SEC Adopts New Dodd-Frank Proxy Disclosure RE: Compensation Committees & Corporate Governance Proxy Disclosures

On June 20, 2012, the U.S. Securities and Exchange Commission adopted new and amended rule 10C to the 34 Act and amended Rule 407 under Regulation S-K (See Text & Rule under 17 CFR PARTS 229 and 240). This was required to be implemented pursuant to Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Rule 10C-1 directs the national securities exchanges to establish listing standards that, among other things, require each member of a listed issuer’s compensation committee to be a member of the board of directors and to be “independent,” as defined. The securities exchanges must use the following criteria in determining “independence” of the compensation committee members:


“(1) Independence. (i) Each member of the compensation committee must be a
member of the board of directors of the listed issuer, and must otherwise be independent.
(ii) Independence requirements. In determining independence requirements for
members of compensation committees, the national securities exchanges and national securities associations shall consider relevant factors, including, but not limited to:


(A) The source of compensation of a member of the board of directors of an issuer,
including any consulting, advisory or other compensatory fee paid by the issuer to such member of the board of directors; and


(B) Whether a member of the board of directors of an issuer is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer.
(iii) Exemptions from the independence requirements. (A) The listing of equity securities of the following categories of listed issuers is not subject to the requirements of paragraph (b)(1) of this section:


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

The committee in its role as a committee of the board may retain, in its discretion, compensation consultants and legal counsel; however, they are not required to follow the recommendations of the consultant, advisor, or attorney. They are also required to perform an independent review of the amounts paid to and relationship of any hired advisor to look for conflicts of interest. The requirements will essentially be implemented and policed by the listing agency, but the requirements do not apply to smaller reporting companies.

Under amended Rule 407, the following was added to corporate governance proxy disclosures: “With regard to any compensation consultant identified in response to Item 407(e)(3)(iii) whose work has raised any conflict of interest, disclose the nature of the conflict and how the conflict is being addressed.”

The new rules will be effective 30 days after their publication in the Federal Register and listing agencies have 90 days to implement them into their listing standards. Issuers will be required to comply with the new disclosure and proxy rules for annual shareholder meetings with director elections on or after January 1, 2013.