SEC Issues Final Rules on Compensation Committee and Adviser Independence

The Securities and Exchange Commission (“SEC”) recently issued final rules implementing Dodd-Frank Act provisions regarding the independence of public company compensation committee members and advisers.

First, the final rules require compensation committee members to be “independent,” based on a definition of independence that must, at a minimum, consider (1) the source of the director’s compensation, including any consulting, advisory or other fees paid by the company, and (2) whether the director is an affiliate of the company or its subsidiaries or affiliates.

Second, the final rules require compensation committees to have sole discretion to choose, and funding to pay for, independent advisers (which includes compensation consultants, independent legal counsel or other advisers).

Compensation committees must consider the following independence factors when selecting these advisers: (1) whether the adviser provides other services to the company; (2) the fees received by the adviser from the company; (3) the adviser’s own conflict of interest policies; (4) any relationships between the adviser and compensation committee members; (5) whether the adviser owns any stock of the company; and (6) any relationships between the adviser and the company’s executive officers. However, the listing standards do not have to, and most likely will not, require that the compensation committee only hires independent advisers.

These first and second provisions of the final rules are to be implemented through the national securities exchanges, which have been directed by the SEC to incorporate the requirements into their listing standards. The exchanges must submit their proposed listing standards to the SEC within 90 days of publication of the final rules and must establish final listing standards within one year.

Third, the final rules include proxy statement disclosure requirements regarding compensation consultants. This provision of the final rules does not require any further action on the part of the exchanges. Beginning with proxy statements filed with respect to shareholder meetings occurring on or after January 1, 2013, companies must disclose (1) whether their compensation committee retained or obtained the advice of a consultant and (2) whether the compensation consultant’s work has raised any conflict of interest and, if so, the nature of the conflict and how it is being addressed. 

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