SEC Proposes Rules Requiring Listing Standards for Compensation Committees

Published on: 01 Apr 2011

On March 30, the SEC unanimously voted to propose a rule that would require national securities exchanges and associations1 to establish listing standards for listed entities that have compensation committees or that engage compensation consultants or advisors. The proposed rule and rule amendments were developed to address the requirements of Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which adds Section 10C to the Securities Exchange Act of 1934 (“Exchange Act”).

The proposed rule would prohibit listing the equity securities of entities on exchanges that do not comply with the new requirements. The most notable items required by the listing standards include the following:

1.     Compensation committee members are to be independent2 members of the board of directors.

2.     Adoption of disclosure requirements in proxy materials for annual or special shareholder meetings regarding the use of compensation consultants and whether any conflicts of interest were identified though the compensation consultant’s work. If applicable, an issuer would also be required to disclose how such conflicts are being addressed.

In addition, issuers’ compensation committees would be required to:

1.     Have the sole discretionary authority to engage and direct or oversee the work of compensation consultants.

2.     Weigh specific independence factors, as indicated by the SEC, when selecting compensation consultants.

3.     Provide appropriate funding to reasonably compensate such consultants, as determined by the compensation committee.

Comments on the proposed rule are due by April 29, 2011.


[1] The proposed rule includes exemptions for certain categories of listed entities that are not subject to the compensation committee independence requirements as outlined in Section 10C(a)(1) of the Exchange Act; securities futures products and standardized options, as discussed in Section II.B.2.b of the proposed rule; and the equity securities of controlled companies, as directed by Section 10C(g) of the Exchange Act.

[2] The proposed rule does not define “independent” and instead requires exchanges to define the term on the basis of “relevant factors” such as a board director’s source of compensation, including “any consulting, advisory, or other compensatory fee paid by the issuer” to a board member and any affiliation of the board member to the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

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