National securities exchanges will soon be required to adopt listing standards relating to compensation committees now that the SEC has adopted final rules to implement a provision of the Dodd-Frank Act aimed at improving disclosure of executive compensation practices.

Dodd Frank amended the Securities Exchange Act of 1934 to add Section 10C which directs the SEC to require listing standards for compensation committees and compensation advisor requirements. The SEC issued proposed rules in March 2011 and adopted final rules on June 20, 2012. These rules will be effective 30 days after publication in the Federal Register.

Each national securities exchange and national securities association must provide the SEC, no later than 90 days after publication, proposed rule change submissions to implement the listing standards and such rule changes or amendments must be effective no later than one year after publication in the Federal Register.

Independence Requirements

New Rule 10C-1(b)(1) requires exchanges to establish listing standards requiring each member of a listed company’s compensation committee to be a member of the board of directors and to be independent. The rule does not require that exchanges adopt a uniform definition of independence. However, when developing their definitions of independence, exchanges will be required to consider relevant factors, including a director’s source of compensation, including any consulting, advisory or compensatory fee paid by the issuer and whether the director is affiliated with the issuer. The Rule does not define “affiliate” and there is no requirement to adopt listing standards precluding compensation committee membership based on any specific relationships. In determining the listing standards, exchanges may consider additional factors in determining independence beyond those set forth in Rule 10C-1(b)(1).

Authority to Retain Compensation Advisers, Responsibility, and Funding

Section 10C permits compensation committees, in their sole discretion, to retain or obtain the advice of a compensation consultant and independent legal and other advisers. New Rules 10C-1(b)(2) and (3) direct exchanges to adopt listing standards that provide that:

  • the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation adviser
  • the compensation committee (or the board in the absence of a committee) shall be directly responsible for the appointment, compensation, and oversight of the work of any compensation adviser retained by the compensation committee
  • each listed issuer must provide for appropriate funding for payment of reasonable compensation, as determined by the compensation committee, to any compensation adviser retained by the compensation committee

The final rule permits, but does not require, compensation committees to retain or obtain advice from other independent advisers. In-house counsel, outside counsel engaged by management, and compensation consultants engaged by management may also provide advice.

Compensation Adviser Independence Factors

Section 10C requires that compensation committees consider certain factors prior to selecting a compensation adviser, including compensation consultants, legal counsel, or other advisers (other than in-house counsel).

New Rule 10C-1(b)(4) directs exchanges to adopt listing standards that require compensation committees to consider the following factors:

  • the provision of other services to the issuer by the person that employs the compensation adviser
  • the amount of fees received from the issuer (as a percentage of the total revenue) by the person who employs the compensation adviser
  • policies and procedures of the person who employs the compensation adviser that are designed to prevent conflicts
  • any business or personal relationship of the compensation adviser with a member of the compensation committee
  • any stock of the issuer owned by the compensation adviser
  • any business or personal relationships between the executive officers of the issuer and the compensation adviser or person employing the adviser

In a release, the SEC emphasized that it is not requiring that a compensation adviser be independent, only that the compensation committee consider independence before selecting the adviser. This assessment is required with respect to all compensation consultants, legal counsel or other advisers (other than in-house counsel) that provides advice to the compensation committee, including advisers engaged by management.

Opportunity to Cure Defects

New Rule 10C-1(a)(3) requires the exchanges to provide appropriate procedures for listed issuers to have a reasonable opportunity to cure any noncompliance with the compensation committee listing standards that could result in the delisting of the issuer’s securities. The listing standards may also provide that if a member of the compensation committee ceases to be independent for reasons outside of the member’s reasonable control, that person, with notice by the issuer to the applicable exchange, may remain a compensation committee member until the earlier of the next annual meeting of shareholders or one year from the occurrence of the event that caused the member to no longer be independent.


The listing standards will apply to any committee of the board designated as the compensation committee or any committee that performs functions typically performed by a compensation committee, including oversight of executive compensation. Certain listing standards—such as director independence, the consideration of a compensation adviser’s independence, and the requirements relating to the appointment, compensation and oversight of compensation advisers—also apply to members of the board of directors who, in the absence of a board committee, oversee executive compensation matters on behalf of the board.

The SEC does not require listed companies to have a compensation committee or a committee that performs functions typically assigned to a compensation committee, although an exchange may separately impose such a requirement.

Only exchanges that list equity securities will be required to adopt these listing standards and such standards will apply only to companies with listed equity securities. Any national securities exchange registered as such solely pursuant to Section 6(g) of the Exchange Act and that lists and trades only security futures products is exempt from these rules. The same exemption applies to standardized options as well.

Controlled companies and smaller reporting companies will be exempt from the listing standards, as will limited partnerships, companies in bankruptcy proceedings, open-end management companies registered under the Investment Company Act of 1940, and any foreign private issuers that disclose in their annual reports the reasons that the foreign private issuer does not have an independent compensation committee. An exchange may exempt other categories of issuers, provided that the exchange seeks SEC approval before adopting any new exemptions.

Compensation Consultant Disclosure and Conflicts of Interest

Section 10C(c)(2) requires, in any proxy or consent solicitation materials for an annual meeting (or special meeting in lieu of an annual meeting), that issuers provide enhanced disclosure about the engagement of a compensation consultant and any conflicts of interest regarding the work of the compensation consultant.

The SEC added new Item 407(e)(3)(iv) to Regulation S-K to address conflicts of interest. The SEC concluded that the disclosure required in Item 407(e)(3)(iii), which requires issuers to disclose any role of compensation consultants in determining or recommending the amount or form of executive or director compensation, adequately covers the other disclosures required by Section 10C(c)(2).

Issuers are now required to:

  • identify the consultants
  • state whether such consultants were engaged directly by the compensation committee or any other person
  • describe the nature and scope of the compensation consultant’s assignment and the material elements of any instructions given to the consultants under the engagement
  • disclose the aggregate fees paid to a consultant for advice or recommendations on the amount or form of executive and director compensation, as well as the aggregate fees for additional services if the consultant provided both and the fees for the additional services exceeded $120,000 during the fiscal year
  • disclose the nature of the conflict and how the conflict was addressed for any compensation consultant identified whose work raised any conflict of interest

This disclosure is required of all companies subject to the requirements of the Exchange Act, not just those listed on an exchange. This disclosure will be required in any proxy or information statement for an annual meeting (or special meeting in lieu of an annual meeting) at which directors will be elected occurring on or after January 1, 2013.

For more information on this release or other securities matters, please contact Justin P. Klein at 215.864.8606 or, Mary J. Mullany at 215-864-8631 or, Katayun I. Jaffari at 215-864-8475 or, Gerald J. Guarcini at 215-864-8625 or, Patricia G. Cramer at 215.854.8607 or, or any member of the Securities Group with any questions.

Copyright © 2012 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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