Effective July 27, 2012, the SEC has adopted a new rule that requires national securities exchanges to modify their listing standards. The rule provides new standards for compensation committees and compensation advisers. The SEC also requires companies to disclosure of conflicts of interest for their compensation consultants.
The new listing standards must include provisions that require each member of a company’s compensation committee to be a member of the board of directors and to be independent. Independence will be gauged based on the source of the person’s compensation and whether the person is affiliated with the company, among other factors.
The standards must provide that the compensation committee:
-may retain a compensation adviser,
-be responsible for the selection, payment, and supervision of the compensation adviser, and
-is properly funded.
The standards must only allow a compensation committee to select a compensation adviser after considering:
-other services provided by the adviser to the company
-amount the adviser has earned from the company
-policies to prevent conflicts of interest
-relationships between the adviser and members of the compensation committee
-whether the adviser owns company stock
-relationships between the adviser and company executives
The following companies will be exempt from the compensation committee independence requirements:
-companies in bankruptcy proceedings
-registered open-end management investment companies
-foreign private issuers, though they must explain why they don’t have an independent compensation committee in their annual reports
The exchanges can establish additional exemptions.
The following companies are exempt from the compensation committee listing standards altogether:
-smaller reporting companies
Under new proxy disclosure rules, companies must disclose whenever the work of a compensation consultant raises a conflict of interest, if that consultant has a role in setting the level of executive and director compensation.
Source: SEC Release 2012-115
This alert applies to the Series 24, Series 62, Series 79, and Series 7.