On June 20, 2012, the United States Securities and Exchange Commission adopted Rule 10C-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and adopted an amendment to its existing proxy disclosure rules. Rule 10C-1 requires national securities exchanges, such as the New York Stock Exchange, and FINRA on behalf of the NASDAQ Stock Market (collectively, the “Exchanges”), to establish listing standards that, among other things:

  • Provide independence standards for compensation committee members or board of director members responsible for performing the functions generally allocated to compensation committees
  • Require each member of an issuer’s compensation committee to be a member of such issuer’s board of directors and to satisfy the applicable Exchange’s new independence standards for compensation committee members
  • Require compensation committees to consider six independence factors relating to any compensation consultants, independent legal counsel or other advisers they seek to retain (which the SEC refers to collectively as “Compensation Advisers”)
  • Establish the compensation committee as being responsible for the appointment, compensation and oversight of Compensation Advisers

The amendment to the existing proxy disclosure rules requires additional disclosures relating to any conflicts of interests that arise as a result of the services provided by Compensation Advisers. The new rule and amendment implement Section 10C of the Exchange Act, which was enacted pursuant to Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This provision of the Dodd-Frank law is aimed at enhancing corporate accountability to shareholders for executive compensation practices.

Rule 10C-1


The listing standards promulgated by the Exchanges pursuant to Rule 10C-1 will be applicable to compensation committees that have been formally designated as such, as well as any committee of the board of directors that performs functions typically performed by a compensation committee. With the exception of standards relating to a compensation committee’s authority to retain Compensation Advisers and required funding for payment of such Compensation Advisers, an Exchange’s new listing standards will also apply to members of an issuer’s board of directors that oversee executive compensation matters without being structured as a formal committee. Thus, whenever we reference independence standards applicable to compensation committees in this Alert, such standards are equally applicable to any members of the board of directors who oversee executive compensation matters on behalf of the board of directors.

Compensation Committee Membership Independence Requirements

Rule 10C-1 requires that the Exchanges adopt listing standards that require the members of an issuer’s compensation committee be independent and be members of such issuer’s board of directors. The rule also requires that the Exchanges define “independence” as it relates to compensation committee members after taking into consideration all factors such Exchanges deem relevant, which must include, without limitation:

  • A director’s source of compensation, including any consulting, advisory or other compensatory fees paid to the director by the issuer
  • Whether a director is affiliated with the issuer, a subsidiary of the issuer or any affiliate of a subsidiary of the issuer

Despite the requirement to consider the above two factors, it is notable that Rule 10C-1 does not require the Exchanges to adopt listing standards that prohibit directors that receive compensatory fees from, or that are affiliates of, an issuer from being deemed independent. The Exchanges may, therefore, adopt independence criteria that differ significantly from that applicable to members of an issuer’s audit committee.

Authority to Retain and Funding for Compensation Advisers

Pursuant to Rule 10C-1, Exchanges are required to adopt listing standards providing that:

  • The compensation committee may, in its sole discretion, retain or obtain the advice of a Compensation Adviser
  • The compensation committee shall be directly responsible for the appointment, compensation and oversight of any Compensation Advisers
  • Each issuer must provide for appropriate funding for payment of reasonable compensation, as determined by the compensation committee, to any Compensation Adviser (regardless of independence) retained by the compensation committee

The Exchanges are not required to enact listing standards requiring compensation committees to retain independent Compensation Advisers. Pursuant to Rule 10C-1, a Compensation Adviser may include in-house counsel or non-independent outside counsel.

