as agent,
consultant, employee, partner, officer, director, proprietor, investor (except as an investor
owning less than 5% of the stock of a publicly owned company, or investing his personal assets
in nonpublic corporations or businesses that do not directly or indirectly compete with the
Company or any of its affiliated companies) or otherwise of any person, firm, corporation or
enterprise engaged in any business in which the Company or the Trust Company is engaged at
the date of termination of employment (the "Business) in any
time durin the Em to ? Y geographic area in which, at any
g p yment Period, the Company or the Trust Company conducts the Business
(the "Non-Competition Area"),
engaged provide in the Business in th Neon Competi on Ay Pearson, firm' corporation, or
enterprise
(iii) engage in any of the foregoing types of business with, or solicit the sale of or
sell any financial service or product relating to the Business to, any customer or client of the
Company or the Trust Company; or
(iv) solicit or hire any employees of the Company or the Trust Company who are
engaged in the Business or induce any of such employees to terminate their empl yment
o
relationship with the Company or the Trust Company,
(b) Judicial Cut-Back Authorized. It is expressly understood and agreed that,
although the Executive and the Bank consider the restrictions contained in Section 8(a) hereof
reasonable for the purpose ofpreserving for the Company and the Trust Company their good will
and other proprietary rights, if a final judicial determination is made by a court having
jurisdiction that the time or territory or any other restriction contained in Section 8(a) hereof is an
unreasonable or otherwise unenforceable restriction against the Executive, the provisions of
SLl 695652x21007835.00043 10
Section 8(a) hereof shall not be rendered void but shall be deemed amended to apply as to such
maximum time and territory and to such other extent as such court may judicially determine or
indicate to be reasonable.
(c) Restrictive Period. The provisions of this Section 8 shall be applicable
commencing on the date of this Agreement and ending on the date that is two years following the
Executive's termination of employment. In the event the Executive's employment terminates as
a result of his notice to the Company of his non-agreement to renewal of this Agreement, the
provisions of this Section 8 shall be fully applicable to him. In the event termination of the
Executive's employment is as a result of the Company's involuntary termination of the
Executive or notice to him of non- renewal of this Agreement at.the expiration of its initial term,
the provisions of this Section 8 shall not apply to the Executive beyond the termination date.
(i) Confidential Information. The Executive agrees that he shall be bound by the
confidentiality provisions of section 112(a) of the Stock Purchase Agreement.
(d) Section 8 Remedies. In addition to any damages to which it may be entitled for
any violation of this Section 8 by the Executive, the Company shall also be entitled to an
injunction or other equitable relief to halt the continuation of such violation.
9. Arbitration. The Company and the Executive recognize that in the event a dispute
should arise between them concerning the interpretation or implementation of this Agreement,
lengthy and expensive litigation will not afford a practical resolution of the issues within a
reasonable period of time. Consequently, each party agrees that all disputes, disagreements and
questions of interpretation concerning this Agreement are to be submitted for resolution to the
American Arbitration Association (the "Association") in Pittsburgh, Pennsylvania. The
Company or the Executive may initiate an arbitration proceeding at any time by giving notice to
the other in accordance with the rules of the Association. The arbitrator shall be selected and
proceedings shall be conducted in accordance with the Association's National Rules for the
Resolution of Employment Disputes. The arbitrator shall not be bound by the rules of evidence
and procedure of the courts of the Commonwealth of Pennsylvania but shall be bound by the
substantive law applicable to this Agreement. The decision of the arbitrator, absent fraud,
duress, incompetence or gross and obvious error of fact, shall be final and binding upon the
parties and shall be enforceable in courts of proper jurisdiction. Following written notice of a
request for arbitration, the Company and the Executive shall be entitled to an injunction
restraining all further proceedings in any pending or subsequently filed litigation concerning this
Agreement, except as otherwise provided herein regarding equitable remedies.
14. Exclusive Remedy Release. The Executive agrees that the amounts and benefits
provided for in this Agreement, if paid when due or promptly after resolution of any good faith
disputes regarding the same, shall constitute the Executive's sole and exclusive remedy,
contractual or otherwise, in the event of his termination of employment. The Executive agrees
that he shall not be entitled to any severance payment or benefit under any severance program
maintained by the Company or any of its affiliated companies, except as provided in this
Agreement and the Stock Purchase Agreement. To the extent the preceding sentence is not
enforceable under any such program, the payments and/or benefits he would otherwise receive
hereunder shall be reduced (but not below zero) by the severance payments and benefits he
SLl 695652v2/007935.00043 11
actually receives under such program. Notwithstanding condition of receiving any Section 6 or 7 termination anything or benefit herein to rthe
e contraryunder, as a
Executive agrees to first execute a Release substantially payment
form of Exhibit B attached hereto.
The Company agrees that its rights under this Agreement or the Stock Purchase Agreement
represent the Company's sole and exclusive contractual remedy in the event of his termination of
employment. The foregoing sentence shall in no way limit the ability of the Company to seek
any remedy against the Executive if the cause of action arises other than in contract.
11. Notices. Any notice required or permitted to be given under this Agreement shall be
deemed properly given if in writing and if mailed by registered or certified mail postage with return receipt requested, to the last known residence of the Executive, in thecase of notice s
to the Executive, and to the principal office of the Company, in the case of notices to the
Company. Notices of any change in address may be given in the same manner.
12. Waiver. No provision of this Agreement may be modified, waived, or discharged
unless such waiver, modification, or discharge is agreed to in writing and signed by the
Executive and a director or officer of the Company specifically designated by the Board of
Directors. No waiver by any party hereto at any time of any breach by any other hereto of,
or compliance with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time.
13. Assiznment. This Agreement shall not be assignable by either party hereto, except by
the Company to any successor in interest to the business of the Company.
14. Entire Agreement. This Agreement is subject to the terms and conditions set forth in
the Stock Purchase Agreement.
15. Successor- Inurement Followin Death.
(a) Assumption by Successor. The Company will require any direct or indirect
successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly assume and agree to
Perform this Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure by the Company to obtain
such assumption and agreement prior to the effectiveness of any such succession shall constitute
a breach of this Agreement and the provisions of Section 6 shall apply. As used in this
Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor
to the respective business and/or assets of the Company as aforesaid, which assumes and agrees
to perform this Agreement by operation of law or otherwise.
(b) Inurement Following Death. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors
distributees, devisees, and legatees. If the Executive should die while any amount is to
the Executive under this Agreement or the Stock Purchase Agreement if the Executive had
continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the Executive's estate.
SLl 695652v2l007835.00043 12
16. Termination. Any termination of the Executive's employment under this Agreement
or of this Agreement shall not affect the stated intent of the terms of this A m in din ,
without limitation, the provisions of Sections 6, 7, 8 and 9 hereof (to the extentrelevant),?which
shall survive any such termination and remain in full force and effect in accordance with their
respective terms.
17. V_ audit . The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any
remain in full force and effect other provision of this Agreement, which shall
.
18. ADDlicable Law. Except to the extent preempted by federal law, this Agreement shall
be governed by and construed in accordance with the domestic laws (but not the law of conflict
of laws) of the Commonwealth of Pennsylvania.
19. Headings. The headings of the several sections and subsections of this Agreement are
for convenience of reference only and shall not control or affect the meaning or construction or
limit the scope or intent of any of the provisions of this Agreement.
20. Effective Date. This Agreement shall become effective upon the day and year first
above written.
21. Tax Withholding. All payments made and benefits provided hereunder shall be
subject to required tax withholding, the cost of which, except as otherwise specifically provided
herein, shall be borne by the Executive. In the case of a noncash benefit, the Company may
require the Executive, as a condition of the Receipt of such benefit, to deposit sufficient funds
with the Company to discharge any required withholding obligation.
22. Number. Words used herein in the singular form shall be deemed to include the
plural, as appropriate in the context in which such word is used, and vice versa.
23. Application of Section 409A of Internal Revenue Code. Notwithstanding anything in
this Agreement to the contrary, the provisions of this Agreement shall be interpreted and applied
in a manner that is consistent with Code Section 409A and any guidance issued by the United
States Treasury Department thereunder. Accordingly, unless the parties shall otherwise agree,
(i) to the extent that any amount payable in connection with the termination of Executive's
employment cannot be paid until six months following such termination to avoid subjecting
Executive to the additional income taxes imposed under Code Section 409A, such payments will
be so delayed and paid, without interest, in a single lump-sum payment six months thereafter and
(ii) with respect to medical benefits and other welfare benefits, the Executive shall bear the full
cost of such benefits for six months following such termination date and shall be reimbursed for
costs that Executive would not have otherwise incurred during such period in a single lump-sum
payment six months thereafter (unless guidance issued by the United States Treasury Department
permits benefit continuation through such six-month period), and the Company shall continue to
provide (or cause to be provided) such benefits to Executive and his eligible dependents for the
remaining period provided herein, starting on the six-month anniversary of the termination date.
SLI 695652v2/007835.00043 13
--v vc urrlbc * TALUHUN 4?J001/003
IN WITNESS WW=OF, the parties have executed this Agroetnent as of the date Stst
above wrhtm
WEST CHBSTER CAPITAL ADVIStDRS, INC.
By
AMERISERV FWANCIAI., INC.
B3'
R. Dennlsc n, president
AUWYJ tV BANK
By
Allan R. Dennison, resid ent -
Thomas F. McKeon (SEAL)
sifa 0502V1/WRIS.00M 14
IN WITNESS WHEREOF, the patties have executed this Agreement as of the date first
above written.
By
By
WEST CHESTER CAPITAL ADVISORS, INC.
ByV 67%!hG? VP
AMERISERV FINANCIAL, INC.
Allan R. Dennison, President
AMERISERV BANK
Allan R. Dennison, President
J
464?? {SEAL}
Thomas F. McKeon
SLt 695652v2/oo7S35.00043
14
EXHIBIT B
=MA
`°'
a
~a
i
I9.?5
o?
Monday,
June 15, 2009
Part M
Department of the
Treasury
31 CFR Part 30
TARP Standards for Compensation and
Corporate Governance; Interim Final Rule
28394 Federal Register / Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
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.
SUMMARY. This interim final rule,
promulgated pursuant to sections
101(a)(1), 101(c)(5), and ill 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, http://
www-regWations.gov or by e-mail to
executivecompensation
comments@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 tohttp://Vww.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 fuial 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; (B) 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 compensat°:d employees; (11)
compliance with 1`9deral securities rules
and regulations re arding the
submission of a n . i-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.
1. 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 .11
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.
Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 28395
El. Previous Rulamaldng
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 financal 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 7Yeasury 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,
LR.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-TARP, 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 § 30.17 (Q-1 7) of
the Interim Final Rule, and the
discussion of § 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 fnr
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 TART, the February 2009 Treasury
Guidance proposed to (1) limit the
annual compensation of senior .
executives to $500,000 other than
28396 Federal Register / Vol. 74, No. 113/Monday, June 15, 2D09 / Rules and Regulations
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
farm 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 e:rtablished by thr.
Secretary under that section and the
provisions of section 162(m)(5) of the
Internal Revenue Code, as applimable.
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 § 30.17 (Q-
17), and•the discussion of § 30.17 ((-17)
in section M.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
Federal Register / Vol. 74, No. 113 /Monday, June 15, 2009 /Rules and Regulations 28397
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 1i1(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(a)(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 § 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 facf
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 § 30.1. Section
30.1 (C-1) of the Interim Final Rule
bases the determination of the SEOs on
the executive compensation disclosure
requireri ents 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 (¢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
28398 Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
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,
§ 30.1 (¢S) 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 -et 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
miBht 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 ptisuant 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, § 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), §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 numr of duties.
Many public company TARP recipients
already maintain compensation
committees of independent directors
pursuant to stock exchange listing
standards, and § 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, § 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, § 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
Federal Register / Vol. 74, No. 113/Monday, June 15, 2009 / Rules and Regulations 28399
short-term results rather than long-term
value creation. In addition, § 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),
§ 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),
§ 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) ofthe
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 and of the TARP
period.
Pursuantto section 111(b)(3)(D),
§ 30.10 (¢10) of the Interim Final Rule
prohibits a TARP recipient from paym?
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 SEW 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
assistante 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 io 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
213400 Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
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 firom 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 o£
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),
§ 30.10 ((-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, § 30.1 (Q-1) of the Interim Final
Rule defines long-term restricted stork
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)(30)(i)(1), §30.11 (Q-11)
of the Interim Final Rule states that the
value of -the long-term restricted stock
can be no greater than 1/8 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
Federal Register / Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 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),
§ 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)(13)(iii),
§ 30.10 (¢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, 2D09, such that my
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 compen..ation 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 IADM-1(b)(4), into a
payment of deferred compensation that
would he 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), § 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 she, before the later of
ninety days after the closing date of the
28402 Federal Register / Vol. 74, No. 113 /Monday, June 15, 2009/Rules and Regulations
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. Sectian 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(a), 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, § 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 § 30.10 (Q-
10) of the Interim Final Rule.
Second, § 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 boards of directors the
type of perquisite if the total value of all
perquisites exceeds $10,000 for an
individual officer or director; and the
value of any perquisite if the value
exceeds the greater of $25,000 or 10%
of the total amount of perquisites for an
individual officer or director.
Third, § 30.11(c) (Q-11) of the Interim
Final Rule requires a TARP recipient to
disclose to Treasury and its primary
Federal regulator annually whether the
TARP recipient, the board, or the
compensation committee has engaged a
compensation consultant and all types
of services the compensation consultant
or any of its affiliates has provided to
the TARP recipient, the board, or the
compensation committee during the
past three years, including any
"benchmarking" or comparisons
employed to identify certain percentile
levels of compensation (for example,
other peer group companies used for
benchmarking and a justification for
using these companies, and the lowest
percentile level of other companies'
employee compensation considered for
compensation proposals). Existing
Federal securities regulations require
only that public companies identify
compensation consultants and their role
in setting executive and director
compensation; whether the
compensation committee directly
engages }he compensation consultant;
the nature and scope of the
compensation consultant's assignment;
and the material elements of the
compensation consultant's duties under
the engagement.
Fourth, § 30.11(d) (t-11) of the
Interim Final Rule prohibits TARP
recipients from providing tax gross-ups
or other reimbursements for the
payment of taxes to any of the SEOs and
next twenty most highly compensated
employees relating to severance
payments, perquisites, or any other form
of compensation. Existing Federal
securities regulations require only that
public companies disclose "gross-ups"
or other reimbursements to the SEOs for
the payment of taxes. The Interim Final
Rule excludes from this prohibition
certain international tax equalization
arrangements intended to compensate
an employee for certain different taxes
on account of an overseas assignment.
Section 30.14 (Q-14) of the Interim
Final Rule includes a special rule for
cases in which a TARP recipient (target)
is acquired by an entity (acquirer) that
is not a TARP recipient in an
acquisition of any form. Under this rule,
the acquirer does not become subject to
section 111 of EESA as a result of the
acquisition. In addition, the employees
of the target who are SEOs or most
highly compensated employees subject
to section 111 immediately prior to the
acquisition who continue employment
with the acquirer will no longer be
subject to section 111 of EESA after the
acquisition. However, if the primary
purpose of the acquisition is to avoid or
evade application of section 111 of
EESA, then the acquirer will be treated
as a TARP recipient. For purposes of
determining the affected employees, the
principal executive officer and the
principal financial officer of the post-
acquisition acquirer are treated as SEOs.
For purposes of identifying the most
highly compensated employees, the
acquirer employees and the pre-
acquisition target employees who are
employed at the acquirer (or anticipated
to be employed at the acquirer) are
aggregated and their most highly
compensated employee status
determined based upon the
compensation earned during the most
recently: completed fiscal year at either
the pre-acquisition acquirer or target, as
appropriate.
Pursuant to section 111(b)(4), § 30.15
((-15) of the Interim Final Rule
establishes a compliance reporting
regime relating to the executive
compensaeion requirements set forth in
the Interim Final Rule. The Interim
Final Rule requires that the PEO and the
Federal Register / Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 28403
PFO of the TARP recipient provide the
following certifications within ninety
days of the completion of each fiscal
year any part of which is a TARP
period: (1) The compensation committee
has met at least every six months during
the prior fiscal year with the senior risk
officers of the TARP recipient to discuss
and evaluate SEO compensation plans
and employee compensation plans and
the risks these plans pose to the TARP
recipient; (2) the compensation
committee has identified and limited
the features in the SEO compensation
plans that could lead SEOs to take
unnecessary or excessive risks that
could threaten the value of the TARP
recipient, has identified any features in
the employee compensation plans that
pose risks to the TARP recipient, and
has limited those features to ensure that
the TARP recipient is not unnecessarily
exposed to risks; (3) the compensation
committee has reviewed at least every
six months the terms of each employee
compensation plan and identified and
limited the features in the plan that
could encourage the manipulation of
reported earnings of the TARP recipient
to enhance the compensation of an
employee; (4) the compensation
committee will certify to these reviews;
(5) the compensation committee will
provide a narrative description of how
it limited the features in (i) SEO
compensation plans that could lead
SEOs to take unnecessary and excessive
risks that could threaten the value of the
TARP recipient, (ii) employee
compensation plans to ensure that the
TARP recipient is not unnecessarily
exposed to risks, and (iii) employee
compensation plans that could
encourage the manipulation of reported
earnings of the TARP recipient to
enhance the compensation of an
employee; (6) the TARP recipient has
required that all bonuses, retention
awards, and incentive compensation of
the SEOs and next twenty most highly
compensated employees be subject to a
provision for recovery or "clawback" by
the TARP recipient if the payments
were based on materially inaccurate
financial statements or any other
materially inaccurate performance
metric criteria; (7) the TARP recipient
has prohibited any golden parachute
payment to the SEOs and the next five
most highly compensated employees;
(8) the TARP recipient has limited
bonuses, retention awards, and
incentive compensation paid to or
accrued by employees to whom the
bonus payment limitation applies; (9)
for a TARP recipient that has securities
registered with the SEC under the
Federal securities laws, it will permit a
non binding shareholder resolution on
the SEO compensation disclosures
provided under the Federal securities
laws in accordance with any guidance,
rules, and regulations promulgated by
the SEC; (10) the TARP recipient has
adopted and maintains an excessive or
luxury expenditures policy and has
provided this policy to Treasury in each
case in accordance with the
requirements under the lute-rim Final
Rule; (11) the TARP recipient will
disclose the amount, nature, and
justification for the offering of any
perquisites whose total value exceeds
$25,000 for each of the employees
subject to the bonus payment
limitations; (12) the TARP recipient will
disclose whether the TARP recipient,
the board, or the compensation
committee has engaged a compensation
consultant, and the services the
compensation consultant or any affiliate
provided; (13) the TARP recipient has
prohibited any tax gross-ups on
compensation to the SEOs and the next
twenty most highly compensated
employees; (14) the TARP recipient has
substantially complied with any
compensation requirements set forth in
the agreement between the TARP
recipient and the Treasury, as may have
been amended; (15) certain employees
named in the certification are the SEOs
and most highly compensated
employees for the current fiscal year
based on their compensation during the
prior fiscal year; and (16) the officer
certifying understands that a knowing
and willful false or fraudulent statement
made in connection with the
certification may be punished by fine,
imprisonment, or both (See, for example
18 U.S.C. 1001). In addition, the PEO
and the PFO of a TARP recipient
receiving exceptional financial
assistance must certify that the TARP
recipient has either limited annual
compensation to $500,000 (excluding
grants of long-term restricted stock but
including certain pension benefits and
deferred compensation accruals
otherwise excluded from annual
compensation) for any executive officer
or one of the 100 most highly
compensated employees who is not
subject to the bonus payment
limitations and has or will pay any
additional compensation in the form of
long-term restricted stock, or to the
extent not so limited the TARP recipient
has had the compensation, structure of
those employees approved by the Office
of the Special Master for TARP
Executive Compensation.
Section 30.15 (Q-15) of the interim
Final Rule requires that TARP recipients
that have securities registered with the
SEC pursuant to the Federal securities
laws provide these certifications on
Exhibit 99.1 in their annual report on
Form 10-K and to Treasury, and that a
TARP recipient that does not have
securities registered with the SEC under
the Federal securities laws provide
these certifications to its primary
regulatory agency and to Treasury. The
TARP recipient must also preserve
appropriate documentation and records
to substantiate each certification for no
less than six years after the date of the
certification, the first two years in an
easily accessible place, and must
furnish promptly to Treasury any
documentation and records requested
bySectio 0.15 (Q-15) of the Interim
Final Rule also affirms that any
individual, or entity making or providing
false information or certifications to
Treasury pursuant to the Interim Final
Rule or as required pursuant to this part
may be subject to the criminal penalties
under title 18 of the U.S. Code or other
provision of Federal law.
To comply with EESA Section 111
and this'Interim Final Rule, TARP
recipients generally will need to modify
compensation structures. For a small
number of TARP recipients--those
receiving exceptional assistance-the
new compensation structures and
compensation payments for SEOs and
the most highly paid employees are
subject to review and approval by the
Office of the Special Master for TARP
Executive Compensation (described
below). In other instances, TARP
recipients may find it helpful to have
guidance as to how the rules apply to
their particular circumstances, or
confirmation that their modified
compensation arrangements are
compliant. In addition, under section
in(f), the Secretary is charged with
reviewing bonuses, retention awards,
and other compensation paid before
February 17, 2009 to SEOs and the next
twenty most highly compensated
employees, an is required to determine
whether. any such payments were
inconsistent with the purposes of EESA
section 111 or the TARP, or were
otherwise contrary to the public
interest.
