Discover 2009 Annual Report Download - page 67

compensation arrangements, require the adoption and disclosure of a luxury expenditure policy, and require compliance
with federal securities rules and regulations allowing stockholders to have a non-binding advisory vote on executive
compensation. Under rules issued by the SEC pursuant to EESA, we, as a participant in the Capital Purchase Program,
will be required to include a non-binding, advisory shareholder vote on the compensation of our executives, as set forth in
the compensation discussion and analysis, the compensation tables, and any related material in our proxy statement, at
our annual meeting in April. Additionally, new requirements under the U.S. Treasury’s rules include enhanced disclosure
of perquisites and the use of compensation consultants, and a prohibition on tax gross-up payments.
In October 2009, the Federal Reserve issued proposed supervisory guidance designed to ensure that incentive
compensation practices of banking organizations are consistent with safety and soundness. The proposed guidance was
subject to a public comment period which has expired, but no final guidance has been issued. The Federal Reserve has
also commenced a special horizontal review of compensation practices at 28 large complex banking organizations,
including us.
The financial regulatory reform bill approved by the House of Representatives in December 2009, which is described
above, would impose additional disclosures and restrictions on compensation paid by financial institutions if enacted. The
bill also would require the regulation of “inappropriate or imprudently risky compensation practices.”
FDIC Rule Regarding Securitizations
While we have capacity to issue new asset-backed securities from our securitization trusts, there has been uncertainty
in the securitization market recently as a result of revised accounting standards and related guidance from the FDIC. The
ability of issuers of asset-backed securities to obtain necessary credit ratings for their issuances has been based, in part,
on the FDIC’s rule entitled Treatment by the Federal Deposit Insurance Corporation as Conservator or Receiver of
Financial Assets Transferred by an Insured Depository Institution in Connection with a Securitization or Participation,
which provides that the FDIC will not seek to reclaim or recover assets transferred in connection with a securitization, or
recharacterize them as assets of the insured depository institution, provided such transfer meets the conditions for sale
accounting treatment under GAAP. Pursuant to FASB guidance for transfers of financial assets, effective for us on
December 1, 2009, certain transfers of assets to special purpose entities (including Discover Bank’s transfer of assets to
the Discover Card Master Trust) no longer qualify for sale accounting treatment. Consequently, there has been uncertainty
in the securitization market as to how the FDIC will treat assets transferred into securitization vehicles under the new FASB
guidance. This uncertainty had made it difficult or impossible to obtain the necessary credit ratings for the issuances of
asset-backed securities, including the required ratings for securities to qualify as eligible securities under TALF.
In November 2009, the FDIC issued an interim final rule that preserves the legal isolation treatment applicable under
the existing FDIC rule for asset-backed securities issued on or prior to March 31, 2010, which is the date that TALF
expires. Issuances after this date are subject to the final determination of the FDIC regarding the legal isolation standard,
the potential framework of which was described in the FDIC’s Advance Notice of Proposed Rulemaking in December
2009. The form that this rule will ultimately take is uncertain at this time, but it may impact our ability and/or desire to
issue asset-backed securities in the future.
FDIC Rule Regarding Assessments
Market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to
insured deposits. As a result, we may be required to pay significantly increased premiums or additional special
assessments. In 2009, we paid $15.8 million for a special industry-wide FDIC deposit insurance assessment. The FDIC
has finalized a proposal that requires banks to prepay their FDIC insurance premiums for the years 2010 through 2012.
On December 30, 2009, we prepaid $185.5 million, which includes all of our quarterly assessments, typically paid one
quarter in arrears, for the calendar quarters ending December 31, 2009 through December 31, 2012. Additionally, in
January 2010, the FDIC issued an Advance Notice of Proposed Rulemaking seeking comment on ways that the FDIC’s
risk-based deposit insurance assessment system could be changed to account for the risks posed by certain employee
compensation programs.
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The remaining discussion provides a summary of our results of operations for the years ended November 30, 2009,
2008 and 2007, as well as our financial condition at November 30, 2009 and 2008. All information and comparisons
are based solely on continuing operations.
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