The NASPP Blog

Last week, the SEC issued final rules requiring US exchanges to adopt listing standards on the independence of compensation committee members and the use of compensation advisors by said committees.

I don’t have a lot to say about these rules because they don’t directly relate to stock compensation. Sure, the compensation committee typically has authority over the company’s stock plans and changing who sits on the committee and which advisors the committee relies on could have implications for the company’s stock plan, but there’s nothing specific to stock compensation in the rules. And, let’s face it, for purposes of this blog, there are only two categories of stuff: 1) Stock compensation and things that explicity impact it and 2) Things I don’t care about. But, despite that fact that the new rules seem to fall into category #2, it is a current development that, at least peripherally impacts our world, so I figured a blog entry might be in order.

Rules to Create Rules

The final rules issued by the SEC are 124 pages (and no, I haven’t read them all–see #2 above–but I did read a nifty summary by Morrison & Foerster). What strikes me is that here we have 124 pages of rules, but these aren’t actually the real rules yet. These rules just direct the exchanges (Nasdaq, NYSE) to adopt the rules. They don’t even tell Nasdaq and the NYSE what the rules should be, they just suggest things that should be considered in creating the rules. The exchanges now have around 90 days to propose the actual rules, which presumably will be subject to comment (although the SEC rules were already subject to comment) and then eventually the actual, final rules will be adopted. Just an observation, not a criticism of the SEC–they are just doing what they were instructed to do under Dodd-Frank.

Three Independence Standards

The rules require the exchanges to adopt rules requiring compensation committee members to be independent, taking into consideration sources of compensation paid to directors and any relationships directors have with the company or its officers. If you’re thinking that this sounds familiar, you’re right. For purposes of Section 16, most companies maintain a committee of two or more “nonemployee” directors and for purposes of Section 162(m), companies also ensure that the members of that committee are “outside” directors. Now the committee members will also have to be “independent” under the listing standards the exchanges adopt. My guess is that they aren’t going to just adopt the Section 16 or 162(m) definition (which are similar to each other but just different enough to be confusing) and that we’ll have a third standard to comply with.

Compensation Advisors

The rules also stipulate that the exchange listing standards require that compensation committees have sole authority to engage advisors (compensation consultants and/or attorneys) and that company provide funding to the committee to pay the advisors. The rules specify a number of independence factors that the exchanges are to direct compensation committees to consider when engaging advisors. The rules don’t preclude the committee from receiving advise from non-independent counsel or consultants (e.g., the company’s in-house or outside legal counsel).

Compensation committee reliance on independent advisors has been a best practice for many years now; I suspect that many companies already have practices that partially or fully comply with this requirement. Even so, given that the advisors your compensation committee hires are likely to be making recommendations on stock compensation issued to executives, it’s something to be aware of. See topics #1 and #2 in our recent webcast “Ten Equity Compensation Issues That Affect All Stock Plan Professionals (That No One Told You About).”

Disclosures

The final rules also update the disclosures companies are required to make with respect to compensation consultants, expanding the factors that must be considered in evaluating the independence of the consultants.

To learn more about the new rules and to read all 124 pages of them yourself, see the NASPP alert “SEC Requires Listing Standards for Compensation Committees and Advisors.”  And don’t miss the 9th Annual Executive Compensation Conference (which is included in the 20th Annual NASPP Conference), where I’m sure this topic will be covered. 

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog. 

– Barbara