SEC Finalizes Independence Standards for Compensation Committees and Outside Advisers

Signaling some movement on Dodd-Frank implementation, the SEC this week approved rules to implement two sets of independence criteria, namely the requirements mandated by the Dodd-Frank Act that apply to directors who serve on compensation committees and factors compensation committees must consider when retaining a compensation adviser.  Overall it is not expected the final rules will have a material impact on most companies, although some disclosure changes are required.  The next step is for stock exchanges to adopt revised listing standards and have the SEC approve them within one year from the date the rules are published in the Federal Register, which means they could be effective in time for next proxy season.  Under the rules, the revised listing standards must mandate that each member of a company's compensation committee be an independent board member based on factors such as the director's sources of compensation and whether the director is affiliated with the issuer or subsidiary.  In addition, the final rules provide that the compensation committee may in its sole discretion decide whether to retain the services of an independent compensation adviser and, in doing so, have the sole authority for the appointment, payment and oversight of such an adviser.  The final rules also clarify that the compensation adviser is not required to be independent, but the compensation committee must evaluate six factors when deciding whether to hire such an adviser:

• Whether the compensation consulting company, law firm, etc., employing the adviser or legal counsel provides other services to the company;
• The amount of fees that the compensation consulting firm or law firm receives from the issuer and the percentage of total of the firm’s revenue it represents;
• The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;
• Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee;
• Any stock of the issuer owned by the compensation consultant, legal counsel or other adviser; and
• Any business or personal relationships between executive officers of the issuer and the adviser or the person employing the adviser.

Finally, the rules beefed up existing rules governing company disclosure of compensation consultants in the proxy, including whether an adviser had any role in determining or recommending the amount or form of compensation or was engaged by the compensation committee, and if any conflicts of interest are identified, the nature of the conflicts and how they were addressed.