Financial Regulatory Forum

US SEC cracks down on how companies are governed

December 16, 2009

Rachelle Younglai

WASHINGTON, Dec 16 (Reuters) – U.S. companies will have to disclose their compensation practices and board members’ qualifications under rules adopted by the Securities and Exchange Commission on Wednesday.

The SEC voted 4-1 to change how companies govern themselves and provide more information to investors, who have criticized lax boards and lavish executive compensation.

“Good corporate governance is a system in which those who manage a company … are effectively held accountable for their decisions and performance,” SEC Chairman Mary Schapiro said at an open meeting.

Amid the worst financial crisis in decades, shareholders have voiced frustration over how companies performed and executives are paid.

Shareholders have taken a more active role in how their companies are governed, pushing for say on pay and seeking an easier way to influence the composition of the corporate board.

Under the SEC’s new rules, companies would be required to tell shareholders more about pay policies, board members’ qualifications and why they chose a certain leadership structure.

Companies would have to disclose how diversity is

considered in identifying director nominees. They would also be required to disclose fees paid to compensation consultants when they help determine how much an executive or director should be paid.

RULES FOR INVESTMENT ADVISERS

In the wake of Bernard Madoff’s $65 billion fraud, the SEC also voted unanimously for rules to hold investment advisers more accountable for customers’ assets.

Madoff, who sent out false statements to his clients, ran a Ponzi scheme over two decades, where earlier investors were paid with money collected from later investors.

Under the SEC rule, some 1,600 investment advisers who physically hold their clients’ assets will undergo an annual surprise audit to make sure the assets are really there.

The agency backed down from its original proposal to

require about 9,600 of the 11,000 registered investment

advisers to undergo such an exam. The proposal had included investment advisers who were also deemed to have custody or the ability to deduct fees from their clients’ assets.

Madoff’s investment advisory business was registered with the SEC. He was also registered as a broker-dealer and subject to oversight by the SEC and industry-funded watchdog the Financial Industry Regulatory Authority.

The SEC also will require investment advisers who hold client assets in the firm or through an affiliate to have their internal controls reviewed by a third party.

(Reporting by Rachelle Younglai; Editing by Lisa Von Ahn and Matthew Lewis)

((rachelle.younglai@thomsonreuters.com; + 1 202 898 8411))

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