The SEC today adopted rules to implement Section 952 of the Dodd-Frank Act, requiring stock exchanges to adopt listing standards that:
- impose independence requirements on compensation committee members,
- authorize compensation committees to retain independent advisers, and
- require compensation committees to assess the independence of any consultant, legal counsel or other adviser that provides advice to the compensation committee, other than in-house counsel.
Stock exchanges have 90 days from the date the SEC’s rules are published in the Federal Register to propose listing standards that comply with the SEC’s rules, and the listing standards must be finalized and implemented no later than one year after the SEC’s rules are published in the Federal Register. We expect that the SEC has coordinated with the stock exchanges so that they are in a position to meet these deadlines.
The SEC also adopted a rule that requires companies to assess whether any work performed by a compensation consultant that was retained to provide advice on executive or director compensation raised any conflict of interest, and if so to disclose the nature of the conflict and how it was addressed. This rule applies to proxy and information statements for an annual meeting at which directors will be elected occurring on or after January 1, 2013.
The SEC’s adopting release is available here. Gibson Dunn will issue a client alert with a detailed discussion of these rules in the near future. However, from a quick review of the rules, a number of items are notable:
- The SEC did not mandate that the stock exchanges adopt any specific independence standard for compensation committee members, but instead will allow the exchanges to develop independence standards that are appropriate for their listed companies. In developing their own standards for compensation committee member independence, the exchanges will be required to consider certain factors set forth in the statute, including whether a director is affiliated with an issuer. However, the SEC’s rules do not require stock exchanges to prohibit affiliates from serving on a compensation committee. Thus, the SEC’s rules provide welcome flexibility for each stock exchange to develop independence standards that are appropriate in light of the practices of companies listed on the exchange.
- The SEC’s rules require the exchanges to adopt listing standards to provide that compensation committees must have the authority to retain and pay for compensation consultants, independent legal counsel and other advisers (as is currently the case with audit committees). A compensation committee must be directly responsible for the appointment, compensation and oversight of the work of any adviser that it retains. However, compensation committees will have discretion to determine whether to retain such advisers. They also may retain advisers that do not qualify as “independent” and can obtain advice from company personnel or consultants and other advisers retained by the company.
- The stock exchange listing standards must require a compensation committee to assess specifically enumerated independence factors with respect to any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee, other than in-house legal counsel. While the text of the SEC rules are unclear on the point, the rules adopted by the exchanges may clarify whether this requirement applies only to persons providing advice on executive or director compensation (and not, for example, to persons providing advice on broad-based compensation plans). Nevertheless, this new requirement will require companies to establish procedures and questionnaires for vetting outside advisers, and in some cases may have the unintended consequence of reducing the extent to which companies present the work product of outside advisers to their compensation committees.