Among other things, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires a company with securities listed on a national exchange to:

  • Have a compensation committee of independent directors;
  • Provide the committee with authority and funding to retain its own advisers; and
  • Have the committee assess the independence of its advisers (other than in-house counsel) before retaining the adviser or receiving the advice.

As previously announced in our January 29, 2013 client bulletin (available [here]), the NYSE and Nasdaq have adopted rules implementing the Dodd-Frank requirements.

Effective July 1, 2013, under applicable NYSE and Nasdaq rules, the compensation committee is required to consider the independence of its compensation consultant, outside legal counsel and other advisers before selecting or receiving advice from them.  There is no requirement that the committee hire or receive advice from solely independent advisers, only that it consider their independence before selecting or receiving the advice.

The independence assessment requirement is triggered not only when the committee is directly responsible for the appointment and oversight of the adviser, but also potentially when the committee receives advice indirectly from a compensation consultant, legal counsel or other adviser retained by management.

Management and in-house counsel often assist the compensation committee with its responsibilities by providing information and other assistance to the committee.  As part of this process, management may seek guidance regarding best practices, and technical tax or securities law requirements from its compensation consultant or outside counsel.  Based on informal guidance from the SEC staff, it would be advisable to consider whether outside counsel may be deemed to be providing indirect advice to the committee, based on the particular facts and circumstances, thereby triggering the independence assessment requirement.

Some examples of potential indirect advice to the committee may include advice regarding:  design of stock or bonus plans and awards for executives, preparation of executive employment or severance agreements, assistance with proxy statement compensation disclosures or compensation plan proposals and other regular securities or tax law advice.  The SEC has stated that the independence assessment is required of any consultant, outside counsel or adviser that provides advice to the committee, whether or not limited to advice on executive compensation.

The committee must review and assess the independence of its advisers by considering the following six factors (in the case of NYSE companies, in addition to any others deemed relevant):  

  1. The types of services provided by the advisory firm to the company;
  2. The amount of fees received by the advisory firm as a percentage of the total advisory firm revenue;
  3. The policies and procedures the advisory firm has in place that are designed to prevent conflicts of interest;
  4. Any business or personal relationship of the individual adviser with a member of the compensation committee;
  5. Any stock of the company owned by the individual adviser (and his or her immediate family members); and
  6. Any business or personal relationship of the individual adviser or the advisory firm with an executive officer of the company.

Note, that “smaller reporting companies” and certain other categories of companies are exempt from these requirements.  In addition, the independence assessment is not required for a compensation adviser whose role is limited to (i) consulting on any non-discriminatory broad-based plan or (ii) providing  information that is not customized for a particular company or customized based on parameters not developed by the adviser and about which the adviser does not consult.

In approving the new rules, the SEC indicated that it anticipates that committees will conduct their independence assessments at least annually.

In anticipation of the July 1, 2013 effective date of this new listing requirement, many compensation consultants, outside legal counsel and other advisers are gathering data to assist compensation committees of their public company clients with such requirement.  Some commentators recommend that compensation committees preemptively consider the independence of the company’s regular outside counsel at the committee’s next scheduled meeting, in order to avoid risk of delays in case of an unanticipated need to consider such outside counsel’s advice later in the year.

Action Items:  We recommend that each NYSE and Nasdaq company:

  • Ensure that its compensation committee is aware of this new requirement;
  • Assist the committee by preparing a list of compensation consultants, legal counsel and other advisers directly retained by the compensation committee;
  • Assist the committee and/or management in determining whether and when it would be advisable to evaluate the independence of advisers retained by management or in-house counsel that could be deemed to provide indirect advice to the committee and, if so determined, provide the committee with a list of such indirect advisers;
  • Gather any information provided by the advisers for review by the committee; and
  • Assist the committee with obtaining any additional information necessary to complete the independence assessment before retaining the adviser or receiving advice.