SEC proposes compensation committee and adviser independence rules.

• Author: Ladd, Scott
• Position: Regulation - Securities and Exchange Commission

The U.S. Securities and Exchange Commission recently proposed rules to enhance the independence of executive compensation decisions. The rules apply the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and direct stock exchanges to implement revised listing standards applicable to compensation committees.

The rules generally mirror Dodd-Franks' requirements, as the SEC added very little in the way of additional requirements or clarifications.

Proposed by the SEC on March 30, the rules instruct stock exchanges to create a definition of "independence" for compensation committee members that takes into account the sources of each member's compensation and whether a member is affiliated with the company or its subsidiaries.

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In the process of defining compensation committee member independence, exchanges might--but are not required to--consider a director's affiliation with other shareholders (such as private equity or venture capital firms) and relationships between compensation committee members and management.

The proposed rules also instruct exchanges to require that compensation committees have the power and funding to retain advisers and consider their independence.

In determining adviser independence, the committee would consider other services an adviser provides the company, what percentage of its total revenue is received from the company, the adviser's conflict of interest policies, business and personal relationships between the adviser and committee members and whether the adviser owns stock in the company. The rules do not require that the adviser be independent, just that committees consider adviser independence.

Finally, the proposed rules create a proxy...