In another significant development, the Securities and Exchange Commission has confirmed that hundreds of federally supported financial companies must hold their first “say on pay” votes this year. These advisory votes represent an extraordinary expansion of this reform and will likely set the stage for a market-wide rule.

The SEC issued an updated guidance today that backed the legislative interpretation offered by Senator Christopher Dodd in a Feb. 20 letter to the agency. As chairman of the Banking Committee, Dodd has oversight authority over the SEC and inserted the advisory vote provision into the recently enacted economic stimulus legislation.

While the stimulus bill did not set a precise date for the first compensation vote at the almost 400 firms that have participated in the federal Troubled Asset Relief Program (TARP), the law directed the SEC to prepare pay vote rules within a year, leading governance observers to initially conclude that the first votes would be in 2010. However, Dodd, in his letter, wrote that he believes that the legislation mandates advisory votes at any TARP firm that files both its preliminary and final proxy statements after Feb. 17, 2009—the date the law was signed.

The new SEC guidance and Dodd’s letter has further encouraged the investor coalition that filed more than 100 “say on pay” resolutions this season. This campaign has made significant progress since 2006 when the first shareholder proposals appeared on U.S. ballots. Insurer Aflac held the management-sponsored advisory vote last May, and was followed by five other firms in 2008.

Tim Smith, a senior vice president at Walden Asset Management and a leading pay vote proponent, said the latest SEC guidance will prod other firms to agree to hold pay votes. He recalled that one major bank had expressed concern that holding a pay vote would leave it at a “competitive disadvantage,” but said the new guidance “leaves us feeling much more comfortable with providing investors a chance to vote on compensation.”

“We will watch the list of objections that would have appeared in company proxies melt away as companies by the hundreds respectfully comply with this new requirement,” Smith said.

In its guidance, the SEC confirmed that the new requirement applies to all TARP companies, not just those that receive an investor proposal seeking “say on pay.” The commission also said that firms may not satisfy the requirement by simply putting such a shareholder proposal on the ballot.