As I discussed last week, on June 20th the SEC issued its Final Rule on Compensation Committee Independence under Dodd-Frank Act Section 952, which includes rules on the independence of advisers. The SEC’s final rules do not require a Compensation Committee to retain independent legal counsel. However, the SEC rule provides that a Compensation Committee is required to conduct the independence assessment using the six independence factors* set forth in Rule 10C-1(b)(4) with respect to any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee, other than in-house legal counsel.
Wow. In corporate America, most Compensation Committees still seek and receive advice from executive compensation partners at the company’s regular corporate law firm. Many Compensation Committees have retained independent legal counsel in recent years, but certainly not the majority of them. Those Compensation Committees who have not retained independent legal counsel will need to grapple with questions/factors 1 and 2 below, just as they once did for their compensation consultant.
We all have seen this movie before – only staring the compensation consultants instead of legal counsel, and we all know how it ends. In light of that expectation, other possible titles I considered for this Blog were:
- Compensation Counsel Gets "Consultantized."
- Now it is Compensation Counsels’ Turn to Get the "Independence’ Treatment.”
The SEC considered and expressly rejected the position that a compensation committee conferring with or soliciting advice from the issuer’s in-house or regular outside legal counsel would not be required to consider the independence factors with respect to such counsels. The SEC also considered and expressly rejected the position “that a compensation committee should be required to consider the independence factors only when the committee itself selects a compensation adviser, but not when it receives advice from, but does not select, an adviser.”
Committees should undertaking this assessment before year end 2012, in time for any changes in the relationship or disclosure in the 2013 proxy statement.
Later this week, we will look at a couple of the other issues raised by this new rule, including:
- How will the proxy advisory services react to this new rule and the disclosure it produces?
- At some point, could legal counsel be deemed to be acting as a "consultant" under the new rule (consultants are subject to much more stringent independence and disclosure requirements), e.g., where the Committee does not have an independent compensation consultant in the picture?
*The new SEC rule adds an additional independence factor to the five factors set forth in Dodd-Frank Act 952, which compensation committees must consider before selecting a compensation adviser. The final rule directs the exchanges to adopt listing standards that require a compensation committee to take into account any business or personal relationships between the executive officers of the issuer and the compensation adviser or the person employing the adviser. This would include, for example, situations where the CEO and the compensation adviser have a familial relationship or where the CEO and the compensation adviser (or the adviser’s firm) are business partners. Thus, the six independence factors are as follows:
- The provision of other services to the company by the firm that “employs” [most advisers will be partners] the legal counsel;
- The amount of fees received from the company by the firm that employs the legal counsel, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel, or other adviser;
- The policies and procedures of the firm that employs the legal counsel, which are designed to prevent conflicts of interest;
- Any business or personal relationship of the legal counsel with a member of the compensation committee;
- Any stock of the company owned by the legal counsel, or other adviser;
- Any business or personal relationships between the executive officers of the company and the compensation adviser or the firm employing the adviser.