UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

 

 

April 25, 2007

Dear Stockholders:

You are cordially invited to attend the 2007 Annual Meeting of Stockholders of ACA Capital Holdings, Inc., on Wednesday, May 16, 2007 at 11:00 a.m. (Eastern Daylight Time) at our offices at 140 Broadway, 47th Floor, New York, New York 10005. The accompanying Notice of 2007 Annual Meeting of Stockholders and Proxy Statement describe the items to be considered and acted upon by the stockholders at the meeting.

Whether or not you are able to attend, it is important that your shares be represented at the meeting. Accordingly, we ask that you please complete, sign, date and return the enclosed proxy card in the envelope provided at your earliest convenience. Alternatively, you can vote your proxy by telephone or through the Internet by following the instructions on the enclosed proxy card. If you attend the meeting, you may revoke your proxy, if you wish, and vote personally.

Along with the attached Proxy Statement, we are also sending you the ACA Capital 2006 Annual Report, which includes our 2006 Annual Report on Form 10-K and financial statements.

As the representation of stockholders at the meeting is very important, we thank you in advance for your participation.

 

ACA CAPITAL HOLDINGS, INC.

140 Broadway, 47th Floor
New York, New York 10005
(212) 375-2000
www.aca.com

NOTICE OF 2007 ANNUAL MEETING OF STOCKHOLDERS

NOTICE IS HEREBY GIVEN that the 2007 Annual Meeting of Stockholders of ACA Capital Holdings, Inc. (“ACA”) will be held on May 16, 2007 at 11:00 a.m., EDT, at ACA’s offices at 140 Broadway, 47th Floor, New York, New York 10005 to consider and vote upon the following matters:

1.                To elect nine directors for terms of one year each, to serve until their successors have been duly elected and qualified;

2.                To ratify the selection of Deloitte & Touche LLP as ACA’s independent registered public accounting firm for 2007; and

3.                To transact such other business as may properly come before the meeting or any adjournments or postponements thereof.

Only stockholders of record as of the close of business on March 27, 2007 will be entitled to notice of, and to vote at, the Annual Meeting and any adjournments or postponements thereof. A list of stockholders entitled to vote at the meeting will be available for inspection during normal business hours beginning May 6, 2007 at ACA’s offices at 140 Broadway, 47th Floor, New York, New York 10005.  Whether or not you plan to attend the meeting, please complete, sign, date and return the enclosed proxy card in the envelope provided to ensure that your shares of common stock are represented at the meeting. You may also vote your shares by telephone or through the Internet by following the instructions on the enclosed proxy card. If you attend the meeting in person, you may vote your shares of common stock at the meeting, even if you have previously sent in your proxy.

		By Order of the Board of Directors,
		Nora J. Dahlman
		Senior Managing Director, General Counsel
		and Secretary

 

New York, New York
April 25, 2007

If you vote by telephone or on the Internet, you do not need to return your proxy card.

TABLE OF CONTENTS

 

PROXY STATEMENT FOR ACA CAPITAL HOLDINGS, INC.
2007 ANNUAL MEETING OF STOCKHOLDERS

INFORMATION ABOUT THE ANNUAL MEETING AND VOTING

Why did I receive this proxy statement?

We are providing this proxy statement (“Proxy Statement”) in connection with the solicitation by the Board of Directors (“Board”) of ACA Capital Holdings, Inc. (“ACA”, “Company”, “we”, “us” or “our”) of proxies to be voted at our 2007 Annual Meeting of Stockholders and at any adjournment or postponement thereof (“Annual Meeting”).

This Proxy Statement describes the matters on which we would like you to vote and provides information on those matters so that you can make an informed decision.

The Notice of 2007 Annual Meeting, this Proxy Statement, the form of proxy card and the voting instructions are being mailed starting April 25, 2007.

What proposals will be voted on at the Annual Meeting?

There are two proposals scheduled to be voted on at the Annual Meeting:

·        the election of nine directors; and

·        the ratification of the selection of Deloitte & Touche LLP (“Deloitte”) as ACA’s independent registered public accounting firm for 2007.

What is ACA’s Board’s voting recommendation?

Our Board recommends that you vote your shares “FOR” each of the nominees of the Board, and “FOR” the ratification of the selection of Deloitte as ACA’s independent registered public accounting firm for 2007.

Who is entitled to vote at the Annual Meeting?

Holders of ACA common stock at the close of business on March 27, 2007 are entitled to receive the Notice of 2007 Annual Meeting and to vote their shares at the Annual Meeting. On that date, there were 36,562,756 shares of ACA common stock outstanding. ACA common stock is our only class of voting stock.

How many votes do I have?

You will have one vote for every share of ACA common stock that you owned at the close of business on March 27, 2007.

What is the difference between holding shares as a stockholder of record and as a beneficial owner?

If your shares are registered directly in your name with ACA’s transfer agent, Mellon Investor Services LLC, you are considered the “stockholder of record” with respect to those shares. The Notice of 2007 Annual Meeting, this Proxy Statement, the proxy card and our annual report for the year ended December 31, 2006 (the “2006 Annual Report”) have been sent directly to you by Mellon Investor Services LLC.

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” with respect to those shares. These shares are sometimes referred to as being held “in street name.”  The Notice of 2007 Annual Meeting, this Proxy Statement, the proxy card and the 2006 Annual Report have been forwarded to you by your broker, bank or other holder of record who is considered the stockholder of record with respect to those shares. As the beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote your shares by using the voting instruction card included in the mailing or by following the instructions on the voting instruction card for voting by telephone or on the Internet.

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How do I vote?

You may vote using any of the following methods:

By Mail

Be sure to complete, sign and date the proxy card or voting instruction card and return it in the prepaid envelope. If you are a stockholder of record and you return your signed proxy card but do not indicate your voting preferences, the persons named in the proxy card will vote the shares represented by that proxy as recommended by our Board.

By telephone or on the Internet

Instead of submitting your vote by mail on the enclosed proxy card, you may vote via the Internet or by telephone. Please note that there are separate Internet and telephone arrangements depending on whether you are a stockholder of record (that is, if you hold your stock in your own name) or you are a beneficial owner and hold your shares in “street name” (that is, if your stock is held in the name of your broker, bank or other nominee).

If you are a stockholder of record, you may vote by telephone, or electronically through the Internet, by following the instructions provided on your proxy card. If you are a beneficial owner but not the record owner since you hold your shares in “street name”, you will need to contact your broker, bank or other nominee to determine whether you will be able to vote by telephone or electronically.

The telephone and Internet voting procedures are designed to authenticate stockholders’ identities, to allow stockholders to give their voting instructions and to confirm that stockholders’ instructions have been recorded properly. If you vote via the Internet, you may incur costs, such as usage charges from Internet access providers and telephone companies. You will be responsible for those costs.

Whether or not you plan to attend the Annual Meeting, we urge you to vote. Returning the proxy card or voting by telephone or over the Internet will not affect your right to attend the Annual Meeting and vote in person.

In person at the Annual Meeting

All stockholders may vote in person by ballot at the Annual Meeting. You may also be represented by another person at the Annual Meeting by executing a proper proxy designating that person. If you are a beneficial owner of shares but not the record holder, you must obtain a legal proxy from your broker, bank or other nominee and present that legal proxy to the inspectors of election with your ballot to be able to vote at the Annual Meeting.

What can I do if I change my mind after I vote?

If you are a stockholder of record, you can revoke your proxy before it is exercised by:

·        written notice to the Company’s Secretary at the address indicated on page 4 under “Can a stockholder communicate directly with our Board?”;

·        timely delivery of a valid, later-dated proxy or a later-dated vote by telephone or on the Internet; or

·        attending the Annual Meeting and voting in person by ballot.

If you are a beneficial owner of shares but not the record holder, you may submit new voting instructions by contacting your broker, bank or other nominee. You may also vote in person at the Annual

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Meeting if you obtain a legal proxy as described in the answer to the previous question. All shares that have been properly voted and not revoked will be voted at the Annual Meeting.

What votes need to be present to hold the Annual Meeting?

Under our Bylaws, the presence, in person or by proxy, of the holders of a majority of our outstanding common stock on March 27, 2007 entitled to vote at the Annual Meeting will constitute a quorum for the transaction of business at the Annual Meeting. Abstentions and broker “non-votes” are counted as present and entitled to vote for purposes of determining whether a quorum exists.

What vote is required to approve each proposal?

