SEC Directs Exchanges to Adopt Listing Standards for Compensation Committees

By Final Rule adopted June 20 and to be effective 30 days after publication in the Federal Register, the SEC has adopted new rules to implement Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 10C to the Securities Exchange Act of 1934.  Section 10C requires the SEC to direct national securities exchanges and national securities associations to prohibit the listing of any equity security of an issuer that is not in compliance with certain compensation committee and compensation adviser requirements.

Under new Rule 10C-1, the exchanges are required to adopt listing standards that require each member of a company’s compensation committee to be a member of the board of directors and to be independent.  In developing a definition of independence, the exchanges will be required to consider relevant factors, including the source of compensation of the board member and whether the board member is affiliated with the company or any of its subsidiaries. 

Rule 10C-1 requires the exchanges to adopt listing standards providing that the compensation committee of a listed company:

• May, in its sole discretion, retain or obtain the advice of a compensation adviser;
• Is directly responsible for the appointment, compensation and oversight of compensation advisers, and
• Must be appropriately funded by the listed company.

The exchanges themselves may impose additional factors.  These listing standards, with limited exceptions, will also apply to members of a listed company’s board of directors who, in the absence of a board committee, oversee executive compensation matters on behalf of the board of directors.  Rule 10C-1 requires the exchanges to exempt four categories of companies from the compensation committee independence requirements:

• Limited partnerships;
• Companies in bankruptcy proceedings;
• Open-end management investment companies registered under the Investment Company Act of 1940, and
• Any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.  

Each national exchange that lists equity securities must propose listing standards that comply with the new rule no later than 90 days after effectiveness.  The new listing standards must be approved by the Commission within one year of the new rule becoming effective.  Amendments to Item 407 of Regulation S-K will require issuers to provide certain disclosures regarding their use of compensation consultants and how they address compensation consultant conflicts of interest.