The Securities and Exchange Commission has adopted a final rule pursuant to Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring national securities exchanges to adopt listing standards for public companies addressing the independence of compensation committee members and the use by compensation committees of compensation advisers. Rule 10C-1, adopted June 20, 2012, also includes amendments to the SEC’s existing proxy disclosure rules with respect to the use of compensation consultants and conflicts of interest. The SEC’s adopting release can be found at http://www.sec.gov/rules/final/2012/33-9330.pdf.

The new SEC rule takes effect on July 27, 2012. The exchanges will then have 90 days to propose listing standards that comply with the SEC rule. The SEC must approve those proposed listing standards no later than July 27, 2013. We expect, however, that the SEC will move quickly to approve the new listing standards, possibly in time for the 2013 proxy season.

Compensation Committee Independence

Rule 10C-1 requires the exchanges to adopt listing standards that require each member of a listed company’s compensation committee to be a board member who qualifies as independent. The exchanges must define "independent" for this purpose, but Rule 10C-1 requires that in doing so the exchanges consider certain relevant factors, including:

> the sources of compensation of a compensation committee member, including any consulting, advisory or other compensatory fee paid by the company to the director; and

> whether the director is affiliated with the company, a subsidiary of the company.

Authority and Funding of Compensation Committee

The listing standards to be adopted pursuant to Rule 10C-1 must also address the authority and funding of the compensation committee. Specifically, the listing standards must provide that the compensation committee of a listed company:

> may, in its sole discretion, retain or obtain the advice of a compensation adviser;

> is directly responsible for the appointment, compensation and oversight of compensation advisers; and

> must be appropriately funded by the listed company.

Selection of Compensation Advisers

Rule 10C-1 mandates that the new listing standards include the following six independence standards that compensation committees must consider before selecting a compensation consultant, legal counsel or other advisor (other than in-house legal counsel):

> whether the company employing the compensation adviser is providing any other services to the listed company;

> the amount of fees the company employing the compensation adviser has received from the listed company, as a percentage of the consulting company’s total revenue;

> what policies and procedures have been adopted by the company employing the compensation adviser to prevent conflicts of interest;

> whether the compensation adviser has any business or personal relationship with a member of the compensation committee;

> whether the compensation adviser owns any stock of the company (which the SEC interprets to include stock owned by the adviser and his or her immediate family members); and

> whether the compensation adviser or the company employing the adviser has any business or personal relationship with an executive officer of the listed company.

Applicability of New Rule

The listing standards required by Rule 10C-1 will generally apply to compensation committees of listed companies. The new rule does not require a listed company to have a compensation committee. Therefore, where a listed company has no compensation committee, the listing standards with respect to independence of the committee members and selection of advisers (but not those with respect to authority and funding) will apply to the directors who are responsible for overseeing executive compensation matters on behalf of the board, which may be the entire board. Rule 10C-1 automatically exempts controlled companies and smaller reporting companies from all of the requirements of the new compensation committee listing standards. The new rule also authorizes the exchanges to exempt a particular relationship from the independence requirements applicable to compensation committee members.

The following four categories of issuers will be automatically exempted from the new listing standards pursuant to Rule 10C-1:

> limited partnerships;

> companies in bankruptcy proceedings;

> open-end management investment companies registered under the Investment Company Act of 1940; and

> any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.

The rule also allows the exchanges to exempt other categories of issuers, subject to the exchange receiving prior SEC approval for each exemption.

Compensation Consultant Disclosure and Conflicts of Interest

The SEC’s existing proxy rules for public companies already require disclosure of information about a company’s use of compensation consultants, including specific information about fees paid to consultants. Under the newly adopted amendments to the proxy disclosure rules, with respect to any compensation consultant that has played a role in determining or recommending the amount or form of executive and director compensation and whose work has raised any conflict of interest, companies will be required to disclose pursuant to Item 401(e)(3)(iv) of Regulation S-K the nature of the conflict and how the conflict is being addressed. The new disclosure requirements will be applicable for proxy statements relating to the election of directors at meetings occurring on or after January 1, 2013.