Proposal 1: Elect Nine Directors		The nine nominees for director who receive the most votes will be elected. If you do not vote for a nominee, or you indicate “withhold authority to vote” for any nominee on your proxy card, your vote will not count either for or against the nominee.
Proposal 2: Ratify Selection of Independent Auditors		The affirmative vote of a majority of the votes present and entitled to vote at the Annual Meeting is required to ratify the selection of Deloitte as ACA’s independent registered public accounting firm for 2007. If you “abstain” from voting, it has the same effect as if you voted “against” this proposal.

 

How are votes counted?

In the election of directors, your vote may be cast “FOR” all of the nominees or your vote may be “WITHHELD” with respect to one or more of the nominees. For other proposals, your vote may be cast “FOR” or “AGAINST” or you may “ABSTAIN”. If you “ABSTAIN”, it has the same effect as a vote “AGAINST”. If you sign your proxy card with no further instructions, your shares will be voted in accordance with the recommendations of our Board.

What is the effect of broker non-votes?

A broker “non-vote” occurs when a broker, bank or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner. Under current policy of the New York Stock Exchange (“NYSE”), a broker, bank or other nominee may exercise discretionary voting power for both the election of directors and the ratification of the selection of Deloitte.

Who will count the votes?

Representatives of our transfer agent, Mellon Investor Services LLC, will tabulate the votes and act as inspectors of election at the Annual Meeting.

Is voting confidential?

We maintain a policy of keeping all the proxies and ballots confidential. The inspectors of election will forward to management any written comments that you make on the proxy card.

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What are the costs of soliciting these proxies and who will pay them?

We will bear all costs of solicitation. Upon request, we will reimburse banks, brokers, and other nominees for the expenses they incur in forwarding the proxy materials to you.

Is this Proxy Statement the only way that proxies are being solicited?

No. In addition to our mailing the proxy materials, members of our Board, officers and employees may solicit proxies by telephone, by fax or other electronic means of communication, or in person. They will not receive any compensation for their solicitation activities in addition to their regular compensation. We have not engaged an outside solicitation firm.

Where can I find the voting results?

We will publish the voting results in our Quarterly Report on Form 10-Q for the second quarter of 2007, which we will file with the Securities and Exchange Commission (“SEC”) in August 2007. You will be able to find the Form 10-Q on ACA’s Internet site at www.aca.com, as well as on the SEC’s EDGAR database at www.sec.gov.

Can a stockholder communicate directly with our Board?

Stockholders and other interested parties may communicate with members of our Board by writing to ACA’s General Counsel and Secretary at ACA Capital Holdings, Inc., 140 Broadway, 47th Floor, New York, New York 10005 or by sending an e-mail to ACA’s General Counsel and Secretary at ndahlman@aca.com. Our General Counsel and Secretary will forward all appropriate communications directly to our Board or to any individual director or directors, depending upon the facts and circumstances outlined in the communication.

We have also established methods for employees, stockholders and other interested parties to communicate concerns regarding the conduct of ACA or any of its people, including with respect to our accounting controls or auditing matters. You may visit our Internet site at www.aca.com/investor/corporate,
where you will see instructions on how to report such concerns. Concerns can be reported anonymously, if you so choose.

Whom should I call if I have any questions?

If you have any questions about the Annual Meeting or your ownership of ACA common stock, please contact our transfer agent at:

Mellon Investor Services LLC
480 Washington Boulevard
Jersey City, NJ 07310-1900
Telephone:  (877) 785-9668
TDD for Hearing Impaired:  (800) 231-5469
Foreign Stockholders:  (201) 680-6578
TDD for Foreign Hearing Impaired Stockholders:  (201) 680-6610
Website Address: www.melloninvestor.com/isd

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INFORMATION ABOUT THE ANNUAL REPORT

Will I receive a copy of our annual report?

We have mailed you a copy of the 2006 Annual Report with this Proxy Statement. The 2006 Annual Report includes our audited financial statements, along with other financial information, and we urge you to read it carefully.

How can I receive a copy of our 10-K?

You can obtain, free of charge, a copy of our 2006 Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”), by:

·       accessing our Internet site at www.aca.com; or

·       writing to:

ACA Capital Holdings, Inc.
140 Broadway, 47th Floor
New York, New York 10005
Attention:  Director of Investor Relations

You can also obtain a copy of our 2006 Form 10-K and other periodic filings with the SEC from the SEC’s EDGAR database at www.sec.gov.

CORPORATE GOVERNANCE

Operation and Meetings

Our Board is responsible for broad corporate policy and the oversight of the management of our Company. Members of the Board are kept informed about our Company’s business by various documents sent to them before each meeting and oral reports made to them during these meetings by members of the Company’s management. The full Board is also advised of actions taken by the various committees of our Board by the Chairpersons of those committees. Directors have access to all of our books, records and reports, and members of management are available at all times to answer their questions. Management also communicates with the various members of our Board on a regular informal basis as is needed to effectively oversee the activities of our Company.

During 2006, our Board held four (4) regularly scheduled meetings and two (2) special telephonic meetings. Our Board also acted seven (7) times by consent action. Each then incumbent director attended at least 75% of the total regularly scheduled and special meetings of the Board and the Board committees on which such director served in 2006. For more information, see “—Committees—Committee Membership as of March 27, 2007 and Meetings Held During 2006” below. Our outside (non-management) directors also held regularly scheduled executive sessions without members of management present at which David E. King, chairman of our Board, presided. In 2006, the outside directors met in executive session four (4) times. Beginning in 2007, the Board will schedule at least one executive session per year that includes only independent directors consistent with the listing standards of the NYSE. The procedure by which a presiding director is selected for each such executive session will be determined at the time of the first such meeting. In addition, all director nominees are encouraged to attend our annual meetings of stockholders.

Pursuant to a stockholders agreement, BSMB/ACA LLC has the right to designate a Board observer to attend each meeting of the Board and any Board committee. This observer is subject to the same guidelines and policies as our directors, such as our Code of Conduct and our Securities Trading Policy. However, our Board may exclude such observer from any such meeting to the extent provided for in the stockholders agreement. The various directors and executive management may also invite other individuals

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to attend our Board meetings from time to time. Such attendees are also subject to the same guidelines and policies as our directors. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

Communications with Directors

Stockholders and other interested parties wishing to communicate with our Board may send a written communication addressed to our General Counsel and Secretary at our principal executive offices. Our General Counsel and Secretary will forward all appropriate communications directly to our Board or to any individual director or directors, depending upon the facts and circumstances outlined in the communication.

Director Independence

The Policy Regarding Director Independence Determinations, which was recommended by the nominating and governance committee and approved by our Board, contains guidelines to assist the Board in its determination of director independence. These guidelines meet the listing standards of the NYSE. To qualify as independent under these guidelines, our Board must affirmatively determine that a director has no material relationship with us, other than as a director. The Policy Regarding Director Independence Determinations, as in effect from time to time, is available free of charge on our Internet site at www.aca.com. The Policy Regarding Director Independence Determinations is also available in print to any stockholder who requests it by writing to ACA Capital Holdings, Inc., at 140 Broadway, 47th Floor, New York, New York 10005, Attention: General Counsel.

Pursuant to the Policy Regarding Director Independence Determinations, in 2006 our Board undertook a review of the independence of our directors. During this review, our Board considered transactions and relationships between each director, any member of his or her immediate family or any company or tax-exempt organization at which he or she is an executive officer, has an ownership interest in or is a director of, on the one hand, and the Company and its subsidiaries and affiliates, on the other hand. This review included consideration of the transactions and relationships reported under “Certain Relationships and Related Party Transactions” below. Our Board also examined transactions and relationships between directors or their affiliates and members of our Company’s senior management and their affiliates. As provided in the Policy Regarding Director Independence Determinations, the purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent.

As a result of this review, our Board affirmatively determined that five of the nine directors nominated for election at the Annual Meeting—namely, David M. Barse, John G. Berylson, Douglas L. Jacobs, William H. Lacy and Warren A. Stephens—are independent of our Company and its management under the standards set forth in the Policy Regarding Director Independence Determinations.

Committees

Our Board has the authority to delegate the performance of certain oversight and administrative functions to subcommittees of the Board. Our Board currently has an audit and investment committee, a compensation committee, a nominating and governance committee, a risk oversight committee and an executive committee. In addition, from time to time, special committees may be established under the direction of our Board when necessary to address specific issues. Each committee has adopted a charter which is reviewed annually by that committee and changes, if any, are recommended to our Board for approval. The charters for the audit and investment committee, the compensation committee and the nominating and governance committee are subject to certain NYSE rules, and our charters for those committees comply with such rules. Copies of the committee charters, as in effect from time to time, are available free of charge on our Internet site at www.aca.com. The charters are also available in print to any

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stockholder who requests them by writing to ACA Capital Holdings, Inc., at 140 Broadway, 47th Floor, New York, New York 10005, Attention: General Counsel. In addition, a copy of the audit and investment committee charter as currently in effect is attached as Appendix A to this Proxy Statement.

