Dodd-Frank

The New Nasdaq and NYSE Compensation Committee Listing Standards

by Vanessa Schoenthaler on February 11, 2013

Over the next week or so I’ll hopefully be catching up on a few things that I haven’t been able to get to from the last several weeks, the first being the new Nasdaq and NYSE compensation committee listing standards:

By way of background, Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by adding new Section 10C which requires that the Securities and Exchange Commission adopt rules directing the national securities exchanges to prohibit the listing of a company’s equity securities if that company does not comply with certain compensation committee and compensation adviser requirements. To implement Section 10C, the Commission adopted new Rule 10C-1 and amended Item 407 of Regulation S-K. Rule 10C-1 requires that the national securities exchanges adopt listing rules to effectuate the requirements of Section 10C. Each of the NYSE and Nasdaq filed proposed rule changes on September 25, 2012, and thereafter filed amendments to their proposed rule changes.

Last month, on January 11, 2013, the Commission issued orders approving the NYSE and Nasdaq rule changes, as amended, on an accelerated basis. Below is a comparative summary of the rules:

   

NYSE

 

Nasdaq

General Requirements Listed companies must have a compensation committee composed entirely of independent directors.

 

 

 Listed companies must have, and certify that they have and will continue to have, a standing compensation committee composed of at least two members each of whom must be independent directors.
Compensation Committee Charter The compensation committee must adopt a written charter that addresses:

(1) the committee’s purpose and responsibilities, which, at a minimum, must be to have direct responsibility to:

(A) review and approve corporate goals and objectives relevant to the chief executive officer’s compensation, evaluate the chief executive officer’s performance in light of those goals and objectives, and, either as a committee or together with the other independent directors (as directed by the board), determine and approve the chief executive officer’s compensation level based on this evaluation;

(B) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; and

(C) prepare the compensation committee disclosures required by Regulation S-K;

(2) an annual performance evaluation of the compensation committee;

(3) the committee’s rights and responsibilities related to compensation  advisers, including that:

(A) the committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser;

(B) the committee be directly responsible for the appointment, compensation and oversight of the work of any compensation adviser retained;

(C) the company must provide for appropriate funding, as determined by the committee, for payment of reasonable compensation to a compensation adviser retained by the committee;

(D) the committee may select a compensation adviser only after taking into consideration, all factors relevant to that person’s independence from management, including the
following:

(i) other services provided to the company by the compensation adviser’s employer;

(ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues;

(iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest;

(iv) any business or personal relationship of the compensation adviser with a member of the compensation committee;

(v) any stock of the company owned by the compensation adviser; and

(vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.

 The compensation committee must adopt a written charter and review and assess the adequacy of that charter on an annual basis.

The compensation committee charter must specify:

(1) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements;

(2) the committee’s responsibility for determining or recommending executive compensation;

(3) that the chief executive officer may not be present during voting or deliberation on his compensation; and

(4) the committee’s specific responsibilities and authorities related to compensation advisers, including that:

(A) the committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser;

(B) the committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the compensation committee;

(C) the company must provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee;and

(D) the committee may select, or receive advice from, a compensation adviser, other than with respect to in-house legal counsel, only after taking into consideration the following factors:

(i) other services provided to the company by the compensation adviser’s employer;

(ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues;

(iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest;

(iv) any business or personal relationship of the compensation adviser with a member of the compensation committee;

(v) any stock of the company owned by the compensation adviser; and

(vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.
Director Independence  Compensation committee members must be  independent under the general board independence requirements (Listing Standard 303A.02).

In addition, in affirmatively determining the independence of a director who will serve on the compensation committee, a company’s board must consider all factors specifically relevant to whether the director has a relationship to the company which is material to the director’s ability to be independent from management in connection with the duties of a committee member, including, without limitation:

(1) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company; and

(2) whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

Compensation committee members must be  independent under the general board independence requirements (Listing Rule 5605(a)(2)) and not accept, directly or indirectly, any consulting, advisory or other compensatory fee from the company or a subsidiary of the company.

