© 2012 Woods Oviatt Gilman LLP
On June 20, 2012, the Securities and Exchange Commission, or SEC, approved final rules that direct national securities exchanges to adopt listing standards for public company boards of directors, compensation committees and advisers.
Background. Section 952 of the Dodd-Frank Act, passed by Congress in 2010, requires the SEC to direct the exchanges to adopt certain listing standards relating to the independence of compensation committee members, and the authority and responsibility of compensation committees relating to any compensation adviser. Section 952 also requires certain proxy disclosure relating to compensation adviser conflicts of interest.
Independence, Authority and Funding of Compensation Committee. Under new Rule 10C-1 under the Securities Exchange Act of 1934, the exchanges are required to adopt listing standards that require each member of a listed company’s compensation committee to be a director and independent. In developing a definition of independence, the exchanges will be required to consider factors that include (a) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company to the director, and (b) whether the director is affiliated with the company, its subsidiaries or its subsidiaries' affiliates. Additionally, the Rule 10C-1 requires the exchanges to adopt listing standards that provide the compensation committees of listed companies with (a) the discretion to retain or obtain the advice of compensation advisers; (b) responsibility for the appointment, compensation and oversight of compensation advisers, and (c) appropriate funding.
Selecting a Compensation Adviser. Rule 10C-1 requires that the exchanges adopt listing standards providing that compensation committees may select compensation advisers only after considering the following six independence factors (and any additional factors imposed by the exchanges themselves):
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whether the compensation adviser's employer is providing any other services to the listed company;
- how much the compensation adviser's employer has received in fees from the listed company, as a percentage of the compensation adviser's employer's total revenue;
- policies and procedures, if any, adopted by the compensation adviser's employer to prevent conflicts of interest;
- any business or personal relationship between a member of the compensation committee the compensation adviser;
- the compensation adviser's stockholdings in the company; and
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any business or personal relationship between an executive officer of the listed company and the compensation adviser or the compensation adviser's employer.
However, a compensation committee may still receive advice from non-independent counsel, such as in-house counsel or outside counsel retained by management, or from a non-independent compensation consultant or other adviser, including those engaged by management.
Disclosure of Compensation Adviser Conflicts of Interest. Listed companies are already required to disclose information about their use of compensation advisers, including certain information relating to the fees paid to compensation advisers. Under new amendments to the proxy disclosure rules, companies will be required to disclose (a) the nature of any conflict of interest pertaining to a compensation adviser who has been involved in determining or recommending the amount or form of executive and director compensation and (b) how the conflict is being addressed.
General Exemption for Controlled Companies and Smaller Reporting Companies. Controlled companies and smaller reporting companies are exempt from all requirements of the new listing standards, and the exchanges are also authorized, with SEC approval, to exempt other categories of companies. However, the disclosure requirements relating to compensation adviser conflicts of interest will apply to controlled companies and smaller reporting companies.
Other Exemptions. Limited partnerships, companies in bankruptcy and open-end management investment companies registered under the Investment Company Act of 1940 are exempt from the compensation committee independence requirements but not from the compensation adviser requirements or the disclosure requirements relating to compensation adviser conflicts of interest. Foreign private issuers that disclose in their annual reports the reasons they do not have an independent compensation committee are exempt from the compensation committee independence requirements but not from the compensation adviser requirements.
Implementation. Within 90 days after the new rules are published in the Federal Register, each exchange must propose listing standards. The new listing standards must be approved by the Commission within one year of the new rule becoming effective, which means that it is possible that the new listing standards could be in place by the 2013 proxy season. Regardless of the effective date of the new listing standards, companies must comply with the disclosure requirements relating to compensation adviser conflicts of interest in any proxy statement for annual meetings occurring on or after January 1, 2013.
Woods Oviatt attorneys are available to assist companies in their compliance efforts relating to the new rules and listing standards covered in this client alert. If you have questions regarding the new rules and listing standards, or how any related matters may affect your business, please contact the Woods Oviatt attorney you regularly consult or any of the Firm’s attorneys listed below:
Gordon Forth, Chairman - 585-987-2801 or gforth@woodsoviatt.com
Gregory Gribben -585-987-2875 or ggribben@woodsoviatt.com
Robert F. Mechur – 585-987-2881 or rmechur@woodsoviatt.com
Christopher Rodi - 585-987-2820 or crodi@woodsoviatt.com
Sean Jensen -585-987-2819 or sjensen@woodsoviatt.com
Timothy D. Condon – 585-987-2803 or tcondon@woodsoviatt.com
