Originally published June 28, 2012.
Keywords: SEC, compensation committee listing standards, compensation consultant disclosure rules
On June 20, 2012, the U.S. Securities and Exchange Commission (SEC) adopted "Listing Standards for Compensation Committees,"1 implementing Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which added Section 10C to the Securities Exchange Act of 1934 (Exchange Act).
Section 10C required the SEC to adopt rules directing the national securities exchanges to prohibit the listing of equity securities of any issuer not in compliance with the compensation committee independence requirements and the compensation adviser requirements set forth in the Dodd-Frank Act, and to adopt disclosure rules concerning compensation consultant conflicts of interest. The SEC initially proposed compensation committee and compensation consultant rules in March 2011.2
Although containing a few changes from the proposed rules, the final rules closely mirror the statutory language of the Dodd-Frank Act, giving discretion to the exchanges to provide additional detail, restrictions and exemptions, subject to the SEC's approval of any proposed listing standards.
The SEC has adopted new Rule 10C-1 under the Exchange Act to implement the Dodd-Frank Act requirement for listing standards relating to compensation committees. Tracking the statutory language of the Dodd-Frank Act, Rule 10C-1 requires the exchanges to consider relevant factors when determining independence requirements for compensation committee members, including, but not limited to:
The source of a board member's compensation, including any consulting, advisory or other compensatory fee paid by the issuer to such board member; and Whether a board member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer. Rule 10C-1 does not establish any safe harbors for particular relationships or identify any relationships that would bar an independence determination.
While the Dodd-Frank Act requires that all members of a compensation committee be directors and be independent, neither Section 10C of the Exchange Act nor new Rule 10C-1 defines "independence." Rather than imposing a uniform definition, Rule 10C-1 leaves discretion to each exchange to develop its own independence standards. As with all exchange rules, such independence standards must be approved by the SEC.
Unlike the mandatory requirements of Rule 10A-3, which provide for enhanced independence standards for audit committee members, Rule 10C- 1 only requires the exchanges to consider relevant factors, including the two specified above, when developing compensation committee independence standards. The exchanges are not required to preclude compensation committee membership where relationships described in the relevant factors exist. For example, the exchanges will not be required to prohibit directors who represent holders of a large percentage of a company's shares from serving on compensation committees, although such significant investors may be affiliates of the company by virtue of their share holdings.
The SEC left it to the exchanges to determine the details of compensation committee listing standards not expressly mandated by the Dodd- Frank Act. In so doing, however, the SEC is requiring the exchanges to provide information to the SEC beyond what is typically required when the exchanges submit rule changes. For...