The prohibition on compensatory fees excludes fees received as a member of the compensation committee itself and fixed fees received under a retirement plan for prior service to the company.

In addition, in determining whether a director is eligible to serve on the compensation committee, a company’s board also must consider the whether the director has affiliate relationships and whether such affiliations would impair the director’s judgment as a member of the compensation committee.

Under exceptional and limited circumstances,  where there are at least three members of a compensation committee, one may be a non-independent director who is not an executive officer, family member of an executive officer or employee, if the board determines that appointment of the non-independent director is in the best interests of the company and its shareholders. A non-independent director appointed under this exception may not serve longer than two years. In addition the company will be required to make certain disclosures either through its website or in its proxy statement related to the appointment.
Adviser Independence It is not necessary that a compensation adviser actually be independent, only that the compensation committee conduct and independence assessment taking into consideration the independence factors enumerated in the committee’s charter, before selecting, or receiving advice from, a compensation adviser.

However, no independence assessment is required in the case of in-house counsel or a compensation adviser who’s role is limited to:

(1) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor executive officers or directors and is generally available to all salaried employees; and/or

(2) providing information that either is not customized for the company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

 It is not necessary that a compensation adviser actually be independent, only that the compensation committee conduct and independence assessment taking into consideration the independence factors enumerated in the committee’s charter, before selecting, or receiving advice from, a compensation adviser.

However, no independence assessment is required in the case of in-house counsel or a compensation adviser who’s role is limited to:

(1) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor executive officers or directors and is generally available to all salaried employees; and/or

(2) providing information that either is not customized for the company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.
Adviser Recommendations The compensation committee will not be required to implement or act consistently with the advice or recommendations of any compensation adviser, but rather shall retain the ability and obligation to exercise its own judgement in fulfillment of its duties.

 

 The compensation committee will not be required to implement or act consistently with the advice or recommendations of any compensation adviser, but rather shall retain the ability and obligation to exercise its own judgement in fulfillment of its duties.
Cure Period If a company fails to meet the compensation committee requirements because a member ceases to be independent for reasons outside of that member’s reasonable control, that person, with prompt notice to NYSE and only so long as a majority of the compensation committee continues to be independent, may remain a compensation committee member until the earlier of:

(1) the next annual shareholders’ meeting; or

(2) one year from the occurrence of the event that caused the member to be no longer independent.

 If a company fails to meet the compensation committee requirements because of a vacancy on the committee or because a member ceases to be independent for reasons outside of that member’s reasonable control, the company shall regain compliance by the earlier of:

(1) the next annual shareholders’ meeting; or

(2) one year from the occurrence of the event that caused the noncompliance.

However, if the annual shareholders’ meeting occurs no later than 180 days following the event that caused noncompliance, the company will instead have 180 days to regain compliance. A company relying on the cure period must immediately notify Nasdaq upon learning of its noncompliance.

 
Smaller Reporting Companies Smaller reporting companies are required to have a compensation committee composed entirely of independent directors.However, smaller reporting companies are exempt from compliance with the additional independence requirements specific to compensation committee membership, as well as from the requirements that the compensation committee to conduct an independence assessment prior to selecting a compensation adviser. Smaller reporting companies are required to have, and certify that they will continue to have, a compensation committee composed of at least two independent directors and to adopt, and certify that they have adopted, a formal written charter (or board resolution in place of a charter) specifying:

(1) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements;

(2) the committee’s responsibility for determining or recommending executive compensation; and

(3) that the chief executive officer may not be present during voting or deliberation on his compensation.

Smaller reporting companies are exempt from the remaining compensation committee requirements, including the requirements related to specific compensation committee responsibilities and authority.

Smaller reporting companies may avail themselves of the exception for non-independent directors under exceptional and limited circumstances and the cure period.