To conduct these reviews most
efficiently, and to ensure that the rules
are applied consistently and equitably,
this Interim Final Rule establishes an
Office of the Special Master for TARP
Executive Compensation (Special
Master).;As described in Section 30.16
(Q-16) of the Interim Final Rule, the
Special Master will be appointed by,
and serve at the pleasure of; the
Secretary, The Secretary may remove
the Special Master without notice,
28404 Federal Register/Vol. 74, No. 113/Monday, June 15, 2009 / Rules and Regulations
without cause, and before the naming of
any successor Special Master. The scope
of the Special Master's authority and
responsibility is limited to
compensation and corporate governance
matters under section 111 with respect
to TARP recipients, and the Special
Master has no authority to provide
guidance or review any submissions
with respect to matters other than
compensation and corporate governance
matters under section 111, or to provide
guidance or review any submissions
with respect to compensation or
corporate governance matters of
employers that are not TARP recipients.
The Secretary has delegated to the
Special Master the authority to (1)
interpret the application of the
restrictions on executive compensation
and corporate governance requirements
for TARP recipient employees under
EESA, these regulations, and any other
applicable guidance, to specific facts
and circumstances; (2) administer
section 111(f) of EESA, which requires
the Secretary to review bonuses,
retention awards, and other
compensation paid before February 17,
2009 to employees of each entity
receiving TARP assistance, to determine
whether any such payments were
inconsistent with the purposes of EESA
section 111 or the TARP, or otherwise
contrary to the public interest, and
which further requires that, if the
Secretary makes such a determination,
the Secretary seek to negotiate with the
TARP recipient and the employee for
appropriate reimbursements to the
Federal Government with respect to
compensation or bonuses; (3) approve
compensation payments to, and
compensation structures for, certain
employees of TARP recipients receiving
exceptional financial assistance; (4)
provide opinions, as requested or
otherwise as appropriate, regarding
payments to, or compensation structures
for, other employees of TARP recipients;
and (5) perform such other duties as the
Secretary may delegate from time to
time to the Special Master relating to
executive compensation issues under
the TARP, including the specific
application of any terms or conditions
in a contract between the Treasury and
a TARP recipient Section 30.16 (Q-16)
also outlines a set of principles that the
Special Master is required to follow in
conducting these reviews.
Treasury requests comments on
potential procedures and terms under
which employees may return
compensation to the TARP recipient or
the TARP recipient may reimburse
Treasury either for compensation paid
that the Special Master has determined
is inconsistent with the purposes of
EESA section 111 or the TARP, or
otherwise contrary to the public
interest, or for compensation that was
paid contrary to the requirements of
EESA section 111 and this Interim Final
Rule.
Section 30.17 (Q-17) of the Interim
Final Rule states that the standards
under the Interim Final Rule are
effective upon June 15, 2009, except
with respect to certain sections of the
ARRA amendments that were effective
immediately upon enactment of the
statute (for example, amended section
111(4) requiring a nonbinding
shareholder vote on executive
compensation). Accordingly, the bonus
payment limitations under the Interim
Final Rule will not apply to bonuses,
retention awards, and incentive
compensation paid or accrued by TARP
recipients or their employees prior to
June 15, 2009, and the enhanced golden
parachute prohibition will not apply to
amounts paid prior to June 15, 2009. In
addition, as discussed above, the bonus
payment limitations under the Interim
Final Rule will not apply to bonuses,
retention awards, and incentive
compensation required to be paid
pursuant to a written employment
contract executed on or before February
11, 2009 (a grandfatbered arrangement),
that is paid on or after June 15, 2009.
However, the Special Master may
provide an advisory opinion on either or
both of these categories of payments,
stating whether such payments are
consistent with ARRA or EESA, or
otherwise contrary to the public
interest, under the same standards
applied to the Special Master's review
of compensation paid to certain
employees prior to the enactment date
of ARRA, and may seek reimbursement
of such payments where appropriate.
Finally, the Special Master will take
into account any payment made prior to
June 15, 2009, or any payment made or
that may be made pursuant to a
grandfathered arrangement, as part of
the Special Master's review of the
compensation payments and structures
required to be approved by the Special
Master for certain employees of TARP
recipients receiving exce tional
assistance, and for any advisory opinion
the Special Master may issue with
respect to a compensation structure for,
or compensation payment to, a TARP
recipient employee.
In addition, for the period before June
15, 2009, the provisions of the October
2008 Interim Final Rule, Notice 2008-
PSSFI, and Notice 2008-TRAP,
remained in effect Subject to ARRA and
this Interim Final Rule, all contractual
provisions to which a TARP recipient
agreed prior to the enactment of ARRA
or the publication of this Interim Final
Rule also continue in effect,
IV. Procedural Requirements
Justification for Interim Rulemaldng
The Interim Final Rule is promulgated
pursuant to EESA, as amended, which
immediately provides for authority and
facilities that the Secretary can use to
restore liquidity and stability to the
financial system of the United States.
Specifically, the Interim Final Rule
implements certain provisions of
section 111 of EESA, which directs
Treasury to establish executive
compensation and corporate governance
standards for entities receiving financial
assistance under the TARP.
To encourage entities to choose or
continue to participate in the TARP,
those entities must have timely and
reliable information with respect to the
applicable executive compensation and
corporate governance rules that apply
under the TARP. Accordingly, because
of exigencies in the financial markets,
Treasury finds that it would be contrary
to the public interest, pursuant to 5
U.S.C. 553(b)(B), to delay the issuance
of the Interim Final Rule pending an
opportunity for public comment and
good cause exists to dispense with this
requirement. For the same reasons,
pursuant to 5 U.S.C. 553(d) (3), 't'reasury
has determined that there is good cause
for the Interim Final Rule to become
effective immediately upon publication.
While the Interim Final Rule is effective
immediately upon publication, Treasury
is inviting public comment on the
Interim Final Rule during a sixty-day
period and will consider all comments
in developing a final rule.
Regulatory Planning and Review
The Interim Find Rule is designated
as a "significant regulatory action" as
defined in Executive Order 12866. The
agency has not prepared a regulatory
impact analysis consistent with the
OMB Circular A-4 that examines the
likely benefits and costs associated with
this interim rule. The agency plans to
prepare such analysis when it
promulgates a final rule that will
supersede this rulemaking.
Regulatory Flexibility Act
Because no notice of proposed
rulemaking is required, the Interim
Final Rule is not subject to the
provisions of the Regulatory Flexibility
Act (5 U.S.C chapter 6).
Paperwork Reduction Act
The information collection contained
in the Interim Final Rule has been
submitted to the Office of Management
Federal Register / Vol. 74, No. 113 / Monday, June 15, 2009 /Rules and Regulations 28405
and Budget (OMB) under the Paperwork
Reduction Act (44 U.S.C. 35) and OMB
approval is pending. Under the
Paperwork Reduction Act, an agency
may not conduct or sponsor, and an
individual is not required to respond to,
a collection of information unless it
displays a valid OMB control number.
Comments on the collection of
information should be sent to the Desk
Officer for the Department of Treasury,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Washington, DC 20503 (or by e-
mail to oira submission@omb.eop.go0
with a copy to Executive Compensation
Comments, Office of Financial
Institutions Policy, Room 1418,
Department of the Treasury, 1500
Pennsylvania Avenue, NW.,
Washington, DC 20220.
List of Subjects in 31 CFR Part 30
Executive compensation, Troubled
assets.
¦ Accordingly, under the authority of 12
U.S.C. 5221, for the reasons set out in
the preamble, Treasury amends 31 CFR
Subtitle A by revising part 30 to read as
follows:
PART 30-TARP STANDARDS FOR
COMPENSATION AND CORPORATE
GOVERNANCE
Sec.
30.0 Executive compensation and corporate
governance.
30.1 Q-1: What definitions apply in this
part?
30.2 ¢2: To what entities does this part
. apply?
30.3 Q-3: How are the SEOs and the most
highly compensated employees
identified for purposes of compliance
with this part?
30.4 Q-4: What actions are necessary for a
TARP recipient to comply with the
standards established under sections
111(b)(3)(A), 111(b)(3)(h), 111(b)(3)(F)
and ill (c) of EESA (evaluation of
employee plans and potential to
encourage excessive risk or manipulation
of earnings)?
30.5 Q-5: How does a TARP recipient
comply with the requirements under
§ 30.4 (Q-4) of this part that the
compensation committee discuss,
evaluate, and review the SEO
compensation plans and other employee
compensation plans to ensure that the
SEO compensation plans do not
encourage the SEOs to take unnecessary
and excessive risks that threaten the
value of the TARP recipient, or that the
employee compensation plans pose
unnecessary risks to the TARP recipient?
30.6 Q-6: How does a TARP recipient
comply with the requirement under
§ 30.4 (Q-4) of this pert that the
compensation committee discuss,
evaluate, and review the employee
compensation plans to ensure that these
plans do not encourage the manipulation
of reported earnings of the TARP
recipient to enhance the compensation of
any of the TARP recipient's employees?
30.7 Q-7; How does a TARP recipient
comply with the certification and
disclosure requirements under § 30.4 (Q-
4) of this part?
30.8 Q-8: What actions are necessary for a
TARP recipient to comply with the
standards established under section
111(6)(3)(13) of EESA (the "clawback"
provision requirement)?
30.9 Q-9: What actions are necessary for a
TARP recipient to comply with the
standards established under section
111(b)(3)(C) of EESA (the prohibition on
golden parachute payments)?
30.10 Q-10: What actions are necessary for
a TARP recipient to comply with section
111(b)(3)(13) of EESA (the limitation on
bonus payments)?
30.11 Q-11: Are TARP recipients required
to meet any other standards under the
executive compensation and corporate
governance standards in section 111 of
EESA?
30.12 Q-12: What actions are necessary for
a TARP recipient to comply with section
111(d) of EESA (the excessive or luxury
expenditures policy requirement)?
30.13 Q-13: What actions are necessary for
a TARP recipient to comply with section
iii(e) ofEESA (the shareholder
resolution on executive compensation
requirement)?
30.14 Q-14: How does section 111 of EESA
operate in connection with an
acquisition, merger, or reorganization?
30.15 Q-15: What actions are necessary for
a TARP recipient to comply with the
certification requirements of section
111(b)(4) of EESA?
30.16 Q-16: What is the Office of the
Special Master for TARP Executive
Compensation, and what are its powers,
duties and responsibilities?
30.17 Q-17: How do the effective date
provisions apply with respect to the
requirements under section ill of
EESA?
Authority: 12 U.S.C. 5221; 31 U.S.C. 321.
§30.0 Executive compensation and
corporate govemance.
The following questions and answers
reflect the executive compensation and
corporate governance requirements of
section ill of the Emergency Economic
Stabilization Act of 2008, as amended
(12 U.S.C. 5221) (EESA), with respect to
participation in the Troubled Assets
Relief Program (TARP) established by
the Department of the Treasury
(Treasury) thereunder.
§30.1 G-1: What definitions apply in this
part?
Affiliate. The term "affiliate" means
an "affiliate" as that term is defined in
Rule 405 of the Securities Act of 1933
(17 CFR 230.405).
Annual compensation. (1) General
rule. The term "annual compensation"
means, except as otherwise explicitly
provided in this part, the dollar value
for total compensation for the applicable
fiscal year as determined pursuant to
Item 402(a) of Regulation S-K under the
Federal securities laws (17 CFR
229.402(a)). Accordingly, for this
purpose.the amounts required to be
disclosed pursuant to paragraph
(c)(2)(vifi) of Item 402(a) of Regulation
S-K (actuarial increases in pension
plans and above market earnings on
deferred' compensation) are not required
to be included in annual compensation.
(2) Application to private TARP
recipients. For purposes of determining
annual compensation, a TARP recipient
that does not have securities registered
with the SEC pursuant to the Federal
securities laws must follow the
requirements set forth in paragraph (i)
of this definition. .
Al3Rfi. The term "ARRA" means the
American Recovery and Reinvestment
Act of 2009 (Pub. L. 111-5).
Benefif plan. The term "benefit plan"
means any plan, contract, agreement or
other arrangement that is an "employee
welfare benefit plan" as that term is
defined in section 3(1) of the Employee
Retirement Income Security Act of 1974,
as amended (29 U.S.C. 1002(1)), or other
usual and customary plans such as
dependent care, tuition reimbursement,
group 1 :gal services or cafeteria plans;
provided, however, that this term does
not include:
(1) Any plan that is a deferred
compensation plan; or
(2) Any severance pay plan, whether
or not nondiscriminatory, or any other
arrangement that provides for payment
of severance benefits to eligible
employees upon voluntary termination
for good-reason, involuntary
termination, or termination under a
window;program as defined in 26 CFR
1.409A 1(b)(9)(vi).
Bonus. The term "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. Such term
generally does not include payments to
or on behalf of an employee as
contributions to any qualified
retirement plan (as defined in section
4974(c) of the Internal Revenue Code
(26 U.S.C. 4974(c)), benefits under a
broad based benefit plan, bona fide
overtime pay, or bona fide and routine
expense reimbursements. In addition,
provided that the rate of commission is
pre-established and reasonable, and is
applied consistently to the sale of
substantially similar goods or services,
commission compensation will not be
treated as a bonus, For this purpose, a
28406 Federal Register / Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
bonus may include a contribution to, or
other increase in benefits under, a
nonqualified deferred compensation
plan, regardless of when the actual
payment will be made under the plan.
A bonus may also qualify as a retention
award or as incentive compensation.
Bonus payment. For purposes of this
part, except where otherwise noted, the
term "bonus payment" includes a
payment that is, or is in the nature of,
a bonus, incentive compensation, or
retention award. Whether a payment is
a bonus payment, or whether the right
to a payment is a right to a bonus
payment, is determined based upon all
the facts and circumstances, and a
payment may be a bonus payment
regardless of the characterization of
such payment by the TARP recipient or
the employee. For purposes of this part,
a bonus payment may include the
forgiveness of a loan or other amount
that otherwise may be required to be
paid by the employee to the employer.
Commission compensation. (1)
Definition. The term "commission
compensation" means:
(i) Compensation or portions of
compensation earned by an employee
consistent with a program in existence
for that type of employee as of February
17, 2009, if a substantial portion of the
services provided by this employee
consists of the direct sale of a product
or service to an unrelated customer,
these sales occur frequently and in the
ordinary course of business of the TARP
recipient (but not a specified
transaction, such as an initial public
offering or sale or acquisition of a
specified entity or entities), the
compensation paid by the TARP
recipient to the employee consists of
either a portion of the purchase price for
the product or service sold to the
unrelated customer or an amount
substantially all of which is calculated
by reference to the volume of sales to
the unrelated customers, and payment
of the compensation is either contingent
upon the TARP recipient receiving
payment from the unrelated customer
for the product or service or, if applied
consistently to all similarly situated
employees, is contingent upon the
closing of the sales transaction and such
other requirements as may be specified
by the TARP recipient before the closing
of the sales transaction with the
unrelated customer,
(ii) Compensation or portions of
compensation earned by an employee
that meet the requirements of paragraph
(1)(i) of this definition except that the
transaction occurs with a related
customer, provided that substantial
sales from which commission
compensation arises are made, or
substantial services from which
commission compensation arises are
provided, to unrelated customers by the
service recipient, the sales and service
arrangement and the commission
arrangement with respect to the related
customer are bona fide, arise from the
service recipient's ordinary course of
business, and are substantially the same,
both in term and in practice, as the
terms and practices applicable to
unrelated customers to which
individually or in the aggregate
substantial sales are made or substantial
services provided by the service
recipient; or
(iii.) Compensation or portions of
compensation earned by an employee
consistent with a program in existence
for that type of employee as of February
17, 2009, if a substantial portion of the
services provided by this employee to
the TARP recipient consists of sales of
financial products or other direct
customer services with respect to
unrelated customer assets or unrelated
customer asset accounts that are
generally intended to be held
indefinitely (and not customer assets
intended to be used for a specific
transaction, such as an initial public
offering, or sale or acquisition of a
specified entity or entities), the
unrelated customer retains the right to
terminate the customer relationship and
may move or liquidate the assets or
asset accounts without undue delay
(which may be subject to a reasonable
notice period), the compensation
consists of a portion of the value of the
unrelated customer's overall assets or
asset account balance, an amount
substantially all of which is calculated
by reference to the increase in the value
of the overall assets or account balance
during a specified period, or both, or is
calculated by reference to a contractual
benchmark (such as a securities index or
peer results), and the value of the
overall assets or account balance and
commission compensation is
determined at least annually. For
purposes of this definition, a customer
is treated as an unrelated customer if the
person would not be treated as related
to the TARP reci lent under 26 CFR
1,409A-1(f)(2)(lifand the person would
not be treated as providing management
services to the TARP recipient under 26
CFR 1.409A-1(f)(2) (iv).
(2) Examples. The following examples
illustrate the provisions of paragraph (1)
of this definition:
Example 1. Employee A is an employee of
TARP recipient Among TARP recipient's
businesses is the sale of life insurance
policies, and TARP recipient buys and sells
such policies frequently as part of its
ordinary comae of business. Employee A's
primary duties consist of selling life
insurance policies to customers unrelated to
the TARP recipient Under a commission
program existing for all TARP Recipient
employees selling life insurance policies as
of February 17, 2009, Employee A is entitled
to receive an amount equal to 75% of the
total first year's premium paid by an
unrelated customer to whom Employee A has
sold a life insurance policy. The payments to
Employee A under the program constitute
commission compensation.
Example 2. The same facts as Example 1,
except that under the program, the rate of
commission increases to 80% of the total first
year's premium paid by a customer once
Employee A has sold $10 million in policies
in a year. Provided that 80% Is a reasonable
commission, the payments to Employee A
under the program constitute commission
compensation.
Example 3, Employee B is an employee of
TARP recipient Among TARP recipient's
businesses is the investment management of
unrelated customer asset accounts, and TARP
recipient provides such services routinely
and in the ordinary course of business.
Employee B's primary duties as an employee
consist of managing the investments of the
asset accounts of specified unrelated
customers who have deposited amounts with
the TARP recipient Under a program in
existence on February 17, 2009, Employee H
is entitled to receive an amount equal to i%
of the aggregate account balances of the
assets under management, as determined
each December 31. The payments to
Employee B constitute commission
compensation.
Exomple 4. TARP recipient employs
Employee C. As part of Employee C's duties,
Employee C is responsible for specified
aspects of any acquisition of an unrelated
entity by TARP Recipient As part of an
acquisition in 2009, Employee C is entitled
to 1 % of the purchase price if and when the
transaction closes. Regardless of whether
such an arrangement was customary or
established under a specific program as of
February 17, 2009, the amount is not
commission compensation because the
compensation relates to a specified
transaction, in this case the purchase of the
entity. Accordingly, the compensation is
incentive' compensation.
Example 5. TARP recipient employs
Employee D. As part of Employee D's duties,
Employee D is responsible for managing the
initial public offerings of securities of
unrelated customers of TARP recipient As
part of an initial public offering in 2009,
Employee D is entitled to 1% of the purchase
price if and when the initial public offering
closes. Regardless of whether such an
arrangement was customary or established
under a specific program as of February 17,
2009, theAmount is not commission
compensation because the compensation
relates to 'a specified transaction, in this case
the initial public offering. Accordingly, the
compensation is incentive compensation.
Compensation means all
remuneration for employment,
including but not limited to salary,
commissions, tips, welfare benefits,
Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 28407
retirement benefits, fringe benefits and
perquisites.
Compensation committee. (1) General
rule. The term "compensation
committee" means a committee of
independent directors, whose
independence is determined pursuant to
Item 407(a) of Regulation S-K under the
Federal securities laws (17 CFR
229.407(x)).
(2) Application to private TARP
recipients. For purposes of determining
director independence, a TARP
recipient that does not have securities
registered with the SEC pursuant to the
Federal securities laws must follow the
requirements set forth in Item
407(a)(1)(ii) of Regulation S-K under the
Federal securities laws (17 CFR
229.407(a)(1)(ii)),
Compensation structure. The term
"compensation structure" means the
characteristics of the various forms of
total compensation that an employee
receives or may receive, including the
amounts of such compensation or
potential compensation relative to the
amounts of other types of compensation
or potential compensation, the amounts
of such compensation or potential
compensation relative to the total
compensation over the relevant period,
and how such various forms of
compensation interrelate to provide the
employee his or her ultimate total
compensation. These characteristics
include, but are not limited to, whether
the compensation is provided as salary,
short-term incentive compensation, or
long-term incentive compensation,
whether the compensation is provided
as cash compensation, equity-based
compensation, or other types of
compensation (such as executive
pensions, other benefits or perquisites),
and whether the compensation is
provided as current compensation or
deferred compensation.
Deferred compensation plan. The
term "deferred compensation plan"
means
(1) Any plan, contract, agreement, or
other arrangement under which an
employee voluntarily elects to defer all
or a portion of the reasonable
compensation, wages, or fees paid for
services rendered which otherwise
would have been paid to the employee
at the time the services were rendered
(including a plan that provides for the
crediting of a reasonable investment
return on such elective deferrals),
provided that the TARP recipient either:
(i) Recognizes a compensation
expense and accrues a liability for the
benefit payments accordin? to GAAP; or
(ii) Segregates or otherwise sets aside
assets in a trust which may only be used
to pay plan and other benefits, except
that the assets of this trust may be
available to satisfy claims of the TARP
recipient's creditors in the case of
insolvency; or
(2) A nonqualified deferred
compensation or supplemental
retirement plan, other than an elective
deferral plan established by a TARP
recipient:
(i) Primarily for the purpose of
providing benefits for a select group of
directors, management, or highly
compensated employees in excess of the
limitations on contributions and
benefits imposed by sections 415,
401(a)(17), 402(8) or any other
applicable provision of the Internal
Revenue Code (26 U.S.C. 415,
401(a)(17), 402(g)); or
(ii) Primarily for the purpose for
providing supplemental retirement
benefits or other deferred compensation
for a select group of directors,
management or highly compensated
employees (excluding severance
payments).
