Speech by SEC Commissioner:
Statement at Open Meeting to Propose Amendments Regarding Listing Standards for Compensation Committees
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
March 30, 2011
Thank you, Chairman Schapiro.
The recommendation before us is to propose rule changes concerning compensation committees. These rule changes would go toward implementing Exchange Act Section 10C, which was added by Section 952 of the Dodd-Frank Act.
I support the recommendation before us. As always, I look forward to considering the comments we will receive. I am particularly interested in comments that address how smaller reporting companies should be treated.
Under the proposal, and in accordance with Dodd-Frank, each exchange would be permitted to exempt smaller reporting companies from the compensation committee listing requirements that Section 10C provides for. An exchange, however, could not provide an exemption for smaller reporting companies unilaterally. Rather, as the proposing release explains, an exchange’s determination to exempt smaller reporting companies would be subject to Commission review pursuant to the agency’s SRO rule filing process under Section 19(b) of the Exchange Act – a process that can be burdened by uncertainty.
An alternative approach would be for the SEC to use its general exemptive authority to grant smaller reporting companies an exemption from the listing requirements at the outset. To permit an exchange flexibility in fashioning its listing standards, any exemption the SEC granted could perhaps be structured as a default – that is, the SEC could exempt smaller reporting companies as an initial matter, but if an exchange preferred to subject smaller reporting companies to the Section 10C compensation committee requirements, the exchange could be permitted to do so.
The question, then, is this: Should the SEC exempt smaller reporting companies from the new listing requirements? Relatedly, should the SEC exempt newly public companies? Are there still other categories of issuers that the Commission should exempt from the listing requirements? Or should all exemptions be left to the exchanges to propose, subject to Commission review under Section 19(b)?
The question of exemptions also arises in the context of the proposed disclosures regarding compensation consultants and conflicts of interest. As proposed, the new disclosures would be implemented by amending Item 407 of Regulation S-K. The release notes that “[b]ecause Item 407 . . . is not part of Section 10C, Section 10C(f)(3) would not permit exchanges to exempt any category of issuers from [the] proposed revisions to Item 407, if adopted.” Accordingly, the SEC must decide whether to afford smaller reporting companies – and possibly other categories of issuers, such as unlisted issuers – an exemption from these expanded disclosure obligations. Should the Commission do so?
I hope that commenters will address these topics.
I join my colleagues in thanking the staff – particularly those from the Division of Corporation Finance – for your hard work on this rulemaking.