On March 30, 2011, the Securities and Exchange Commission proposed rules directing the national securities exchanges to adopt listing standards related to the compensation committee of a company as well as its compensation advisers. These rules are mandated by Section 10C of the Securities Exchange Act of 1934, which was added as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Section 10C requires the SEC to direct national securities exchanges to adopt listing standards relating to:
- the independence of the members on a compensation committee;
- the committee's authority to retain compensation advisers; and
- the committee's responsibility for the appointment, compensation and oversight of the work of any compensation adviser.
Section 10C also requires each company to modify its proxy statement disclosure regarding compensation consultants to include whether its compensation committee retained or obtained the advice of a compensation consultant, whether the work of the compensation consultant has raised any conflict of interest, and the nature of any such conflict and how it is being addressed.
The SEC's proposal, which tracks closely Section 10C, would require the exchanges to adopt listing standards that:
- Require each member of a company's compensation committee to be subject to independence requirements developed by the exchanges, considering:
- the sources of compensation of a director, including any consulting, advisory or compensatory fee paid by the company to such director; and
- whether a director of a company is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company.
- Provide that the compensation committee (a) may, in its sole discretion, retain or obtain the advice of a compensation adviser, (b) be directly responsible for the appointment, compensation and oversight of the work of any compensation advisers, and (c) be appropriately funded by the company.
- Provide that a compensation committee may select a compensation consultant, legal counsel or other adviser only after considering the following independence factors:
- Whether the compensation consulting company employing the compensation adviser is providing any other services to the company;
- How much has the compensation consulting company received in fees from the company, as a percentage of the compensation consulting company's total revenue;
- What policies and procedures have been adopted by the compensation consulting company to prevent conflicts of interest;
- Whether the compensation adviser has any business or personal relationship with a member of the compensation committee;
- Whether the compensation adviser owns any stock of the company; and
- Any other additional considerations imposed by the exchanges.
As directed by Section 10C, the proposed rules would require the exchanges to exempt the companies meeting any of the following categories from the compensation committee independence requirements:
- Controlled companies, meaning those companies that are listed on an exchange and in which 50% or more of the voting power is held by a single investor or group of investors;
- Limited partnerships;
- Companies in bankruptcy proceedings;
- Open-end management investment companies registered under the Investment Company Act of 1940; and
- Any foreign private issuer that discloses in its annual report the reasons why the foreign private issuer does not have an independent compensation committee.
The proposed rules also:
- authorize the exchanges to exempt a particular relationship from the independence requirements applicable to compensation committee members, and to exempt certain categories of issuers, as the national securities exchange or national securities association deems appropriate, from all of the requirements of the new compensation committee listing standards; and
- eliminate the current disclosure exception for services that are limited to consulting on broad-based plans or providing non-customized benchmark data, but would retain the fee disclosure requirements, including the exemptions from those requirements.
This proposed release is not the final step relating to this matter. Once the SEC reviews the comments it receives and publishes its final rule in the Federal Register, the exchanges would then have 90 days to provide the SEC with proposed rules or rule amendments and one year to have final rules or rule amendments approved by the SEC.