EESA. The term "EESA" means the
Emergency Economic Stabilization Act
of 2008, as amended
Employee. The term "employee"
means an individual serving as a servant
in the conventional master-servant
relationship as understood by the
common-law agency doctrine. In
general, a partner of a partnership, a
member of a limited liability company,
or other similar owner in a similar type
of entity, will not be treated as an
employee for this purpose. However, to
the extent that the primary purpose for
the creation or utilization of such
partnership, limited liability company,
or other similar type of entity is to avoid
or evade any or all of the requirements
of section 111 of EESA or these
regulations with respect to a partner,
member or other similar owner, the
partner, member or other similar owner
will be treated as an employee. In
addition, a personal service corporation
or similar intermediary between the
TARP recipient and an individual
providing services to the TARP
recipient will be disregarded for
purposes of determining whether such
individual is an employee of the TARP
recipient.
Employee compensation plan. The
term "employee compensation plan"
means "plan" as that term is defined in
Item 402(a)(6)(i.i; of Regulation S-K
under the Federal securities laws (17
CFR 229,402(a)(6)(ii)), but only any
employee compensation plan in which
two or more employees participate and
without regard to whether an executive
officer participates in the employee
compensation plan,
Exceptional financial assistance. The
term "exceptional financial assistance"
means any financial assistance provided
under the Programs for Systemically
Significant Failing Institutions, the
Targeted Investment Program, the
Automotive Industry Financing
Program, and any new program
designated by the Secretary as providing
exceptional financial assistance.
Excessive or luxury expenditures. The
term "excessive or luxury expenditures"
means excessive expenditures on any of
the following to the extent such
expenditures are not reasonable
expenditures for staff development,
reasonable performance incentives, or
other similar reasonable measures
conducted in the normal course of the
TARP recipient's business operations:
(1) Entertainment or events;
(2) Office and facility renovations;
(3) Aviation or other transportation
services; and
(4) Other similar items, activities, or
events for which the TARP recipient
may reasonably anticipate incurring
expenses, or reimbursing an employee
for incurring e?cpenses.
Excessive or luxury expenditures
policy. The term "excessive or luxury
expenditures policy" means written
standards applicable to the TARP
recipient and its employees that address
the four categories of expenses set forth
in the definition of "excessive or luxury
expenditures" (entertainment or events,
office and facility renovations, aviation
or other transportation services, and
other similar items, activities or events),
and that-are reasonably designed to
eliminate excessive and luxury
expenditures. Such written standards
must:
(1) Identify the types or categories of
expenditures which are prohibited
(which may include a threshold
expenditure amount per item, activity,
or event or a threshold expenditure
amount per employee receiving the item
orp articipating in the activity or event);
(2) Identify the types or categories of
expenditures for which prior approval is
required (which may include a
threshold expenditure amount per item,
activity,'or event or a threshold
expenditure amount per employee
receiving the item or participating in the
activity or event);
(3) Provide reasonable approval
procedures under which an expenditure
requiring prior approval may be
approved;
M Rewire PEO and PFD certification
that the approval of any expenditure
requiring the prior approval of any SEO,
any executive officer of a substantially
similar level of responsibility, or the
TARP recipient's board of directors (or
28408 Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
a committee of such board of directors),
was properly obtained with respect to
each such expenditure;
(5) Require the prompt internal
reporting of violations to an appropriate
person or persons identified in this
policy; and
(6) Mandate accountability for
adherence to this policy.
Executive officer. The term "executive
officer" means an "executive officer" as
that term is defined in Rule 3b-7 of the
Securities Exchange Act of 1934
(Exchange Act) (17 CFR 240.3b-7).
Financial assistance. (1) Definition,
The term "financial assistance" means
any funds or fund commitment
provided through the purchase of
troubled assets under the authority
granted to Treasury under section 101 of
EESA or the insurance of troubled assets
under the authority granted to Treasury
under section 102 of EESA, provided
that the term "financial assistance" does
not include any loan modification under
sections 101 and 109 of EESA, A change
in the form of previously received
financial assistance, such as a
conversion of convertible preferred
stock to common stock, is not treated as
new or additional financial assistance.
(2) Examples. The following examples
illustrate the provisions of paragraph (1)
of this definition:
Example 1. Company A sells $500,000,000
of preferred stock to Treasury through the
Capital Purchase Program. Company A has
received financial assistance.
Example 2. Company B posts collateral to
and receives a loan from the Federal Reserve
special purpose vehicle under the Term
Asset-Backed Security Loan Facility program.
Company B has neither sold troubled assets
to Treasury, nor insured troubled assets
through Treasury, and therefore has not
received financial assistance.
Example 3. LP C is a limited partnership
established for the purpose of participating in
the Public Private Investment Program. LP C
has a general partner (GP) that makes
management decisions on behalf of LP C. A
limited liability company controlled by an
affiliate of GP (LLC partner) raises
$55,000,000 from twenty investors, with each
investing equal shares, joins LP C as a limited
partner, and invests those funds for a 55%
equity interest in LP C. LP C sells a
$45,DDO,ooo equity interest to Treasury. LP C,
at the direction of the GP, will buy and sell
securities as investments and manage those
investments. LP C will contract for
investment advice from an investment
advisor that is an affiliate of GP. LP C has
received financial assistance. LLC partner has
received financial assistance because it is
treated as the same employer as LP C
according to the standards set forth in
paragraph (1)(ii) of the definition of "TARP
recipient". The investors in the U C partner
have not received financial assistance
because they are not treated as the same
employer as LP C according to the standards
set forth in paragraph (1)(ii) of the definition
of "TARP recipient". GP is not an employee
of LP C pursuant to the definition of
"employee" in this rule, and is not treated as
the same employer as LP C according to the
standards set forth in paragraph (1)(ii) of the
definition of "TARP redpient". The
investment advisor-contractor to LP C has not
received financial assistance. Entities that
sell secanties to or buy securities from LP C
have neither sold troubled assets to Treasury
nor insured troubled assets through Treasury,
and therefore have not received financial
assistance.
Example 4. Company D, a servicer of
mortgage loans or mortgaged-barked
securities, issues a financial instrument to
Treasury's financial agent in which Company
D commits to modify mortgages it is servicing
consistent with guidelines established by
Treasury under the Home Affordable
Modification Program. Treasury, through its
financial agent, commits to pay up to
$800,000,000 in incentive payments and
credit enhancements for Company E's
commitment to modify mortgages. Company
E has not received financial assistance.
GAAP. The term "GAAP" means U.S.
generally accepted accounting
principles.
Golden parachute payment. (1)
General rule. The term "golden
parachute payment" means any
payment for the departure from a TARP
recipient for any reason, or any payment
due to a change in control of the TARP
recipient or any entity that is included
in a group of entities treated as one
TARP recipient, except for payments for
services performed or benefits accrued.
For this purpose, a change in control
includes any event that would qualify as
a change in control event as defined in
26 CFR 1.280G-1, Q&A-27 through
Q&A-29 or as a change in control event
as defined in 26 CFR 1.409A-3(i)(5)(i).
For this purpose, a golden parachute
payment includes the acceleration of
vesting due to the departure or the
change in control event, as applicable.
A golden parachute payment is treated
as paid at the time of departure or
change in control event, and is equal to
the aggregate present value of all
payments made for a departure or a
change in control event (including the
entire aggregate present value of the
payment if the vesting period was not
otherwise completed but was
accelerated due to departure, regardless
of whatever portion of the required
vesting period the employee had
completed). Thus, a golden parachute
payment may include a right to amounts
actually payable after the TARP period.
(2) Exclusions. For purposes of this
part, a golden parachute payment does
not include any of the following:
(i) Any payment made pursuant to a
pension or retirement plan which is
qualified (or is intended within a
reasonable period of time to be
qualified) under section 401 of the
Internal Revenue Code (26 U.S.C. 401)
or pursuant to a pension or other
retirement plan which is governed by
the laws of any foreign country;
(ii) Any payment made by reason of
the departure of the employee due to the
employee's death or disability; or
(iii) Any severance or similar payment
which is required to he made pursuant
to a State statute or foreign law
(independent of any terms of a contract
or other agreement) which is applicable
to all employers within the appropriate
jurisdiction (with the exception of
employers that may be exempt due to
their small number of employees or
other similar criteria),
(3) Payments far services performed or
benefits accrued, (i) General rules.
Except as otherwise provided for
payments made under a deferred
compensation plan or a benefit plan in
paragraph (4) of this definition, a
payment made, or a right to a payment
arising under a plan, contract,
agreement, or other arrangement
(including the acceleration of any
vesting conditions) is for services
performed or benefits accrued only if
the payment was made, or the right to
the payment arose, for current or prior
services'to the TARP recipient (except
that an appropriate allowance may be
made for services for a predecessor
employer), Whether a payment is for
services performed or benefits accrued
is determined based on all the facts and
circumstances. However, a payment, or
a right to a payment, generally will be
treated as a payment for services
performed or benefits accrued only if
the payment would be made regardless
of whether the employee departs or the
change in control event occurs, or if the
payment is due upon the departure of
the employee, regardless of whether the
departure is voluntary or involuntary
(other than reasonable restrictions, such
as the forfeiture of the right to a
payment for an involuntary departure
for cause, but not restrictions relating to
whether-the departure was a voluntary
departure for good reason or subsequent
to a change in control).
(ii) Examples. The following
examples illustrate the genera) rules in
paragraph (3)(i) of this definition:
Example 1. Employee A is a SEO of Entity
B at all relevant times, On September 1, 2007,
Employee A received a stock appreciation
right granting him the right to appreciation
on the underlying shares that would vest
25% for every twelve months of continued
services. Under the terms of the grant, the
stock appreciation right would be
immediately exercised and payable upon
termination of employment. Entity B
Federal Registerl Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 28409
becomes a TARP recipient in December 2008.
On September 1, 2009, Entity B involuntarily
terminates Employee A, at which time
Employee A receives a payment equal to the
post-September 1, 2007 appreciation on 50%
of the shares under the stock appreciation
right (the portion of the shares that had
vested before the termination of
employment). The payment is treated as a
payment for services performed and does not
constitute a golden parachute payment
Example 2. The facts are the same as the
facts in Example 1, except that under
Employee A's employment agreement,
Employee A is entitled to accelerate vesting
if Employee A is terminated involuntarily
other than for cause. If Entity B pays
Employee A the post-September 1, 2007
appreciation on 100% of the shares under the
stock appreciation right, the portion of the
payment representing the additional 50%
accelerated vesting due to the termination of
employment would not be for services
performed and would be a golden parachute
payment
(4) Payments from benefit plans and
deferred compensation plans. A
payment from a benefit plan or a
deferred compensation plan is treated as
a payment for services performed or
benefits accrued only if the following
conditions are met:
(i) The plan was in effect at least one
year prior to the employee's departure;
(ii) The payment 1s made pursuant to
the plan and is made in accordance with
the terms of the plan as in effect no later
than one year before the departure and
in accordance with any amendments to
the plan during this one year period that
do not increase the benefits payable
hereunder;
(iii) The employee has a vested right,
as defined under the applicable plan
document, at the time of the departure
or the change in control event (but not
due to the departure or the change in
control event) to the payments under
the plan;
(iv) Benefits under the plan are
accrued each period only for current or
prior service rendered to the TARP
recipient (except that an appropriate
allowance may be made for service for
a predecessor employer);
(v) Any payment made pursuant to
the plan is not based on any
discretionary acceleration of vesting or
accrual of benefits which occurs at any
time later than one year before the
departure or the change in control
event; and
(vi) With respect to payments under a
deferred compensation plan, the TARP
recipient has previously recognized
compensation expense and accrued a
liability for the benefit payments
according to GAAP or segregated or
otherwise set aside assets in a trust
which may only be used to pay plan
benefits, except that the assets of this
trust may be available to satisfy claims
of the TARP recipient's creditors in the
case of insolvency and payments
pursuant to the plan are not in excess
of the accrued liability computed in
accordance with GAAP.
Gross-up, The term "gross-up" means
any reimbursement of taxes owed with
respect to any compensation, provided
that a gross-up does not include a
payment under a tax equalization
agreement, which is an agreement,
method, program, or other arrangement
that provides payments intended to
compensate an employee for some or all
of the excess of the taxes actually
imposed by a foreign jurisdiction on the
compensation paid by the TART'
recipient to the employee over the taxes
that would be imposed if the
compensation were subject solely to
U.S. Federal, State, and local income
tax, or some or all of the excess of the
U.S. Federal, State, and local income tax
actually imposed on the compensation
paid by the TARP recipient to the
employee over the taxes that would be
imposed if the compensation were
subject solely to taxes in the applicable
foreign jurisdiction, provided that the
payment made under such agreement,
method, program, or other arrangement
may not exceed such excess and the
amount necessary to compensate for the
additional taxes on the amount paid
under the agreement, method, program,
or other arrangement.
Incentive compensation. The term
"incentive compensation" means
compensation provided under an
incentive plan.
Incentive plan, (1) Definition. The
term "incentive plan" means an
"incentive plan" as that term is defined
in Item 402(a)(6)(iii) of Regulation S-K
under the Federal securities laws (17
CFR 229.402(a)(6)(iii)), and any plan
providing stock or options as defined in
Item 402(a)(6)(i) of Regulation S-K
under the Federal securities laws (17
CPR 229,402(a)(6)(i)) or other equity-
based compensation such as restricted
stock units or stock appreciation rights,
except for the payment of salary or other
permissible payments in stock, stock
units, or other property as described in
paragraph (2) of this definition. An
incentive plan does not include the
payment of salary, but does include an
arrangement under which an employee
would earn compensation in the nature
of a commissio-', unless such
compensation qualifies as commission
compensation (as defined above),
Accordingly, an incentive plan includes
an arrangement under which an
employee receives compensation only
upon the complation of a specified
transaction, such as an initial public
offering or sale or acquisition of a
specified entity or entities, regardless of
how such compensation is measured.
For examples, see the definition of
"commission compensation," above. An
incentive plan, or a grant under an
incentive plan, may also qualify as a
bonus or a retention award.
(2) Salary or other permissible
payments paid in property. The term
"incentive plan" does not include an
arrangement under which an employee
receives`salary or another permissible
payment in property, such as TARP
recipient stock, provided that such
property is not subject to a substantial
risk of forfeiture (as defined in 26 CFR
1.83-3(c)) or other future period of
required services, the amount of the
payment is determinable as a dollar
amount through the date such
compensation is earned (for example, an
agreement that salary payments will be
made in;stock equal to the value of the
cash payment that would otherwise be
due), and the amount of stock or other
property accrues at the same time or
times as.the salary or other permissible
payments would otherwise be paid in
cash. The term "incentive plan" also
does not include an arrangement under
which an employee receives a restricted
stock unit that is analogous to TARP
recipient stock, that otherwise meets the
requirements of the previous sentence.
For this purpose, a unit is analogous to
stock if the unit is based upon stock of
the TARP recipient, or is applied as if
the applicable entity, division, or other
unit were a corporation with one class
of stock and the number of units of
stock granted is determined based on a
fixed percentage of the overall value of
this corporation, and the term "TARP
recipient stock" with respect to a
particular employee recipient means the
stock of a corporation (or the entity,
division; or other unit the value of
which fdrms the basis for the unit) that
is an "eligible issuer of service recipient
stock" under 26 CFR 1.409A-
1(b)(5)(iii)(E) (applied by analogy to
non-corporate entities).
(3) Examples. The following examples
illustrate the provisions of paragraph (2)
of this definition.
Example 1. Employee is an employee of
TARP recipient For 2010, TARP recipient
agrees to pay a salary of $15,000, payable
monthly. At each salary payment date
Employee will receive a $10,000 payment in
cash, and be transferred a number of shares .
of common stock of TARP recipient equal to
$5,000 divided by the fair market value of a
share of common stock on the salary payment
date. The arrangement is for the payment of
salary, and is not an incentive plan.
Exam le 2. Same facts as Example 1,
except that pursuant to a valid elective
deferral election, Employee elects to defer
28410 Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
20% of each salary payment into a
nonqualified deferred compensation plan. At
each salary payment date Employee will
receive an $8,000 payment in cash, be
transferred a number of shares of common
stock of TARP recipient equal to $4,000
divided by the fair market value of a share
of common stock on the salary payment date,
and a $3,000 contribution to an account
under a nonqualiffed deferred compensation
plan. The arrangement is for the payment of
salary, and is not an incentive plan.
Example 3. Employee is an employee of
TARP recipient For 2010, TARP recipient
agrees to pay a salary of $15,000, payable
monthly. At each salary payment date,
Employee will receive a $10,000 payment in
cash, and accrue a right to a number of shares
of common stool: of TARP recipient equal to
$5,000 divided by the fair market value of a
share of common stock on the salary payment
date. At the end of the year, TARP recipient
will transfer the total number of accrued
shares to Employee, subject to a multi-year
holding peno (a restriction that the shares
or otherwise disposed
may not Zeno
of by Employee for a specified number of
years). If Employee's employment with the
TARP recipient terminates during the
holding period, the termination will not
affect the duration or application of the
holding period or Employee's right to retain
the shares and to transfer or otherwise
dispose of them at the end of the holding
period.. The arrangement is for the payment
of salary, and is not an incentive plan. The
arrangement would also be for the payment
of salary, and not an incentive plan, if the
arrangement provided that the holding
period was to last until the later of a
specified time period or a specified time
following Employee's retirement or other
terminatton of employment
Example 4. Employee is an employee of
TARP recipient For 2010, TARP recipient
agrees to pay a salary of $15,000, payable
monthly. At each salary payment date,
Employee will receive a $10,000 payment in
cash, and accrue a right to a contribution to
an account equal to $5,000 divided by the
fair market value of a share on the salary
payment date. The account balance will be
subject to notional gains and losses based on
the investment return on TARP recipient
common stack. The amount will be payable
upon the last day of the second year
immediately following the year the services
are performed. The arrangement is for the
payment of salary, and is not an incentive
plan. However, the arrangement generally
will provide deferred compensation for
purposes of section 409A of the Internal
Revenue Code. ,
Infernal Revenue Code. The term
"Internal Revenue Code" means the
Internal Revenue Code of 1986, as
amended.
Long-term restricted stock The term
"long-term restricted stock" means
restricted stock or restricted stock units
that include the following features:
(1) The restricted stock or restricted
stock units are issued with respect to
common stock of the TARP recipient.
For this purpose, a restricted stock unit
includes a unit that is payable, or may
be payable, in cash or stock, provided
that the value of the payment is equal
to the value of the underlying stock
With respect to a specified division or
other unit within a TARP recipient or a
TARP recipient that is not a stock
corporation, a unit analogous to
common stock may be used. For this
purpose, a unit is analogous to common
stock if applied as if the entity, division,
or other unit were a corporation with
one class of common stock and the
number of units of common stock
granted is determined based on a fixed
percentage of the overall value of this
corporation. Notwithstanding the
foregoing, with respect to a particular
employee recipient, the corporation the
stock of which is utilized (or the entity,
division, or other unit the value of
which forms the basis for the unit) must
be an "eligible issuer of service
recipient stock" under 26 CFR 1.409A-
ICb)(5)(iii)(E) (applied by analogy to
non-corporate entities).
(2) The restricted stock or restricted
stock unit may not become transferable
(as defined in 26 CFR 1.83-3(d)), or
payable as applied to a restricted stock
unit, at any time earlier than permitted
under the following schedule (except as
necessary to reflect a merger or
acquisition of the TARP recipient):
(i) 25% of the shares or units granted
at the time of repayment of 25% of the
aggregate financial assistance received.
(ii) An additional 25% of the shares
or units granted (for an aggregate total
of 50% of the shares or units granted)
at the time of repayment of 50% of the
aggregate financial assistance received.
(iii) An additional 25% of the shares
or units granted (for an aggregate total
of 75% of the shares or units granted)
at the time of repayment of 75% of the
aggregate financial assistance received.
(iv) The remainder of the shares or
units granted at the time of repayment
of 100% of the aggregate financial
assistance received.
(3) Notwithstanding the foregoing, in
the case of restricted stock for which the
employee does not make an election
under section 83(b) of the Internal
Revenue Code (26 U.S.C. 83(b)), at any
time beginning with the date upon
which the stock becomes substantially
vested (as defined in 26 CFR 1.83-3(b))
and ending on December 31 of the
calendar year including that date, a
portion of the restricted stock may be
made transferable as may reasonably be
required to pay the Federal, State, local,
or foreign taxes that are anticipated to
apply to the income recognized due to
this vesting, and the amounts made
transferable for this purpose shall not
count toward the percentages in the
schedule above.
(4) The employee must be required to
forfeit the restricted stock or restricted
stock unit if the employee does not
continue performing substantial services
for the TARP recipient for at least two
years from the date of giant, other than
due to the employee's death or
disability, or a change in control event
(as defined in 25 CFR 1.280G-1, Q&A-
27 through Q&A-29 or as defined in 26
CFR 1.409A-3(i)(5)(i)) with respect to
the TARP recipient before the second
anniversary of the date of grant
(5) No in paragraphs (1), (2), (3),
and (4) of this definition is intended to
prevent the placement on such
restricted stock or restricted stock unit
of any additional restrictions,
conditions, or limitations that are not
inconsistent with the requirements of
these paragraphs.
Most highly compensated employee.
(1) In general. The term "most highly
compensated employee" means the
employee of the TARP recipient, other
than the:SEOs of the TARP recipient,
whose annual compensation is
determined to be the highest among all
employees of the TARP recipient,
provided that, for this purpose, a former
employee who is no longer employed as
of the first day of the relevant fiscal year
of the TARP recipient is not a most
highly compensated employee unless it
is reasonably anticipated that such
employee will return to employment
with the' TARP recipient during such
fiscal year.
