Will the new rules mandated by the Dodd-Frank Act for the independence of compensation committees and their advisers trickle down to the rest of corporate America like the audit committee rules of Sarbanes-Oxley did?

A summary of the new rules is as follows:

  1. Compensation committees must be composed entirely of independent directors using the independence rules for audit committees.  This generally means the directors cannot (i) be in a position of controlling, being controlled by or under common control with the organization or any of the organization’s affiliates; or (ii), subject to a few exceptions, receive compensation directly or indirectly from the organization other than directors’ fees.
  2. The compensation committee must be authorized to, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser.  This authority is required to be set forth in the compensation committee’s charter.
  3. Although compensation committees are not required to retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser, if they retain or receive advice of such a consultant, legal counsel or other adviser, the compensation committee must first take into consideration the following six factors:
  1. The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser;
  2. 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;
  3. 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;
  4. Any business or personal relationship between the compensation consultant, legal counsel or other adviser and a member of the compensation committee;
  5. Any stock of the issuer owned by the compensation consultant, legal counsel or other adviser; and
  6. Any business or personal relationship between the compensation consultant, legal counsel, other adviser or the person employing the adviser and an executive officer of the issuer.
  1. If the compensation committee retains any compensation consultant, independent legal counsel or other adviser, the compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of such consultant, legal counsel or other adviser.
  2. Although the compensation committee may retain or obtain the advice of a compensation consultant, legal counsel or other adviser, it must continue to exercise its own judgment in fulfillment of the duties of the compensation committee. Accordingly, the committee is not required to implement or act consistently with the advice or recommendations of the compensation consultant, independent legal counsel or other adviser.
  3. Finally, the organization must provide for appropriate funding, as determined by the compensation committee in its capacity as a committee of the board of directors, for payment of reasonable compensation to a compensation consultant, independent legal counsel or any other adviser retained by the compensation committee.

Currently, these rules apply only to publicly traded companies, with respect to the independence of compensation consultants, independent legal counsel or any other advisers, effective July 1, 2013.  Similar rules are mandated for federal banks. These Dodd-Frank Act rules are likely to trickle down to tax-exempt organizations as well as regulated organizations, such as insurance companies, similar to the trickle down that occurred with Sarbanes-Oxley.