Compensation Adviser Independence Factors

Rule 10C-1 requires that the Exchanges adopt listing standards that require compensation committees to consider the following six independence factors before retaining or otherwise consulting with a Compensation Adviser:

  • Whether the Compensation Adviser or its employer is providing other services to the issuer
  • The amount of fees received from the issuer by the Compensation Adviser or its employer as a percentage of the total revenue of such Compensation Adviser or its employer
  • The policies and procedures of the Compensation Adviser or its employer that are designed to prevent conflicts of interest
  • Whether the Compensation Adviser has a business or personal relationship with any member of the compensation committee
  • Whether the Compensation Adviser owns any stock of the issuer
  • Whether the Compensation Adviser or its employer has a business or personal relationship with any officer of the issuer

Although the Exchanges are required to adopt the above factors, they may, subject to SEC approval, incorporate additional independence factors into their respective listing standards. The factors included in the Exchanges’ listing standards should be considered as a collective whole, with no single factor being determinative of independence. Rule 10C-1 does not require Exchanges to prohibit compensation committees from retaining the non-independent Compensation Adviser; instead, it merely requires that such committees first consider the six independence factors above as well as any others that have been adopted by the Exchange and approved by the SEC. The only situation in which the factors need not be considered before consulting a Compensation Adviser is when the Compensation Adviser is in-house counsel.

Opportunity to Cure Defects

Rule 10C-1 requires that the Exchanges provide listed companies with a reasonable opportunity to cure any failure to comply with the compensation committee listing standards. In this regard, the Exchanges may establish rules similar to those relating to the independence standards applicable to audit committee members. For example, under circumstances in which a compensation committee member ceases to be independent for reasons that are outside of that member’s control, the Exchange’s rules may permit that member to continue to serve on the compensation committee until the earlier of the issuer’s next annual shareholders’ meeting or one year from the occurrence of the event that caused the member to be no longer independent.


The new rule does not apply to “controlled companies” and “smaller reporting companies.” As such, these companies are exempt from the compensation committee listing standards, the Compensation Adviser retention, oversight and funding listing standards, and the Compensation Adviser selection criteria. A “controlled company” is a listed issuer of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company. A “smaller reporting company” is defined by existing Exchange Act Rule 12b-2.

In addition, the Exchanges are required to exempt the following companies from the compensation committee listing standards (but not the Compensation Adviser retention, oversight, funding listing standards or the Compensation Adviser selection criteria):

  • Limited partnerships
  • Companies in bankruptcy proceedings
  • Open-end management investment companies registered under the Investment Company Act of 1940
  • Foreign private issuers
  • Other categories of issuers and particular relationships as the Exchanges may deem appropriate, subject to the SEC’s approval

Compensation Adviser Proxy Disclosure Amendment

Item 407(e)(3)(iii) of Regulation S-K currently requires that companies subject to the proxy rules disclose the role of any Compensation Adviser in determining executive and director compensation. The SEC amended Item 407 by adding Item 407(e)(3)(iv) to Regulation S-K, which expands the disclosure obligations related to Item 407(e)(3)(iii). Under this new subsection, listed companies with Compensation Advisers identified pursuant to Item 407(e)(3)(iii) are required to disclose whether the Compensation Adviser’s work raised a conflict of interest and, if so, the nature of the conflict and how it is being addressed.


The Exchanges are required to provide the SEC with revised listing standards that comply with Rule 10C-1 by no later than September 25, 2012 and each Exchange must receive SEC approval of the final version of its listing standards by no later than July 27, 2013.

The new Item 407 disclosures relating to Compensation Adviser conflicts of interest must be included in proxy or information statements for shareholder meetings at which directors are to be elected occurring on or after January 1, 2013.

Impact of Rule 10C-1 and the Compensation Adviser Proxy Disclosure Amendment

It is unlikely that Exchange-listed companies will be subject to any new listing standards pursuant to Rule 10C-1 in the near future. The Exchanges must publish proposals of, solicit comments for and obtain SEC approval of such rules, and given that process and the possibility of differences in the rules enacted by the Exchanges, it is difficult to anticipate the standards that will eventually be applicable to listed companies. As discussed above, the new Item 407 disclosures are not effective with respect to shareholder meeting for the election of directors that occur prior to January 1, 2013. In the interim, it is advisable for companies that are, or expect to be, subject to the new rules or amendments to:

  • Advise their directors and officers of Rule 10C-1 and the amendments to Item 407 of Regulation S-K, including the timeline for the implementation of each
  • Continue monitoring the Exchange’s development of rules pursuant to Rule 10C-1