(2) Aliplication to new entities. For an
entity that is created or organized in the
same year that the entity becomes a
TARP recipient, a most highly
compensated employee for the first year
includes the person that the TARP
recipient determines will be the most
highly compensated employee for the
next year based upon a reasonable, good
faith determination of the projected
annual compensation of such person
earned during that year. This
determination must be made as of the
later of the date the entity is created or
organized or the date the entity becomes
a TAPP recipient, and must be made
only once. However, a person need not
yet be an employee to be treated as a
most highly compensated employee, if it
is reasonably anticipated that the person
will become an employee of the TARP
recipient during the first year.
Obligation. (1] Definition, The term
"obligation" means a requirement for, or
an ability of, a TARP recipient to repay
financial assistance received from
Treasury, as provided in the terms of the
applicable financial instrument and
related agreements, through the
Federal Register / VoL 74, No. 113 /Monday, June 15, 2009/Rules and Regulations 28411
repayment of a debt obligation or the
redemption or repurchase of an equity
security, but not including warrants to
purchase common stock of the TARP
recipient.
(2) Examples. The following examples
illustrate the provisions of paragraph (1)
of this definition.
Example 1. TARP recipient sells $500
million of preferred stock to Treasury, and
provides warrants to Treasury for the
purchase of $75 million of common stock.
The TARP recipient has an ability to redeem
the preferred stock and thus maintains an
outstanding obligation to Treasury.
Example 2. Same facts as Example 1,
except that TARP recipient redeems the $500
million of preferred stock, so that Treasury
holds only the $75 million of warrants to
purchase common stock outstanding. TARP
recipient does not maintain an outstanding
obligation to Treasury.
Example 3. TARP recipient sells $120
million of securities backed by Small
Business Administration-guaranteed loans to
Treasury through the Consumer and Business
Lending initiative, and provides warrants to
Treasury for the purchase of $10 million of
common stock. Because the TARP recipient
does not as a result of this transaction owe
a debt obligation or have a requirement or
right to redeem or repurchase an equity
security (other than the warrants to purchase
common stock provided to the Treasury), the
TARP recipient does not have an outstanding
obligation to Treasury as a result of this
transaction.
PEO. The term "PEO" means the
principal executive officer or an
employee acting in a similar capacity.
Perquisite. The term "perquisite"
means a "perquisite or other personal
benefit" the amount of which is
required to be included in the amount
reported under Item 402 (c) (2)(ix) (A) of
Regulation S-K under the Federal
securities laws (17 CFR
229.402(c)(2)(ix)(A)) (Column (i) of the
Summary Compensation Table (All
Other Compensation)), modified to also
include any such perquisite or other
personal benefit provided to a most
highly compensated employee subject to
§ 30.11(b) (Q-11).
PFO. The term "PFO" means the
principal financial officer or an
employee acting in a similar capacity.
Primary regulatory agency. The term
"primary regulatory agency" means the
Federal regulatory agency that has
primary supervisory authority over the
TARP recipient. For a TARP recipient
that is a State-chartered bank that does
not have securities registered with the
SEC pursuant to the Federal securities
laws, the primary regulatory agency is
the TARP recipient's primary Federal
banking regulator. If a TARP recipient is
not subject to the supervision of a
Federal regulatory agency, the term
"primary regulatory agency" means the
Treasury.
Repayment. The term "repayment"
means satisfaction of an obligation.
Retention award. (1) General
definition. The term "retention award"
means any payment to an employee,
other than a payment of commission
compensation, a payment made
pursuant to a pension or retirement plan
which is qualified (or is intended within
a reasonable period of time to be
qualified) under section 401 of the
Internal Revenue Code (26 U.S.C. 401),
a payment made pursuant to a benefit
plan, or a payment of a fringe benefit,
overtime pay, or reasonable expense
reimbursement that:
(i) Is not payable periodically to an
employee for services performed by the
employee at a regular hourly, daily,
weekly, monthly, or similar periodic
rate (or would not be payable in such
manner absent an elective deferral
election);
(ii) 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
(iri) Is not based an 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
(2) New hires. With respect to newly
hired employees, a payment that will be
made only if the new hire continues
providing services for a specified period
generally constitutes a retention award.
For example, a signing bonus that must
be repaid unless the newly hired
employee completes a certain period of
service is a retention award. Similarly,
a "make-whole" agreement under which
a newly hired employee is provided
benefits intended to make up for
benefits foregone at his former
employer, where these new benefits are
subject to a continued service period
vesting requirement (such as a
continuation of the vesting period at the
former employer), is a retention award.
(3) Deferred compensation plans.
Whether a benefit under a deferred
compensation plan that is subject to a
service vesting period is a retention
award depends on all the facts and
circumstances. However, to the extent
an employee continues to accrue, or
becomes eligible to accrue, a benefit
under a plan the benefits under which
have not been materially enhanced for
a significant period of time prior to the
employee becoming an SEO or most
highly compensated employee
(including through expansion of the
eligibility for such plan), the benefits
accrued generally will not be a retention
award. However, to the extent the plan
is amended to materially enhance the
benefits provided under the plan or to
make such employee eligible to
participate in such plan, and such
benefits are subject to a requirement of
a continued period of service, such an
amendmant generally will be a retention
award.
SEC. The term "SEC" means the U.S.
Securities and Exchange Commission.
Senior executive officer or SEQ. (1)
General definition. The term "senior
executive officer" or "SEO" means a
"named.executive officer" as that term
is determined pursuant to Instruction 1
to Item 402(a)(3) of Regulation S-K
under the Federal securities laws (17
CFR 229.402(a)) who is an employee of
the TARP recipient
(2) Application to smaller reporting
company. A TARP recipient that is a
smaller reporting company must
identify SEOs pursuant to paragraph (1)
of this definition. Such a TARP
recipient must identify at least five
SEOs, even if only three named
executive officers are provided in the
disclosute pursuant to Item 402(m)(2) of
Regulation S-K under the Federal
securities laws (17 CFR 229.402(m)(2)),
provided that no employee must be
identified as a SEO if the employee's
total annual compensation does not
exceed $100,000 as defined in Item
402(x)(3)(1) of Regulation S-K under the
Federal securities laws (17 CFR
229.402(a)(3)(1)).
(3) Application to private TARP
recipients. A TARP recipient that does
not have securities registered with the
SEC pursuant to the Federal securities
laws must identify SEOs in accordance
with rules analogous to the rules in
paragraph (1) of this definition.
SEO compensation plan. The term.
"SEO compensation plan" means
"plan" as that term is defined in Item
402(a)(6)(ii) of Regulation S-K under the
Federal securities laws (17 CFR
229.402(a)(6)(ii)), but only with regard
to a SEO compensation plan in which
a SEO participates.
Senior risk officer, The term "senior
risk officer" means a senior risk
executive officer or employee acting in
a similar capacity.
Smaller reporting company. The term
"smaller reporting company" means a
"smaller reporting company" as that
term is defined in Item 10(f) of
Regulation S-K under the Federal
securities laws (17 CFR 229,10(f)).
Sunset date. The term "sunset date"
means the date on which the authorities
provided under EESA section 101 and
102 terminate, pursuant to EESA section
28412 Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
120, taking into account any extensions
pursuant to EESA section 120(b).
TARP. The term "TARP" means the
Troubled Asset Relief Program,
established pursuant to EESA.
TARP fiscal year. The term "TARP
fiscal year" means a fiscal year of a
TARP recipient, or the portion of a fiscal
year of a TARP recipient, that is also a
TARP period.
TARP period. The term "TARP
period" means the period beginning
with the TARP recipient's receipt of any
financial assistance and ending on the
last date upon which any obligation
arising from financial assistance
remains outstanding (disregarding any
warrants to purchase common stock of
the TARP recipient that the Treasury
may hold).
TARP recipient. (1) General
definition. The term "TARP recipient"
means
(i) Any entity that has received or
holds a commitment to receive financial
assistance; and
(ii) Any entity that would be treated
as the same employer as an entity
receiving financial assistance based on
the rules in sections 414(b) and 414(c)
of the Internal Revenue Code (26 U.S.C.
414(b) or (c)), but modified by
substituting "50%" for "80%" in each
place it appears in section 414(b) or
414(c) and the accompanying
regulations. However, for purposes of
applying the aggregation rules to
determine the applicable employer, the
rules for brother-sister controlled groups
and combined groups are disregarded
(including disregarding the rules in
section 1563(a)(2) and (a)(3) of the
Internal Revenue Code (26 U.S.C.
1563(a)(2) and (a)(3)) with respect to
corporations and the parallel rules that
are in 26 CFR 1.414(c)-2(c) with respect
to other organizations conducting trades
or businesses).
(2) Certain excluded entities. Neither
any entity receiving funds under TARP
pursuant to section 109 of EESA nor any
Federal Reserve bank as that term is
used in the Federal Reserve Act (12
U.S.C. 221 et seq.) will be treated as a
TARP recipient subject to section 111 of
EESA and any rules and regulations
promulgated thereunder.
(3) Anti-abuse rule. Notwithstanding
paragraph Cl) of this definition, the term
"TARP recipient" means any entity that
has received, or holds a commitment to
receive, financial assistance; and any
entity related to such TARP recipient to
the extent that the primary purpose for
the creation or utilization of such entity
is to avoid or evade any or all of the
requirements of section 111 of EESA or
these regulations.
Treasury. The term "Treasury" means
the U.S. Department of the Treasury.
Valid employment contract. The term
"valid employment contract" means a
written employment contract that is:
(i)(i) A material contract as
determined pursuant to Item
601(b)(10)(iii)(A) of Regulation S-K
under the Federal securities laws (17
CFR229.601(b)(10)(iii)(A)); or
(ii) A contract that would be deemed
a material contract as determined
pursuant to Item 601(b)(10)(iii) of
Regulation S-K under the Federal
securities laws (17 CFR
229.601(b)(io)(iii)), but for the fact that
the material contract relates to one or
more employee who is not an executive
officer; and
(2) Is enforceable under the law of the
applicable jurisdiction.
§ 30.2 Q-2: To what entities does this part
apply?
This part applies to any TARP
recipient, provided that the
requirements of sections 111(b)
(portions of § 30.4 (Q-4), § 30.5 (Q-5)
and § 30.7 (Q-7), as applicable, § 30.6
(Q-6), and § 30.8 (Q-8) through § 30.11
(Q-11), and § 30.15 (Q-15)), and section
111(e) (§ 30.13 (Q-13)) apply only
during the period during which any
obligation to the Federal government
arising from financial assistance
provided under the TARP remains
outstanding. The requirements of
section 111(c) (including portions of
§ 30.4 (Q-4), § 30.5 (Q-5) and § 30.7 (Q-
7), as applicable) and section 111(d)
(§ 30.12 (Q-12)) apply through the later
of the last day of the period during
which any obligation to the Federal
government arising from financial
assistance provided under the TARP
remains outstanding for TARP
recipients with an obligation, or the last
day of the TARP recipient's fiscal year
including the sunset date for a TARP
recipient that has never had an
obligation. For this purpose, an
obligation includes the ownership by
the Federal government of common
stock of a TARP recipient.
§ 30.3 Q-3: How are the SEps and most
highly compensated employees identified
for purposes of compliance with this part?
(a) Identification. The SEOs for a year
are the "named executive officers" who
are employees and are identified in the
TARP recipient's annual report on Form
10-K or annual meeting proxy statement
for that year (reporting the SEOs'
compensation for the immediately
preceding year). These employees are
considered the SEOs throughout that
entire year, For purposes of the
standards in this part applicable to the
most highly compensated employees,
the determination of whether an
employee is a most highly compensated
employee in a current fiscal year looks
back to the annual compensation for the
last completed fiscal year without
regard to whether the compensation is
includible in the employee's gross
income for Federal income tax
purposes.
(b) Compliance. Regardless of when
during the current fiscal year the TARP
recipient determines the SEOs or the
most highly compensated employees,
the TARP recipient must ensure that
any of the SEOs or employees
potentially subject to the requirements
in this part for the current fiscal year
complies with the requirements in this
part as applicable.
§ 30.4 Q-4: What actions are necessary for
a TARP recipient to comply with the
standards established under sections
111(bX3XA),111(bx3)(E),111(b)(3)(F) and
111(c) of EESA (evaluation of employee
plans and potential to encourage excessive
risk or manipulation of earnings)?
(a) General rule. To comply with the
standards established under sections
111(b)(3)(A),111(b)(3)(E), 111(b)(3)(F)
and 111(c) ofEESA, a TARP recipient
must establish a compensation
committee by the later of ninety days
after the closing date of the agreement
between the TARP recipient and
Treasury or September 14, 2009, and
maintain a compensation committee
during the remainder of the TARP
period. If a compensation committee is
already established before the later of
the closing date or September 14, 2009,
the TAR- P recipient must maintain its
compensation committee. During the
remainder of the TARP period after the
later of ninety days after the closing date
of the agreement between the TARP
recipient and Treasury or September 14,
2009, the compensation committee
must:
(1) Discuss, evaluate, and review at
least every six months with the TARP
recipient's senior risk officers the SEO
compensation plans to ensure that the
SEO compensation plans do not
encourage SEOs to take unnecessary and
excessive risks that threaten the value of
the TARP recipient;
(2) Discuss, evaluate, and review with
senior risk officers at least every six
months employee compensation plans
in light of the risks posed to the TARP
recipient by such plans and how to limit
such risks;
(3) Discuss, evaluate, and review at
least every six months the employee
compensation plans of the TARP
recipient to ensure that these plans do
not encourage the manipulation of
Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 28413
reported earnings of the TARP recipient
to enhance the compensation of any of
the TARP recipient's employees;
(4) At least once per TARP recipient
fiscal year, provide a narrative
description of how the SEO
compensation plans do not encourage
the SEOs to take unnecessary and
excessive risks that 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, the risks posed by employee
compensation plans and how these risks
were limited, including how these
employee compensation plans do not
encourage behavior focused on short-
term results rather than long-term value
creation, and how the TARP recipient
has ensured that the employee
compensation plans do not encourage
the manipulation of reported earnings of
the TARP recipient to enhance the
compensation of any of the TARP
recipient's employees; and
(5) Certify the completion of the
reviews of the SEO compensation plans
and employee compensation plans
required under paragraphs (a) (1), (2),
and (3) of this section.
(b) Exclusion of TAMP recipients with
no employees or no affected employees.
For any period during which a TARP
recipient has no employees, or has no
SEO or compensation plan subject to the
review process, the TARP recipient is
not subject to the requirements of
paragraph (a) of this section.
(c) Application to private TARP
recipients. The rules provided in
paragraph (a) of this section are also
applicable to TARP recipients that do
not have securities registered with the
SEC pursuant to the Federal securities
laws. A TARP recipient that does not
have securities registered with the SEC
pursuant to the Federal securities laws
and has received $25,000,000 or less in
financial assistance is subject to
paragraph (a) of this section, except that,
in lieu of establishing and maintaining
a compensation committee, such a
TARP recipient is permitted to ensure
that all the members of the board of
directors carry out the duties of the
compensation committee as described
in paragraph (a) of this section.
However, such a TARP recipient will be
required to establish and maintain a
compensation committee satisfying the
requirements of paragraph (a) of this
section for the first fiscal year following
a fiscal year during which the TARP
recipient either registers securities with
the SEC pursuant to the Federal
securities laws or has received more
than $25,000,000 in financial assistance,
and during subsequent years of the
TARP period.
(d) Application to TARF recipients
that have never had an outstanding
obligation. For TARP recipients that
have never had an outstanding
obligation, only paragraphs (a)(2), (a)(4),
(a) (5) (but for the narrative and
certification requirements of (a)(4) and
(a) (5), applied only to the requirements
of paragraph (a) (2)), (b) and (c) of this
§ 30.4 (Q-4) shall apply.
§30.5 ":How does a TARP recipient
comply with the requirements under § 30.4
(0-4) of this part that the compensation
committee discuss, evaluate, and review
the SEO compensation plans and employee
compensation plans to ensure that the SEO
compensation plans do not encourage the
SEOs to take unnecessary and excessive
risks that threaten the value of the TARP
recipient, or that the employee
compensation plans do not pose
unnecessary risks to the TARP recipient?
At least every six months, the
compensation committee must discuss,
evaluate, and review with the TARP
recipient's senior risk officers any risks
(including long-term as well as short-
term risks) that the TARP recipient faces
that could threaten the value of the
TARP recipient. The compensation
committee must identify the features in
the TARP recipient's SEO compensation
plans that could lead SEOs to take these
risks and the features in the employee
compensation plans that pose risks to
the TARP recipient, including any
features in the SEO compensation plans
and the employee compensation plans
that would encourage behavior focused
on short-term results and not on long-
term value creation. The compensation
committed is required to limit these
features to ensure that the SEOs are not
encouraged to take risks that are
unnecessary or excessive and that the
TARP recipient is not unnecessarily
exposed to risks.
§30.6 0--6: How does a TARP recipient
comply with the requirement under § 30.4
(0-4) of this part that the compensation
committee discuss, evaluate, and review
the employee compensation plans to
ensure that these plans do not encourage
the manipulation of reported earnings of the
TARP recipient to entrance the
compensation of any of the TARP
redpient's employees?
The compensation committee must
discuss, evaluate, and review at least
every six months the terms of each
employee compensation plan and
identify and eliminate the features in
these plans that could encourage the
manipulation of reported earnings of the
TARP recipient to enhance the
compensation of any employee.
§30.7 t?-?: How does a TARP recipient
comply with the certification and disclosure
requirements under § 30.4 (0--4) of this
part?
(a) Certification. The compensation
committee must provide the
certifications required by § 30.4 (Q-4) of
this part stating that it has reviewed,
with the. TARP recipient's senior risk
offic:ers,'the SEO compensation plans to
ensure that these plans do not
encourage SEOs to take unnecessary and
excessive risks, the employee
compensation plans to limit any
unnecessary risks these plans pose to
the TARP recipient, and the employee
compensation plans to eliminate any
features of these plans that would
encourage the manipulation of reported
earnings, of the TARP recipient to
enhance the compensation of any
employee. For any period during which
no obligation arising from financial
assistance provided under the TARP
remains outstanding, the requirements
under this paragraph shall be modified
to be consistent with § 30.4(d) (¢-4(d)).
Providing a statement similar to the
following and in the manner provided
in paragraphs (c) and (d) of this section,
as applicable, would satisfy this
standard: "The compensation
committee certifies that
(1) It has reviewed with senior risk
officers the senior executive officer
(SEO) compensation plans and has
made all reasonable efforts to ensure
that these plans do not encourage SEOs
to take unnecessary and excessive risks
that threaten the value of [identify
TARP recipient];
(2) It has reviewed with senior risk
officers the employee compensation
plans and has made all reasonable
efforts td limit any unnecessary risks
these plans pose to the [identify TARP
reci ient]; and
It has reviewed the employee
compensation plans to eliminate any
features of these plans that would
encourage the manipulation of reported
earnings of [identify TARP recipient] to
enhance the compensation of any
empployee."
(b) Disclosure. At least once per TARP
recipient fiscal year, the compensation
committee must provide a narrative
description identifying each SEO
compensation plan and explaining how
the SEO compensation plan does not
encourage the SEOs to take unnecessary
and excessive risks that threaten the
value of the TARP recipient. The
compensation committee must also
identify each employee compensation
plan, explain how any;unnecessary risks
posed by the employee compensation
plan have been limited, and further
explain how the employee
28414 Federal Register / Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
compensation plan does not encourage
the manipulation of reported earnings to
enhance the compensation of any
employee.
(c) Location. For TARP recipients
with securities registered with the SEC
pursuant to the Federal securities law,
the compensation committee must
provide these certifications and
disclosures in the Compensation
Committee Report required pursuant to
Item 407(e) of Regulation S-K under the
Federal securities laws (17 CFR
229.407(a)) and to Treasury. These
disclosures must be provided in the
Compensation Committee Report for
any disclosure pertaining to any fiscal
year any portion of which is a TARP
period (for a TARP recipient with an
obligation), or for any disclosure
pertaining to any fiscal year including a
date on or before the sunset date (for a
TARP recipient that has never had an
obligation). Within 120 days of the
completion of a fiscal year during any
part of which is a TARP period (for a
TARP recipient with an obligation), or
the completion of a fiscal year including
a date on or before the sunset date (for
a TARP recipient that has never had an
obligation), a TARP recipient that is a
smaller reporting company must
provide the certifications of the
compensation committee to its primary
re LIJ tory agency and to Treasury.
(d) Application to private TARP
recipients. The rules provided in
paragraphs (a), (b), and (c) of this
section are also applicable to TARP
recipients that do not have securities
registered with the SEC pursuant to the
Federal securities laws. Within 120 days
of the completion of the fiscal year
during any part of which is a TARP
period (for a TARP recipient with an
obligation), or the completion of a fiscal
year including a date on or before the
sunset date (for a TARP recipient that
has never had an obligation), a private
TARP recipient must provide the
certification of the compensation
committee (or board of directors, as
applicable under § 30.4 (Q-4)) to its
primary regulatory agency and to
Treasury.
§ 34.8 Q--8: What actions are necessary for
a TARP recipient to comply with the
standards established under section
111(bj(3)(B) of EESA (tile "clawback"
provision requirement)?
