SEC Proposes Guidance to Stock Exchanges on Compensation Committee and Adviser Independence: Exchanges Will Be Responsible for Details, Including Whether Significant Stock Ownership Will Impact Committee Member Independence; Timing of Implementation Depends on Stock Exchange Rulemaking

Sullivan & Cromwell LLP - April 1, 2011

On Wednesday, March 30, 2011, the Securities and Exchange Commission proposed rules to implement Section 952 of the Dodd-Frank Act, under which the SEC must direct national securities exchanges to incorporate compensation committee and compensation adviser independence requirements into their equity listing standards.

Hewing closely to the text of Section 952, the SEC proposal leaves most of the important details, including the definition of “independence,” to the exchanges to propose. The SEC does, however, propose guidance on some interpretive issues. In particular, the SEC proposes that an exchange may conclude that significant stock ownership or affiliation with a significant stockholder does not preclude independence for purposes of compensation committee membership even though it would preclude audit committee membership. The SEC must approve any final listing standards proposed by the exchanges.

The SEC also proposed rules implementing the Section 952 disclosure requirements relating to the use of, and conflicts of interests of, compensation consultants, which would slightly expand existing disclosure requirements for companies that are subject to the U.S. proxy rules.

Comments on the SEC’s proposed rules are due by April 29, 2011. Under the Dodd-Frank Act, the SEC must issue final rules by July 16, 2011. The SEC has proposed that once these final rules are issued, the national securities exchanges will have 90 days to submit their own proposed listing standards to the SEC and one year to issue final listing standards.