SEC approves rule on pay disclosure for TARP firms

WASHINGTON — The Securities and Exchange Commission on Wednesday unanimously approved rules requiring greater transparency for executive compensation at bailed-out firms and all public companies.

In an open meeting, the panel voted 5-0 for a rule requiring firms that received government bailouts to let shareholders vote on executive pay. The SEC also voted to make all public companies give shareholders more information about pay policies, risk management and corporate governance.

Congress mandated the rule for participants in the Troubled Asset Relief Program, the $700 billion financial bailout. Known as "say-on-pay," it gives shareholders the opportunity to vote on companies' compensation practices, although the votes can be nonbinding.

The new rules must go through a two-month public comment period before they can be enacted.

The broader rule includes a range of requirements: Companies would have to describe how compensation policies relate to risk; explain the qualifications of directors, executives and nominees; and state whether compensation consultants might have conflicts of interest.

The aim is to create "better, more timely disclosure, not simply additional disclosure," SEC Chairman Mary Schapiro said at the meeting.

Responding to commissioners' concerns that proxy statements already are too long and complex for most shareholders to understand, SEC staff members said the benefit of greater transparency outweighs the problem of slightly longer filings.

The commission last approved an overhaul of executive compensation disclosure rules in 2006. That move required companies to disclose their executives' pay and perks in greater detail and required noting the date of stock option grants. At the time, corporate America was gripped by a scandal over the backdating of option awards.

Those rules took effect in late 2006 and forced much greater disclosure starting with companies' annual statements for that year.

The proposal approved Wednesday likewise addresses concerns related to current concerns in the securities markets. The financial crisis has highlighted the danger of compensation practices that reward excessive risk.

Investors also are clamoring for more transparency from boards of directors, and about risk management practices. Both would be required under the new rule.

In a separate vote, the SEC accepted a proposed New York Stock Exchange rule to prevent brokers from voting shares on behalf of their clients, since brokers do not have a direct financial interest in the companies.

Some commissioners expressed concerns about the unintended effects of the rule. They suggested that it could disenfranchise investors who are accustomed to letting brokers represent their interests.

The proposal eventually gained approval from the SEC, which must clear all stock exchange rule changes.