To comply with the standards
established under section 111(b)(3)(11) of
EESA, a TARP recipient must ensure
that any bonus payment made to a SEO
or the next twenty most highly
compensated employees during the
TARP period is subject to a provision
for recovery or "clawback" by the TARP
recipient if the bonus payment was
based on materially inaccurate financial
statements (which includes, but is not
limited to, statements of earnings,
revenues, or gains) or any other
materially inaccurate performance
metric criteria. Whether a financial
statement or performance metric criteria
is materially inaccurate depends on all
the facts and circumstances. However,
for this purpose, a financial statement or
performance metric criteria shall be
treated as materially inaccurate with
respect to any employee who knowingly
engaged in providing inaccurate
information (including knowingly
failing to timely correct inaccurate
information) relating to those financial
statements or performance metrics.
Otherwise, with respect to a
performance criteria, whether the
inaccurate measurement of the
performance or inaccurate application
of the performance to the performance
criteria is material depends on whether
the actual performance or accurate
application of the actual performance to
the performance criteria is materially
different from the performance required
under the performance criteria or the
inaccurate application of the actual
performance to the performance criteria.
The TARP recipient must exercise its
clawback rights except to the extent it
demonstrates that it is unreasonable to
do so, such as, for example, if the
expense of enforcing the rights would
exceed the amount recovered. For the
purpose of this section, a bonus
payment is deemed to be made to an
individual when the individual obtains
a legally binding right to that payment.
§30.9 Q-9: What actions are necessary for
a TARP recipient to comply with the
standards established under section
111(bx3XC) of EESA (the prohibition on
golden parachute payments)?
(a) Prohibition on golden parachute
payments. To comply with the
standards established under section
111(b)(3)(C) of EESA; a TARP recipient
must prohibit any golden parachute
payment to a SEO and any of the next
five most highly compensated
employees during the TARP period. A
golden parachute payment is treated as
paid at the time of departure and is
equal to the aggregate present value of
all payments made for a departure,
Thus, a golden parachute payment
during the TARP period may include a
right to amounts actually payable after
the TARP period.
(b) Examples. The following examples
illustrate the provisions of paragraph (a)
of this section:
Example 1. Employee A is a SED of a
TARP recipient. Employee A is entitled to a
payment of three times his annual
compensation upon an involuntary
termination of employment or voluntary
termination of employment for good reason,
but such amount is not payable unless and
until the TARP period expires with respect
to TARP recipient. Employee A terminates
employment during the TARP period.
Because, for purposes of the prohibition on
golden parachute payments, the payment is
made at the time ofdeparture, Employee A
may not obtain the right to the payment upon
the termination of employment.
Example 2. Employee B involuntarily
terminated employment on July i, 2Do8, at
which time Employee B was a SEA of a
financial institution. Employee B's
employment agreement provided that if
Employee B were involuntarily terminated or
voluntarily terminated employment for good
reason, Employee B would be entitled to a
series of five equal annual payments. After
the first payment, but before any subsequent
payment, the entity became a TARP
recipient, Because, for purposes of the
prohibition on golden parachute payments,
all of the five payments are deemed to have
occurred at termination of employment and
because, in this case, termination of
employment occurred before the beginning of
the applicable TARP period, the payment of
the four remaining payments due under the
agreement will not violate the requirements
of this section.
§30.11) 410: What actions are necessary
for a TARP recipient to comply with section
111(bx3XD) of EESA (the Ilmitations on
bonus payments)?
(a) General rule. To comply with
section 111(b)(3)(D) of EESA, pursuant
to the schedule under paragraph (b) of
this section and subject to the
exclusions under paragraph (e) of this
section, a TARP recipient must prohibit
the payment or accrual of any bonus
payment during the TARP period to or
by the employees identified pursuant to
paragraph (b) of this section.
(b)(1) Schedule, The prohibition
required under paragraph (a) of this
section applies as follows to:
M The most highly compensated
employee of any TARP recipient
receiving less than $25,000,000 in
financial assistance;
(ii) At.least the five most highly
compensated employees of any TARP
recipient receiving $25,000,00D but less
than $250,000,000 in financial
assistance;
(iii) The SEOs and at least the ten next
most highly compensated employees of
any TARP recipient receiving
$250,000,000 but less than $500,000,000
in financial assistance; and
(iv) The SEOs and at least the twenty
next most highly compensated
employees of any TARP recipient
receiving $500,000,000 or more in
financial assistance.
(2) Changes in level of financial
assistance. The determination of which
Federal Register/ Vol. 74, No. 113/Monday, June 15, 2009 /Rules and Regulations 28415
schedule in paragraph (b) of this section
is applicable to a TARP recipient during
the TARP period is determined by the
gross amount of all financial assistance
provided to the TARP recipient, valued
at the time the financial assistance was
received Whether a TARP recipient's
financial assistance has increased
during a fiscal year to the point in the
schedule under paragraph (b) of this
section that the SEOs or a greater
number of the most highly compensated
employees will be subject to the
requirements under paragraph (a) of this
section is determined as of the last day
of the TARP recipient's fiscal year, and
the increase in coverage is effective for
the subsequent fiscal year.
(3) Application to feat year of
financial assistance. For employers who
become TARP recipients after June 15,
2DD9, the bonus payment limitation
provision under this paragraph (b) does
not apply to bonus payments paid or
accrued by TARP recipients or their
employees before the first date of the
TARP period, Certain bonus payments
may relate to a service period beginning
before and ending after the first date of
the TARP period. In these
circumstances, the employee will not be
treated as having accrued the bonus
payment on or after the first date of the
TARP period if the bonus payment is
reduced to reflect at least the portion of
the service period that occurs on or after
the first date of the TARP period.
However, if the employee is a SEO or
most highly compensated employee at
the time the amount would otherwise be
paid, the bonus payment amount as
reduced in accordance with the
previous sentence still may not be paid
until such time as bonus payments to
that employee are permitted.
(c) Accrual. (1) General rule. Whether
an employee has accrued a bonus
payment is determined based on the
facts and circumstances. An accrual
may include the granting of service
credit (whether toward the calculation
of the benefit or any vesting
requirement) or credit for the
compensation received (or that
otherwise would have been received)
during the period the employee was
subject to the restriction under
paragraph (a) of this section. For
application of this rule to the fiscal year
including June 15, 2009, see § 30.17 (Q-
17).
(2) Payments or accruals after the
employee is na longer a SEO or most
highly compensated employee. If after
the employee is no longer a SEO or most
highly compensated employee, the
employee is paid a bonus payment or
provided a legally binding right to a
bonus payment that is 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 such bonus payment
during the period the employee was a
SEO or most highly compensated
employee. For example, if the employee
is retroactively granted service credit
under an incentive plan (whether for
vesting or benefit calculation purposes)
for the period in which the employee
was a SEO or most highly compensated
employee, the employee will be treated
as having accrued that benefit during
the period the employee was a SEO or
most highly compensated employee.
(3) Multi year service periods. Certain
bonus payments may relate to a multi-
year service period, during some portion
of which the employee is a SEO or most
highly compensated employee subject to
paragraph (a) of this section, and during
some portion of which the employee is
not. In these circumstances, the
employee will not be treated as having
accrued the bonus payment during the
period the employee was a SEO or most
highly compensated employee if the
bonus payment is at least reduced to
reflect the portion of the service period
that the employee was a SEO or most
highly compensated employee. If the
employee is a SEO or most highly
compensated employee at the time the
net bonus payment amount after such
reduction would otherwise be paid, the
amount still may not be paid until such
time as bonus payments to that
employee are permitted.
(d) Examples. The following examples
illustrate the rules of paragraphs (a)
through (c) of this section:
Example 1. Employee A is a SEO of a
TARP recipient in 2010, but not in 2011. The
TARP recipient maintains an annual bonus
program, generally paying bonus payments in
March of the following year. Employee A
may not be paid a bonus payment in 2010
(for services performed in 2009 or any other
year). In addition, Employee A may not be
paid a bonus payment in 2011 to the extent
such bonus payment is based on services
performed in 2010.
Example 2. Same facts as in Exampleeive 1,
provided further that Employee A recs a
salary increase for 2011. The salary increase
equals the same percentage as similarly
situated executive officers, with an
additional percentage increase which, over
the course of twelve months, equals the
bonus that would have been payable to
Employee A in 2011 (for services performed
in 2010), except far application of paragraph
(a) of this section. Under these facts and
circumstances, the additional percentage
increase will be treated as a bonus payment
accrued in 2010 and Employee A may not be
paid this bonus payment
Example 3. Same facts as in Example 1,
provided further that on March 1, 2011,
Employee A is granted a stock option under
the TARP recipient stock incentive plan with
a value approximately equal to the bonus that
would have been payable to Employee A in
2011 (for services performed in 2010), except
for application of paragraph (a) of this
section. Other similarly situated employee
not covered by the bonus limitation for 2010
do not receive such a grant Under these facts
and circumstances, the stock option grant
will be treated as a bonus payment accrued
in 2010 and will not be permitted to be paid
to Employee A.
Example 4. Employee B is not a SEO or a
most highly compensated employee of a
TARP recipient during 2009. On July 1, 2009,
Employee B is granted the right to a bonus
payment of $50,000 if Employee B is
employed by the TARP recipient through
July 1, 2011 (two years). Employee B is a SEO
of a TARP recipient during 2010, but is not
a SEO or a most highly compensated
employee of the TARP recipient during 2011.
Employee B is employed by the TARP
recipient on July 1, 2011. Thus, Employee B
was a SEO or most highly compensated
employee during one-half of the two-year
required service period. Provided that
Employee B is paid not more than half of the
otherwise payable bonus payment, or
$25,000, Employee B will not be treated as
having accrued a bonus payment while
Employee B was a SEO or a most highly
compensated employee.
(a) Exclusions-(I) Long-term
restricted stock-4i) General rule. The
TARP recipient is permitted to award
long-term restricted stock to the
employees whose compensation is
limited according to the schedule under
paragraph (b) of this section, provided
that the value of this grant may not
exceed one third of the employee's
annual compensation as determined for
that fiscal year (that is, not using the
look-back method for the prior year).
For purposes of this paragraph, in
determining an employee's annual
compensation, all equity-based
compensation granted in fiscal years
ending after June 15, 2009 will only be
included in the calculation in the year
in which it is granted at its total fair
market value on the grant date, and all
equity based compensation granted in
fiscal years ending prior to June 15,
2009 will not be included in the
calculation of annual compensation for
any subsequent fiscal year. For purposes
of this paragraph, in determining the
value of the long-term restricted stock
grant, the long-term restricted stock
granted in accordance with this
paragraph will only be included in the
calculation in the year in which the
restricted stock is granted at its total fair
market value on the grant date.
(ii) Example. During 2008, Employee A
receives compensation of $1 million salary
and a $1,200,000 long-term restricted stock
grant subject to a three-year vesting period.
During 2009, Employee A received
28416 Federal Register/Vol, 74, No. 113/Monday, June 15, 2009/Rules and Regulations
compensation of $1 million salary and no
grant of long-term restricted stock. During
2010, Employee A receives compensation of
$600,000 salary and a $300,000 long-term
restricted stock grant subject to a three-year
vesting period. Under the general SEC
compensation disclosure rules used to define
annual compensation in § 30,1 (¢1) of this
part, the compensation related to the long-
term restricted stock grants would be
allocated over the vesting period. Assume for
this purpose, that for 2010, $400,000 of the
2008 long-term restricted stock giant is
allocated as compensation, and $100,000 of
the 2010 long-term restricted stock grant is
allocated as compensation, so that the total
annual compensation is $1,100,000 ($600,000
salary + $400,000 + $100,000). However, for
purposes of determining Employee A's
annual compensation to apply the limit on
the value of the long-term restricted stork
that may be granted to Employee A in 2010,
the entire $300,000 value of the 2010 grant
is included but the $400,oao value attributed
to the 2008 grant is excluded. Accordingly,
Employee A's adjusted annual compensation
is 390,000 ($1,100,000 - 5100,000 +
$300,000 - $400,000). In addition, the entire
fair market value of the 2010 long-term
restricted stock grant is included for
purposes of da+e minim whetherthelimit
has been exceeded. Because the $300,000
adjusted value of the long-term restricted
stock grant does not exceed one-third of the
$900,000 adjusted annual compensation, the
grant complies with paragraph (e)(1)(i),
(2) Legally binding right under valid
employment contmcta-4i) General rule.
The prohibition under paragraph (a) of
this section does not apply to bonus
payments required to be paid under a
valid employment contract if the
employee had a legally binding right
under the contract to a bonus payment
as of February 11, 2009. For purposes of
determining whether an employee had a
legally binding right to a bonus
payment, see 26 CFR 1.409A-1(b)(i). In
addition, the bonus payment must be
made in accordance with the terms of
the contract as of February 11, 2009
(which may include application of an
elective deferral election under a
qualified retirement plan or a
nonqualified deferred compensation
plan), such that any subsequent
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 bonus payment being
treated as not made under the
employment contract executed on or
before February 11, 2009. However,
amendment of a valid employment
contract executed on or before February
11, 2009 under which an employee has
a legally binding right to a bonus
payment to reduce the amount of the
bonus payment or to enhance or include
service-based or performance-based
vesting requirements or holding period
requirements will not result in this
treatment. The amended employment
contract would still be deemed a valid
employment contract and the employee
would still be treated as having a legally
binding right to the bonus payment
under the original employment contract.
The TARP recipient and the employees
of the TARP recipient should be
cognizant of the restrictions under
section 409A of the Internal Revenue
Code (26 U.S.C. 409A) in the case of an
amendment described in the preceding
sentence.
(ii) Examples. The following
examples illustrate the provisions of
this paragraph (2).
Example 1. TARP recipient sponsors a
written restricted stock unit plan. Under the
plan, restricted stock units are traditionally
granted each July 1, and are subject to a
three-year vesting requirement Employee A,
a SEO of TARP recipient, received grants on
July 1, 2007, July 1, 2008, and July 1, 2009.
The July 1, 2007 and July, 1, 2008 grants are
excluded from the limitation on payments,
because although the awards were subject to
a continuing service vesting requirement,
Employee A retained a legally binding right
to the restricted stock units as of February 11,
2009. However, regardless of the fact that the
restricted stock unit program was in
existence on February 11, 2009, Employee A
did not retain a legally binding right to a
restricted stock unit for 2009 as of February
11, 2009, but rather obtained the legally
binding right only when the restricted stock
unit was granted on July 1, 2009.
Accordingly, the July 1, 2009 grant is subject
to the limitation and is not permitted to be
accrued or paid (unless such grant complies
with the exception for certain grants of long-
term restricted stock).
Example 2. TARP recipient sponsors an
annual bonus program documented in a
written plan. Under the bonus program, the
board of directors retains the discretion to
eliminate or reduce the bonus of any
employee in the bonus pooL Employees B
and C, both SEOs, are in the bonus pool for
200B. On January 15, 2009, the compensation
committee determines the bonuses to which
the employees of the division in which
Employee B works are entitled, and awards
Employee B a $10,000 bonus payable on June
1. Employee 8 has a legally binding right to
the bonus as of February 11, 2009 and
payment of the bonus is not subject to the
limitation. However, as of February 11, 2009,
the board of directors has not met to
determine which employees of the division
in which Employee C works will be entitled
to a bonus ar the amount of such bonus.
Accordingly, Employee C did not have a
legally binding right to a bonus as of
February 11, 2009 and may be subject to the
bonus payment limitation.
Example 3. TARP recipient sponsors a
written stock option plan under which stock
options may be granted to SEOs designated
by the compensation committee.
Designations and grants typically occur at a
meeting in August of every year, and no
meeting occurred in 2009 before August
Regardless of the existence of the general
plan, no SEO had a legally binding right to
a stock option grant for 2009 as of February
11, 2009 because no grants had been made
under the plan. Accordingly, any 2009 grant
will be subject to the limitation and is not
permitted to be made.
Example 4. Employee D is an SEO of a
TARP recipient. Under Employee D's written
employment agreement executed before
February 11, 2009, Employee D is entitled to
the total of whatever bonuses are made
available to Employee E and Employee F. As
of February 11, 2009, Employee E had a
legally binding right to a $100,000 bonus,
Employees E and F are never at any time
SEOs or highly compensated employees
subject to the limitation. As of February 11,
2009, Employee F had no legally binding
right to a bonus, but was eligible to
participate in a bonus pool and was
ultimately awarded a bonus of $50,000. As of
February 11, 2009, Employee D had a legally
binding right to a $100,000 bonus, so that
bonus is not subject to the limitation.
However, as of February 11, 2009, Employee
D did not have a legally binding right to the
additional $5,000 bonus, so that bonus is
subject to the bonus payment limitation and,
if not paid before June 15, 2009 is not
permitted to be paid.
(f) Application to private TARP
recipients. The rules set forth in this
section are also applicable to TARP
recipients that do not have securities
registered with the SEC pursuant to the
Federal securities laws.
§30.11 4-11: Are TARP recipients
required to most any other standards under
the executive compensation and corporate
governance standards In section 111 of
EESA?
(a) Approval of compensation
payments to, and compensation
strictures for, certain employees of
TARP recipients receiving exceptional
financial assistance. For any period
during which a TARP recipient is
designated as a TARP recipient that has
received exceptional financial
assistance, the TARP recipient must
obtain the approval by the Special
Master of all compensation payments to,
and compensation structures for, SEOs
and most highly compensated
employees subject to paragraph (b) of
§ 30.10 (Q-10). TARP recipients that
receive exceptional financial assistance
must alst) receive approval by the
Special Master for all compensation
structures for other employees who are
executive officers (as defined under the
Securities and Exchange Act, Rule 3b-
7) or one of the 100 most highly
compensated employees of a TARP
recipient receiving exceptional
assistance (or both), who are not subject
to the bonus limitations under § 30.10
(Q-10). For this purpose, compensation
payments and compensation structures
Federal Register / Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 28417
may include awards or other rights to
compensation which an employee has
already received but not yet been paid
or, in some instances, fully accrued.
Accordingly, the Special Master has the
authority to require that such
compensation payments or
compensation structures be altered to
meet the standards set forth in § 30.16
(Q-16). However, this approval
requirement is not applicable to
payments that are not subject to
paragraph (a) of § 30.10 (Q-30) due to
the application of paragraph (e)(2) of
§ 30.10 (Q-30) or the effective date
provisions of § 30.17 (Q-17), though the
Special Master will take such payments
into account in reviewing the
compensation structure and amounts
payable, as applicable, that are subject
to review. Notwithstanding any of the
foregoing, approval is not required with
respect to an employee not subject to
the bonus payment limitations to the
extent that the employee's annual
compensation, as modified in § 30.15
(Q-16) to include certain deferred
compensation and pension accruals but
to disregard any grant of long-term
restricted stock, is limited to $500,000
or less, and any further compensation is
provided in the form of long-term
restricted stock. For details, see § 30.16
(Q-16).
(b) Perquisite disclosure-41) General
rule. TARP recipients must annually
disclose during the TARP period any
perquisite whose total value for the
TARP recipient's fiscal year exceeds
$25,000 for each of the SEOs and most
highly compensated employees that are
subject to paragraph (a) of § 30.10 (Q-
10). TARP recipients must provide a
narrative desorption of the amount and
nature of these perquisites, the recipient
of these perquisites, and a justification
for offering these perquisites (including
a justification for offering the perquisite,
and not only for offering the perquisite
with a value that exceeds $25,000).
Such disclosure must be provided
within 120 days of the completion of a
fiscal year any part of which is a TARP
period.
(2) Location. A TARP recipient must
provide this disclosure to Treasury and
to its primary regulatory agency.
(c) Compensation consultant
disclosure-41) General rule. The
compensation committee of the TARP
recipient must provide annually a
narrative description of whether the
TARP recipient, the board of directors of
the TARP recipient, or the
compensation committee has engaged a
compensation consultant; and all types
of services, including non-compensation
related services, the compensation
consultant or any of its affiliates has
provided to the TARP recipient, the
board, or the compensation committee
during the past three years, including
any "benchmarking" or comparisons
employed to identify certain percentile
levels of compensation (for example,
entities used for benchmarking and a
justification for using these entities and
the lowest percentile level proposed for
compensation). Such disclosure must be
provided within 120 days of the
completion of a fiscal year any part of
which is a TARP period.
(2) Application to TARP recipients
not required to maintain compensation
committees. For those TARP recipients
not required to establish and maintain
compensation committees under
§ 30.4(c) (Q-4), the board of directors
must provide the disclosure under
§ 30.4(c)(1).
(3) Location. A TARP recipient must
provide this disclosure to Treasury and
to its primary regulatory agency.
(d) Prohibition on gross-ups. Except as
explicitly permitted under this part,
TARP recipients are prohibited from
providing (formally or informally) gross-
ups to any of the SEOs and next twenty
most highly compensated employees
during the TARP period. For this
purpose, providing a gross-up includes
providing a right to a payment of such
a gross-up at a future date, for example
a date after the TARP period.
§30.12 Q-12: What actions are necessary
for a TARP recipient to comply with section
111(d) of EESA (the excessive or luxury
expenditures policy requirement)?
To comply with section 111(d) of
EESA, by the later of ninety days after
the closing date of the agreement
between the TARP recipient and
Treasury or September 14, 2009, the
board of directors of the TARP recipient
must adopt an excessive or luxury
expenditures policy, provide this policy
to Treasury and its primary regulatory
agency, and post the text of this policy
on its Internet Web site, if the TARP
recipient maintains a company Web
site. After adoption of the policy, the
TARP recipient must maintain the
policy during the remaining TARP
period (if the TARP recipient has an
obligation), or through the last day of
the TARP recipient's fiscal year
including the sunset date (if the TARP
recipient has never had an obligation).
If, after adopting an excessive or luxury
expenditures policy, the board of
directors of the TARP recipient makes
any material amendments to this policy,
within ninety days of the adoption of
the amended policy, the board of
directors must provide the amended
policy to Treasury and its primary
regulatory agency and post the amended
policy on its Internet Web site, if the
TARP recipient maintains a company
Web site. This disclosure must continue
through the TARP period (if the TARP
recipient has an obligation), or through
the last day of the TARP recipient's
fiscal year that includes the sunset date
(if the TARP recipient has never had an
obligation).