 
Foreign Private Issuers Foreign private issuers are permitted to follow home country practice in lieu of NYSE’s compensation committee listing standards but must still disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards. Foreign private issuers that follow home country practices in lieu of Nasdaq’s compensation committee listing standards must discloses in their annual report:

(1) the reasons they do not have an independent compensation committee;

(2) the requirements they do not follow; and

(3) the home country practices followed in lieu thereof.

 
Transition Period Companies must comply with the requirements related to compensation committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers beginning on July 1, 2013.

Companies will have until the earlier of:

(1) their first annual meeting after January 15, 2014; or

(2) October 31, 2014,

to comply with the independence requirements specific to compensation committee service.

 Companies must comply with the requirements related to compensation committee responsibilities and authority by July 1, 2013.

If a company does not have a standing compensation committee by July 1, 2013, then the independent directors who determine, or recommend to the board for determination, executive compensation must comply with the requirements related to responsibilities and authority.

Companies must comply with the remaining requirements related to compensation committees, including having a written compensation committee charter, by the earlier of:

(1) their first annual meeting after January 15, 2014; or

(2) October 31, 2014.

Companies must certify their compliance with the compensation committee rules to Nasdaq no later than 30 days after the final implementation deadline.

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Exchange Policy and Rule Changes and the Upcoming Meeting of the Advisory Committee on Small and Emerging Companies

by Vanessa Schoenthaler on January 30, 2012

I’m still playing a bit of catch up, but hopefully this is the week that I finally get back to a regular posting schedule … in the meantime, here are a few items from the week that was:

NYSE and Amex Changes to Broker Non-Votes

As has been widely reported, on Wednesday NYSE issued a Information Memo relating the the application of Rule 452, which governs when NYSE and Amex brokers may vote shares without specific shareholder instructions.

Under the new policy brokers will not be permitted to vote uninstructed shares on corporate governance proxy proposals, including proposals related to:

  • de-stagger boards;
  • majority voting in director elections;
  • the elimination of supermajority voting requirements;
  • use of consents;
  • the right to call special meetings; and
  • certain types of anti-takeover provision overrides.

The above list is meant to be illustrative, not exhaustive, and if you have any questions about a specific proposal you should speak to your counsel or contact the NYSE staff.

Additionally, you might recall that the Dodd-Frank Act required the national securities exchanges to adopt rules prohibiting members from voting uninstructed shares on matters related to the election of directors, executive compensation and “other significant matters” as determined by the Commission. The Commission hasn’t yet defined “other significant matters” and, according to its current Dodd-Frank Act implementation schedule, hasn’t yet determined when it will do so. As such, we may continue to see a narrowing of the matters over which broker have discretionary voting authority, which in turn requires that you plan to spend more time on shareholder analysis and voting outreach.

Finally remember that Rule 452 applies to NYSE and Amex member firms, not the companies whose securities are listed on the NYSE and Amex. Meaning that these changes also affect companies with their securities listed on Nasdaq and those that are quoted in the over the counter markets.

Nasdaq Reverts Back to its Two-Tier Fees Structure for Written Interpretations of Listing Rules

On Thursday the Commission published a rule change relating to the fees that Nasdaq charges for written interpretations of its listing rules.

Under the revised rule Nasdaq is reverting back to its previous two-tier fee structure, whereby a company that seeks a written interpretation of the listing rules will be required to submit a $5,000 non-refundable fee for a regular request or, alternatively, can submit a $15,000 non-refundable fee for an expedited request.

For regular requests Nasdaq will generally provide a written response within four weeks of the date that it receives all of the information necessary to respond.  For expedited requests Nasdaq will generally provide a written response by a date that is less than four weeks, but at least one week, after it receives all of the information necessary to respond.

Advisory Committee on Small and Emerging Companies Meets Again on Wednesday

Also on Thursday, the Advisory Committee on Small and Emerging Companies announced the agenda for its meeting this Wednesday and posted a number of useful background materials on the Commission’s website.

