Schiff Hardin Corporate and Securities Update

SEC Issues Proposed Rules on Listing Standards for Compensation Committees and Consultants and Proxy Disclosure Regarding Compensation Consultants

On March 30, 2011, the Securities and Exchange Commission ("SEC"), in order to implement Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), issued proposed rules that would require national securities exchanges to adopt or, in some cases, revise listing standards regarding compensation committee member independence and the appointment of compensation committee consultants. The proposed rules also would modify certain existing proxy disclosure rules relating to compensation consultants.

Compensation Committee Member Independence — Under proposed new Rule 10C-1(b)(1), exchanges will be required to adopt listing standards requiring all members of a company's compensation committee to be members of the company's board of directors and to be "independent." Neither Dodd-Frank nor proposed Rule 10C-1 define "independent." In crafting a definition of independence under their listing standards, exchanges would need to consider (1) the sources of compensation of a director, including any consulting fees paid by the company, and (2) whether a director is affiliated with the company or a subsidiary or affiliate of the company. Under the SEC's proposed rules, the listing standards adopted by the exchanges must exempt certain entities from the independence requirement, including, among others, controlled companies, limited partnerships, companies in bankruptcy proceedings and open-end management investment companies.

Compensation Consultants and Advisers — Under proposed new Rule 10C-1(b)(4), exchanges will be required to adopt listing standards granting authority to a compensation committee to retain or obtain the advice of a consultant or independent legal counsel or other compensation adviser only after considering the following five factors:

1. Whether the consultant's employer is providing any other services to the company,
2. How much the consultant's company has received in fees from the company, as a percentage of total revenue,
3. What policies have been adopted by the consultant's employer to prevent conflicts of interest,
4. Whether the consultant has any relationship with a member of the compensation committee, and
5. Whether the consultant owns any stock of the company.

The SEC also proposed new Rules 10C-1(b)(2) and 10C-1(b)(3), which together would mandate that exchange listing standards require an issuer's compensation committee to (1) have authority to "retain and obtain the advice of a compensation consultant, independent legal advisor or other adviser," and (2) be directly responsible for the appointment, payment and oversight of any compensation adviser. In addition, the proposed rules would require that the listed issuer must provide appropriate funding for payment of reasonable compensation to such compensation adviser. The proposing release makes clear that these new requirements do not require a compensation committee to retain a compensation consultant or require a compensation committee to retain independent legal or other counsel (or prohibit a compensation committee from obtaining advice from in-house counsel or outside counsel retained by the issuer or management). Please note that any listing standards that exchanges adopt pursuant to the final SEC rules will need to be approved by the SEC.

Proxy Disclosures — The proposed rules also would modify existing proxy disclosure rules relating to compensation consultants under Item 407(e) of Regulation S-K. Specifically, these modified rules would require proxy disclosure about whether the compensation committee has obtained the advice of a consultant and whether the consultant's work has raised any conflict of interest, the nature of any conflict and how the conflict is being addressed. The proposed disclosure requirements are broader and more open-ended than the current requirements in that they require disclosure beyond the nature of the engagement and the fees paid to the consultant. In fact, disclosure would be required under the proposed rule if the issuer "requested or received advice from a compensation consultant, regardless of whether there is a formal engagement . . . or a client relationship between the compensation consultant and the compensation committee or management or any payment of fees to the consultant for its advice." The proposing release also makes clear that a "general description of the issuer's policies and procedures to address conflicts of interest . . . [will] not suffice." The proposed rules also would eliminate the current disclosure exception for services that are limited to consulting on broad-based plans and the provision of non-customized benchmark data. Existing fee disclosure requirements concerning consultants would remain in place under the SEC's proposed rules. These proposed rules would apply to all Exchange Act registrants subject to the SEC's proxy rules, whether or not the issuer is listed, and whether or not the issuer is a controlled company.

Comments and Timing — The SEC has requested comments to the proposed rules on or before April 29, 2011. Dodd-Frank did not establish a specific deadline for the final exchange listing standards to be in effect, but Dodd-Frank does require the SEC to issue rules on these matters by July 16, 2011, which is likely a key reason for the relatively short comment period on the proposed rules. In connection with these timing issues, the SEC proposed that each exchange must provide to the SEC, no later than 90 days after publication of the SEC's final rules, proposed rules that comply with the final rules, and that each exchange would need to have final listing standards approved by the SEC no later than one year after publication of the SEC's final rules. Even though it is still relatively early in 2011 and the 2011 proxy season isn't even over yet, given the timeline presented by the SEC and the steps that still need to be taken by the exchanges and the SEC to finalize the rules and listing standards, there is the potential that the new listing standards may not be in place in time for the 2012 proxy season.

A copy of the release can be found on the SEC's Web site at www.sec.gov/rules/proposed/2011/33-9199.pdf.

For more information, please contact one of the attorneys listed above or another member of our Corporate and Securities Group.

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