SEC Final Rule: Listing Standards for Public Company Boards and Compensation Advisers
|Final Rule Issue||Effective Date||Compliance Date, Rule Changes||Compliance Date, Disclosure|
|June 27, 2012||July 27, 2012||September 25, 2012||January 1, 2013|
On June 20, 2012, the Securities and Exchange Commission approved a final rule requiring securities exchanges to adopt listing standards for compensation committees and compensation advisers. Under the new statute, Rule 10C-1, national securities exchanges are directed to establish listing standards that, among other things, require each member of a listed issuer’s compensation committee to be a member of the board of directors and to be “independent.”<ref>SEC Adopts Rule Requiring Listing Standards for Compensation Committees and Compensation Advisers. Securities and Exchange Commission. Retrieved on June 21, 2012.</ref> The rule was published in the Federal Register on June 27, 2012, and its effective date is July 27, 2012.
Regarding compliance, each national securities exchange and association must provide to the SEC, by September 25, 2012, any proposed rule change submissions associated with 10C-1 compliance. The exchanges must have final rules in place within one year. Additionally, related changes must be disclosed in proxy or information sheets by the first shareholder meeting at which directors will be elected on or after January 1, 2013.
Among the mandates of Title IX of the Dodd-Frank Act is a requirement that exchanges create listing standards to address:
- The independence of the members on a compensation committee
- The committee’s authority to retain compensation advisers
- The committee’s consideration of the independence of any compensation advisers and
- The committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser.
Additionally, Title IX requires disclosure in a company's proxy materials as to:
- whether its board’s compensation committee retained or obtained the advice of a compensation consultant, and
- whether the work of the compensation consultant has raised any conflict of interest.
On March 30, 2011, the SEC approved its proposed rule on listing standards. The final rule adopts most aspects of the proposed rule, but took into consideration the public comments submitted. To view the original proposed rule, click HERE.
Summary of the Rule
Under the rule, exchange compensation committees must fall within the definition of "independence" which requires the consideration of certain factors, including:
- The source of compensation of a member of the board of directors, including any consulting, advisory or other compensatory fee paid by the company to such director, and
- Whether a member of the board of directors of a company is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company.
Compensation committees may retain, but will be directly responsible for the appointment, oversight and compensation of, compensation advisers. Selection of advisers must include these six criteria:
- Whether the compensation consulting company employing the compensation adviser is providing any other services to the company
- How much the compensation consulting company who employs the compensation adviser has received in fees from the company, as a percentage of that person’s total revenue
- What policies and procedures have been adopted by the compensation consulting company employing the compensation adviser to prevent conflicts of interest
- Whether the compensation adviser has any business or personal relationship with a member of the compensation committee
- Whether the compensation adviser owns any stock of the company, and
- Whether the compensation adviser or the person employing the adviser has any business or personal relationship with an executive officer of the issuer.
The exchanges must exempt four categories of companies from the independence requirements:
- Limited partnerships,
- Companies in bankruptcy proceedings,
- Open-end management investment companies registered under the Investment Company Act of 1940,
- Any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.
As with all listing standards, the exchanges would need to seek the approval of the SEC before adopting any exemptions.
Existing regulations already require the disclosure of compensation and fees paid to consultants. The new regulations require disclosure of conflicts of interest a consultant may have, and whether the consultant played a role in determining compensation for executives and directors.
Related Document: Federal Register Entry
Note: The Federal Register entry contained one error on the compliance date. Line 13 should read "June 27, 2013." It was erroneously printed as June 27, 2012. Exchanges have until June 2013 to submit rule changes to the SEC.