In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act") for adopting regulations required by section 952 of the Reform Act, the Securities and Exchange Commission (the "SEC") on June 20, 2012 issued a press release and published final rules (Release No. 33-9330) (the "Final Rules") for compensation committee and compensation adviser independence requirements.
As we have previously commented (see our blog from July 26, 2010 "The Regulatory March to Reform Executive Compensation Practices Takes Another Step Forward"), the Reform Act implemented numerous new laws affecting executive compensation and corporate governance at publicly-held companies. Section 952 of the Reform Act added Section 10C to the Securities Exchange Act of 1934 (the "Exchange Act"). Among other things, Section 10C required the SEC to adopt rules directing the national securities exchanges and national securities associations (the "Exchanges") to prohibit the listing of any equity security of an issuer that is not in compliance with Section 10C's compensation committee and compensation adviser independence requirements.
Section 10C essentially provides that limited partnerships, companies in bankruptcy proceedings, registered open-end management investment companies registered under the Investment Company Act of 1940, and foreign private issuers that provide annual disclosures to shareholders of the reasons why the foreign private issuer does not have an independent compensation committee will not be subject to the Exchanges' listing requirements regarding compensation committee member independence. Section 10C further expressly provides that controlled companies are exempt from its requirements. The Final Rules provide a slightly modified definition of a "controlled company" for purposes of these rules and which more closely tracks the definition currently used by the NYSE and Nasdaq.
In response to the requirements of Section 10C, the SEC over one year ago on March 30, 2011 released the Proposed Rules (see our blog on the Proposed Rules from April 25, 2011 "SEC Proposes New Rules Calling For Greater Independence Standards for Compensation Committees and Their Advisors") which are the foundation for the adopted Final Rules.
Below is a brief overview of the Final Rules (which are contained in new Rule 10C-1 of the Exchange Act which provides the listing standards related to compensation committees and in new Item 407(e)(3)(iv) to Regulation S-K which provides the disclosure requirements related to compensation consultant conflicts of interest).
Compensation Committee - Independence Requirements
The Final Rules will compel the Exchanges to establish listing standards that require each member of a listed issuer's compensation committee to be...