The following table shows the membership of each committee of our Board as of March 27, 2007 and the number of meetings held by each committee during 2006:

Committee Membership as of March 27, 2007 and Meetings Held During 2006

 

Audit and Investment Committee

The audit and investment committee was established to assist the Board in its oversight of the integrity of our financial reporting process, our system of internal controls, the audit process and the performance, qualification and independence of our independent auditors. The audit and investment committee currently consists of Douglas L. Jacobs (chairman), Robert Juneja and William H. Lacy. Under the stockholders agreement, the number of members of the audit and investment committee cannot exceed five and is required at all times to include at least one member who was nominated by BSMB/ACA LLC, subject to compliance with applicable securities laws and the rules and regulations of the NYSE. Currently, that member is Mr. Juneja. Our Board has determined that Messrs. Jacobs and Lacy are independent under the current NYSE independence requirements and SEC rules, Mr. Jacobs meets the SEC criteria for an “audit committee financial expert,” and each of the members are “financially literate” under the rules of the NYSE. Within 12 months after our listing on the NYSE (no later than November 10, 2007), all of the members of the audit and investment committee will be independent as of such date in accordance with the NYSE and SEC rules.

The audit and investment committee’s primary duties and assigned responsibilities are to:

·       oversee the audit and other services of our independent auditors and be directly responsible for the appointment, independence, qualifications, compensation and oversight of the independent auditors, who are to report directly to the audit and investment committee;

·       serve as an independent and objective body to monitor and assess our compliance with legal and regulatory requirements as they relate to our financial statements, our financial reporting processes and related internal control systems and the performance, generally, of our internal audit function;

·       resolve any disagreements between management and our independent auditors regarding financial reporting;

·       review and discuss with management and our independent auditors our quarterly financial statements, our annual audited financial statements and the Management’s Discussion and Analysis

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of Financial Condition and Results of Operations section of our Form 10-Q and Form 10-K filings with the SEC; and

·       oversee, direct and review the management of our investment portfolios.

The audit and investment committee charter also mandates that the audit and investment committee pre-approve all audit, audit-related, tax and other services conducted by our independent auditors. The audit and investment committee also approves budgets for the pre-approved audit, audit-related, tax and other services to be performed by our independent auditors, as well as for the accounting services provided by other accounting firms. In the first quarter 2007, the audit and investment committee passed a resolution authorizing the chairman of that committee to approve all such services with fees less than $50,000 and to report all such approvals to the full committee at its next regularly-scheduled meeting.

A copy of the audit and investment committee charter is attached as Appendix A to this Proxy Statement.

Compensation Committee

The compensation committee was established to discharge the Board’s responsibilities relating to the compensation of our executive officers, and to administer and implement our incentive compensation plans and equity-based plans. The compensation committee currently consists of David E. King (chairman), Douglas L. Jacobs, David M. Barse and John G. Berylson. Under the stockholders agreement, the number of members of the compensation committee cannot exceed five and is required at all times to include at least one member who was nominated by BSMB/ACA LLC, subject to compliance with applicable securities laws and the rules and regulations of the NYSE. Currently, that member is Mr. King. Our Board has determined that Messrs. Jacobs, Barse and Berylson are independent under the current NYSE independence requirements and SEC rules. Within 12 months after our listing on the NYSE (no later than November 10, 2007), all of the members of the compensation committee will be independent as of such date in accordance with the NYSE rules. In 2005 and 2006, the compensation committee engaged the firm of McLagan Partners to assist in benchmarking pay levels against the comparable market to support the attraction and retention of qualified management and related staff. Under the terms of its charter, the primary duties and assigned responsibilities of the compensation committee include the following:

·       establish and annually review our compensation philosophy and ensure it fairly rewards our Chief Executive Officer (the “CEO”) and other senior executives;

·       annually review and approve corporate goals and objectives relevant to compensation of the CEO and determine and approve the CEO’s compensation levels;

·       annually review and approve the CEO’s compensation recommendations for the other senior executives; and

·       review and administer our Company’s incentive compensation and equity-based plans, including the approval of awards to be granted thereunder.

For additional information regarding the compensation committee’s processes and procedures for the consideration and determination of executive compensation, please see “Compensation Discussion and Analysis” below.

Nominating and Governance Committee

The nominating and governance committee was established to assist the Board in fulfilling its responsibilities with respect to the governance of our Company. The nominating and governance committee currently consists of David E. King (chairman), Warren A. Stephens and William H. Lacy. Under the stockholders agreement, the number of members of the nominating and governance committee

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cannot exceed five and is required at all times to include at least one member who was nominated by BSMB/ACA LLC, subject to compliance with applicable securities laws and the rules and regulations of the NYSE. Currently, that member is Mr. King. Our Board has determined Messrs. Stephens and Lacy are independent under the current NYSE independence requirements. Within 12 months after our listing on the NYSE (no later than November 10, 2007), all of the members of the nominating and governance committee will be independent as of such date in accordance with the NYSE rules. The charter of the nominating and governance committee specifies the committee’s duties and assigned responsibilities, which include the following:

·       establish criteria for board and committee membership, and recommend to the Board qualified individuals for election to the Board or appointment to board committees;

·       consider and make recommendations to our Board concerning the size and composition of the board and each committee thereof;

·       review the compensation of non-employee directors and make recommendations to the Board concerning compensation of non-employee directors;

·       prepare an annual assessment of the Board and each committee thereof, and assist the Board and each committee in its self-evaluation to determine whether the Board and such committees are functioning effectively; and

·       review and reassess the adequacy of our Corporate Governance Guidelines and recommend any proposed changes thereto to the Board.

The nominating and governance committee also evaluates the performance of our CEO and oversees management development and succession planning in coordination with our compensation committee.

Risk Oversight Committee

The risk oversight committee was established to oversee our credit analysis and risk management processes. The risk oversight committee currently consists of David E. King (chairman), William H. Lacy, Douglas L. Jacobs and Alan S. Roseman. Under the stockholders agreement, the number of members of the risk oversight committee cannot exceed five and is required at all times to include at least one member who was nominated by BSMB/ACA LLC. Currently, that member is Mr. King. Under the terms of its charter, the risk oversight committee’s primary duties and assigned responsibilities include the following:

·       monitor the compliance with our underwriting policies and procedures, and review reports on the performance of our municipal finance and structured finance business sectors;

·       evaluate the tools we use for measuring risk/return and review our risk/return performance;

·       review the guidelines and policies governing the processes for identifying and assessing significant risk or exposures and for formulating and implementing steps to monitor and control such risks and exposures;

·       monitor legal/regulatory risk unrelated to our financial statements; and

·       review management proposals to introduce new product lines, services and information technology initiatives.

Executive Committee

We also have an executive committee, which has the power to act on behalf of our Board with respect to the management and business affairs of our Company during intervals between meetings of our Board to the extent permitted under Delaware law, our Certificate of Incorporation, our Bylaws and the NYSE rules. The executive committee meets on an as needed basis. The executive committee currently consists of

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David E. King (chairman), David M. Barse and Alan S. Roseman. While the stockholders agreement does not require that we have an executive committee, the stockholders agreement provides that the composition of any committee of the Board may not exceed five members and is required at all times to include at least one member who was nominated by BSMB/ACA LLC. Currently, that member is Mr. King.

Director Qualifications

Our Corporate Governance Guidelines contain Board membership criteria that apply to nominees recommended by the nominating and governance committee for a position on our Board. The nominating and governance committee will review with our Board the requisite skills and characteristics for new Board members. The nominating and governance committee and our Board will consider an individual’s background, specific skill requirements, diversity and business experience, as well as assess his or her independence pursuant to the Policy Regarding Director Independence Determinations. Copies of our Corporate Governance Guidelines, Code of Conduct, Code of Ethics for Chief Executive Officer and Senior Financial Officers and Policy Regarding Director Independence Determinations are available free of charge on our Internet site at www.aca.com. These items are also available in print to any stockholder who requests them by writing to ACA Capital Holdings, Inc., at 140 Broadway, 47th Floor, New York, New York 10005, Attention: General Counsel.

