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On June 20, 2012, the Securities and Exchange Commission
("SEC") issued final rules establishing minimum standards
that an exchange-listed company will have to meet with regard to
the independence of its compensation committee and other advisers
assisting with executive compensation matters (the "Final
Rules").
The Final Rules, issued under Section 952 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act ("Dodd-Frank
Act"):
adopt a new Rule 10C-1, which directs the national securities
exchanges to establish listing standards requiring that
compensation committee members also be members of the company's
board of directors, and regarding the independence of the
compensation committee members and the retention of compensation
advisers; and
amend the proxy disclosure rules under Item 407 of Regulation
S-K to enhance disclosure regarding compensation consultants and
related conflicts of interest.
The new Rule 10C-1 will be effective 30 days after the new rules
are published in the Federal Register, but will not have an
immediate practical effect as the securities exchanges must then
adopt the actual listing standards as directed by the new rule. The
security exchanges have 90 days from the publication of the Final
Rules in the Federal Register to propose new or amended listing
standards that comply with Rule 10C-1, and one year from the
publication of the Final Rules in the Federal Register to publish
compliant final listing standards. Exchange-listed companies must
comply with the change to Item 407 in their proxy statements for
annual meetings (or special meetings held in lieu of an annual
meeting) held on or after January 1, 2013 at which directors are
elected.
These Final Rules differ from the rules previously proposed by
the SEC in several ways, most notably in that the compensation
committee must consider any business or personal relationships that
a compensation adviser has with any executive officer of the
company when evaluating that adviser's independence (in
addition to other listed factors, and any other factors that are
specified by the applicable securities exchange). Also, while the
proposed rules only addressed compensation committee members, the
Final Rules make it clear that the same independence standards
apply with regard to other board members acting in a similar
capacity as compensation committee members, regardless of whether a
compensation committee has been established by the company's
board of directors.
With regard to advisers, the Final Rules also make it clear that
compensation committees are permitted to obtain advice from
non-independent counsel, such as in-house counsel or outside
counsel retained by management, or from a non-independent
compensation consultant or other adviser, including those engaged
by management. The amended proxy disclosure rules also do not
require disclosure regarding compensation consultants who provide
only non-customized benchmark data or are engaged solely in
connection with broad-based plans.
A full discussion of the final rule
This article is presented for informational purposes only
and is not intended to constitute legal advice.
s and their implications will follow shortly in a Reed Smith
Client Alert.
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