October 10, 2012
In late September, the New York Stock Exchange (NYSE) and Nasdaq filed proposed listing standards with the Securities and Exchange Commission (SEC) that could influence the way that publicly traded companies determine compensation for their highest ranking employees. If the SEC approves the proposed listing rules, some provisions will go into effect as soon as July 1, 2013.
Why are the stock exchanges proposing new rules regarding compensation committees? The SEC adopted Rule 10C-1 earlier this summer to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Rule 10C-1 requires the NYSE and Nasdaq to create rules about their national listing standards so that any companies publicly listed on the stock exchange adopt certain corporate governance procedures related to their compensation committees.
As securities law experts have pointed out, the SEC’s oversight is mainly with regard to disclosures; to change corporate governance practices, direction must really come from the national stock exchanges, which have the authority to “impose conditions on substantive practices.”
What is the intent of the stock exchanges’ new standards? The stock exchanges’ new listing standards attempt to foster the independence of the compensation committee from management influence, much like the efforts that took place under the Sarbanes-Oxley Act of 2002 with regard to independent audit committees after the fall of Enron and several other large companies.
The national listing standards, as currently proposed, would require publicly traded companies to establish independent compensation committees, although the NYSE and Nasdaq proposals differ in approach. For a compensation committee member to be deemed independent under the new standards, both proposals consider who is paying the compensation committee member, including for any consulting and advising for the company by the committee member. Both proposals also examine the committee member’s affiliations with the company and its subsidiaries.
And both proposals examine the role of compensation advisors — consultants that compensation committees have historically turned to for help in bench-marking their chief executives’ pay. Some financial observers say that, on the recommendations of compensation advisors, pay has sky-rocketed in the past few decades as companies race to compete against each other for top pay for their highest ranking executives.
When would the proposed rules go into effect? The SEC is supposed to approve the stock exchanges’ proposals by June 27, 2013. The new standards will go into effect during a transition period after that, but should be implemented by December 31, 2014.
Tip: How can you stay on top of Dodd-Frank reforms? The SEC’s focus on executive compensation is just one aspect of the sweeping reforms called for by Dodd-Frank. Two ways to stay up-to-date on other regulatory changes are adding the Dodd-Frank Wall St Reform tab in Westlaw Classic or searching for Dodd-Frank related topics in Reg and Leg Center on WestlawNext.