On June 20, the SEC released a statement announcing that it has approved a rule (Rule 10C-1) that requires national securities exchanges to adopt listing standards for boards of directors and compensation advisers of public companies. You can view the Final Rule.
The new rule requires the listing standards to include:
- The independence of the individual members of the compensation committee;
- The committee’s authority to retain compensation advisers;
- The committee’s consideration of the independence of any compensation advisers; and
- The committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser.
In order for a company to be listed on a particular securities exchange, the company must meet the new listing standards of that particular exchange in order for its shares to trade on that exchange. The new rule (and its amendments) will take effect 30 days after the publication in the Federal Register. The securities exchanges must update their listing standards policies, and companies must amend their current procedures to comply with the new rule no later than 90 days after the new rule goes into effect. The new listing standards must be approved by the SEC within one year of the new rule going into effect.
In addition to the new listing standards, the SEC also amended its proxy disclosure rules, requiring companies to provide additional disclosures about their use of compensation consultants and conflicts of interest. Companies are already required to disclose information about their use of compensation consultants, including details about the fees paid to consultants. The new amendments require companies to disclose the nature of any conflict in regards to any compensation consultant that has played a role in determining the amount or form of executive and director compensation and whose work has raised a conflict of interest. The amendments also require the company to disclose how the conflict is being addressed.
Does Your Company Need to Comply with Rule 10C-1?
The new rule specifically exempts a number of companies from its requirements. Specifically, the following companies are exempt: limited partnerships; companies in bankrupt proceedings; open-end management investment companies registered under the Investment Company Act of 1940; and any foreign private issuer that discloses in its annual report the reasons the foreign private issuer does not have an independent compensation committee.
The new rule also exempts controlled companies—i.e. corporations where a majority of the voting shares of stock are held by an individual or another company—and smaller reporting companies from all the requirements of the new listing standards and authorizes the exchanges to exempt other categories of issuers. Of course, the listing exchange is required to first obtain approval from the SEC before adopting such exemptions.
If you’re interested in learning more about Rule 10C-1 or how the rule might affect your business, please contact us for your free 30-minute consultation.