On June 20, the Securities and Exchange Commission adopted a final rule that requires national securities exchanges to adopt listing standards regarding the independence of compensation committees and compensation advisers of public companies.

The new Rule 10C-1, pursuant to Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 10C to the Securities Exchange Act of 1934, directs that the listing standards of national securities exchanges require:

  • Each member of a company’s compensation committee must be a member of the board of directors and must be independent. For determinations of independence, the exchanges will be required to consider relevant factors, including the source of compensation of a director and whether a director is an affiliate of the company.
  • A compensation committee may, in its sole discretion, obtain the advice of a compensation adviser and the compensation committee is directly responsible for the appointment, compensation and oversight of compensation advisers.
  • A compensation committee must be appropriately funded by the company.
  • A compensation committee may select a compensation consultant, legal counsel or other adviser only after considering certain specified independence factors, including whether the compensation consultant is providing any other services to the company, the amount of fees paid to the consultant as a percentage of the consultant’s revenues, whether the compensation adviser has any business or personal relationship with a member of the compensation committee or an executive officer, and whether the adviser owns any stock of the company.

Rule 10C-1 also requires these listing standards to apply, with limited exceptions, to directors who oversee executive compensation matters in the absence of a compensation committee.

Rule 10C-1 exempts controlled companies and smaller reporting companies from all of the requirements of the new listing standards and authorizes the exchanges to exempt other categories of issuers. Further, Rule 10C-1 requires the exchanges to exempt from the compensation committee independence requirements (i) limited partnerships, (ii) companies in bankruptcy proceedings, (iii) open-end management investment companies registered under the Investment Company Act of 1940 and (iv) any foreign private issuer that discloses in its annual report the reasons that it does not have an independent compensation committee.

The SEC also amended Item 407 of Regulation S-K to require that companies disclose any conflicts of interest with respect to a compensation consultant and how such conflicts are being addressed. There are no issuer exemptions from the disclosure requirements.

The new rule and Item 407 amendment will take effect 30 days after publication in the Federal Register, and thereafter each national securities exchange will have 90 days to propose listing standards that comply with the new rule. The SEC must approve the new listing standards within one year of the new rule becoming effective.

Click here to view the adopting release for the rule and rule amendments (Release Nos. 33-9330; 34-67220). The final rule and compliance considerations will be discussed further in an upcoming Katten Client Advisory.