§30.13 413: What actions are necessary
for a TARP recipient to comply with section
111(e) of EESA (the shareholder resolution
on executive compensation requirement)?
(a) General rule. As provided in
section 111(e) of EESA, any proxy or
consent or authorization for an annual
or other meeting of the shareholders of
any TARP recipient that occurs during
the TARP period must permit a separate
shareholder vote to approve the
compensation of executives, as required
to be disclosed pursuant to the Federal
securities laws (including the
compensation discussion and analysis,
the compensation tables, and any
related material). To meet this standard,
a TARP recipient must comply with any
rules, regulations, or guidance
promulgated by the SEC.
§30.14 Q-14: How does section 111 of
EESA operate In connection with an
acquisition, merger, or reorganization?
(a) Special rules for acquisitions,
mergers, or reorganizations. In the event
that a TARP recipient (target) is
acquired by an entity that is not an
affiliate of the target (acquirer) in an
acquisition of any form, including a
purchasA of substantially all of the
assets of the target, such that the
acquirer after the transaction would
have been treated as a TARP recipient
if the target had received the TARP
funds immediately after the transaction,
acquirer will not become subject to
section 111 of EESA merely as a result
of the acquisition. If the acquirer is not
subject to section 111 of EESA
immediately after the transaction, then
any employees of the acquirer
immediately after the transaction
(including met employees who were
SEOs or most highly compensated
employees immediately prior to the
transaction and became acquirer
employees as a result of the transaction)
will not be subject to section 111 of
EESA.
(b) Anti-abuse rule. Notwithstanding
the provisions of paragraph (a) of this
section, if the primary purpose of a
transaction involving the acquisition, in
any form, of a TARP recipient is to
avoid or. evade the application of any of
the requirements of section 111 of
EESA, the acquirer will be treated as a
TARP recipient immediately upon such
acquisition. In such a case, the SEOs
28418 Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
and the most highly compensated
employees to whom any of the
requirements of section 111 of EESA
and this Interim Final Rule apply shall
be redetermined as of the date of the
acquisition. The redetermined SEOs and
most highly compensated employees of
the post-acquisition acquirer shall
consist of the PEO and PFO of the post-
acquisition acquirer, plus the applicable
number of next most highly
compensated employees determined by
aggregating the post-acquisition
employees of the acquirer (to include
the pre-acquisition employees of the
target employed by the acquirer, or
anticipated to be employed by the
acquirer), and ranking such employees
in order of compensation for the
immediately preceding fiscal year of the
pre-acquisition target or pre-acquisition
acquirer, as appropriate. In the case of
an asset acquisition, the entity or
entities to whom the target's assets are
transferred shall be treated as the direct
recipient of the financial assistance for
purposes of determining which other
related entities are treated, in the
aggregate, as the TARP recipient under
the definition of "TARP recipient" in
§ 30.1 (Q-1).
§30.15 Q-15: What actions are necessary
for a TARP recipient to comply with
certification requirements of section
111(b)(4) of EESA?
(a) Certification Requirements-(1)
General. To comply with section
111(b)(4) of EESA, the PEO and the PFO
of the TARP recipient must provide the
following certifications with respect to
the compliance of the TARP recipient
with section 111 of EESA as
im? lemented under this part:
t2) First Fiscal Year Certification. (i)
Within ninety days of the completion of
the first annual fiscal year of the TARP
recipient any portion of which is a
TARP period, the PEO and the PFO of
the TARP recipient must provide
certifications similar to the model
provided in appendix A to this section.
(ii) If the first annual fiscal year of a
TARP recipient any portion of which is
a TARP period ends within thirty days
after the closing date of the applicable
agreement between the TARP recipient
and Treasury, the TARP recipient shall
have an additional sixty days beginning
on the day after the end of the fiscal
year during which it can establish the
compensation committee, if not already
established, and during which the
compensation committee shall meet
with senior risk officers to discuss,
review, and evaluate the SEO
compensation plans and employee
compensation plans in accordance with
§ 30.4 (Q--4) of this part The
certifications of the PEO and the PFO of
the TARP recipient must be amended to
reflect the timing of the establishment
and reviews of the compensation
committee.
(3) Years Following First Fiscal Year
Certification. Within ninety days of the
completion of each TARP fiscal year of
the TARP recipient after the first TARP
fiscal year, the PEO and the PFO of the
TARP recipient must provide a
certification similar to the model
provided in Appendix B to this section.
(4) Location. A TARP recipient with
securities registered with the SEC
pursuant to the Federal securities law
must provide these certifications as an
exhibit (pursuant to Item 601(b)(99)(i) of
Regulation S-K under the Federal
securities laws (17 CFR
229.601(b)(99)(i)) to the TARP
recipient's annual report on Form 10-K
and to Treasury. To the extent that the
PEO or the PFO of the TARP recipient
is unable to provide any of these
certifications in a timely manner, the
PEO or the PFO must provide Treasury
an explanation of the reason such
certification has not been provided.
These certifications are in addition to
the compensation committee
certifications required by § 3D.5 (Q-5) of
this part.
(5) Application to private TARP
recipients, The rules provided in this
section are also applicable to TARP
recipients that do not have securities
registered with the SEC pursuant to the
Federal securities laws, except the
certifications under paragraphs (a)(2)(x)
and (a)(3)(x) of this section are not
required. A private TARP recipient must
provide these certifications to its
primary regulatory agency and to
Treasury.
(6) Application to TARP recipients
that have never had an obligation. For
those TARP recipients that have never
had an obligation, the PEO and PFO
must.provide the certifications pursuant
to this paragraph (a) only with respect
to the requirements applicable to a
TARP recipient that has never had an
obligation (generally certain
compensation committee reviews of
employee compensation plans and the
issuance of, and compliance with, an
excessive or luxury expenses policy).
(b) Recordkeeping requirements. The
TARP recipient must preserve
appropriate documentation and records
to substantiate each certification
required under paragraph (a) of this
section for a period of not less than six
years after the date of the certification,
the first two years in an easily accessible
place. The TARP recipient must furnish
promptly to Treasury legible, true,
complete, and current copies of the
documentation and records that are
required to be preserved under
paragraph (b) of this section that are
requested by any representative of
Treasury.
(c) Penalties for maldng or providing
false or fraudulent Statements, Any
individual or entity that provides
information or makes a certification to
Treasury pursuant to the Interim Final
Rule or as required pursuant to 31 CFR
Part 30 may be subject to 16 U.S.C.
1001, which generally prohibits the
making of any false or fraudulent
statement in a matter within the
jurisdiction of the Federal government.
Upon receipt of information indicating
that any'individual or entity has
violated-any provision of title 18 of the
U.S. Code or other provision of Federal
law, Treasury shall refer such
information to the Department of justice
and the Special Inspector General for
the Troubled Asset Relief Program.
Appendix A to § 30.15-Model
Certification for First Fiscal Year
Certification
"I, [identify certifying individual], certify,
based on my knowledge, that:
(i) The compensation committee of
[identify TARP recipient] has discussed,
reviewed, and evaluated with senior risk
officers at least every six months during the
period beginning on the later of the closing
date of the agreement between the TARP
recipient and Treasury or June 15, 2009 and
ending with the last day of the TARP
recipient's fiscal year cont_ fining that date,
senior executive officer (SEO) compensation
plans and employee compensation plans and
the risks these plans pose to [identify TARP
recipient];
(ii) The compensation committee of
[identify TARP recipient] has identified and
limited during the period beginning on the
later of the closing date of the agreement
between the TARP recipient and Treasury or
June 15, 2009 and ending with the last day
of the TARP recipient's fiscal year containing
that date, the features in the SEO
compensation plans that could lead SEOs to
take unnecessary and excessive risks that
could threaten the value of [identify TARP
recipient] and identified any features in the
employee compensation plans that pose risks
to [identify TARP recipient] and limited
those features to ensure that [identify TARP
recipient] is not unnecessarily exposed to
risks; ;
(iii) Thy compensation committee has
reviewed at least every six months during the
period beginning on the later of the closing
date of the agreement between the TARP
recipient and Treasury or June 15, 2009 and
ending with the last day of the TARP
recipient's fiscal year containing that date,
the terms of each employee compensation
plan and identified the features in the plan
that could encourage the manipulation of
reported earnings of [identify TARP
recipient] to enhance the compensation of an
employee and has limited those features;
Federal Register/Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 28419
(iv) The compensation committee of
[identify TARP recipient] will certify to the
reviews of the SEO compensation plans and
employee compensation plans required
under (i) and (iii) above;
(v) The compensation committee of
[identify TARP recipient] will provide a
narrative description of how it limited during
any part of the most recently completed fiscal
year that included a TARP period the
features in
(A) SEO compensation plans that could
lead SEOs to take unnecessary and excessive
risks that could threaten the value of
[identify TARP recipient];
(B) Employee compensation plans that
unnecessarily expose [identify TARP
recipient] to risks; and
(C) Employee compensation plans that
could encourage the manipulation of
reported earnings of [identify TARP
recipient] to enhance the compensation of an
employee;
(vi) [Identify TARP recipient] has required
that bonus payments, as defined in the
regulations and guidance established under
section 111 of EESA [bonus payments), of the
SEOs and twenty next most highly
compensated employees be subject to a
recovery or "dawback" provision during any
part of the most recently completed fiscal
year that was a TARP period if the bonus
payments were based on materially
inaccurate financial statements or any other
materially inaccurate performance metric
criteria;
(vii) [Identify TARP recipient] has
prohibited any golden parachute payment, as
defined in the regulations and guidance
established under section ill of EESA, to an
SEO or any of the next five most highly
compensated employees during the period
beginning on the later of the closing date of
the agreement between the TARP recipient
and Treasury or June 15, 2009 and ending
with the last day of the TARP recipient's
fiscal year containing that date;
(viii) [Identify TARP recipient] has limited
bonus payments to its applicable employees
in accordance with section ill of EE SA and
the regulations and guidance established
thereunder during the period beginning on
the later of the closing date of the agreement
between the TARP recipient and Treasury or
June 15, 2009 and ending with the last day
of the TARP recipient's fiscal year containing
that date, [forrecipients of exceptional
assistance: and has received or is in the
process of receiving approvals from the
Office of the Special Master for TARP
Executive Compensation for compensation
payments and structures as required under
the regulations and guidance established
under section ill of EESA, and has not made
any payments inconsistent with those
approved payments and structures);
(ix) The board of directors of [identify
TARP recipient] has established an excessive
or luxury expenditures policy, as defined in
the regulations and guidance established
under section 111 of EESA, has provided this
policy to Treasury and its primary regulatory
agency, and [identify TARP recipient,] and its
employees have complied with this policy
during the period beginning on the later of
the closing date of the agreement between the
TARP recipient and Treasury or June 15,
2009 and ending with the last day of the
TARP recipient's fiscal year containing that
date, and that any expenses requiring
approval of the board of directors, a
committee of the board of directors, an SEO,
or an executive officer with a similar level of
responsibility, were properly approved;
(x) [Identify TARP recipient] will permit a
non binding shareholder resolution in
compliance with any applicable Federal
securities rules and regulations on the
disclosures provided under the Federal
securities laws related to SEO compensation
paid or accrued during the period beginning
on the later of the closing date of the
agreement between the TARP recipient and
Treasury or June 15, 2009 and ending with
the last day of the TARP recipient's fiscal
year containing that date;
(xi) [Identify TARP recipient] will disclose
the amount, nature, and justification for the
offering during the period beginning on the
later of the closing date of the agreement
between the TARP recipient and Treasury or
June 15, 2009 and ending with the last day
of the TARP recipient's fiscal year containing
that date of any perquisites, as defined in the
regulations and guidance established under
section 111 of EESA, whose total value
exceeds $25,000 for each employee subject to
the bonus payment limitations identified in
paragraph (vii);
(xii) [Identify TARP recipient) will disclose
whether [identify TARP recipient], the board
of directors of [identify TARP recipient], or
the compensation committee of [TARP
recipient) has engaged during the period
beginning on the later of the closing date of
the agreement between the TARP recipient
and Treasury or June 15, 2009 and ending
with the last day of the TARP recipient's
fiscal year containing that date, a
compensation consultant; and the services
the compensation consultant or any affiliate
of the compensation consultant provided
during this period;
(xib) [Identify TARP recipient) has
prohibited the payment of any gross-ups, as
defined in the regulations and guidance
established under section ill of EESA, to the
SEOs and the next twenty most highly
compensated employees during the period
beginning on the later of the closing date of
the agreement between the TAR? recipient
and Treasury or June 15, 2009 and ending
with the last day of the TARP recipient's
fiscal year containing that date;
(xiv) [Identify TARP recipient] has
substantially complied with all other
requirements related to employee
compensation that are provided in the
agreement between (identify TARP recipient]
and Treasury, including any amendments;
(xv) The following employees are the SEOs
and the twenty next most highly
compensated employees for the current fiscal
year and the most recently completed fiscal
year, with the non-SEOs ranked in order of
level of annual compensation starting with
the greatest amount: [identify name, title, and
employer of each SEO and most highly
compensated employee]; and
(xvi) I understand that a knowing and
willful false or fraudulent statement made in
connection with this certification may be
punished by fine, imprisonment, or both.
(See, for example, 18 U.S.C. 1001.1"
Appendix B to § 30.15-Model
Certification for Years Following First
Fiscal Year Certification
"I, [identify certifying individual], certify,
based on my knowledge, that:
(i) The compensation committee of
[identify TARP recipient] has discussed,
reviewed, and evaluated with senior risk
officers at least every six months during any
part of thb most recently completed fiscal
year that was a TARP period, senior
executive` officer (SEO) compensation plans
and employee compensation plans and the
risks these plans pose to [identify TARP
recipient];
(ii) The compensation committee of
[identify TARP recipient] has identified and
limited during any part of the most recently
completed fiscal year that was a TARP period
the features in the SEO compensation plans
that could lead SEOs to take unnecessary and
excessive risks that could threaten the value
of [identify TARP recipient] and identified
any features in the employee compensation
plans that pose risks to [identify TARP
recipient] and limited those features to
ensure that [identify TARP recipient] is not
unnecessarily exposed to risks;
(iii) The compensation committee has
reviewed at least every six months during
any part of the most recently completed fiscal
year that was a TARP period the terms of
each employee compensation plan and
identified the features in the plan that could
encourage the manipulation of reported
earnings of [identify TARP recipient] to
enhance the compensation of an employee
and has limited these features that would
encourage the manipulation of reported
earnings of [identify TARP recipient];
(iv) The compensation committee of
[identify TARP recipient] will certify to the
reviews of the SEO compensation plans and
employee compensation plans required
under (i) and (iii) above;
(v) The compensation committee of
[identify TARP recipient] will provide a
narrative description of how it limited during
any part of the most recently completed fiscal
year that was a TARP period the features in
(A) SW compensation plans that could
lead SEOs to take unnecessary and excessive
risks that could threaten the value of
[identify TARP recipient];
(B) Employee compensation plans that
unnecessarily expose [identify TARP
recipientl to risks; and
(C) Employee compensation plans that
could encourage the manipulation of
reported earnings of [identify TARP
recipientJ to enhance the compensation of an
employee;
(vi) [Identify TARP recipient) has required
that bonus payments to SEOs or any of the
next twenty most highly compensated
employees, as defined in the regulations and
guidance established under section 111 of
EESA (bonus payments), be subject to a
recovery or "clawback!' provision during any
part of the most recently completed fiscal
year that was a TARP period if the bonus
payments were based on materially
inaccurate financial statements or any other
28420 Federal Register/Vol. 74, No. 113/Monday, June 15, 20091Rules and Regulations
materially inaccurate performance metric
criteria;
(vii) [Identify TARP recipient] has
prohibited any golden parachute payment, as
defined in the regulations and guidance
established under section 111 of EESA, to a
SEO or any of the next five most highly
compensated employees dining any part of
the most recently completed fiscal year that
was a TARP period;
(viii) (Identify TARP recipient] has limited
bonus payments to its applicable employees
in accordance with section 111 of EESA and
the regulations and guidance established
thereunder during any part of the most
recently completed fiscal year that was a
TARP period ( for recipients of exceptional
assistance] and has received or is in the
process of receiving approvals from the
Office of the Special Master for TARP
Executive Compensation for compensation
payments and structures as required under
the regulations and guidance established
under section 111 of EESA, and has not made
any payments inconsistent with those
approved payments and structures;
(ix) [Identify TARP recipient] and its
employees have complied with the excessive
or luxury expenditures policy, as defined in
the regulations and guidance established
under section 111 of EESA, during any part
of the most recently completed fiscal year
that was a TARP period, and that any
expenses requiring approval of the board of
directors, a committee of the board of
directors, an SEO, or an executive officer
with a similar level of responsibility, were
properly approved;
(x) [Identify TARP recipient) will permit a
non-binding shareholder resolution in
compliance with any applicable Federal
securities rules and regulations on the
disclosures provided under the Federal
securities laws related to SEO compensation
paid or accrued during any part of the most
recently completed fiscal year that was a
TARP period;
(xi) [Identify TARP recipient] will disclose
the amount, nature, and justification for the
offering during any part of the mast recently
completed fiscal year that was a TARP period
of any perquisites, as defined in the
regulations and guidance established under
section 111 of EESA, whose total value
exceeds $25,000 for for each employee
subject to the bonus payment limitations
identified in paragraph (viii);
(xii) f Identify TARP recipient] will disclose
whether [identify TARP recipient], the board
of directors of [identify TARP recipient], or
the compensation committee of [identify
TARP recipient] has engaged during any part
of the most recently completed fiscal year
that was a TARP period a compensation
consultant; and the services the
compensation consultant or any affiliate of
the compensation consultant provided
during this period;
(xiii) [Identify TARP recipient] has
prohibited the payment of any gross-ups, as
defined in the regulations and guidance
established under section 111 of EESA, to the
SE08 and the next twenty most highly
compensated employees during any part of
the most recently completed fiscal year that
was a TARP period;
(xiv) [Identify TARP recipient] has
substantially complied with all other
requirements related to employee
compensation that are provided in the
agreement between [identify TARP recipient)
and Treasury, including any amendments;
(xv) The following employees are the SEOs
and the twenty most highly compensated
employees for the current fiscal year, with
the non-SEOs ranked in order of level of
annual compensation starting with the
greatest amount: [identify name, title, and
employer of each SEC]; and
(xvi) I understand that a knowing and
willful false or fraudulent statement made in
connection with this certification may be
punished by fine. imprisonment, or both.
(See, for example 18 U.S.C. tool.)',
§30.16 416: What Is the Offimbf the
Special Master for TARP Executive
Compensation, and what are its powers,
duties and responsibilities?
(a) The Office of the Special Master
for TARPExecutive Compensation. The
Secretary of the Treasury shall establish
the Office of the Special Master for
TARP Executive Compensation (Special
Master), The Special Master shall serve
at the pleasure of the Secretary, and may
be removed by the Secretary without
notice, without cause, and prior to the
naming of any successor Special Master.
The Special Master shall have the
following powers, duties and
responsibilities:
(1) Interpretative authority, The
Special Master shall have responsibility
for interpreting section 111 of EESA,
these regulations, and any other
applicable guidance, to determine how
the requirements under section 111 of
EESA, these regulations, and any other
applicable guidance, apply to particular
facts and circumstances. Accordingly,
the Special Master shall make all
determinations, as required, as to the
meaning of such guidance and whether
such requirements have been met in any
particular circumstances, In addition, a
TARP recipient or a TARP recipient
employee may submit a request, in
accordance with paragraph (c)(3) of this
section, for an advisory opinion with
respect to the requirements under
section 111 of EESA, these regulations
and any other applicable guidance.
(2) Review of prior payments to
employees. Section 111(f) of EESA
provides that the Secretary shall review
bonuses, retention awards, and other
compensation paid before February 17,
2009, to employees of each entity
receiving TARP assistance before
February 17, 2009, to determine
whether any such payments were
inconsistent with the purposes of
section 111 of EESA or TARP, or
otherwise contrary to the public
interest. Section 111(f) of EESA
provides that, if the Secretary makes
such a determination, the Secretary
shall seek to negotiate with the TARP
recipient and the subject employee for
appropriate reimbursements to the
Federal Government with respect to
compensation or bonuses. The Special
Master shall have the responsibility for
administering these provisions,
including the identification of the
payments that are inconsistent with the
purposes of EESA or TARP, or
otherwise contrary to the public
interest,'and the Special Master shall
have responsibility for the negotiation
with the TARP recipient and the subject
employee for appropriate
reimbursements to the Federal
Government with respect to
compensation or bonuses. The Special
Master shall make this determination by
application of the principles outlined.in
paragraph (b) of this section. The
Special Master's administration of these
provisions may provide for the scope of
review by the Special Master of a
payment, including a limited review or
no review, depending on the payment
amount; the type of payment, the overall
compensation earned by the employee
during the relevant period, a
combination thereof, or such other
factors as the Special Master may
determine, where the Special Master
determines that such factors
demonstrate that such payments are not,
or are highly unlikely to be, inconsistent
with thepurposes of section 111 of
EESA or TARP, or otherwise contrary to
the public interest, or that renegotiation
of such payments is not in the public
interest. The Special Master may request
in writing any information from TARP
recipients necessary to carry out the
review of prior compensation required
under section 111(f) of EESA. TARP
recipients must submit any requested
information to the Special Master
within 3,0 days of the request.
