SEC Guidance on Compensation Committee Independence

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On June 21, 2012, the SEC finalized its rules on board compensation committee independence. As a practical matter, for most companies the rules do not change much, primarily because existing tax (IRC Section 162(m) and securities law (Rule 16b-3) already effectively require that compensation committees meet fairly rigorous independent standards) Moreover, the new rules will not even have much effect until acted on by the stock exchanges, including NYSE and Nasdaq, which are charged with amending their listing requirements to implement most of the new rules. Nonetheless the new rules will provide for a new formalized framework regarding compensation committee independence that apply regardless of tax and securities law references and compliance, and because companies will have to address how they deal with certain independence standards in their proxies, the new rules will require some attention in the 2013 proxy season.

In a nutshell, the new rules require exchanges to require that for companies listed on an exchange:

• Each director with executive compensation oversight responsibility (typically members of the compensation committee) must be independent pursuant to rules which must be determined by the exchanges;

• The board, usually through the compensation committee, must have access (if it chooses) to independent consultants and advisers paid by the Company; and

• In hiring advisers, the board, usually through the compensation committee, must address independence related issues of the adviser, such as other services performed for the company, fees paid by the company to the adviser as a percent of the adviser’s revenue, company conflict of interest policies and procedures, adviser business or personal relationships to board members or management, and adviser ownership of company stock.

As for required proxy disclosure, any company which has hired a consultant must describe the following in its proxy:

• The name of the consultant;

• Whether the consultant was directly engaged by the board, usually through the compensation committee;

• Nature and scope of, and directions given with respect to, the consultant’s assignment; and

• How any conflicts of interest have been addressed.

We will be blogging in more detail about the new rules and advise on new developments as they arise.

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