Identifying and Evaluating Nominees for Directors

Our Board is responsible for selecting its own members, and delegates the screening process for new directors to the nominating and governance committee, with counsel from the chairman of our Board, the CEO and outside consultants as appropriate. This committee utilizes a number of methods for identifying and evaluating nominees for Board membership. This committee regularly assesses the appropriate size of our Board, and whether any vacancies are anticipated due to retirement or otherwise. In the event our Board elects to increase the number of its members or there is a vacancy on our Board, this committee will consider various potential candidates for director, which may come to the attention of this committee through current Board members, professional search firms, stockholders, or other persons. In connection with the selection and nomination process, this committee reviews the desired experience, mix of skills and other qualities to assure appropriate Board composition, taking into account the background and qualifications of the current Board members and the specific needs of our Company and our Board. Our Board will look for individuals who have displayed high ethical standards, integrity, and sound business judgment. This process is designed to ensure that our Board includes members with diverse backgrounds, skills and experience, including appropriate financial and other expertise relevant to our business.

We may from time to time engage a third party search firm to assist our Board and the nominating and governance committee in identifying and recruiting candidates for Board membership.

Compensation Committee Interlocks and Insider Participation

The current members of the compensation committee are David E. King (chairman), Douglas L. Jacobs, David M. Barse and John G. Berylson.

Mr. King is a Senior Managing Director of Bear, Stearns & Co. Inc. and an Executive Vice President of Bear Stearns Merchant Banking, LLC, an affiliate of BSMB/ACA LLC, our largest stockholder. Mr. King has been nominated for our Board by BSMB/ACA LLC. See “Certain Relationships and Related Party Transactions” below for a description of any relationships between our Company and BSMB/ACA LLC and its affiliates, none of which were transactions directly involving Mr. King.

None of the members of our compensation committee during 2006 or as of the date of this Proxy Statement is or has been an officer or employee of the Company and no executive officer of the Company served on the board or compensation committee of any company that employed any member of our Board.

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Proposal 1—Election of Directors

Nominees for Election as Directors

A Board consisting of nine directors is proposed to be elected to serve a one-year term or until their successors have been elected and qualified. The nine nominees, together with their ages, positions and biographies, are listed below. All of the nominees are currently directors. Our Board is not aware that any nominee named in this Proxy Statement is unable or unwilling to accept nomination or election. If any nominee becomes unable to accept nomination or election, the persons named in the proxy card will vote your shares for the election of a substitute nominee selected by the Board.

Vote Required and Recommendation of Board

The nine nominees receiving the greatest number of votes duly cast for election as directors will be elected. Abstentions will be counted for purposes of determining whether a quorum is present at the Annual Meeting, but will not be counted for purposes of calculating a plurality. Therefore, abstentions will have no impact as to the election of directors. Under NYSE regulations, brokers will have discretionary voting power over director elections at the Annual Meeting.

Under the terms of the stockholders agreement, each stockholder that is a party to that agreement has agreed to vote for directors nominated by certain stockholders and each of our employees who is a party to that agreement is required to appoint BSMB/ACA LLC as proxy and attorney-in-fact to vote for the election of directors. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below. The aggregate number of shares of common stock owned by stockholders who are parties to the stockholders agreement as of March 27, 2007 was 29,213,832, which was approximately 79% of our then outstanding common stock.

Our Bylaws provide that the number of directors on the Board can be no fewer than three and no greater than fourteen. The exact number of directors is to be determined from time to time by resolution adopted by our Board. Currently, our Board has set the size at nine directors. Under the stockholders agreement, BSMB/ACA LLC currently has the right to nominate three directors as BSMB/ACA LLC representatives, but has currently nominated only two of these directors. BSMB/ACA LLC also has the right to nominate two independent directors, which it has done. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below. Should BSMB/ACA LLC decide to nominate a third director as a BSMB/ACA LLC representative, our Board will increase the size of the Board as required to accommodate the additional member and in order to comply with the NYSE requirements discussed under “Corporate Governance—Operations and Meetings” above. We are actively reviewing director candidates and may increase the size of our Board at any time.

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Our Board unanimously recommends a vote “FOR” the election of the nine nominees listed below.

 

David E. King has been the Chairman of our Board since he became a member in September 2004. He has served since 2001 as a Senior Managing Director of Bear, Stearns & Co. Inc. and an Executive Vice President of Bear Stearns Merchant Banking, LLC, where he oversees the firm’s financial services industry investment activity. BSMB/ACA LLC, an affiliate of Bear Stearns Merchant Banking, LLC, is one of our stockholders. Prior to joining Bear, Stearns & Co. Inc. in 2001, he was a Partner at McCown De Leeuw & Co. in charge of the New York office investment activities. He serves on the board of directors of a number of privately held companies, including the following financial services companies: Cavalry Investments, LLC; Churchill Financial Holdings, LLC; Caribbean Financial Group; and Ironshore Insurance Inc. Mr. King also sits on the advisory board of Falconhead Capital LLC and is a member of the Stony Brook University Graduate School Dean’s Council. Under the terms of the stockholders agreement, Mr. King has been nominated by BSMB/ACA LLC. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

Alan S. Roseman has been the Deputy Chairman of our Board and has served as our Chief Executive Officer and President since he joined our Company in May 2004. Prior to joining us, he was the Executive Vice President and Co-Chief Operating Officer, as well as a member of the Executive and Underwriting Committees, of ACE Financial Solutions from 1999 to 2004. Before joining ACE, he served for 11 years as Executive Vice President and General Counsel, and as a member of the Executive Committee, of Capital Re Corporation, a financial guaranty reinsurance company. Mr. Roseman also sits on the board of directors of Caribbean Financial Group, a privately held financial services company. Under the terms of the stockholders agreement, Mr. Roseman is a nominee by reason of his position as our Chief Executive Officer. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

Edward U. Gilpin has been a member of our Board since September 2004. Mr. Gilpin has also served as our Executive Vice President and Chief Financial Officer (the “CFO”) since he joined our Company in December 2000. Previously, Mr. Gilpin was a senior investment banker in the Financial Institutions Group at Prudential Securities. Prior to that, Mr. Gilpin was the Chief Financial Officer for an “AAA” start-up venture sponsored by us and Prudential Securities and served in various senior positions at MBIA, Inc. Under the terms of the stockholders agreement, Mr. Gilpin has been nominated as the second management director reserved and was selected by our Chief Executive Officer, Mr. Roseman. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

David M. Barse has been a member of our Board since March 2001. He is currently President and Chief Executive Officer of Third Avenue Management LLC, a registered investment company and the investment advisor to the Third Avenue Family of Funds and its affiliated broker dealer, MJ Whitman LLC. Mr. Barse joined Third Avenue in 1991. Third Avenue Trust, one of Third Avenue’s funds, is one of

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our stockholders. From July 1996 until July 2002, Mr. Barse served as President and Chief Operating Officer of Danielson Holding Corporation and has served on its board of directors since 1996. In 2005, Danielson changed its name to Covanta Holding Corporation. Covanta is a New York Stock Exchange-listed company. Under the terms of the stockholders agreement, Mr. Barse has been nominated by Third Avenue Trust. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

John G. Berylson has been a member of our Board since December 2000 and has previously served as our Chairman. Since March 2002, Mr. Berylson has served as Chairman and Chief Executive Officer of Chestnut Hill Ventures LLC, an affiliate of one of our stockholders, Chestnut Hill ACA, L.L.C. Since October 2000, he has served as President of GCC Investments, Inc. From 1993 until October 2000, he served as Senior Vice President and Chief Investment Officer of GC Companies, Inc. Mr. Berylson currently serves on the board of directors of FleetCor Technologies, Inc., a privately held company. Under the terms of the stockholders agreement, Mr. Berylson has been nominated by Chestnut Hill ACA, LLC. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

Douglas L. Jacobs has been a member of our Board since November 2004. Since 2003, Mr. Jacobs has been a self-employed investor. From 1995 to 2003, he was Executive Vice President and Treasurer for FleetBoston Financial Group. He joined Fleet Bank in 1988 as Executive Vice President of the Fleet Mortgage Group, responsible for secondary trading and financing and capital markets. Mr. Jacobs’ career began at Citibank in 1972, where he ultimately assumed the position of Division Executive for the Investment Banking Group’s MBS Group. Mr. Jacobs’ other directorships include Fortress Investment Group LLC, a publicly traded company, Hanover Capital Mortgage Holdings, Inc., a publicly traded REIT, Women & Infants Hospital and Trinity Repertory Theatre in Providence, Rhode Island. Under the terms of the stockholders agreement, Mr. Jacobs has been nominated by BSMB/ACA LLC as an independent director. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

