United States: SEC Adopts Rules Requiring Listing Standards For Compensation Committees And Compensation Advisers

Last Updated: July 4 2012
Article by Paul Bork and Dean F. Hanley

On June 20, 2012 the Securities and Exchange Commission adopted rules under the Securities Exchange Act of 1934 (Exchange Act), that direct the national securities exchanges to adopt listing standards for public company boards of directors, compensation committees, and compensation advisers. These rules implement Section 10C of the Exchange Act enacted as part of 2010's Dodd-Frank legislation. The SEC has amended its proxy disclosure rules correspondingly to require new disclosures from companies about their use of compensation consultants and conflicts of interest.


The new rules regarding listing standards will take effect 30 days after publication in the Federal Register. The exchanges will then have 90 days after effectiveness to propose listing standards that comply with the new rules and one year after effectiveness to finalize the rules and receive approval from the SEC. Depending on how fast the SEC and the exchanges work the new listing standards could be in effect as soon as the 2013 proxy season. Once the new listing standards are in effect, issuers listed on national securities exchanges will have to comply with the specific standards established by the exchange on which they are listed.

This alert summarizes the SEC's directives to the exchanges, but the particular compliance obligations of public companies will depend on how the exchanges implement the new rules.

Independence Requirement

Under new Exchange Act Rule 10C-1(b)(1), the national securities exchanges must adopt listing standards requiring each member of an issuer's compensation committee to be an independent member of the issuer's board of directors. In determining independence requirements, the exchanges must consider factors including, but not limited to,

  • the source of compensation of a member of the board (including consulting, advisory or other compensatory fees) and
  • whether a member of the board is an affiliate of the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer.

In the absence of a compensation committee, these independence requirements will also apply to members of the board who oversee compensation on behalf of the board of directors.

Most exchanges already require directors who determine executive compensation to be independent under existing listing standards. This new rule is intended to allow the exchanges to develop their own standards of independence for compensation committee members as long as the above factors are considered. Interestingly, the SEC seems willing to allow the exchanges to adopt standards that do not prohibit all affiliates from serving on a compensation committee.

After considering the specified factors, the exchanges may determine that certain affiliates should be permitted to serve on a compensation committee. The SEC advises that exchanges should consider ties between the issuer and a director that may impair the director's judgment as a member of the compensation committee.

Authority and Funding

The new rules grant the compensation committee the authority, similar to audit committees, to retain compensation consultants, independent legal counsel or other compensation advisers and require that the issuer provide for appropriate funding to compensate such advisers. Exchange Act Rule 10C-1(b)(2) provides that compensation committees have sole discretion as to whether or not to retain or obtain compensation advisers and that the compensation committee is directly responsible for the appointment, compensation and oversight of any such adviser so retained. This authority to retain advisers and the responsibility for their oversight also applies to members of the board of directors who oversee executive compensation matters in the absence of a compensation committee.

Under the new rules, compensation committees are not required to retain advisers, but are given the have the authority to do so. Compensation committees are also not required to obtain advice from independent advisers; compensation committees may receive advice from in-house legal counsel, or from advisers retained by management. Should a compensation committee decide to retain an adviser, independent or not, Exchange Act Rule 10C-1(b)(3) provides that issuers must provide for the payment of reasonable compensation to any such compensation consultant or adviser retained by the compensation committee.

In addition, Exchange Act Rule 10C-1(b)(2)(iii) specifies that the compensation committees are not required to act consistently with or implement the advice or recommendations of any adviser it retains.

Adviser Independence

The listing standards of exchanges must also require compensation committees, or board members who oversee executive compensation matters in absence of a compensation committee, to consider certain independence factors before engaging any consultant or advisers. The exchanges may set their own list of considerations, but such considerations must at least include the following:

  • Whether the compensation consulting company employing the compensation adviser is providing any other services to the issuer;
  • The amount of fess received by the compensation consulting company who employs the compensation adviser, as a percentage of that company's total revenue;
  • What policies and procedures have been adopted by the compensation consulting company employing the adviser to prevent conflicts of interest;
  • Whether the compensation adviser has any business or personal relationship with a member of the compensation committee;
  • The stock ownership of the issuer by the compensation adviser; and
  • Whether the compensation adviser, or the compensation consulting company who employs the compensation adviser, has any business or personal relationship with an executive officer of the issuer.

These factors, and any other factors imposed by the exchanges, should be considered in their totality and no one factor should be considered a determinative factor of independence. If, after considering the factors, the compensation committee determines the compensation adviser is not independent, the compensation committee may still retain such adviser so long as the committee has considered all the required factors. The Commission also clarifies that the compensation committee would not have to consider these factors before receiving advice from the issuer's in-house counsel.


The listing standards for compensation committees and compensation advisers do not apply to any controlled company (typically majority owned) or "smaller reporting company" (defined by the SEC as an issuer having a public float of less than $75 million). The exchanges may also exempt other categories of issuers with approval by the SEC.


The proxy rules already require disclosure regarding any role compensation consultants play in determining the compensation of executive officers and directors (including the name of such consultant and any fees paid). The SEC has now amended the proxy rules to require additional disclosure with respect any compensation consultant whose work has raised a conflict of interest pursuant to the factors listed in Exchange Act Rule 10C-1(b)(iv) (discussed above). Pursuant to new Item 407(e)(3)(iv) of Regulation S-K, issuers will be required to disclose the nature of any conflict of interest and how the conflict is being addressed. This disclosure is not required where there is only a potential conflict of interest or the appearance of a conflict of interest.

Issuers must comply with this disclosure requirement in any proxy statement for any annual or special meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Drinker Biddle & Reath LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Drinker Biddle & Reath LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions