SEC Finalizes Rules for Listing Standards for Compensation Committees as Required Under Dodd-Frank Act

SEC Finalizes Rules for Listing Standards for Compensation Committees as Required Under Dodd-Frank Act

June 22 2012

On June 20, 2012, the Securities and Exchange Commission approved new rules concerning the listing requirements for Compensation Committees, as required under Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The final rule is little changed from the proposed rule announced in April 2011 and includes:

  • Listing Standards Regarding Compensation Committees
    • Independence of Compensation Committee Members
    • Authority and Funding of Compensation Committee
  • Listing Standards Regarding Compensation Advisor Independence
  • New Disclosure Requirements

These rules do not directly impose requirements on companies; rather they direct stock exchanges like the NYSE and NASDAQ to revise their listing standards.  New listing standards will then require SEC approval before they take effect.  Once an exchange’s new listing standards are in effect, a listed company must meet these standards in order for its shares to continue trading on that exchange.

Our View
Nothing contained in these proposed rules differs in substance or specifics from the Dodd-Frank Act or the proposal released in April 2011.

We believe independence is critical to our reputation and livelihood, and we guard it vigilantly.  We do not provide any services except those relating to executive compensation, board remuneration and related corporate governance.  When serving as advisors to a Compensation Committee, the Committee oversees all material terms of our relationships, including fee arrangements and any services to management that are separate from our service to the Committee.

Listing Standards Regarding Compensation Committees
Independence of Compensation Committee Members
The new listing standards must require a Compensation Committee member to be a member of the board of directors and independent.  Definitions of independence must consider sources of compensation of a Director and any affiliations a Director has with the company.

Authority and Funding of Compensation Committee
Exchanges must adopt listing standards which require that the Compensation Committee:

  • May, in its sole discretion, retain or obtain the advice of a compensation advisor
  • Is directly responsible for the appointment, compensation and oversight of compensation advisors
  • Must be appropriately funded by the listed company

Listing Standards Regarding Compensation Advisor Independence
The new listing standards must require the Compensation Committee to consider the following six independence factors when selecting a compensation advisor, legal counsel or other advisor:

  • Other services the advisor’s firm provides to the company
  • Amount of fees the advisor’s firm receives from the company as a percentage of the firm’s total revenue
  • Policies and procedures adopted by the compensation advisor’s firm to prevent conflicts of interest
  • Any business or personal relationship with a member of the Compensation Committee
  • Whether the compensation advisor owns any stock of the company
  • Any business or personal relationship with an executive officer of the issuer
    • This requirement was not included in the initial proposal

Listing standards adopted by the exchanges can also call for consideration of additional factors.

New Disclosure Requirements
The amended rules also include a new proxy disclosure requirement.  With respect to any consultant that played a role in determining or recommending the amount or form of executive or Director compensation, if the consultant’s work raised a conflict of interest, the proxy statement must disclose the nature of the conflict and how the conflict is being addressed.  This disclosure requirement will apply to proxy statements for annual meetings in 2013 and thereafter.

Exemptions
Smaller reporting companies and controlled companies are exempted from all requirements of the new rules.  A controlled company is one in which a shareholder or shareholder group has more than 50% of the voting power in electing directors.

The following categories of companies are exempted from the requirement that Compensation Committee members be independent:

  • Limited partnerships
  • Bankrupt companies
  • Open-end management investment companies
  • Foreign issuers who disclose their reasons for not having an independent Compensation Committee

The exchanges are permitted to propose other types of companies for exemption.

Next Steps
The new rule will take effect 30 days after publication in the Federal Register, after which date the exchanges will have 90 days to propose listing standards that comply with the new rule.  The SEC must approve the proposed standards within one year of the rule becoming effective.

SEC Links
SEC Press Release
PDF of the Final Rule

PDF of this Client Alert