US SEC Issues Compensation Consultant Rules

On 20 June 2012, the SEC announced new rules governing the use of compensation advisers and the independence and role of the board compensation committee (see HERE). The provisions fall under under Section 952 of Dodd-Frank (Section 952 added Section 10C to the ’34 Act).

The rules cover the following issues:

·         The independence of the members on a 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.


US stock exchanges have 120 days from when the SEC’s rules are published in the Federal Register (the new rules become effective 30 days after publication) to propose listing standards for compensation committees, which must then be approved by the SEC within one year of the new rule becoming effective.

 Therefore, it’s possible that the new listing standards could be in place in time for the 2013 proxy season. In any event, companies subject to the federal proxy rules, which already have to disclose information about their use of compensation consultants, will be required to disclose the nature of any conflict and how the conflict is being addressed in relation to a consultant who has played a role in determining or recommending the amount or form of executive compensation.

The SEC’s rules confirm that Section 10C does not require compensation committees to retain – or obtain advice – only from independent advisers. As in Australia, a listed issuer’s compensation committee may receive advice from conflicted advisers, including non-independent lawyers, such as in-house counsel or external law firms retained by management, or a non-independent compensation consultant or other adviser, including those who are also engaged by management. (In Australia, the board or remuneration committee can approve any remuneration consultant, no matter how conflicted they are, and do not have to disclose the engagement or advice if the advice is about the operation of the law (including tax law) or accounting or actuarial principles.  Given the amount of regulation relating to executive remuneration, these exemptions in practice allow conflicted lawyers, in particular, to advise on virtually any aspect of executive remuneration without the need for disclosure.  Advice received from management on their own pay, or the board’s failure to obtain external independent advice, also do not have to be disclosed.)

Falling short of mandating the complete independence of such advisers by requiring the compensation committee to hire only those advisers that do no other work for the company, the SEC now requires such potential conflicts of interest to be considered by the committee.

Given that the disclosures about other work such as pension and health benefit consulting have been in place for a couple of years, these regulations do not do much more beyond codifying what most companies are already doing. With the disclosures in place, companies have either been making the perceived conflicts of interest go away by changing compensation consultants, or shareholders have reviewed the information and decided that they are not concerned or, if they are concerned, have been engaging privately with companies on the issue.


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