Up for discussion and consideration are recommendations related the triggers for public registration and reporting (the 500 shareholder rule) and the suspension of reporting requirements, crowdfunding, Regulation A and the IPO On-Ramp report.

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The SEC’s Roundtable on Conflict Minerals

by Vanessa Schoenthaler on October 19, 2011

Yesterday the Securities and Exchange Commission hosted a public roundtable to discuss the Commission’s rulemaking efforts under Section 1502 of the Dodd-Frank Act, addressing conflict mineral disclosure.

The Commission originally proposed rules to implement Section 1502 in December 2010, and then extended the rule’s comment period through March 2011.

To date, the Commission has received nearly 26,000 form comment letters supporting conflict mineral disclosure, over 265 individual comment letters of various types and has logged over 90 meeting with interested individuals and organizations.

The Commission is once again opening the comment period, through November 1, 2011, and soliciting comments on the various issues discussed at yesterday’s roundtable (a webcast of which is available here).

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A Few Odds and Ends from the Last Week or So

by Vanessa Schoenthaler on August 8, 2011

Commissioner Casey Announces Her Departure

On Friday Commissioner Casey officially announced her departure on from the Securities and Exchange Commission. While her five year term ended on June 5, 2011, Commissioners can stay in office for up to 18 months after their terms expire.

In May President Obama nominated Daniel Gallagher to replace Casey. Gallagher, whose nomination has not yet been confirmed, is a Republican and currently a Partner at Wilmer Hale. Formerly he was the Deputy Director of the Commission’s Division of Trading and Markets.

No word yet on where Casey is headed.

Coming Soon: Additional Reverse Merger Listing Requirements

On Thursday NYSE and Amex filed proposed rule changes to adopt additional listing requirements for companies applying to list following a reverse merger. Nasdaq also has a similar set of proposed rule changes pending.

Petition for Rulemaking on Political Spending

On Wednesday the Committee on Disclosure of Corporate Political Spending, a group of ten securities law professors, submitted a rulemaking petition requesting that the Commission develop rules requiring companies’ to disclose their corporate political spending.

(Download File)

The Burdensome Data Collection Relief Act

In March Representative Nan Hayworth et al. introduced the Burdensome Data Collection Relief Act to repeal Section 953(b) of the Dodd-Frank Act.

Section 953(b) requires the Commission to adopt rules regarding disclosure of the:

  • median of the annual total compensation of all of a company’s employees, except the chief executive officer;
  • annual total compensation of the chief executive officer; and
  • ratio of the median of the annual total compensation of all of a company’s employees to the annual total compensation of the chief executive officer.

Two weeks ago a group of attorneys and compensation consultants submitted a comment letter to the Commission expressing their support for repeal of Section 953(b), and, if not repealed, for the adoption of fair and reasonable interpretations of its requirements.

Among other things, the letter highlights the difficulties of integrating multiple payroll systems, especially in an organization with a global workforce, and questions the utility of information regarding foreign employee compensation, which varies considerably from average U.S. employee compensation.

The letter also argues for flexibility in the disclosure requirements, including allowing a company the option of reporting the ratio of its chief executive officer’s annual total compensation to that of the annual total compensation of a private nonfarm worker, which was $40,929.20 according to the Bureau of Labor Statistics’ April 2011 numbers.

(Download File)

 

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CIGFO’s First Annual Report: A Peak at Upcoming SEC-OIG Audits

by Vanessa Schoenthaler on July 27, 2011

Section 989E of the Dodd-Frank Act created the Council of Inspectors General on Financial Oversight (CIGFO). Appropriately named, CIGFO is made up of the Inspector Generals of nine federal agencies–the Fed, CFTC, HUD, Treasury, FDIC, FHFA, NCUA, SEC and SIGTARP–involved in financial oversight.

