On June 20, 2012, the SEC promulgated its final rules pursuant to key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act regulating the independence of compensation committees. The rules direct national stock exchanges to adopt new listing requirements prohibiting any issuer from listing securities without complying with certain compensation committee independence standards. The national exchanges, including the New York Stock Exchange and NASDAQ, must propose their new listing standards by September 25, 2012, with final implementation occurring no later than June 27, 2013.
The SEC has not defined independence for purposes of the new rules, but the rules require the national exchanges to establish their own definitions taking into account all relevant factors, including the source of the committee member's compensation and his or her relationship to the issuer and its affiliates. The independence requirements apply to an issuer's designated compensation committee, or, if no such committee exists, to whichever committee or members perform duties similar to those of a compensation committee. The exchanges are further required to provide a reasonable opportunity to cure any independence violations before an issuer may be delisted.
Under the new listing standards, listed issuers will be required to grant compensation committees the authority to engage independent compensation consultants or other advisers, and to provide funding for that purpose. However, the rules require a compensation committee to assess the independence of any consultants before receiving advice. The SEC's final rule lists several factors a compensation committee must consider when engaging a consultant, including the nature of the relationship between the consultant, the consultant's employer, and the issuer.
As mandated by Dodd-Frank, the new rules also expand the scope of required disclosure regarding compensation consultants. The rules amend Item 407 of Regulation S-K, adding a provision requiring issuers to disclose whether or not any conflicts of interest arose during a compensation consultant's engagement and how the conflict was addressed.
S.E.C. Rel. Nos. 33-9330; 34-67220 (June 20, 2012)