Robert Juneja has been a member of our Board since September 2004. He has served since 2005 as a Managing Director of Bear, Stearns & Co. Inc. and Bear Stearns Merchant Banking, LLC, and has been with Bear, Stearns & Co. Inc. since 2000. BSMB/ACA LLC, an affiliate of Bear Stearns Merchant Banking, LLC, is one of our stockholders. Prior to joining Bear Stearns, Mr. Juneja was Vice President of Corporate Development at Destia Communications, Inc. from 1999 to 2000. He is a member of the board of directors of the following privately held companies: OnFiber Communications, Inc., Cavalry Investments, LLC and Churchill Financial Holdings, LLC. Under the terms of the stockholders agreement, Mr. Juneja has been nominated by BSMB/ACA LLC. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

William H. Lacy has been a member of our Board since February 2005. He is former chairman and chief executive officer of MGIC Investment Corporation, the parent of Mortgage Guaranty Insurance Corporation (MGIC), a private mortgage insurer. Mr. Lacy served in various capacities at MGIC over his 28-year career. He began his career in the secondary mortgage market group, and was appointed President and Chief Executive Officer of MGIC Investment Corporation in 1987. Mr. Lacy retired from MGIC in December 1999. Mr. Lacy has served on several committees including the National Association of Home Builders Mortgage Roundtable, the Lender’s Service, Inc. Advisory Board, and the Fannie Mae Advisory Board. He is a former president of the Mortgage Insurance Companies of America (MICA), an industry trade association, and a member of the board of directors of two other NYSE-listed companies—Johnson Controls, Inc. and Ocwen Financial Corporation. Under the terms of the stockholders agreement, Mr. Lacy has been nominated by BSMB/ACA LLC as an independent director. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

Warren A. Stephens has been a member of our Board since February 2001. Since 1986, Mr. Stephens has been the President and Chief Executive Officer of SF Holding Corp. (f/k/a Stephens Group, Inc.), one

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of our stockholders, and Stephens Inc. He currently serves on the boards of two other NYSE-listed companies—Dillard’s, Inc. and Alltel Corporation—and numerous privately held companies. Under the terms of the stockholders agreement, Mr. Stephens has been nominated by SF Holding Corp. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below.

Director Compensation for 2006

Pursuant to our policy of compensating directors, only those directors who are not employed by us or our large shareholders are entitled to compensation for service on the Board. We refer to these directors as our “unaffiliated independent directors.”  In 2006, our independent directors were Douglas L. Jacobs and William H. Lacy.

Prior to our initial public offering in November 2006 (“IPO”), each unaffiliated independent director was entitled to receive (i) an annual fee of $20,000 for serving on the Board, (ii) a fee of $5,000 for each Board meeting such director attended and (iii) an additional fee of $1,000 for each committee meeting such director attended ($2,000 if the director was chairman of the committee). In addition, each unaffiliated independent director received a one-time grant of 21,000 options to purchase shares of our common stock (after giving effect to the six for one stock split implemented in August 2006) upon his appointment to the Board.

After our IPO, each unaffiliated independent director became entitled to receive (i) an annual fee of $30,000 for serving on the Board, (ii) an annual grant of 3,077 shares of our restricted common stock pursuant to our Amended and Restated Stock 2006 Incentive Plan, and (iii) an additional fee of $1,000 for each committee meeting attended. The chairman of the audit and investment committee is entitled to receive additional annual compensation of $10,000.

Based on the foregoing information, the following table provides compensation earned for the year ended December 31, 2006 for each director of our Board.

(1)          Douglas L. Jacobs and William H. Lacy each earned (i) an annual fee of $20,000 pro-rated for the period of time during 2006 that our Company was not publicly held and $30,000 pro-rated for the period of time during 2006 that our Company was publicly held, (ii) $15,000 and $20,000, respectively, for Board meetings attended for the period of time during 2006 that our Company was not publicly held at $5,000 per meeting, and (iii) $16,000 and $3,000, respectively, for committee meetings attended for the period of time during 2006 that our Company was not publicly held. For the period of time during 2006 that our Company was publicly held, (i) Mr. Jacobs earned $1,667 representing the pro-rated portion of the $10,000 payable to him as chairman of our audit and investment committee and (ii) Mr. Jacobs and Mr. Lacy earned $4,000 and $2,000, respectively, for committee meetings attended.

(2)          Represents the amount of compensation cost recognized by us for 2006 over the requisite service period with respect to restricted stock awards, as computed in accordance with SFAS No. 123(R) (“FAS 123(R)”). A discussion of the assumptions underlying the valuation of these awards is provided in Note 15 to the financial statements included in 2006 Form 10-K. In 2006, Douglas L. Jacobs and

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William H. Lacy were each granted 3,077 shares of restricted common stock of our Company that vest in equal installments annually over 3 years.

(3)          Represents the amount of compensation cost recognized for 2006 over the requisite service period with respect to stock option awards granted in years prior to 2006, as computed in accordance with FAS 123(R). Effective January 1, 2006, the Company adopted FAS 123(R) using the prospective method. For disclosure in this table, compensation cost for stock option awards outstanding at the time our Company adopted FAS 123(R) has been estimated as if our Company utilized the modified prospective transition method. The underlying valuation of these awards assumes a volatility of 0%, a discount rate between 3.86% and 3.88%, an expected life of either 3 or 6 years, and dividend yield of 0%. Douglas L .Jacobs was granted 21,000 options to purchase our Company’s common stock in November 2004 and William H. Lacy was granted 21,000 options purchase our Company’s common stock in February 2005, in each case giving effect to the 6 for 1 stock split that occurred in August 2006. Each award of options vests in equal installments annually over 3 years.

SECURITies OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
officers and directors

The table below sets forth information known to us regarding the beneficial ownership of shares of our common stock as of March 27, 2007 by:

·       each person known by us to be the beneficial owner of more than five percent (5%) of our shares of common stock;

·       each of our directors;

·       our CEO and the other four executive officers named in the Summary Compensation Table that appears in this Proxy Statement; and

·       all directors and executive officers, as a group.

Unless otherwise noted below, to our knowledge, each person has sole voting and investment power over the shares shown as beneficially owned, except to the extent authority is shared by spouses under applicable law.

The number of shares listed as beneficially owned by each stockholder below is determined to be beneficially owned in accordance with the rules promulgated by the SEC. The information does not necessarily indicate beneficial ownership for any other purpose. Shares of common stock subject to options currently exercisable or exercisable within 60 days after March 27, 2007 are deemed outstanding for purposes of computing the percentage beneficially owned by the person or entity holding such securities but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person or entity. Under the terms of the stockholders agreement, certain of our stockholders, including the greater than five percent (5%) stockholders named below (other than Perry Corp.) and our employees who are parties to the stockholders agreement, have agreed to vote for directors nominated by certain stockholders and each of our employees who is a party to the stockholders agreement is required to appoint BSMB/ACA LLC as proxy and attorney-in-fact to vote for the election and/or removal of directors. Schedule 13G filings by all of the parties to the stockholders agreement have been made with the SEC that identify each of the parties to the stockholders agreement. See “Certain Relationships and Related Party Transactions—Stockholders Agreement” below. Accordingly, all of the parties to the stockholders agreement may be deemed to be members of a group, which group would be deemed to beneficially own all the shares held by all of the parties to the stockholders agreement for purposes of Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The aggregate number of shares of common stock owned by stockholders who are parties to the stockholders agreement as of March 27, 2007 was 29,213,832, which was approximately 79% of our then outstanding common

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stock. The table below represents the number of shares owned by each stockholder named below without giving effect to any share these persons may be deemed to beneficially own because they are parties to the stockholders agreement.

Percentage of beneficial ownership is based on 36,562,756 shares of our common stock outstanding as of March 27, 2007. This number revises the number of shares of common stock outstanding reported on the front cover of our 2006 Form 10-K. All share numbers presented are common stock, which is the only class of equity outstanding.

Unless otherwise indicated in the tables, the address of each of the beneficial owners identified is c/o ACA Capital Holdings, Inc., 140 Broadway, 47th Floor, New York, NY 10005.

*                    Less than 1% of our outstanding common stock.

(1)          Shares beneficially owned includes shares of common stock issuable upon the exercise of outstanding stock options exercisable within 60 days of March 27, 2007 and shares of restricted stock.

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(2)          BSMB/ACA LLC is an affiliate of, and is controlled by, Bear Stearns Merchant Banking and an affiliate of The Bear Stearns Companies Inc., a broker/dealer. The Bear Stearns Companies Inc. and John D. Howard, by virtue of his status as the sole member of JDH Management, LLC, may be deemed to share beneficial ownership of shares owned of record by Bear Stearns Merchant Banking and BSMB/ACA LLC. Mr. Howard and The Bear Stearns Companies Inc. share investment and voting power with respect to shares owned by Bear Stearns Merchant Banking and BSMB/ACA LLC, but disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein. Mr. Howard is employed by Bear, Stearns & Co. Inc., a broker/dealer. The Bear Stearns Companies Inc. is the managing member of Bear Stearns Merchant GP II, LLC, which is the general partner of Bear Stearns Merchant Capital II, L.P., the general partner of Bear Stearns Merchant Banking.

