On June 20, 2012, the Securities and Exchange Commission ("SEC") adopted final rules ("Final Rules") to implement Dodd-Frank Act Section 952, requiring national securities exchanges to prohibit the initial or continued listing of any stock of a company that does not satisfy compensation committee independence criteria and compensation adviser independence criteria. The Final Rules also include new SEC disclosure requirements relating to the use of compensation consultants and related conflicts of interest.
The Final Rules (available here), which include several modifications from the proposed rules, will become effective 30 days after publication in the Federal Register. Each national securities exchange and national securities association must submit to the SEC, no later than 90 days after publication of the Final Rules in the Federal Register, proposed rule change submissions (which the SEC must approve) to implement the listing standards. Such Final Rules must be effective no later than one year after publication in the Federal Register. (By contrast, new disclosure rules adopted by the SEC will apply to proxy statements for annual meetings that occur on or after January 1, 2013.)
Compensation Committee Member Independence
The Final Rules require national securities exchanges (e.g., NYSE and NASDAQ) to adopt listing standards for independence criteria for members of compensation committees, as well as any other Board committee which performs functions typically performed by a compensation committee, including oversight of executive compensation (in either case, "Compensation Committee"). The Compensation Committee must consist solely of members of the Board who are independent. The Final Rules will also require the new listing standards to apply to independent directors who oversee executive compensation in lieu of a Board committee. But, notably, the Final Rules do not require the issuer to have a Compensation Committee.
Consideration of Relevant Factors
The Final Rules do not include a uniform definition of "independence." The SEC instructed the exchanges to establish their own definition (which may differ by exchange) after taking into consideration "relevant factors" that the Dodd-Frank Act mandated, provided that the factors must include:
the source of the Board member's compensation, including any consulting, advisory or other fees paid by the issuer; and whether a Board member is affiliated with the issuer...