Compensation Consultants for Public Companies Must Be “Independent” Per New SEC Rules – More Rules in the Pipeline

On June 20, 2012, the SEC adopted final rules requiring companies to disclose whether consultants to its compensation committee have any existing conflicts of interest with the company.  Factors that might constitute a conflict of interest include (i) the consultant providing services to the company other as an advisor to the compensation committee, (ii) the company providing a significant portion of the consultant’s total revenue, or (iii) the consultant having a business or personal relationship with an executive officer of the company.  If a conflict of interest is found to exist, the new rule requires the company to disclose in its proxy statement how the conflict is being addressed.

This new rule is intended to encourage compensation committees at public companies to go through a thorough evaluation process before they retain compensation consultants, outside attorneys, and other advisers.

In addition, the new rules direct NYSE and NASDAQ to adopt new rules mandating that each member of a listed company’s compensation committee be an “independent” director.  The new rule is similar to already-existing rules regarding audit committee members.

Further, the new rules direct the stock exchanges to adopt new rules codifying certain authority and responsibility that must be granted to a listed company’s compensation committee regarding compensation matters, including the ability to retain compensation advisers.

The stock exchanges are expected to issue their new rules by October 2012.  Depending upon how quickly they are finalized, the new NYSE and NASDAQ rules might be effective in time for the 2013 proxy season.

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