(3)          Shares of common stock beneficially owned are based on a Schedule 13G filed on February 12, 2007 by Perry Corp. and Richard C. Perry.

(4)          Includes beneficial ownership of 542,570 shares of restricted stock and/or common stock for which Mr. Roseman holds options exercisable on or within 60 days of March 27, 2007.

(5)          Includes beneficial ownership of 336,779 shares of restricted stock and/or common stock for which Mr. Gilpin holds options exercisable on or within 60 days of March 27, 2007.

(6)          Includes beneficial ownership of 121,913 shares of restricted stock and/or common stock for which Ms. Schwartz holds options exercisable on or within 60 days of March 27, 2007.

(7)          Includes beneficial ownership of 119,828 shares of restricted stock and/or common stock for which Mr. Rothman holds options exercisable on or within 60 days of March 27, 2007.

(8)          Includes beneficial ownership of 135,297 shares restricted stock and/or common stock for which Mr. Pimbley holds options exercisable on or within 60 days of March 27, 2007.

(9)          Mr. King is a Senior Managing Director of Bear, Stearns & Co. Inc. and an Executive Vice President of Bear Stearns Merchant Banking, LLC, an affiliate of BSMB/ACA LLC. Mr. King disclaims beneficial ownership of any of the shares of common stock owned by BSMB/ACA LLC, except to the extent of his pecuniary interest therein, if any.

(10) Mr. Barse is President and Chief Executive Officer of Third Avenue Management, LLC, an affiliate of Third Avenue Trust. Mr. Barse disclaims beneficial ownership of any of the shares of common stock owned by Third Avenue Trust, except to the extent of his pecuniary interest therein, if any.

(11) Mr. Berylson is Chairman and Chief Executive Officer of Chestnut Hill Ventures, LLC, an affiliate of Chestnut Hill ACA, LLC. Mr. Berylson disclaims beneficial ownership of any of the shares of common stock owned by Chestnut Hill ACA, LLC, except to the extent of his pecuniary interest therein, if any.

(12) Includes beneficial ownership of 15,677 shares of restricted stock and/or common stock for which Mr. Jacobs hold options exercisable on or within 60 days of March 27, 2007.

(13) Mr. Juneja is a Managing Director of Bear, Stearns & Co. Inc. and Bear Stearns Merchant Banking, LLC, an affiliate of BSMB/ACA LLC. Mr. Juneja disclaims beneficial ownership of any of the shares of common stock owned by BSMB/ACA LLC, except to the extent of his pecuniary interest therein, if any.

(14) Includes beneficial ownership of 15,677 shares of restricted stock and/or common stock for which Mr. Lacy hold options exercisable on or within 60 days of March 27, 2007.

(15) Mr. Stephens is President and Chief Executive Officer of SF Holding Corp. (f/k/a Stephens Group, Inc.). Mr. Stephens may be deemed to have beneficial ownership of any of the shares of common stock owned by SF Holding Corp.

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our executive officers and directors, and other persons who own more than ten percent (10%) of our outstanding common stock, to file reports of their stock ownership and changes in their ownership of our common stock with the SEC and the NYSE. These same people must also furnish us with copies of these reports.

We have helped our executive officers and certain directors who have requested our assistance to prepare and file the required reports. We have established procedures whereby the executive officers and those directors provide us with the relevant information regarding their transactions in our shares. Based on this information, we prepare and file the required ownership reports on behalf of the executive officers and those directors.

We have performed a general review of the reports prepared and filed either by us or by the filers themselves in 2006. In addition, our executive officers and directors have made written statements to us regarding their ACA common stock ownership. Based on this review of these reports and representations from reporting persons received by us, to our knowledge all our executive officers and directors, and other persons who own more than ten percent (10%) of our outstanding common stock, have fully complied with the reporting requirements of Section 16(a), with the following exceptions:

·       In connection with our IPO, Form 3s were required to be filed by each of William H. Lacy, John G. Berylson, Warren A. Stephens and SF Holding Corp. by November 9, 2006. However, due to delays in receiving the required SEC filing codes, these Form 3s were not filed until November 13, 2006.

·       Form 3s for Drawbridge Special Opportunities Fund LP and Banc of America Strategic Investments Corp. that were also required to be filed by November 9, 2006 were inadvertently not filed until November 15, 2006 (the Banc of America Strategic Investments Corp. filing was amended on November 20, 2006 to add Bank of America Corp /DE/).

·       Form 3s of Life Investors Insurance Company of America and Transamerica Life Insurance Company, as well as their Form 4s disclosing the conversion of our convertible preferred shares into shares of our common stock, were filed on November 9, 2006 but inadvertently listed the wrong entity names. Filings with the correct entity names were made on November 28, 2006.

·       Section 16 filings may have been required to be made by Messrs. Ingato, Larson and Willkomm who are signatories to the stockholders agreement and, therefore, may be deemed members of a greater than 10% ownership group for Section 16 purposes. Although Form 3s were inadvertently not filed for these individuals, Form 5s were timely filed on February 14, 2007.

·       Form 4s for Messrs. Gilpin and Pimbley disclosing their respective purchase of shares of our common stock were inadvertently filed one day late on December 18, 2006.

COMPENSATION DISCUSSION AND ANALYSIS

General Philosophy.   Our Company is guided by compensation principles directed at attracting, retaining and motivating the most qualified executives for their respective positions and responsibilities. The compensation system is intended to reward superior performance, which is evaluated in part based on contributions to, and increases in, stockholder value. The principal objectives of our Company’s compensation program with respect to our named executive officers are as follows:

·       Establish the most direct connection between the executive’s compensation and his or her performance;

·       Establish current compensation at market competitive levels;

·       Provide for clear alignment between the financial interests of the executive with the broader financial interests of the stockholders by ensuring that the mix of current and long-term compensation strongly promote long-term value creation and liquidity; and

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·       Establish a system that is simply understood, efficient to administer and embodies a commitment to the equitable distribution of compensation across departments based on relative performance and contribution.

2006 Compensation Elements.   Our senior management compensation program is overseen by our compensation committee which consists entirely of non-management directors and is composed of two primary components: cash compensation and equity compensation.

(1)         Annual Cash Compensation.   The annual cash compensation component is comprised of base salary and cash bonuses and is intended to drive near-term performance. Our Company strives to set current compensation within the competitive context at levels that are designed to attract top talented professional and related staff, while acknowledging that the Company is somewhat unique and a direct market comparable must be synthesized from various compensation survey data sources. In 2005 and 2006, the compensation committee engaged the firm of McLagan Partners to assist in benchmarking pay levels against the comparable market to support the attraction and retention of qualified management and related staff. Annual cash compensation is targeted to comprise approximately 70%-80% of an executive’s total compensation.

·        Base Salary.   In determining each executive’s base salary, our Company evaluates each executive’s position, experience and performance with reference to the responsibilities of each such individual and market salaries for comparable positions. In order to retain top talented professionals, our Company believes it necessary to set base salaries at least at market medians and to grant cost of living salary increases from time to time. The hiring and salary decisions as they relate to executive management are approved by our Company’s compensation committee.

·        Cash Bonuses.   A meaningful portion of the annual cash compensation is made in the form of an incentive bonus, which is linked to measurable performance metrics established at the beginning of the year. The performance guidelines are a function of objective standards of our Company’s financial performance, the executive’s departmental performance and the senior executive’s individual performance as against defined individual objectives. Such performance criteria include return on equity, operating net income, and net economic margin. For the CEO’s compensation, achievement of these corporate performance goals is weighted 80% and the achievement of qualitative strategic and management goals is weighted 20%. For the other named executive officers, the weighting of corporate goals ranges from 40%-60%, objective departmental financial goals are weighted 30%-50% and individual goals are weighted 10%. Based on performance, actual bonus payments to our Company’s employees can range from 5-10% of base salary for the lowest bonus level to 70%-500% for the highest bonus level. The specific bonus range assigned to an individual relates to the job responsibilities and achievements of that individual and is not specifically tied to the individual’s title. Each of the named executive officers, other than our CEO, are in the second highest bonus level, entitling them, subject to performance both by the individual and our Company and to the approval of the compensation committee, to a bonus in the range of 60% to 400% of their base salary. Our CEO is in the highest bonus level, entitling him, subject to his own performance and the performance of our Company and to the approval of the Compensation Committee, to a bonus between 70% and 500% of his base salary.

