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

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

April 1 2011

On March 30, 2011, the Securities and Exchange Commission voted unanimously to propose 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 proposed rules include:

  • 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 make any requirements of companies; rather they direct stock exchanges like the NYSE and NASDAQ to reexamine their listing standards.  All standards will require SEC approval before they can be adopted.  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
The biggest surprise is that the SEC delegated all major decision-making to the exchanges.  Nothing contained in these proposed rules differs in substance or specifics from the Dodd-Frank Act.

We believe our firm is in compliance with the independence standards set forth in these proposed rules.  Our independence is critical to our reputation and livelihood, and we guard it vigilantly.  We do not provide services to management without the prior approval of the Compensation Committee and we do not provide any services except those relating to executive compensation, board remuneration and related corporate governance.

Listing Standards Regarding Compensation Committees
Independence of Compensation Committee Members
As proposed, the new listing standards will require Compensation Committee members 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
The proposed rules would 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, payment and oversight of compensation advisors
  • Must be appropriately funded by the listed company

Listing Standards Regarding Compensation Advisor Independence
As proposed, the new listing standards will require the Compensation Committee to consider the following five independence factors when selecting a compensation advisor:

  • Other services the advisor’s firm provides to the company
  • Amount of fees the advisor’s firm receives from the company
    • Both in total dollars and as a percentage of 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

The exchanges can also impose additional considerations.

New Disclosure Requirements
The proposed rules also include new disclosure requirements.  Companies would have to disclose in their annual proxy statements whether the Compensation Committee retained a compensation consultant, whether the consultant’s work raised any potential conflicts of interest, and how any such conflict was addressed.

The proposed rules eliminate the current disclosure exception for consulting services on broad-based plans and providing non-customized benchmark data.  However, they retain the current fee disclosure requirements as well as the exemptions regarding those requirements.

Exemptions
The proposed rules provide for exemptions of companies in the following five categories:

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

Additionally, exchanges are authorized to exempt certain relationships from the Compensation Committee member independence requirements and certain categories of companies, such as small companies, from all of the requirements.

Next Steps
The public comment period on the rule proposal runs through April 29, 2011.  The Dodd-Frank Act requires final rules to be adopted by July 16, 2011, but there is no deadline for the exchanges to act, making timing of implementation impossible to predictable.

SEC Links
SEC Rule Proposal
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PDF:  SEC Proposes Rules for Listing Standards for Compensation Committees as Required Under Dodd-Frank Act