At an open meeting this morning, the SEC approved, by a unanimous vote [in contrast to the series of 3-2 votes over other Dodd-Frank implementing rules], proposed a new rule and rule amendments to implement Section 952 of the Dodd-Frank Act, which requires the SEC to:
- Direct the national securities exchanges and associations to adopt listing standards with respect to compensation committees and compensation advisers, and
- Adopt new disclosure rules concerning the use of compensation consultants and conflicts of interest.
From the descriptions and discussion at the open meeting, it does not appear that the proposed rules add much to the terms of the statute. However, we will update you on the gory details once the SEC publishes the proposed rule. The proposed rules and rule amendments would expand the independence requirements of new Section 10C of the 1934 Act beyond exchange listed companies, to all companies required to be registered (e.g., non-listed issuers and controlled companies).
The proposed rules and rule amendments generally are in two parts: listing standards and disclosure requirements. The rules emphasize that they would apply to any board committee that oversees the compensation function in any respect. (One Commissioner expressed some concern over the fact that the rules would not apply if compensation decisions were made outside of any committee of the board, e.g., informally, by a small group of board members, although he acknowledged that nearly all companies made decisions through some form of committee of independent directors. The rules adopt the non-exclusive list of factors that should be considered in determining committee member independence in Section 10C(a)(3), and the factors listed in new Section 10C(b)(2), which the committee must consider before retaining a compensation advisor.
Regarding the disclosure requirement of new Section 10C, again from the discussion at the open meeting, it does not appear that the proposed rules add much to the terms of the statute. Apparently, however, the proposed rules do include an instruction clarifying the meaning of "retained or obtained"
I am certain that a close reading of the actual printed rules when they are released will lead to follow-up Blogs on the intricacies and traps of these rules, so stay tuned.