CIGFO’s purpose is to facilitate information sharing and discussions among members about their ongoing work, with a focus on concerns relating to the broader financial sector and ways to improve financial oversight. CIGFO also is required to produce an annual report, the first of which was issued today:

(Download File)

The SEC-OIG’s contribution, beginning on page 59, reviews recent examples of oversight work by the SEC-OIG and notes that going forward the SEC-OIG plans to:

  • conduct a full audit of the SEC’s economic analysis for a sample of Dodd-Frank rulemaking projects to determine if the SEC is performing its cost-benefit analyses in compliance with applicable requirements (we know what the DC Circuit Court of Appeals thinks about that);
  • conduct a study of the whistleblower protections established under the Dodd-Frank Act (as required by Section 922 of the Act);
  • review the SEC’s Office of Minority and Women Inclusion; and
  • review of the SEC’s internal organizational structure “to ensure efficiencies and lack of duplication of efforts”.

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The GAO Releases A Dodd-Frank Study on Securities Fraud Liability for Secondary Actors

by Vanessa Schoenthaler on July 21, 2011

Section 929Z of the Dodd-Frank Act, which is officially one year old today, required the Government Accountability Office to conduct a study on the impact of creating a private right of action against secondary actors (i.e., lawyers, accountants, bankers, et al.) who aid and abet violations of the federal securities laws.

The study is a bit long on reporting and otherwise short on analysis, but if you’re looking for a brief overview of the anti-fraud provision of the federal securities laws, the role of secondary actors in securities transactions and a review of the legislative and judicial landscape concerning secondary actor liability, it’s not a bad place to start. The final few pages also recount policy arguments for and against a set of House and Senate proposals that were previously introduced to create private rights of action against secondary actors.

(Download File)

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The SEC Recommends No New SOX 404(b) Exemptions for Accelerated Filers

by Vanessa Schoenthaler on April 25, 2011

On Friday the Securities and Exchange Commission released its latest Dodd-Frank Act-mandated study which looks at how the burdens of Sarbanes-Oxley Section 404(b) compliance (the auditor attestation requirement) might be reduced for companies with market capitalizations of between $75 million and $250 million while still maintaining investor protections, as well as at whether a reduction in or exemption from Section 404(b) compliance would encourage companies to list their initial public offerings in the United States.

As part of its analysis the Commission reviewed findings from its 2009 Section 404 study, actions that have already been taken to reduce the burdens of Section 404 compliance (previously discussed here), academic and other research, and comment letters received in response to a request for public comment made in conjunction with the current study. The Commission concluded that:

  • the overall cost of Section 404(b) compliance has declined;
  • investors view Section 404(b) auditor attestations as beneficial;
  • financial reporting is more reliable when auditors are involved; and
  • there is no conclusive evidence that links the requirements of Section 404(b) compliance with the listing choices of companies undertaking their initial public offerings.

Based on these findings the Commission makes two recommendations, that:

  • existing Section 404(b) requirements for issuers with market capitalizations of between $75 million and $250 million remain in place; and

So, unless Congress enacts another exemption, it looks like accelerated filers with market capitalizations of between $75 million and $250 million will remain subject to Sarbanes-Oxley Section 404(b)’s auditor attestation requirement.

***

There wasn’t too much in the way of new information in the Section 404(b) study, but there were a few interesting charts and data points:

In 2009, 9,092 unique issuers filed annual reports with the Commission on Forms 10-K or 20-F (excluding investment companies, issuers of asset backed securities, certain Canadian issuers and financial institutions, among other miscellaneous categories of filers). These filers are broken down as follows:

There was a significant difference between the mean and median audit fees incurred by accelerated and non-accelerated filers in 2009:

Source: Section 404(b) Study Fig. 3, page 37

More than 80% of all restatements that occurred in 2009 were caused by the misapplication of GAAP accounting standards, but issuers that were subject to Section 404(b) had lower restatement rates.

Source: Section 404(b) Study Fig. 7, page 40

Finally, the U.S. markets’ share of world-wide IPOs raising less than $250 million has declined dramatically over the past decade.

