• SEC Adopts Rules Mandating Compensation Committee Listing Standards and Related Disclosures
  • August 28, 2012 | Author: J. Andrew Gipson
  • Law Firm: Jones Walker LLP - Jackson Office
  • On July 27, 2012, new rules of the Securities and Exchange Commission ("SEC") went into effect relating to compensation committee independence standards for listed public companies. The rules were issued by the SEC to implement Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which added Section 10C to the Securities Exchange Act of 1934. Section 10C requires the Commission to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any equity security of an issuer that is not in compliance with compensation committee and compensation adviser requirements.

    The SEC released its final rule adopting new Exchange Act Rule 10C-1, as well as amendments to Item 407 of Regulation S-K.

    New Exchange Act Rule 10C-1

    Under Rule 10C-1, the national securities exchanges and associations must adopt listing standard rules to implement new compensation committee independence requirements that will apply to compensation committees of listed companies. The term "compensation committee" includes:(i) a committee of the board designated as such, (ii) in the absence of a designated committee, a committee of the board of directors performing functions typically performed by a compensation committee, including oversight of executive compensation; or (iii) members of the board who oversee executive compensation on behalf of the board of directors.

    As directed by the SEC, the listing standards must require that each member of a company’s compensation committee be a member of the board of directors of the listed issuer, and must otherwise be independent. In determining independence requirements, the exchanges are required to consider relevant factors, including but not limited to: (i) the source of compensation of a member of the board of directors of an issuer, including any consulting, advisory, or other compensatory fee paid by the issuer to such member of the board of directors; and (ii) whether a member of the board of directors of an issuer is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

    Additionally, the listing standards must require: (i) authority of the compensation committee to retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser; (ii) that the committee be directly responsible for the appointment, compensation, and oversight of the work of any compensation consultant, independent legal counsel, and other adviser retained by the compensation committee; and (iii) that the issuer provide for appropriate funding of the committee for these purposes.

    The listing standards must also require that a compensation committee selecting compensation consultants, legal counsel, or other advisers conduct an independence assessment, taking into consideration the following factors, among others: (i) the provision of other services to the issuer by the person that employs the compensation consultant, legal counsel, or other adviser; (ii) the amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel, or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel, or other adviser; (iii) the policies and procedures of the person that employs the compensation consultant, legal counsel, or other adviser that are designed to prevent conflicts of interest; (iv) any business or personal relationship of the compensation consultant, legal counsel, or other adviser with a member of the compensation committee; (v) any stock of the issuer owned by the compensation consultant, legal counsel, or other adviser; and (vi) any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the issuer.

    The listing standard rules proposed by national securities exchanges and associations must be submitted to the SEC by September 25, 2012, and will be approved by the SEC no later than June 27, 2013. Certain exemptions may be available under the new rule and related listing standards.

    Amendments to Item 407, Regulation S-K

    In addition to Rule 10C-1, the SEC adopted conflicts of interest proxy disclosure requirements under Item 407 of Regulation S-K. The amendment includes a requirement that with regard to any compensation consultant identified under current disclosure rules whose work "has raised any conflict of interest," issuers must disclose the nature of the conflict and how the conflict is being addressed. For purposes of making the determination of whether a conflict of interest exists, issuers must consider the six factors identified under Exchange Act Rule 10C-1, discussed above.

    Issuers must comply with these new conflict of interest disclosures in any proxy or information statement for an annual meeting of shareholders (or a special meeting in lieu of the annual meeting) at which directors will be elected occurring on or after January 1, 2013.