(2)         ACA Stock Incentive Plan.   As a component of the annual bonus awarded to senior executives, participation in the Amended and Restated 2006 Stock Incentive Plan has been offered as long term-incentive, intended to align the interests of these senior executives with the long-term growth objectives of our Company’s stockholders. Although the plan comprehends a variety of long-term incentive awards, only stock options and restricted stock have been awarded. The individual long-term incentive awards are based on a percentage target of overall compensation

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as well as the senior executive’s level of responsibility and potential impact on stockholder value. Stock options and restricted stock are granted the night before the fourth Quarter Earnings announcement and all options are granted with a fair market value exercise price. Options granted vest ratably every six (6) months over a 42-month period from the date of grant and restricted stock vests one-fourth (1¤4) annually on each of the first four anniversaries of the date of grant.

Our summary compensation table for the year ended December 31, 2006 includes certain other amounts earned or paid to our named executive officers, including amounts contributed to such executive officers under the employer matching portion of the Company’s 401(k) plan. In addition, we provide standard employee health and reimbursement benefits to our named executive officers which we believe is industry competitive and necessary to attract and retain key individuals.

Our named executive officers are parties to employment agreements. These agreements were individually negotiated and will continue in their current forms until such time as the compensation committee determines in its discretion that revisions are advisable. Each of our named executive officers has a provision in his employment agreement providing for certain severance benefits in the event of a termination without cause or as a result of a “constructive termination.”  These severance benefits are designed to reflect the fact that it may be difficult for our named executive officers to find comparable employment within a short period of time, as well as to ensure that the executives are properly compensated for releasing our Company from any and all claims against it and adhering to the post-termination non-competition and non-solicitation covenants found in their agreements. In addition, on a change of control, the agreements provide for the accelerated vesting of the stock options and restricted stock held by the CEO and the CFO. Accelerated vesting encourages our CEO and CFO to remain employed with our Company through the consummation of a transaction, which is beneficial to our stockholders. The agreement for the CEO also contains a gross-up for certain excise taxes that may be payable by the executive in the event of a change of control. These employment agreements are more fully described under “Compensation of Executive Officers—Employment Agreements” section below and the severance and change of control payments are more fully described under “Compensation of Executive Officers—Potential Payments Upon Termination or Change-of-Control” below.

Individual determinations for the current compensation for each employee below our CEO and senior executives are the responsibility of our CEO and the group managers. Our CEO shall insure that all individual positions are market priced on a current basis.

COMPENSATION COMMITTEE REPORT

The Compensation Committee Report that follows will not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement or future filings into any filing under the Securities Act of 1933, as amended (the “Securities Act”) or under the Exchange Act except to the extent that we specifically incorporate the information by reference, and will not otherwise be deemed filed under these Acts.

The compensation committee has reviewed the above Compensation Discussion and Analysis and discussed its contents with management. Based on its review and discussions with management, the compensation committee recommended to our Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

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COMPENSATION OF EXECUTIVE OFFICERS

Summary Compensation Table

The following table shows the 2006 compensation of our CEO, our CFO and each of our three most highly compensated executive officers other than the CEO and CFO serving as of December 31, 2006. We refer to these five executive officers as the “named executive officers.”

(1)             Represents the amount of compensation cost recognized by our Company for 2006 over the requisite service period with respect to restricted stock awards granted in 2006 and previous fiscal years, as computed in accordance with FAS 123(R). A discussion of the assumptions underlying the valuation of 2006 awards is  provided in Note 15 to the financial statements included within the 2006 Form 10-K. Effective January 1, 2006, the Company adopted FAS 123(R) using the prospective method. For disclosure in this table, compensation cost for restricted stock awards outstanding at the time our Company adopted FAS 123(R) has been estimated as if our Company utilized the modified prospective transition method. The underlying valuation of these awards assumes a volatility of 0%, a discount rate between 3.29% and 5.25%, an expected life of 3 years, and dividend yield of 0%.

(2)             Represents the amount of compensation cost recognized by our Company for 2006 over the requisite service period with respect to stock option awards granted in 2006 and previous years, as computed in accordance with FAS 123(R). A discussion of the assumptions underlying the valuation of 2006 awards is  provided in Note 15 to the financial statements included within the 2006 Form 10-K. Effective January 1, 2006, the Company adopted FAS 123(R) using the prospective method. For disclosure in this table, compensation cost for stock option awards outstanding at the time our Company adopted FAS 123(R) has been estimated as if our Company utilized the modified prospective transition method. The underlying valuation of these awards assumes a volatility of 0%, a discount rate between 3.29% and 5.25%, an expected life of 3 years, and dividend yield of 0%.

(3)             Amounts reflect payments of performance-based annual cash incentive awards for 2006 performance. See “Compensation Discussion and Analysis” above and “—Grant of Plan Based Awards Table” below.

(4)             Amount includes (i) $15,000 matching contribution under our Company’s 401(k) savings plan, and (ii) an allowance of $20,000 for executive benefits and the promotion of the business of our Company and its subsidiaries.

(5)             Amount includes (i) $15,000 matching contribution under our Company’s 401(k) savings plan, and (ii) an allowance of $10,000 for executive benefits and the promotion of the business of our Company and its subsidiaries.

(6)             Amount includes $15,000 matching contribution under our Company’s 401(k) savings plan.

(7)             Amount includes $15,000 matching contribution under our Company’s 401(k) savings plan.

(8)             Amount includes $15,000 matching contribution under our Company’s 401(k) savings plan.

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Grants of Plan-Based Awards Table

The following table provides information about plan-based awards made to the named executive officers in respect of 2006.

(1)             These are the grant dates for the equity based awards.

(2)             Amounts reflect payments of performance-based annual cash incentive awards for 2006 performance. Amounts were paid based on objective standards of our Company’s financial performance, the executive’s departmental performance and the executive’s individual performance. For our CEO’s compensation, achievement of these corporate performance goals was weighted 80% and the achievement of qualitative strategic and management goals was weighted 20%. For the other named executive officers, the weighting of corporate goals ranged from 40% - 60%, objective departmental financial goals were weighted 30% - 50% and individual goals were weighted 10%. See “Compensation Discussion and Analysis” above.

(3)             These restricted stock awards were granted pursuant to the Amended and Restated 2006 Stock Incentive Plan. See 
“—Outstanding Equity Awards at 2006 Fiscal Year-End.”

(4)             These stock options were granted pursuant to the Amended and Restated 2006 Stock Incentive Plan. See “—Outstanding Equity Awards at 2006 Fiscal Year-End.”

(5)             Represents the grant date fair value with respect to awards granted in 2006, as computed in accordance with FAS No. 123R. A discussion of the assumptions underlying the valuation of 2006 awards is provided in Note 15 to the financial statements included in the 2006 Form 10-K.

Employment Agreements

Set forth below is a summary of the employment agreements we have with each of our named executive officers. This summary is qualified in its entirety by the detailed provisions of the individual employment agreements. You may refer to the exhibits of our registration statement on Form S-1, as

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amended, File No. 333-133949 (“Form S-1”), our Quarterly Report on Form 10-Q for the quarter ending September 30, 2006, as well as our 2006 Form 10-K, each on file with the SEC and available on the SEC’s EDGAR database at www.sec.gov for copies of these employment agreements.

Alan S. Roseman.   We have entered into an employment agreement with Alan S. Roseman our President, CEO and Deputy Chairman of our Board. Mr. Roseman’s agreement provides for a term ending on September 30, 2009. Mr. Roseman’s employment will be automatically renewed for successive one year periods, unless either the Company or Mr. Roseman provides three months’ written notice of intent not to renew the employment agreement. The non-renewal of the employment agreement is not a termination entitling Mr. Roseman to severance. Mr. Roseman’s base salary for 2006 was $650,000 and Mr. Roseman was eligible for an annual incentive award with a bonus ranging between 70% and 500% of his annual base salary. In addition, Mr. Roseman was granted 55,869 restricted shares of our Company’s series B senior convertible preferred stock, which was converted into 335,214 shares of common stock concurrently with the closing of our IPO. Two-thirds of these shares have vested and the remaining one-third is scheduled to vest on September 30, 2007. If a “change of control” of the Company, as defined in the employment agreement, occurs during his employment, Mr. Roseman’s restricted stock and stock options will become fully vested.

In connection with a “change of control”, Mr. Roseman will be entitled to a gross-up for any excise taxes imposed on him by section 4999 of the tax code.

If we terminate Mr. Roseman for “cause,” as defined in the employment agreement, we are required to pay him his base salary through the date of termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him but not yet paid and other benefits in accordance with our applicable plans and programs.