New listing with proceeds of less than $50 million

Source: Section 404(b) Study Fig. 12, page 47

New listing with proceeds of less than $75 million

Source: Section 404(b) Study Fig. 11, page 47

New listing with proceeds of $75 million to $250 million

Source: Section 404(b) Study Fig. 10, page 45

New listing with proceeds of $50 million to $500 million

Source: Section 404(b) Study Fig. 13, page 48

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Executive Paywatch: A New Site Featuring A CEO Compensation Database and Comparison Tools

by Vanessa Schoenthaler on April 19, 2011

2011 Executive CompensationEarlier today the American Federation of Labor and Congress of Industrial Organizations, better known as the AFL-CIO, the U.S.’s largest federation of labor unions, launched a new website: Executive Paywatch.

The site focuses on the Dodd-Frank Act’s say-on-pay provisions with a particular emphasis on Section 953, which directs the Securities and Exchange Commission to adopt rules requiring disclosure of the:

  • median annual compensation of all of a company’s employees, except for its chief executive officer;
  • total annual compensation of the chief executive officer; and
  • ratio of the median annual compensation of all employees to the total annual compensation of the chief executive officer.

Based on the current Dodd-Frank implementation schedule, the Commission should be proposing rules to address Section 953 some time between August and December 2011 but, as Broc Romanek notes over at The Corporate Counsel, there’s no deadline for implementing Section 953 and the release of proposed rules has already been pushed back once.

Executive Paywatch features a database that includes compensation information for the chief executives of Russell 3,000 companies.

It also includes comparisons of CEO compensation to minimum wage workers, median workers and President Obama, and even allows you to fill out a form to compare your own compensation package (trust me, it’s a pitiful sight, even if you are very well paid).

Executive Paywatch also compares the compensation of chief executives from 299 of the S&P 500′s largest companies, as disclosed in the companies’ most recent proxy materials and compiled by salary.com, with the median salary of workers like nurses, teachers and fire fighters as disclosed in the Bureau of Labor Statistics’ Occupational Employment Statistics estimates.

Source: AFL-CIO analysis of pay data from 299 companies, provided by salary.com

Even though all of this information is publicly available, it’s still utterly jaw dropping when laid out like this.

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Proposed Rules Requiring Proposed Listing Standards About Compensation Committees

by Vanessa Schoenthaler on March 31, 2011

Proposed Rules on Compensation Committees and Compensation ConsultantsSection 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amends the Securities Exchange Act of 1934 by adding new Section 10C, requiring the Securities and Exchange Commission to adopt rules directing the national securities exchanges* to prohibit the listing of the equity securities of a company that does not comply with certain compensation committee and compensation advisor requirements. Yesterday the Commission released a set of proposed rules and amendments that are designed to implement Section 952.

As per usual, the Commission is soliciting public comments on the proposed rules and amendments, which are due on or before April 29, 2011.

Updated April 29, 2011:

On April 29, 2011, in response to a request from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, the Commission has extended the comment period through May 19, 2011.

Who do the proposed rules and amendments apply to?

Proposed Rule 10C-1

Proposed Exchange Act Rule 10C-1 requires that the rules of the national securities exchanges prohibit the initial or continued listing of any equity security of a company that does not comply with certain compensation committee and compensation advisor requirements.

As proposed Rule 10C-1 only applies to companies with exchange-listed equity securities, excluding security future products and standardized options. The Commission estimates that there are approximately 76 companies that fall outside of the scope of Rule 10C-1 by virtue of having only exchange-listed debt securities, and is specifically seeking comment on whether these companies should be made to comply with the final rule.

Additionally, by definition, companies with securities quoted through inter-dealer quotation systems in an over the counter market, such as the OTC Bulletin Board or the OTC Markets Group (formerly the Pink Sheets), are excluded from Rule 10C-1, unless, of course, they also have a class of equity securities listed on a national securities exchange.

Proposed Amendments to Item 407 of Regulation S-K

The proposed amendments to Item 407 of Regulation S-K broaden the scope of existing disclosure requirements with respect to compensation advisor and conflict of interest disclosures.

