SEC Issues Dodd-Frank Compensation Committee Rules

The Securities and Exchange Commission (SEC) issued final Rule 10C-1 1on Wednesday, directing securities exchanges to adopt rules requiring compliance with:

compensation committee member independence standards and rules requiring a review of the independence of certain compensation advisers retained by a compensation committee as conditions to the listing of an issuer's equity securities. 2

The SEC has required that the new rules be made applicable to any committee of the board that performs functions typically performed by a compensation committee, including oversight of executive compensation, whether or not such committee also performs other functions or is formally designated as a compensation committee. 3 As discussed below, the SEC simultaneously issued revisions to Item 407 of Regulation S-K with new proxy disclosure requirements related to conflicts of interest in respect of compensation consultants. While largely following the rules proposed in March 2011, the final Rule contains some important clarifications. The Rule makes clear that a listed issuer's compensation committee need not be the entity retaining those who provide the committee with compensation advice and such advisers need not be independent. However, the Rule makes clear that the committee nonetheless will be required to conduct an independence assessment, as outlined below, with respect to every compensation consultant, legal counsel or other adviser that provides advice to the compensation committee (collectively, "compensation advisers"), other than in-house legal counsel, before receiving such advice, regardless of who retains the adviser. The independence assessment, which need not be disclosed, is to be made without any materiality, numerical or other threshold.

Compensation Committee Director Independence Requirements

New Rule 10C-1(b)(1) requires that each member of a listed issuer's compensation committee be a member of the board of directors and be independent. The Rule does not require a uniform definition of "independence." Exchanges are required to consider relevant factors, including, but not limited to:

a director's source of compensation, including any consulting, advisory or compensatory fee paid by the issuer, and whether a director is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer. The Rule does not specify any additional factors, nor are any standards prescribed that automatically preclude a finding of independence. Exchanges are expected to consider whether those prohibitions in the definition of "audit committee independence" also should apply to compensation committee members. However, even though affiliated directors are not allowed to serve on audit committees, the exchanges are free to determine that such a blanket prohibition is inappropriate for compensation committees and that certain affiliates, such as representatives of significant shareholders, should be permitted to serve. On the other hand, the exchanges may conclude that personal or business relationships between members of the...