(3) Approval of certain payments to
employees of TARP recipients receiving
exceptional financial assistance. (i)
SEOs and most highly compensated
employees. The Special Master shall
determine whether the compensation
st7ucture for each SEO or most highly
compensated employee of a TARP
recipient receiving exceptional
assistance, including the amounts
payable br potentially payable under
such compensation structure, will or,
may result in payments that are
inconsistent with the purposes of
section 111 of EESA or TARP, or are
otherwise contrary to the public
interest. The Special Master shall make
such determinations by applying the
principles outlined in paragraph (b) of
this section, subject to the requirement
Federal Register / Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations 28421
that the compensation structure and
payments satisfy the applicable
limitations under § 30.10 (Q-10). This
requirement shall apply to any
compensation accrued or paid during
any period the SEO or most highly
compensated employee is subject to the
limitations under § 30.10 (Q-10). Initial
requests for such approval must be
submitted no later than August 14,
2009. The Special Master's
administration of these provisions may
provide for the Special Master's scope of
review, including a limited review or no
review, of a portion of a compensation
structure or payment depending on the
amount of such payments, the type of
such payments, the overall
compensation earned by the employee
during the relevant period, a
combination thereof, or such other
factors as the Special Master
determines, if the Special Master has
determined that such factors
demonstrate that such payments are not,
or are highly unlikely to be, inconsistent
with the purposes of section 111 of
EESA or TARP, or otherwise contrary to
the public interest. The Special Master
shall issue a determination within 60
days of the receipt of a substantially
complete submission. The TARP
recipient must make a further request
for approval to the extent the
compensation structure for any SEO or
most highly compensated employee,
including the amounts that are or may
be payable, for any SEO or highly
compensated employee is materially
modified. In reviewing compensation
structures and compensation payments
for any period subject to Special Master
review, the Special Master may take into
account other compensation structures
and other compensation earned, accrued
or paid, including such compensation
and compensation structures that are
not subject to the restrictions of Section
111 of EESA pursuant to section
111(b)(3)(D)(ii.i) (see § 30.10(e)(2) (Q-
30. 10(e)(2) (certain legally binding
rights under valid written employment
contracts)), and amounts that were
accrued or paid prior to June 15, 2009
and are therefore not subject to review
by the Special Master.
(ii) Other executive officers and most
highly compensated employees. With
respect to any employee who is either
an executive officer (as defined under
the Securities and Exchange Act Rule
3b-7) or one of the 100 most highly
compensated employees of a TARP
recipient receiving exceptional
assistance (or both), who is not subject
to the bonus limitations under § 30.10
(Q-10), the Special Master shall
determine whether the compensation
structure for such employees will or
may result in payments that are
inconsistent with the purposes of
section 111 of EESA or TARP, or are
otherwise contrary to the public
interest. The Special Master shall make
such determination through application
of the principles outlined in paragraph
(b) of this section. With respect to the
scope of the required review, the
Special Master shall determine only
whether the compensation arrangements
are adequately structured, and is not
required to rule with respect to the
amounts that are or may be payable
thereunder, However, the TARP
recipient may also request an advisory
opinion with respect to the amounts
that are or may be payable, which the
Special Master may provide in his sole
discretion. Notwithstanding the
foregoing, if the total annual
compensation to an employee complies
with the rules applicable to an SEO
under § 30.10 (Q-10) applied without
any limits on the grant of long-term
restricted stock, and the annual
compensation other than long-term
restricted stock does not exceed
$500,000 (or for 2009, $500,000 prorated
to reflect the remaining portion of 2009
after June 15, 2009), the compensation
structure will automatically be deemed
to meet the requirements and no prior
approval by the Special Master will be
required. For purposes of the $500,000
limit, in determining annual
compensation, all equity-based
compensation granted in fiscal years
ending after June 15, 2009 will be
included in the calculation only in the
year in which they are granted at their
total fair market value on the grant date
and 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 addition, solely for purposes of
applying the limit (and not for purposes
of identifying the most highly
compensated employees), the term
annual compensation includes amounts
required to be disclosed under
paragraph (viii) of Item 402(a) of
Regulation S-K of the Federal securities
laws (change in the actuarial present
value of benefits under a pension plan
and above-market earnings on deferred
compensation), The Special Master's
administration of these provisions may
provide for limited or no review of a
portion of a compensation structure by
the Special Master depending on the
amount of potential payments, the type
of such payments, the overall
compensation earned by the employee
during the relevant period, a
combination thereof, or such other
factors as the Special Master
determines, where the Special Master
has determined that such factors
demonstrate that such payments are not,
or are highly unlikely to be, inconsistent
with the purposes of section 111 of
EESA or' TARP, or otherwise contrary to
the public interest. Initial requests for
such approval must be submitted no
later than 120 days after publication of
the final rule. Separate requests need
not be submitted for each individual
covered employee, but should be
submitted for identified groups of
employees subject to the same
compensation structures to the extent
possible as long as sufficient detail
regarding individual compensation
awards are provided as necessary to
evaluate such employee's compensation
structure. The Special Master shall issue
a determination within 60 days of the
receipt of a substantially complete
submission. The TARP recipient must
make a further request for approval to
the extent the compensation structure,
including the amounts that are or may
be payable, for any executive officer is
materially amended. In reviewing
compensation structures for any period
subject to Special Master review, the
Special Master may take into account
other compensation structures and other
compensation earned, accrued or paid,
including such compensation and
compensation structures that are not
subject to the restrictions of Section 111
of EESA pursuant to section
111(b)(3)(D)(iii) (see § 30.10(e)(2) (Q-
30.10(e)(2) (certain legally binding
rights under valid written employment
contracts)), and amounts that were
accrued or paid prior to June 15, 2009
and are therefore not subject to review
by the Special Master.
(iii) Period from June 15, 2009
through final determination. For the
period from June 15, 2009 through the
date of the Special Master's final
determination, the TARP recipient will
be treated as complying with this
section if, with respect to employees
covered by paragraph (a)(3)(i) of this
section, the TARP recipient continues to
pay compensation to such employees in
accordance with the terms of
employment as of June 14, 2009 to the
extent otherwise permissible under this
Interim Final Rule (for example,
continued salary payments but not any
bonus payments) and if, with respect to
employees covered by paragraph
(a)(3)(ii)'of this section, the TARP
recipient continues to pay
compensation to such employees under
the compensation structure established
as of June 14, 2009, and if in addition
the TARP recipient promptly complies
28422 Federal Register / Vol. 74, No. 113/Monday, June 15, 2009/Rules and Regulations
with any modifications that may be
required by the Special Master's final
determination. However, the Special
Master may take into account the
amounts paid to an employee during
such period in determining the
appropriate compensation amounts and
compensation structures, as applicable,
for the remainder of the year.
(4) Advisory opinions on
compensation structures or
compensation payments to employees of
TARP recipients. A TARP recipient or
TARP recipient employee may request
an advisory opinion from the Special
Master as to whether a compensation
structure is, or will or may result in
payments that are, inconsistent with the
purposes of EESA or TARP, or
otherwise contrary to the public
interest. In addition, the Special Master
may become aware of compensation
structures or payments at any TARP
recipient for which it may be useful to
provide an advisory opinion as to
whether such structure or payments
meets this standard. Accordingly, the
Special Master shall have the authority
to render advisory opinions upon
request or at the Special Master's
initiative, as to whether a compensation
structure is, or will or may result in
payments to an employee that are
inconsistent with the purposes of
section 111 of EESA or TARP, or
otherwise contrary to the public
interest, or whether a compensation
payment made, or to be made, was or
will be inconsistent with the purposes
of section 111 of EESA or TARP, or
otherwise contrary to the public
interest If the Special Master renders an
adverse opinion, the Special Master
shall have the authority to seek to
negotiate with the TARP recipient and
the subject employee for appropriate
reimbursements. to the TARP recipient
or the Federal government Any
advisory opinion shall reflect the
Special Master's application of the
principles outlined in paragraph (b) of
this section. The Special Master shall
not be required to render an advisory
opinion in every instance, but may do
so only where the Special Master deems
appropriate and feasible in the context
of the Special Master's other
responsibilities. In any case, the Special
Master shall render an opinion, or
affirmatively decline to render an
advisory opinion, within 80 days of the
receipt of a substantially complete
submission. The Special Master shall
not be required to explain any decision
to decline to render an advisory
opinion.
(5) Other designated duties and
powers. The Special Master shall have
such other duties and powers related to
the application of compensation issues
arising in the administration of EESA or
TARP as the Secretary or the Secretary's
designate may delegate to the Special
Master, including, but not limited to,
the interpretation or application of
contractual provisions between the
Federal government and a TARP
recipient as those provisions relate to
the compensation paid to, or accrued
by, an employee of such TARP
reci tDeten
(b termination of whether
compensation is inconsistent with the
purposes of section I I I of EESA or
TARP or is otherwise contrary to the
public interest-41) Principles. In
reviewing a compensation structure or a
compensation payment to determine
whether it is inconsistent with the
purposes of section 111 of EESA or
TARP or is otherwise contrary to the
public interest, the Special Master shall
apply the principles enumerated below.
The principles are intended to be
consistent with sound compensation
practices appropriate for TARP
recipients, and to advance the purposes
and considerations described in EESA
sections 2 and 103, including the
maximization of overall returns to the
taxpayers of the United States and
providing stability and preventing
disruptions to financial markets. The
Special Master has discretion to
determine the appropriate weight or
relevance of a particular principle
depending on the facts and
circumstances surrounding the
compensation structure or payment
under consideration, such as whether a
payment occurred in the past or is
proposed for the future, the role of the
employee within the TARP recipient,
the situation of the TARP recipient
within the marketplace and the amount
and type of financial assistance
provided. To the extent that two or more
principles may appear inconsistent in a
particular situation, the Special Master
will datermine the relative weight to be
accorded each principle. In the case of
any review of payments already made
under paragraph (c)(2) of this section, or
of any rights to bonuses, awards, or
other compensation already granted, the
Special Master shall apply these
principles by considering the facts and
circumstances at the time the
compensation was granted, earned, or
paid, as appropriate.
(i) Risk. The compensation structure
should avoid incentives to take
unnecessary or excessive risks that
could threaten the value of the TARP
recipient, including incentives that
reward employees for short-term or
temporary increases in value,
performance, or similar measure that
may not ultimately be reflected by an
increase in the long-term value of the
TARP recipient Accordingly, incentive
payments or similar rewards should be
structured to be paid over a time
horizon that takes into account the risk
horizon so that the payment or reward
reflects whether the employee's
performance over the particular service
period has actually contributed to the
lon&-term value of the TARP recipient.
(ii) Taxpayer return. The
compensation structure, and amount
payable where applicable, should reflect
the need for the TARP recipient to
remain a competitive enterprise, to
retain and recruit talented employees
who will contribute to the TARP
recipient's future success, and
ultimately to be able to repay TARP
obligati6ns.
(iii) Appropriate allocation. The
compensation structure should
appropriately allocate the components
of compensation such as salary, short-
term and long-term incentives, as well
as the extent to which compensation is
provided in cash, equity or other types
of compensation such as executive
pensions, other benefits, or perquisites,
based on the specific role of the
employee and other relevant
circumstances, including the nature and
amount of current compensation,
deferred compensation, or other
compensation and benefits previously
paid or awarded, The appropriate
allocation may be different for different
positions and for different employees,
but generally, in the case of an executive
or other senior level position a
significant portion of the overall
compensation should be long-term
compensation that aligns the interest of
the employee with the interests of
shareholders and taxpayers.
(iv) Performance-based
compensation. An appropriate portion
of the compensation should be
performance-based over a relevant
performance period. Performance-based
compensation should be determined
through tailored metrics that encompass
individual performance and/or the
performance of the TARP recipient or a
relevant,business unit taking into
consideration specific business
objectives. Performance metrics may
relate to employee compliance with
relevant corporate policies. In addition,
the likelihood of meeting the
performance metrics should not be so
great that the arrangement fails to
provide an adequate incentive for the
employee to perform, and performance
metrics should be measurable,
enforceable, and actually enforced if not
met. The appropriate allocation and the
appropriate performance metrics may be
Federal Register / Vol. 74, No. 113 / Monday, June 15, 2009/Rules and Regulations 28423
different for different positions and for
different employees, but generally a
significant portion of total
compensation should be performance-
based compensation, and generally that
portion should be greater for positions
that exercise higher levels of
responsibility.
lv) Comparable structures and
payments. The compensation structure,
and amount payable where applicable,
should be consistent with, and not
excessive, taking into account
compensation structures and amounts
for persons in similar positions or roles
at similar entities that are similarly
situated, including, as applicable,
entities competing in the same markets
and similarly situated entities that are
financially distressed or that are
contemplating or undergoing
reorganization.
(vi) Employee contribution to TARP
recipient value. The compensation
structure, and amount payable where
applicable, should reflect the current or
prospective contributions of an
employee to the value of the TARP
recipient, taking into account multiple
factors such as revenue production,
specific expertise, compliance with
coypany policy and regulation
(including risk management), and
corporate leadership, as well as the role
the employee may have had with
respect to any change in the financial
health or competitive position of the
TARP recipient.
(2) Further guidance. The Secretary
reserves the discretion to modify or
amend the foregoing principles through
notice, announcement or other generally
applicable guidance, provided that such
guidance shall apply only prospectively
from its date of publication and shall
not provide a basis for reconsideration
of a determination of the Special Master,
except as the Special Master deems
appropriate in light of such
modification or amendment.
(c) Special Master determinations-
(1) Initial determinations. The Special
Master shall provide an initial
determination in writing, within 60
days of the receipt of a substantially
complete submission, setting forth the
facts and analysis that formed the basis
for the determination. The TARP
recipient shall have 30 days to request
in writing that the Special Master
reconsider the initial determination.
The request for reconsideration must
specify a factual error or relevant new
information not previously considered,
and must demonstrate that such error or
lack of information resulted in a
material error in the initial
determination. The Special Master must
provide a final determination in writing
within 30 days, setting forth the facts
and analysis that formed the basis for
the determination. If a TARP recipient
does not request reconsideration within
30 days, the initial determination shall
be treated as a final determination.
(2) Final determinations, In the case
of any final determination that the
TARP recipient is required to receive,
the final determination of the Special
Master shall be final and binding and
treated as the determination of the
Treasury.
(3) Advisory Opinions. An advisory
opinion of the Special Master shall not
be binding upon any TARP recipient or
employee, but may be relied upon by a
TARP recipient or employee if the
advisory opinion applies to the TARP
recipient and the employee and the
TARP recipient and employee comply
in all respects with the advisory
opinion.
(d) Submissions to the Special
Master-(1) Submission procedures,
Submissions to the Special Master may
be made under such procedures as the
Special Master shall determine. The
Special Master may reserve the right to
request further information at any time
and a submission shall not be treated as
substantially complete unless the
Special Master has so designated,
(2) Disclosuree procedures. Materials
submitted to the Special Master and the
initial and final determinations of the
Special Master are subject to disclosure
under the standards provided in the
FYeedom of Information Act (FOIA, (5
U.S.C. 552 et seq.)), In addition, the
final determinations of the Special
Master shall be disclosed to the public.
The Special Master shall promulgate
procedures for ensuring that disclosed
materials have been subject to
appropriate redaction to protect
personal privacy, privileged or
confidential commercial or financial
information or other appropriate
redactions permissible under the F01A,
which may include a procedure for the
person or entity making the submission
to request redactions and to review and
request reconsideration of any proposed
redactions before such redacted
materials are released.
§30.17 417: How do the effective date
provisions apply with respect to the
requirements under section 111 of EESA?
(a) General rule. The requirements
under this part with respect to sections
111(b), 111(c), 111(4) and 111(f) are
effective upon June 15, 2009. The
guidance under this part with respect to
those sections supersedes any previous
guidance applicable to a TARP recipient
to the extent that guidance is
inconsistent with those requirements,
but supersedes that guidance only as of
June 15,'2009. To the extent previous
contractual provisions are not
inconsistent with ARRA or the guidance
under this part, those contractual
provisions remain in effect and continue
to apply in accordance with their terms.
(b) Bonus payment limitation. The
bonus payment limitation provision
under § 90:10 (Q-10) of this part does
not apply to bonus payments paid or
accrued by TARP recipients or their
employdes before June 15, 2009. Certain
bonus payments may relate to a service
period beginning before and ending
after June 15, 2009. In these
circumstances, the employee will not be
treated as having accrued the bonus
payment on or after June 15, 2009 if the
bonus payment is at least reduced to
reflect the portion of the service period
that occurs after June 15, 2009. If the
emmployee is an SEO or most highly
compensated employee at the time the
net bonus payment after such reduction
would otherwise be paid, the amount
still may not be paid until such time as
bonus payments to that employee are
permitted.
Andrew Mayock,
Executive Secretary-,
n Doc. E9-13868 Filed 6-12-09; 8:45 am]
BILLING CODE 4810-26-P
EXHIBIT C
09/08/2011 09:33 7172497882 JOW-LAMPI PAGE 03/11
AMNCAN ARBITRATION ASSOCIATION
THOMAS MCR£ON,
Claimant No. 55-166-390-10
V.
AMERISERV FINANCIAL, INC.,
Respondent
IN'x' MM AWARD OF A RS111ZATOR
1, the undersigned Arbitrator, having been designated in accordance with Section
9 of the Employment Agmemeat, dated 6 March 2007, among West Chester Capital
Advisors, Inc. ("West Chester", Ameriserv Financial, inc. ("Respondene }, Ameriserv
Bank ("Haag") and Thomas F. McKeon ("Claimant") (tte "Employment Agreement");
havi g reviewed the Stipulation of Facts (including the documentary exhibits), as
supplemented and submitted by the parties; and having reviewed the Briefs in Support of
Motions for Summary Judgment, as supplemented and submitted, respectively, by the
parties; FIND as follows:
1. Backgmund o£the Dispute.
The parties have stipulated to all of the facts delineated below:
On January 22, 2007, the Respon&4 Bruce L. Matra, Janet
Marra, the Claimant and the Bank, entered into a stock purchase agreement (the
"Stock Purchase Agreement"), whereby the Bank purchased all of the outstanding
capital stock of West Chester, of which Clairrmt bold 10% of such outstanding
capital stock on the date of the Stock Purchase Agreement. As a result of this
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purchase by the Respondent and Batik (hereinafter collectively referred to as the
Respondent), West Chester became a subsidiary of the Respondent. Section 5.6
of the Stock Purchase Agreement required the Respondent to enter into the
Employment Agreement. The following excerpts from the Recitals and Section 2
of the Employment A.greewent are instructive to a resolution of this dispute:
WHEREAS, the patties desire to enter Wto a new
employment contract, setting forth, among other things1 the
respective rights and obligations N kW W the Executive's
continued emoJ9Yme t by
ft ?i Many; and
WHEREAS, the Executive is willing to continue bis
gmploymcmt relationship with C=anv pursuant to the
Stock Purchase Agreement and on the terms set forth herein,
and the Company is willing to employ the Executive on such
terms. (Emphasis added)
2. Duties of Employee....
The Executive [Claimant] shall be employed as the vice
President of the Company [West Chester] and s at a
Minimum. continue to tierForm.?Widgea SjMjIK Q
ner£ormed by him for the Comaany..... (BmPhasis added)
On May 3, 2010, West Chester terminated the Claimant's employment.
Such tcrmination was not for "Cause" as that term is defined under Scction 3(a) of
the l?rmployment Agreement. West Chester provided the Claimant with Ws base
salary and fringe benefits for the period ending June 3, 2010, in accordance with
the Employment Agreement's provision for proper notice of termination. Neither
West Chester nor the Respondent paid the Claimant any of the amounts described
in subsections 7(a) and (b) of the Employment Agreement, Such non-payments
are the subject of this dispute.
The Respondent contends that it was barred firotm making any payments
under Section 7 of the Employment Agreement (tbe "Termination Payments')
2
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because of the Werim Final Rule (the "Regulations') promulgated by the
Department of the Treasury at 31 C.r.R Part 30 and undo the provisions of
Sections 101 (a)(1),101(cK5), and l 1 l of the Emergency Economic Stabilization
Act of 2008, as amended by the American Recovery and Reinvestment act of
2009, which provides guidance to the Respondent on execx&vc compensation and
corporate governance provisions as an entity that received, in December 2008,
$21,000,000 in financial assistance under the Troubled Asset Relief Program
("TARP"). The Respondent reasons that, as a recipient of TARP fiords, it is
legally barred from. makin any payment to Claimant, deemed by the Regulations
(and stipulated by the parties) to be one of the "most highly compensated.
employees," as a result of the Claimant's termination from employment during
the "TARP" period. Respondent characterizes these Termination Payments ar,
"golden parachute payments" to one of the "most highly compensated employees"
as those terms are defined by the Regulations.
Furthermore, the Regulations provide that the parties could have submitted
this dispute to the Department of Treasury Special Mater to request an advisory
opinion as to whether the Respondent is permitted to pay the Claimant the
Termination Payments under the Employment Agreement. Respondent proposed
that the parties agree to be bound by such Special Master's opinion; however, the
Claimant rejected this proposal, stating that he was willing to have this dispute
submitted to such Special Master, but only if the Special Master's opinion was
non-binding on the parties.
The Claimant claims that he is entitled to recover:
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Base salary .................. $166,123.29
Fringe benefits ............... 12,100.00
Liquidated damages .......... 44.555.82
5222
The liquidated damages are sought under the Pennsylvania Wage Payment
and Collections Law, 43 P.S. Section 206.1 et M (the "Pennsylvania Statute").
Moreover, Claimant is sccking recovery of his reasonable attorneys few under
such statute and suggests that an award for attorney fees be handled in a separate
hearing if the Arbitrator finds for the Claim mt under the Pennsylvania Statute.
