Sec Adopts New Rules Requiring Stock Exchange Listing Standards For Compensation Committees

Author:Mr Paul Wessel, David Schwartz and David Mollo-Christensen
Profession:Milbank, Tweed, Hadley & McCloy LLP

New rules also require enhanced disclosures relating to compensation committee advisers

In furtherance of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act")1, on June 20, 2012, the Securities and Exchange Commission ("SEC") adopted new Rule 10C-1 under the Securities Exchange Act of 1934 (the "Exchange Act") and amendments to Item 407 of Regulation S-K. New Rule 10C-1 focuses on ensuring the independence of compensation committee members by directing the national securities exchanges to "establish listings standards that ... require each member of a listed issuer's compensation committee to be ... â€Üindependent' as defined in the listing standards of the exchange." The amendments to Regulation S-K Item 407 will require issuers to provide greater disclosure regarding their compensation committees' use of various compensation advisers as well as any conflict of interest arising from such use.

Each national securities exchange is required to provide to the SEC, no later than 90 days after publication in the Federal Register, proposed rule change submissions that comply with new Rule 10C-1, and have final rules approved no later than one year after publication in the Federal Register. Issuers must comply with the disclosure changes in Item 407 of Regulation S K in any proxy or information statement for a meeting of shareholders at which directors are elected that occurs on or after January 1, 2013.

Compensation Committees

Rule 10C-1(b)(1)(i) requires that each member of a listed issuer's2 compensation committee be an "independent" member of its board of directors. The adopted rule does not define independence, nor does it impose specific independence standards. Instead, the adopted rule directs the exchanges to develop their own definitions after considering "relevant factors," including "any consulting, advisory, or other compensatory fee paid by the issuer to [a] member of the board of directors" and whether any director "is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer." The SEC emphasizes the considerable "discretion" and "flexibility" granted to the exchanges to set "their own minimum independence criteria for compensation committee members," particularly in contrast with the more stringent requirements of Exchange Act Section 10A(m) relating to audit committee independence under which, for instance, affiliated shareholders are conclusively...

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