As proposed the amendments apply to all Exchange Act reporting companies that are subject to the proxy rules, this includes companies with securities quoted in an over the counter market, such as the OTC Bulletin Board or the OTC Markets Group, and controlled companies, but excludes foreign private issuers, which are not subject to the proxy rules, and registered investment companies, but only because they are not subject to the disclosure requirements of Item 407 of Regulation S-K.

What does proposed Rule 10C-1 require regarding compensation committees?

Proposed Rule 10C-1 requires that if a company has a compensation committee, or a committee performing the function of a compensation committee (i.e., one that oversees executive compensation), each committee member must also be a member of the company’s board of directors and must be independent. The national securities exchanges are themselves tasked with defining independence in the context of compensation committee membership, but must take into consideration factors such as:

  • sources of compensation paid to a board member, including consulting, advisory and other fees paid by the company; and
  • whether a board member is affiliated with the company or a subsidiary of the company.

Notably, as proposed Rule 10C-1 does not direct the national securities exchanges to adopt listing standards that would require a company to have a compensation committee, or to apply the compensation committee independence standards to the independent members of a board of directors that oversee executive compensation when there is no committee. The Commission is also specifically seeking comment on whether the final rule should instead direct the national securities exchanges to adopt listing standards that simply require compensation committees.

What does proposed Rule 10C-1 require regarding compensation advisors?

Proposed Rule 10C-1 requires that a compensation committee have the discretion and reasonable funds available to retain compensation consultants, independent legal counsel and other advisors, and that the committee be responsible for appointing, compensating and overseeing the work of such advisors, but not be required to follow the their advice or recommendations.

When choosing advisors, proposed Rule 10C-1 does not require that they also be independent, only that the compensation committee, in its selection process, consider:

  • whether the advisor provides other services to the company;
  • the amount of fees the advisor receives from the company as a percentage of the advisor’s total revenues;
  • what policies and procedures the advisor has in place to prevent conflicts of interest;
  • whether the advisor has a business or personal relationship with any member of the compensation committee; and
  • whether the advisor owns any company stock.

In addition to the foregoing, the national securities exchanges may adopt other relevant factors for consideration in their respective listing standards.

Are there any exemptions?

Exchange Act Section 10C exempts five categories of companies from the the compensation committee independence requirements:

  • controlled companies;
  • limited partnerships;
  • companies in bankruptcy proceedings;
  • open-ended management companies; and
  • foreign private issuers that disclose in their annual report the reason they do not have an independent compensation committee.

Proposed Rule 10C-1 also authorizes the national securities exchanges to adopt listing standards that exempt:

  • certain relationships from the compensation committee independence requirements; and
  • entire categories of companies from all of the Section 10C requirements, taking into consideration the potential impact that the requirements may have on smaller reporting companies.

When will the new listing standards take effect?

Procedurally, following the public comment period, and once the final rules and amendments are adopted and published in the Federal Register, the national securities exchanges will have 90 days to propose conforming listing standards, which must then be approved by the Commission within one year of the date on which its final rules and amendments were published in the Federal Register.

To the extent that they do not already do so, the listing standards of the national securities exchanges will have to provide companies with a reasonable opportunity to cure any defects that would otherwise cause their securities to be delisted, or ineligible for listing, based on a failure to meet the new standards.

What new disclosures do the proposed amendments to Item 407 of Regulation S-K require?

As proposed, the amendments to Item 407 of Regulation S-K would require a company to make certain expanded disclosures in any proxy or information statement filed in connection with an annual or special meeting at which directors are elected, regarding whether:

  • management or the company’s compensation committee retained or obtained the advice of a compensation advisor during the most recently completed fiscal year; and
  • the work of the compensation advisor raised any conflicts of interest, and, if so, how the conflicts are being addressed.

When do the new disclosure requirements take effect?

The new disclosure requirements will not take effect until the effective date of the final rules and amendments adopted by the Commission.