2. The Regulations.
These Regulations are in question-and-answer fort and excerpts
therefrom are provided as instructive to this dispute:
Golden Parachute Payment. (1) General rule.... means any payment. for
the departure from a TARF recipient for any reason, ... except fora ants for
services performed or benefits accrued.... A golden parachute payment is treated
as paid at the time of departure ... and is equal to the aggregate present value of
all payments made for a departure ... Thos, a golden parachute payment may
include aright to amounts actually payable after the TARP period....
(3) Payments for services performed or benefits accrued. (1) ocneral rules.... a
payment made ... is for services performed or benefits accrued only if the
payment was made or the right to the payment arose, for current or prior services
.... Whether a payment is for services performed or benefits accrued _4
determined, based on all the facts Pirr»mef"1GCS. However, a payment, or a
right to a payment, generally will be treated-as a payment for services performed
4
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or benefits accrued ... if the payment is due upon the depmtme of the employee,
regardless of whether the departure is voluntary or involuntary (other than
reasonable restrictions, such as the forfeiture of the right to a payment for an
involuntary payment for cause, but not restrictions relating to whether the
departure was a voluntary departure for good reason or subsequent to a change in
control). (Emphasis added)
Retention Award. (1) General definition. The term "retention award" means any
payment to an employee, ... that ... (ii) 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: epd (ill) is not based Qtr t-b-
Rgdo-wance of the plovee (other a reuW ment that the employee not be
separated fromt employment for cause or the business activities or valuc of the
TARF recinigo. (Emphasis added)
Q- 10... (a) General rule to comply with section 111(b) (3) (A) of ESSA,
pursuant to tbo schedule under paragraph (b) of this section and subjcxt to the
exclusions under paragraph (e) of this section, a TARP recipient must prohibit the
payment ... during the TARP period to or by the employee identified pursuant to
paragraph (b) of this section...
(bxl) Schedule.... (1) The most highly compensated employee of any
TARP recipient receiving less than $2S,000,00 in financial assistance; (ii)
At least the five most highly compensated employees of any TARP
recipient receiving $25,000,000 but less that $250,000,000 in financial
assistance; ...
5
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(e) Exclusions ...
(2) Legally binding right under valid employment contracts - (i) General
rule. The prohibition under paragraph (a) of this section does not apply to
bonus 2mments required to be paid under a valid employment contract if
the employee had a legally binding right under the conauct to a bgnus
payment as of February 11, 2009..... (Emphasis added).
Q--1.... Bonus payment.
For of his uaa* except where otherwise noted, the team, "banns
en ' includes a m t that-is or is in the a of, a bonus,
incentive compensation, or retention award. Whether a payment is a
bonus payment, or whether the right to a payment is a right to a bonus
payment, is damnined based upon all the fagts dc' c cesurnatanand a
payment may be a bonus payment regardless of the dzracterization of
such navment by the TARP recipient or the emaloyeg, (Emphasis added)
3. Claim Under the Employment Agreement.
As part of the consideration to purchase the outstanding capital stock of
West Chester held by the Claimant, the Respondent and Claimant bargained for
the terms and conditions delineated in the Employment Agreement as well as in
the Stock Purchase Agreement. Therefore, the F,mploymew Agreement is a
legally binding contract with rights thereunder accruing to the Claimant as of
March 6, 2007.
One of these bargained-for rights is the expectation that Respondent will
pay Claimant the amount delineated under Section 4 of the Employment
6
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Agreement during the Employment Period delineated under Section 3 of the
Employment Agreement, excepting for a termination of such payment for
"Cause" as delineated under Section 3(a) of the Employment Agreement. The
parties have stipulated that Claimant was not terminated for cause.
A review of the above- voupted recitals and text of Section 2 of the
Employment Agreement leaves the Arbitrator with only one conclusion: the
Respondent desired to retain the Claimant's services for at least four years during
which period West Chester would transition its clients and culture into the
Respondent. And it is also clear to the Arbitrator, that the Employment
Agreement was part of the total mix of consideration bargained-for by the
Claimant when considering the sale of his West Chester stock to the Respondent.
Therefore, the Arbitrator finds that the Termination Payments, based on all
of the facts and circumstances of this dispute, are not (holden Parachute Payments
under the Regulations, but, fall under the exception for services performed or
bemefiits accrued. These Termination Payments were part of the consideration for
the Stock Purchase ,Agreement, i.e., Claimant's expectation for a 4-yeah terra of
employment, excepting tenU ination for cause; and are due to the Claimant
"regardless of whether the departure is voluntary or involuntary."
Moreover, based upon the text of the definitions of -retention award" and
"bonus payment" under the Regulations, the Respondent is not prohibited from
malting these Termination Payments because they are deemed to be a "bonus
payment" under Question _ 1 and excluded from any prohibition under Question
- 10 because Respondent received less than $25,000,000 in financial assistance.
7
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Therefore, Respondent was not prohibited fzom paying to Claimant his
base salary of $166,123.29 and fri oge benefits of $12,100.00.
4. Claims Under the Pennsylvania. Statute.
A. Liquidated Damages
The Pennsylvania Statute provides for liquidated damages only if
there is no "good faith basis" to contest the claim for wages withheld for
payment, The Arbitrator finds that Respondent acted in good faith.
Indeed, the Respondent suggested to Claimant that they submit this
dispute to the Special Master to request an advisory opinion under the
Regulations. Claimant rejected this proposal stating that he was willing to
have this dispute submitted to such Special Master but only if the Special
Master's opinion was non-binding on the partics,h
That position is untenable, fora arauendo, if the Special Master
delivered an opinion deeming the Termination Payments to be prohibited
from payment by the Respondent, what could the Respondent, as a bank
regulated-entity do? It would be placed under a regulatory directive, if it
attempted to make such payments.
B. Payment Of Reasonable, Attorneys Fees
The Claimant is entitled, under the Pennsylvania Statute, to
reimbursement by the Respondent of his reasonable attorneys fees.
Therefore, the Arbitrator requests the parties t4 agree to the amount of
such attorneys fees no later than September 14, 2011. If the parties can
not agree to such amount, them Claimant shall submit his claim for
8
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attorneys fees in detailed itemized format and any legal memorandum in
support to the Arbitrator no later than September 19, 2011 and the
Respondent shall submit to the Arbitrator its reply and any legal
memorandum in support no later than. September 26, 2011 with the
Arbitrator.
5. Termination of this Arbitration Proceeding.
This Arbitration shall be deemed closed on the date the parties submit to
the Arbitrator their stipulation as to the amount of attorneys fees to be reimbursed
to Claimant or the date of Respondent's filing of a reply and any memorandum in
support with respect to the amount of attorneys fees, whichever is later. After
such termination date, the Arbitrator will make a Final Award which will
incorporate by reference this Interim Award, with any appropriate modifications
thereof, as are necessary.
6. Award.
I award as follows:
The Respondent shall pay to the Claimant the sum of 5178,223.29 with
interest to accrue at the current Pennsylvania statutory rate from June 4, 2010
until paid in full.
Except with respect to a fumbler award for attorneys fees if the parties can
not stipulate to the amount of attorneys fees to be reimbursed to the Claimant, the
above award is iu full consideration for all claims presented and claims not
appearing W the above award are denied.
9
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TWs Interim Award is in full settlement of all claims and
counteroiairw submitted to this arbitration, except with respect to the award for
attorneys fees.
Date: September _,,,,,, ,,, 2011
Arbitrator
I, John B. Lamapi, do hereby affirm as Arbitrator, that I am the individual described
herein, and wbo executed this instrument which is my
A.RBURATOR.
September , 2011
John B.
10
RECEIVED TIME SEP. 8. 9:26AM
EXHIBIT D
10/05/2011 21:31 7172497882 JOHN-LAMPI PAGE 02/03
AMERICAN ARAHjMTION ASSOCLATION
THOMAS McKEON,
Claiua Ma No. 55-166-390-10
V.
AMERISERV FINANCIAL, INC.,
Respondent
ANAL AWARID OF ARBITRATOR
I, the undersigned Arbitrator, having been designated in accordance with Section
9 of the Employment .A,geement, dated 6 March 2007, among West Chester Capital
Advisors, Inc. ("West Chester', Ameriserv Fimmoial, Inc. ("Respondent"), Ameriserv
Bank ("Banff") and Thomas F. McKeon ("Claimant') (the `Bmploymeat A,greemem");
having reviewed the Stipulation of Facts (including the documentary exbibits), as
supplemented and submitted by the parties; having reviewed the Briefs in Support of
Motions for Summary Judgment, as supplemented and submitted, respecdively, by the
parties; and having reviewed the submissions of the parties with respect to the award of
attorneys' fees (including the stipulation of the amount of reasonable attorneys' fees);
FIND as follows:
I . Except as modified by this Final Award of Arbitrator, the Interims Award of ,Arbitrator,
dated September 7, 2011, is hereby, in its entirety, incorporated by reference herein.
2. 1 award the stipulated amount of attorneys' fees of $16,677.50 to the Claimant. The
Respondent shall pay to the Claimant this amount as reimbursement for his reasonable
attorneys' fees in accordance with the Pennsylvania Statute wig interest to accrue on
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such amount at the current Pennsylvania statutory rate from the date of this Final Award
of Arbitrator until paid in full.
The adrr in ist?ve fees and expenses of the Ammicam Arbitration Association
totaling $4,375.00 shall be bome equally by the parties. The compensation and expenses
of the Arbitrator totaling $4,484.00 shall be borne equally by the parties. Therefore,
Ttespondent shall reimburse Claimant the sum of $2,187.50, representing that portion of
said fees and expenses in. excess of the apportioned costs previously incurred by
Claimant,
This Final Award of Arbitrator is in frill settlement of all chums and
counterclaims submitted to this arbitration
Daw: October L-, 2011
ArblUVtor
1, John B. Lampi, do hereby affirm as Arbitrator, that T am the individual described
herein, and who executed this instrument which is my
ARBITRATOR.
October, 2011
-A- L. -as"in, rzs(iullE
2
-,
It
RECEIVED TIME OCT. 5, 9:24PM
AMERISERV FINANCIAL, INC., IN THE COURT OF COMMON PLEAS OF
PETITIONER CUMBERLAND COUNTY, PENNSYLVANIA
V.
THOMAS McKEON,
RESPONDENT
11-7681 CIVIL TERM
IN RE: PETITION TO VACATE OR MODIFY ARBITRATION AWARDS
ORDER OF COURT
AND NOW, this d day of May, 2012, the Petition to Vacate or
Modify Arbitration Awards is DENIED and the Final Arbitration Award is
AFFIRMED.
By the Court,
?? G. Thompson Bell, III, Esquire
111 North Sixth Street
P.O. Box 679
Reading, PA 19603-0679
For Petitioner
William T. Wilson, Esquire
17 West Miner Street
P.O. Box 660
West Chester, PA 19381-0660
For Respondent
!V-,d
?G
Albert H. Masland, J.
saa
C..? r.a
C:-
?
T1
-
>
'
AMERISERV FINANCIAL, INC., IN THE COURT OF COMMON PLEAS OF
PETITIONER CUMBERLAND COUNTY, PENNSYLVANIA
V.
THOMAS McKEON,
RESPONDENT 11-7681 CIVIL TERM
IN RE: PETITION TO VACATE OR MODIFY ARBITRATION AWARDS
OPINION AND ORDER OF COURT
Masland, J., May 24, 2012:--
Before the court is a Petition to vacate or modify arbitration awards filed by
Ameriserv Financial, Inc., Petitioner, regarding an award obtained by Thomas
McKeon, Respondent. After careful review of the parties' briefs and oral
argument, the court denies the petition to vacate or modify the arbitration awards.
1. Facts
The facts are not in dispute.'
1. AmeriServ Financial, Inc. [Petitioner] is a bank holding company
headquartered in Johnstown, Pennsylvania.
2. On January 22, 2007, Petitioner and Bruce L. Marra, Janet Marra and
[Respondent] Thomas McKeon entered into a stock purchase agreement
("Stock Purchase Agreement"), pursuant to which AmeriServ purchased
100% of the capital stock of West Chester Capital Advisors, Inc. ("the
Company").
3. [Respondent] has received all of the portion of the purchase price for
the stock of the Company due to him.
4. [Petitioner] continues to own 100% of the capital stock of the Company.
5. On March 6, 2007, the Company, [Petitioner], AmeriServ Bank and
[Respondent] entered into an employment agreement, a true and correct
copy of which is attached as Exhibit A.
1 Prior to arbitration the parties entered into a joint stipulation of facts. See Stipulation of Facts, Pet. Ex. A.
11-7681 CIVIL TERM
6. In December 2008, [Petitioner] received $21,000,000 in financial
assistance from the U.S. Treasury under the Troubled Asset Relief
Program Capital Purchase Program ("TARP").
7. The funds received by [Petitioner] under the TARP program have not
yet been repaid.
8. On May 3, 2010, the Company terminated [Respondent's] employment.
9. [Respondent's] employment with the Company was not terminated for
"Cause" within the meaning of Section 3(a) of the Employment
Agreement.
10. The termination of [Respondent's] employment did not follow a
"Change in Control" within the meaning of Section 5(b) of the Employment
Agreement.
11. [Respondent's] annual base salary as of the date of the termination of
his employment was $181,000. [Respondent] did not receive any bonus
award in any of the three calendar years immediately preceding the
termination of his employment.
12. In 2009, aside from [Petitioner's] "senior executive officers",
[Respondent] was the second "most highly compensated employee" of
[Petitioner] and its affiliated entities, which collectively constitute the
"TARP Recipient", as the terms "senior executive officer", "most highly
compensated employee" and "TARP Recipient" are defined in Section
30.1 of the Interim Final Rule, TARP Standards for Compensation and
Corporate Governance, 74 Fed. Reg. 28394, 28408 (June 15, 2009), 31
C.F.R. Part 30 ("the Interim Rule"). A true and correct copy of the Interim
Final Rule is attached as Exhibit B.
13. The Company provided [Respondent] with his base salary and fringe
benefits for the period ending June 3, 2010.
14. Neither the Company [Petitioner) or AmeriServ Bank paid
[Respondentl any of the amounts described in Subsections 7(a) and (b) of
the Employment Agreement.
Pet. Ex. A (emphasis added).
II. Employment Agreement
The relevant portions of the Employment Agreement read:
-2-
11-7681 CIVIL TERM
7. Rights in Event of Termination of Employment Without Cause in
Absence of Change in Control. In the event that [Respondent's]
employment is terminated by the Company without Cause and no Change
in Control shall have occurred at the date of such termination,
[Respondent] shall be entitled to receive the amounts and benefits set
forth in this section.
(a) Current Compensation at Termination. For a period of one
year from the date of termination of employment, [Respondent] shall be
paid his Current Compensation at Termination.
(i) For purposes of this section, the term "Current
Compensation at Termination" means the sum of (A) [Respondent's] base
salary as of the date of termination of employment (or prior to any
reduction thereof preceding termination of employment), and (B) a dollar
amount equal to the average of the awards [Respondent] received as
bonuses (including deferred bonuses) for each of the three calendar years
preceding the year in which the termination of employment occurs.
(ii) Amounts required to be paid to [Respondent] under this
Section 6(a) shall be paid in a lump sum within 30 days following the date
of termination of employment.
(b) Benefits. For a period of one year from the date of termination
of employment [Respondent shall receive a continuation of all life, medical
insurance and other welfare benefits (other than disability insurance) in
effect with respect to [Respondent] during the two calendar years prior to
his termination of employment .... At the election of the Company, the
amount required to be paid by this Section 7(b) may be paid as a lump
sum equal to the Company's good faith estimate of the present value of
such benefits.
Employment Agreement ¶¶7(a)-(b).
III. Regulations
At the outset, the court notes, as reflected in the parties' stipulation, there
is no dispute that at the time of termination, Petitioner was a TARP recipient and
Respondent was a highly compensated employee governed by TARP's Golden
Parachute provisions. The real issue the parties submitted to the Arbitrator was
whether the disputed payments constituted Golden Parachute payments as
-3-
11-7681 CIVIL TERM
described by the applicable Treasury Department Regulations. The relevant
regulations provide:
Golden parachute payment. (1) General rule. The term "golden parachute
payment" means any payment for the departure from a TARP recipient for
any reason, or any payment due to a change in control of the TARP
recipient or any entity that is included in a group of entities treated as one
TARP recipient, except for payments for services performed or benefits
accrued.
Payments for services performed or benefits accrued. (i) General rules ...
a payment made ... is for services performed or benefits accrued only if
the payment was made, or the right to the payment arose, for current or
prior .... Whether a payment is for services performed or benefits accrued
is determined based on all the facts and circumstances. However, a
pavment or a right to a payment generally will be treated as a payment
for services performed or benefits accrued only if the payment would be
made regardless of whether the employee departs or the change in
control event occurs or if the payment is due upon the departure of the
employee regardless of whether the departure is voluntary or involuntary
(other than reasonable restrictions, such as the forfeiture of the right to a
payment for an involuntary departure for cause, but not restrictions
relating to whether the departure was a voluntary departure for good
reason or subsequent to a change in control).
31 CFR § 30.1 (emphasis added).
IV. Arbitrator's Decision
Pursuant to paragraph nine of the employment agreement, the parties
submitted this dispute to Arbitration conducted by the American Arbitration
Association. The Arbitrator ultimately concluded that the payments did not
constitute a Golden Parachute. He reasoned:
[T]he [Petitioner] desired to retain the [Respondent's] services for at
least four years during which period West Chester would transition its
clients and culture into the [Petitioner]. And it is also clear to the
Arbitrator, that the Employment Agreement was part of the total mix of
consideration bargained-for by the [Respondent] when considering the
sale of his West Chester stock to the [Petitioner].
-4-
11-7681 CIVIL TERM
Therefore, the Arbitrator finds that the Termination Payments,
based on all the facts and circumstances of this dispute, are not Golden
Parachute Payments under the Regulations, but, fall under the exception
for services performed or benefits accrued. These Termination Payments
were part of the consideration for the Stock Purchase Agreement, i.e.,
[Respondent's] expectation for a 4-year term of employment, excepting
termination for cause; and are due to the [Petitioner] "regardless of
whether the departure is voluntary or involuntary."
Interim Award of Arbitrator at 7.
Following the Arbitrator's decision, Petitioner sought relief in this court by
filing a Petition to Vacate or Modify Arbitration Awards.
V. Discussion
At the outset we note our courts "strongly favor the settlement of disputes
by arbitration." Langston v. National Media Corp., 596 A.2d 860, 864 (Pa. Super.
1991). Accordingly, our review of a Common Law Arbitration proceeding is
exceedingly narrow. Specifically, "[t]he award of an arbitrator in a nonjudicial
arbitration ... is binding and may not be vacated or modified unless it is clearly
shown that a party was denied a hearing or that fraud misconduct, corruption or
other irregularity caused the rendition of an unjust, inequitable or unconscionable
award." 42 Pa.C.S. §7341 (emphasis added). Further, "arbitrators are the final
judges of both law and fact, and an arbitration award is not subject to a reversal
for a mistake of either." McKenna v. Sosso, 745 A.2d 1, 4 (Pa. Super. 1999)
(emphasis added).
Here, Petitioner argues the Arbitrator erred in holding the Termination
Payments constituted payments for services rendered and benefits accrued and
consequently rendered the award unjust, inequitable, or unconscionable as the
-5-
11-7681 CIVIL TERM
award required Petitioner to violate applicable federal law and subject Petitioner
to federal penalties.
Petitioner points to both the Treasury Regulations and the language of the
Employment Agreement to support its position. Specifically, the Regulations
state:
[A] payment for services performed or benefits accrued only if the
payment would be made regardless of whether the employee
departs or the change in control event occurs, or if the payment is
due upon the departure of the employee, regardless of whether the
departure is voluntary or involuntary ....
31 CFR § 30.1 (emphasis added). Meanwhile, Section 7 of the Employment
Agreement clearly conditions eligibility for the Termination Payment upon
Respondent's termination without cause. Accordingly, had Respondent been
terminated involuntarily, with cause, he would not have been entitled to the
Termination Payment. Thus, the Payment is not for services rendered or
benefits accrued because Respondent is not entitled to it regardless of whether
termination was voluntary or involuntary.
We find this argument persuasive, and if we were conducting a de novo
review we would be constrained to agree. However, as previously stated, our
review here is decidedly narrow and what we perceive to be an error of law is
insufficient for us to vacate an arbitration award. McKenna v. Sosso, 745 A.2d
1, 4 (Pa. Super. 1999). Further, Petitioner has failed to establish it was denied a
hearing or was the victim of fraud, misconduct, corruption or other irregularity.
Moreover, we do not consider the award to be unjust, inequitable or
-6-
11-7681 CIVIL TERM
unconscionable -- in the grand scheme of parachutes, this one was gold-plated
at best.
We are also unconvinced by Petitioner's contention that compliance with
the Arbitration Award would force it to violate federal law and subject it to criminal
sanction. We hesitate to predict the response of an appellate court, let alone
another branch of government, but are relatively confident that with our Court
Order in hand, Petitioner will avoid the wrath of the Treasury Department.
VI. Conclusion
For all these reasons, the Petition to Vacate or Modify Arbitration Awards
is denied and the Final Arbitration Award is affirmed in all respects.
ORDER OF COURT
AND NOW, this day of May, 2012, the Petition to Vacate or
Modify Arbitration Awards is DENIED and the Final Arbitration Award is
AFFIRMED.
By the Court,
Albert H. Masland, J.
G. Thompson Bell, III, Esquire
111 North Sixth Street
P.O. Box 679
Reading, PA 19603-0679
For Petitioner
William T. Wilson, Esquire
17 West Miner Street
P.O. Box 660
West Chester, PA 19381-0660
For Respondent :saa
-7-