Amid the global focus on executive compensation, the independence of compensation committees has emerged in the United States as a cornerstone for assuring good corporate governance and accountability for the boards of directors of public companies. Accordingly, on June 20, 2012, the Securities and Exchange Commission (the "SEC") adopted Rule 10C-1 of the Securities Exchange Act of 1934 and amended Item 407(e) of Regulation S-K to implement the provisions of Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.1 In the press release accompanying the final rule, SEC Chairman Mary Schapiro singled out the independence of compensation consultants and advisers as being a key consideration, stating "[t]his rule will help to enhance the board's decision-making process on executive compensation matters, particularly the selection, engagement and oversight of compensation advisers, and will provide more transparency with respect to conflicts of interest of consultants engaged by boards." 2
As discussed in more detail below, Rule 10C-1 applies to most public companies and requires the U.S. national securities exchanges to establish listing standards that, among other things:
require each member of a company's compensation committee to be independent; provide that the compensation committee has the authority to retain compensation advisers and that such committee be directly responsible for the appointment, compensation, and oversight of the work of any compensation adviser; and require compensation committees to consider six independence factors in selecting not only compensation consultants but also any other advisers, including outside legal counsel. The amendment to Item 407(e) of Regulation S-K requires disclosure regarding conflicts of interest associated with compensation consultants.
Compliance and Effective Dates
In order to implement Rule 10C-1, the exchanges must submit their proposed rule changes to the SEC not later than 90 days after its publication in the Federal Register, and must have their final rules or amendments approved by the SEC no later than one year after such publication in the Federal Register. Therefore, depending on how quickly the exchanges and the SEC move in proposing and approving the new listing standards, such listing standards could be in place for the 2013 proxy season. Any proxy or information statement for an annual meeting of shareholders (or a special meeting in lieu of an annual meeting) occurring on or after January 1, 2013, at which directors are to be elected, must comply with the new...