________________________

* The proposed rules would also apply to a registered national securities association that lists equity securities in an automated inter-dealer quotation system.  At present, the Financial Industry Regulatory Authority (FINRA) is the only registered national securities association, however, FINRA does not list equity securities and, as such, the new rules do not apply to it.

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Does an Optimized SEC Require Less Funding?

by Vanessa Schoenthaler on March 11, 2011

Securities and Exchange Commission Organizational Study and ReformSection 967 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that the Securities and Exchange Commission hire an independent consultant to examine the Commission’s internal operations, structure, funding and the need for comprehensive reform, as well as its relationships with and reliance on self-regulatory and other organizations.  Specifically Section 967 requires that the study look at:

  • the elimination of unnecessary or redundant units within the Commission;
  • improving communication between Commission offices and divisions;
  • the need for a clear chain-of-command structure, particularly with respect to enforcement examinations and compliance inspections;
  • the effects of technological advances (such as high frequency trading) on the securities markets and what is needed to monitor these effects;
  • the Commission’s hiring authority, workplace practice and personnel policies;
  • whether the Commission’s reliance on self-regulatory organizations promotes efficient and effective governance for the securities markets; and
  • whether the Commission’s reliance on self-regulatory organizations requires adjustment.

In October 2010 the Commission engaged The Boston Consulting Group (BCG) as its independent consultant, and yesterday BCG presented its findings to Congress in a comprehensive 263 page report, replete with the requisite consultant speak (which some would say is at least better than legalese).

In its report BCG reached two key conclusions: the Commission “has significant opportunity to further optimize its available resources through implementing the [recommended] initiatives … ” and “Congress should reflect on whether or not such optimization adequately meets its expectations for the [Commission's] efficiency and effectiveness … [and i]f not, it should consider … ” providing the Commission with additional funding or a role that fits its available resources.

Meaning, the Commission can more efficiently use its existing resource, but those resources will only take it so far, so Congress has to consider whether the Commission can effectively carry out its mission, given its current level of funding, and, if not, should either increase the Commission’s budget or decrease its workload.  The funding issue is, of course, a reoccurring theme, as the Commission continues to suffer from budgetary constraints that have forced it to scale back or delay implementation of a number of Dodd-Frank initiatives, among other things.

SEC Organizational Study and Reform With respect to the first conclusion BCG suggests that the Commission can more efficiently use its existing resources in four ways:

  • Reprioritizing its regulatory activities — by focusing on the highest-priority matters, scaling-back or eliminating lesser-priority matters, delegating matters to self-regulatory agencies and requesting flexibility with respect to the implementation of certain Dodd-Frank mandated activities.
  • Reshaping the organization — by redesigning the Commission’s organizational structure, improving Commission and staff interactions, clarifying the delegation of authority between the Commission and staff and implementing ongoing improvement processes.
  • Investing in key infrastructure — such as technology, human resources management and employees with high-priority skills.
  • Enhancing self-regulatory engagement — by strengthening its relationships with self-regulatory agencies, increasing its oversight of, and improving its interactions with, such agencies, and clarifying its rule making processes.

BCG estimates the Commission could reallocate approximately $50 million in resources by implementing its suggested initiatives.  That’s a long way off from the Commission’s $264 million requested budget increase for the 2012 fiscal year, but at least it’s a start.

Update March 18, 2011:

The Washington Post is reporting that on Tuesday Representatives Randy Neugebauer, Chairman of the Subcommittee on Oversight and Investigations, and Spencer Bachus, Chairman of the House Financial Services Committee, penned a letter to Chairman Schapiro seeking information about the “what editorial input” the Commission had over BCG’s report to Congress.  WaPo seems to suggest that the letter is calling into question the integrity of BCG’s report, but Representative Neugebauer characterizes the inquiry as part of a broad effort to examine the influence of studies on policy.

This is Representative Neugebauer and Bachus’ latest letter to the Commission. In their last letter they were seeking information about what implementation and execution of the Dodd-Frank Act would cost the Commission on an annual basis.

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