The SEC recently issued proposed rules to implement the provisions of Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). Section 952 of the Dodd-Frank Act added new Section10Cto the Securities Exchange Act of 1934 (the “Exchange Act”) and requires the SEC to direct the national securities exchanges to adopt certain listing standards relating to the independence, authority, and compensation of compensation committees of listed companies’ boards of directors and their compensation advisers. In addition, the SEC’s proposed rules would require new disclosures from companies concerning their use of compensation consultants and the existence of conflicts of interest.
This SEC Alert will summarize the key aspects of the proposed rules.
Proposed Rules
Independence Requirements
Section10Cof the Exchange Act requires the SEC to direct the national securities exchanges to prohibit the listing of any equity security of an issuer, with certain exemptions, that is not in compliance with the independence requirements for members of the compensation committee of the board of directors of an issuer. Accordingly, the proposed rules would require the national securities exchanges to establish listing standards that require each member of a listed issuer’s compensation committee to be a member of the board of directors and to be independent. In developing a definition of independence, the national securities exchanges would be required to consider such facts as the sources of compensation of a director and whether a member of the board is affiliated with the company or its affiliates.
Authority to Engage Compensation Advisors
Section10Cof the Exchange Act also requires the SEC to direct the national securities exchanges to prohibit the listing of any security of an issuer if such issuer’s compensation committee is not in compliance with certain requirements relating to its authority. Accordingly, the proposed rules would require the national securities exchanges to adopt listing standards providing that compensation committees of listed companies:
• have the authority in its sole discretion to retain or obtain the advice of compensation advisers;
• are directly responsible for the appointment, payment, and oversight of the compensation advisers they retain; and
• are appropriately funded.
Compensation Adviser Independence
The SEC’s proposed rules would also require the national securities exchanges to adopt listing standards providing that compensation committees may select a compensation adviser only after considering the following five independence factors:
• Whether the employer of the compensation adviser is providing any other services to the issuer;
• The amount of fees received from the issuer by the employer of the compensation adviser, as a percentage of the total revenue of such employer;
• The compensation adviser’s employer’s policies and procedures that are designed to prevent conflicts of interest;
• Whether the compensation adviser has any business or personal relationship with a member of the compensation committee; and
• Whether the compensation adviser owns any stock of the issuer.
Conflicts of Interest Disclosure
Item 407 of Regulation S-K currently requires Exchange Act registrants that are subject to the proxy rules to provide certain disclosures concerning their compensation committees and the use of compensation consultants. The SEC’s proposed rules would modify the existing rules to require each issuer to disclose in any proxy or information statement relating to an annual meeting of shareholders at which directors are to be elected whether the issuer’s compensation committee retained or obtained the advice of a compensation consultant; whether the work of the composition consultant has raised any conflict of interest; and if so, the nature of the conflict and how the conflict is being addressed.
Please contact us if you would like to discuss this alert or receive additional information regarding these rule proposals.
By: Steve Kronengold and David C. Zuckerbrot. © April 2011. All rights reserved.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.