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Listing Standards for Compensation Committees and Disclosure Regarding Compensation Consultant Conflicts of Interest

A Small Entity Compliance Guide1


On June 20, 2012, the Securities and Exchange Commission adopted a new rule and amendments to its proxy disclosure rules to implement Section 952 of the Dodd-Frank Act, which added Section 10C to the Securities and Exchange Act of 1934. Section 10C requires the SEC to adopt new disclosure rules concerning compensation consultant conflicts of interest.

Section 10C also requires the SEC to adopt rules directing the national securities exchanges—such as NYSE and NASDAQ—and national securities associations (collectively, the “exchanges”) to adopt listing standards with respect to compensation committees and compensation advisers. Under the new rule, the exchanges will be directed to prohibit the listing of an equity security of certain issuers that are not in compliance with Section 10C’s compensation committee and compensation adviser requirements. Smaller reporting companies are exempted from these requirements.

The new rule and amendments will take effect on July 28, 2012. No later than September 25, 2012, each exchange that lists equity securities must propose listing standards that comply with the rule. The exchanges must have any new listing standards approved by the SEC no later than June 27, 2013.

What are the requirements of the rules?

New Disclosure about Conflicts of Interests of Compensation Consultants

Currently, Item 407(e)(3)(iii) of Regulation S-K require issuers to disclose any role of a compensation consultant in determining or recommending the amount or form of executive and director compensation. Disclosure is not required under the Item, if the consultant’s role is limited to consulting on broad-based non-discriminatory plans or providing compensation surveys, or similar information, that is not customized for the issuer, or is customized based on parameters that are not developed by the consultant.

The SEC amended Item 407(e)(3) to require all issuers to disclose, in connection with any compensation consultant that is identified as having played a role in determining or recommending the amount or form of executive and director compensation, whether the work of the consultant has raised any conflict of interest with the issuer and, if so, the nature of the conflict and how the conflict is being addressed.

New Listing Requirements for Compensation Committees

Under new Rule 10C-1, the exchanges are required to develop listing standards concerning compensation committees that are compliant with the rule. In particular, Rule 10C-1 requires the listing standards to address:

  • the independence of the members on a compensation committee,
  • the committee’s funding and authority to retain compensation advisers,
  • the committee’s consideration of the independence of any compensation advisers, and
  • the committee’s responsibility for the appointment, compensation and oversight of the work of any compensation adviser.

As noted above, Rule 10C-1 exempts smaller reporting companies from all of the requirements of the new compensation committee listing standards and authorizes the exchanges to exempt other categories of issuers. In addition, the following categories of issuers are exempt from the compensation committee independence requirements:

  • Limited partnerships.
  • Companies in bankruptcy proceedings.
  • Open-end management investment companies registered under the Investment Company Act of 1940.
  • Any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.

Rule 10C-1 directs the exchanges to apply the listing standards, with limited exceptions, to members of a listed issuer’s board of directors who, in the absence of a board committee, oversee executive compensation matters on behalf of the board of directors. The rule, however, does not apply to the OTC Bulletin Board or the OTC Markets Group. Accordingly, issuers whose equity securities are quoted on these interdealer quotation systems will not need to comply with any listing standards developed pursuant to the rule by the exchanges.

Small entities that have equity securities listed on an exchange and that are not smaller reporting companies would generally need to comply with any new standards adopted by the exchange pursuant to Rule 10C-1 if they wish to maintain their listing on the exchange.

Other Resources

The adopting release for these amendments can be found on the SEC’s Web site at http://www.sec.gov/rules/final/2012/33-9330.pdf.

Regulation S-K can be accessed through the “Corporation Finance” section of the SEC’s Web site at http://www.sec.gov/divisions/corpfin/ecfrlinks.shtml.

The SEC’s disclosure forms can be accessed on the Commission’s Web site at http://www.sec.gov/about/forms/secforms.htm.

Compliance and disclosure interpretations related to the amendments are available at http://www.sec.gov/divisions/corpfin/cfguidance.shtml.

Contacting the SEC

The SEC’s Division of Corporation Finance is available to assist small companies and others with questions regarding the amendments. You can contact the Division for this purpose at (202) 551-3500 or at https://tts.sec.gov/cgi-bin/corp_fin_interpretive.

Questions on other SEC regulatory matters concerning small companies may be directed to the Division’s Office of Small Business Policy by e-mail at the address above, or by telephone at (202) 551-3460.

1 This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended (SBREFA). The guide summarizes and explains rules adopted by the SEC but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.



Modified: 07/12/2012