If we terminate Mr. Roseman’s employment without cause or if he terminates his employment as a result of a “constructive termination,” as defined in the employment agreement, we are required to pay him his base salary through the date of termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him but not yet paid and other benefits in accordance with our applicable plans and programs. In addition, upon his execution of a release of all claims against us, Mr. Roseman will be entitled to (i) a pro-rata annual incentive award for the year of termination calculated on the basis of the prior year’s annual incentive award paid to Mr. Roseman, (ii) a lump sum severance payment equal to two times his base salary as of the date of termination, (iii) full vesting of all restricted stock and stock options and (iv) payment of COBRA premiums for the entire period of eligibility and continued participation in all of our welfare plans until the earlier of one year from termination or the receipt of equivalent coverage from a subsequent employer. Additionally, the post-termination exercise period of Mr. Roseman’s stock options granted on or after November 9, 2006 is one year from the date of termination.

Mr. Roseman is subject to standard non-competition, non-solicitation and confidentiality covenants.

Edward U. Gilpin.   We have entered into an employment agreement with Edward U. Gilpin, our CFO and Executive Vice President. Mr. Gilpin’s agreement provides for a three-year term ending on September 30, 2007. The term of employment will be automatically renewed for successive one year periods, on the same terms and conditions set forth in the employment agreement, unless our Company or Mr. Gilpin provides 60 days’ written notice of intent not to renew the employment agreement. The non-renewal of the employment agreement is not a termination entitling Mr. Gilpin to severance. Mr. Gilpin’s base salary for 2006 was $400,000 and he was eligible for an annual incentive award with a target bonus of 100% of his annual base salary.

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If Mr. Gilpin is terminated for “cause”, as defined in his agreement, we are required to pay him his base salary through the date of the termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him but not yet paid and other benefits in accordance with our applicable plans and programs.

If we terminate Mr. Gilpin’s employment without “cause” or if he terminates his employment as a result of a “constructive termination,” as defined in the employment agreement, we are required to pay him his base salary through the date of termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him but not yet paid and other benefits in accordance with our applicable plans and programs. In addition, upon the execution of a release of all claims against us, Mr. Gilpin will be entitled to (i) a pro-rata annual incentive award for the year of termination, (ii) a lump sum severance payment equal to two times his base salary as of the date of termination and (iii) payment of COBRA premiums for the entire period of eligibility and continued participation in all of our welfare plans until the earlier of one year from termination and equivalent coverage from a subsequent employer. Additionally, all of Mr. Gilpin’s stock options and restricted stock shall immediately vest upon the occurrence of a “change of control,” as defined in the employment agreement.

Mr. Gilpin is subject to standard non-competition, non-solicitation and confidentiality covenants.

Other Named Executive Officers.   We have entered into employment agreements with Laura U. Schwartz, a Senior Managing Director, James A. Rothman, a Senior Managing Director and Joseph M. Pimbley, an Executive Vice President (collectively, the “Executives”). Each agreement provides for a three-year term ending on September 30, 2007. The term of employment will be automatically renewed for successive one year periods, on the same terms and conditions set forth in each of the employment agreements, unless either the Company or the Executive provides 60 days’ written notice of intent not to renew the employment agreement. The non-renewal of their employment agreements is not a termination entitling the Executives to severance. Each of their base salaries for 2006 was $275,000. Each Executive is eligible for an annual incentive award with a target bonus of 100% of annual base salary.

If an Executive is terminated for “cause”, as defined in each employment agreement, we are required to pay such Executive his or her base salary through the date of the termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him or her but not yet paid and other benefits in accordance with our applicable plans and programs.

If we terminate an Executive’s employment without cause or if he or she terminates his or her employment as a result of a “constructive termination,” as defined in his or her employment agreement, we are required to pay such Executive his or her base salary through the date of termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him or her but not yet paid and other benefits in accordance with our applicable plans and programs. In addition, upon the execution of a release of all claims against us, the Executive will be entitled to (i) a pro-rata annual incentive award for the year of termination, (ii) a lump sum severance payment equal to one year of base salary as of the date of termination and (iii) payment of COBRA premiums for the entire period of eligibility and continued participation in all of our welfare plans until the earlier of one year from termination and equivalent coverage from a subsequent employer.

The Executives are subject to standard non-competition, non-solicitation and confidentiality covenants.

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Outstanding Equity Awards at 2006 Fiscal Year-End

       (1) Vest in equal installments on each of the next three 6 month anniversaries of November 10, 2006.

       (2) These shares will vest on September 30, 2007.

       (3) Vest in equal installments on each of the next five 6 month anniversaries of February 9, 2007.

       (4) Vest in equal installments on the next four anniversaries of November 10, 2006.

       (5) Vest in equal installments on each of the next seven 6 month anniversaries of November 10, 2006.

       (6) Vest in equal installments on the next four anniversaries of November 10, 2006.

       (7) Vest in equal installments on each of the next three 6 month anniversaries of November 10, 2006.

       (8) Vest in equal installments on each of the next five 6 month anniversaries of February 9, 2007.

       (9) Vest in equal installments on each of the next seven 6 month anniversaries of November 10, 2006.

(10) Vest in equal installments on the next four anniversaries of November 10, 2006.

(11) Vest in equal installments on each of the next three 6 month anniversaries of November 10, 2006.

(12) Vest in equal installments on each of the next five 6 month anniversaries of February 9, 2007.

(13) Vest in equal installments on each of the next seven 6 month anniversaries of November 10, 2006.

(14) Vest in equal installments on the next four anniversaries of November 10, 2006.

(15) Vest in equal installments on each of the next three 6 month anniversaries of November 10, 2006.

(16) Vest in equal installments on each of the next five 6 month anniversaries of February 9, 2007.

(17) Vest in equal installments on each of the next seven 6 month anniversaries of November 10, 2006.

(18) Vest in equal installments on the next four anniversaries of November 10, 2006.

(19) Vest in equal installments on each of the next three 6 month anniversaries of November 10, 2006.

(20) Vest in equal installments on each of the next five 6 month anniversaries of February 9, 2007.

(21) Vest in equal installments on each of the next seven 6 month anniversaries of November 10, 2006.

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Option Exercise and Stock Vested

 

Potential Payments Upon Termination or Change-of-Control

Severance Benefits Provided Pursuant to Employment Agreements

Under the terms of their respective employment agreements, the named executive officers are entitled to severance and other benefits following certain terminations of their employment. These benefits are summarized below. The amounts of potential post employment payments and benefits assume that the termination occurred on December 31, 2006.

Alan S. Roseman.   If we terminate Mr. Roseman’s employment without cause or if he terminates his employment as a result of a “constructive termination,” as defined in his employment agreement, we are required to pay him his base salary through the date of termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him but not yet paid and other benefits in accordance with our applicable plans and programs. In addition, upon his execution of a release of all claims against us, Mr. Roseman will be entitled to (i) a pro-rata annual incentive award for the year of termination calculated on the basis of the prior year’s annual incentive award paid to Mr. Roseman, (ii) a lump sum severance payment equal to two times his base salary as of the date of termination, (iii) full vesting of all restricted stock and stock options and (iv) payment of COBRA premiums for the entire period of eligibility and continued participation in all of our welfare plans until the earlier of one year from termination or the receipt of equivalent coverage from a subsequent employer.

Edward U. Gilpin.   If we terminate Mr. Gilpin’s employment without cause or if he terminates his employment as a result of a “constructive termination,” as defined in his employment agreement, we are required to pay him his base salary through the date of termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him but not yet paid and other benefits in accordance with our applicable plans and programs. In addition, upon the execution of a release of all claims against us, Mr. Gilpin will be entitled to (i) a pro-rata annual incentive award for the year of termination, (ii) a lump sum severance payment equal to two years of base salary as of the date of termination and (iii) payment of COBRA premiums for the entire period of eligibility and continued participation in all of our welfare plans until the earlier of one year from termination and equivalent coverage from a subsequent employer.

Other Named Executive Officers.   If we terminate a named executive officer’s employment without cause or if he or she terminates his or her employment as a result of a “constructive termination,” as defined in his or her employment agreement, we are required to pay such executive his or her base salary through the date of termination, accrued but unused vacation pay, any other amounts earned, accrued or owing to him or her but not yet paid and other benefits in accordance with our applicable plans and programs. In addition, upon the execution of a release of all claims against us, the executive will be entitled to (i) a pro-rata annual incentive award for the year of termination, (ii) a lump sum severance payment equal to one year of base salary as of the date of termination and (iii) payment of COBRA premiums for the entire period of eligibility and continued participation in all of our welfare plans until the earlier of one year from termination and equivalent coverage from a subsequent employer.

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