Section 952(b) of the Dodd-Frank Act, "Independence of Compensation Consultants and Other Compensation Committee Advisers," added a new Section 10C to the Securities and Exchange Act of 1934, which provides that:
- The compensation committee may only select a compensation consultant or legal counsel after taking into consideration factors identified by the SEC; and
- The company must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to an independent compensation consultant or legal counsel.
The SEC proposed rules on adviser independence in March 2011, and recently announced that it planned to adopt final rules in the September to December 2011 time frame. After the SEC publishes its final rules, the stock exchanges will have a period of time to amend their listing standards before the rules become fully effective for publicly traded companies.
Clearly Dodd-Frank Act Sec. 952(b) does not require a Compensation Committee to retain separate counsel.
However, the question is becoming: Should the Compensation Committee retain separate, independent legal counsel as a best practice?
The SEC has not issued rules on this Dodd-Frank provision and this is a rapidly evolving area, but our current thinking is that the answer is: "Generally, no, with some exceptions."
For most Compensation Committees, for most matters, regular executive compensation and securities counsel can more than adequately explain the tax, securities law, market, and best practices issues facing the Committee. Compensation committees expect to get complete and accurate advice from regular corporate counsel, particularly since the corporation itself, represented by the board of directors or compensation committee is the counsel's client, not the executives. Additionally, most Committees retain an independent compensation consultant and rely on it for advice on market competitiveness, peer group, ISS concerns, etc.
Tomorrow, I will discuss some special circumstances where using independent legal counsel could be a best practice.
On September 20,1881, Chester A. Arthur was inaugurated as the 21st President following the assassination of James Garfield by a deranged office seeker (is there any other kind?), after only 200 days in office. When Garfield (an Ohio Congressman and Civil War General) won the Republican nomination for President in 1880, Arthur was nominated for Vice President to balance the ticket by adding an easterner to it. Arthur then lost his bid for the Republican nomination as candidate in the 1884 election to James G. Blaine who in turn lost the general election to Grover Cleveland.