As we previously reported, earlier in 2013 the Securities and Exchange Commission (the “SEC”) approved certain new listing requirements for the NYSE and NASDAQ effective July 1, 2013. The new listing requirements implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and SEC Rule 10C-1, which require compensation committees of listed companies to assess the independence of their advisers, including outside legal counsel.
Under the Dodd-Frank Act, a compensation committee may engage compensation consultants, legal counsel and other advisers only after considering the following six independence factors:
(i) the provision of other services by the adviser's employer to the listed company;
(ii) the amount of fees received by the adviser's employer, as a percentage of total revenue, from the listed company;
(iii) the policies and procedures of the adviser's employer that are designed to prevent conflicts of interest;
(iv) any business or personal relationship between the adviser and a compensation committee member;
(v) the adviser's holdings of the listed company’s stock; and
(vi) any business or personal relationship between the adviser and any executive officer of the listed company.
Listed companies should start implementing processes and procedures for collecting the information required by the rules and disclosing this information to their compensation committees. First, companies should determine which employees of their outside advisers provide advice or legal representation on executive compensation matters. Then, with respect to each adviser and outside advisory firm, companies should collect data on the financial, business and personal relationships that the adviser or advisory firm have to the listed company, the listed company’s executive officers and the compensation committee. Listed companies should develop their queries around the six factors specified above.
Importantly, while the exchange rules require the collection and disclosure of the data required for the independence assessment, they do not require that a compensation adviser or legal counsel be independent. In general, the goal is to alert compensation committees as to potential conflicts of interest when retaining advisers and determining executive compensation.
If there is no ongoing representation with regard to executive compensation, the company must merely meet the requirements of the new rule in advance of the first advisory relationship or legal representation after July 1. The independence assessment must be performed prior to the start of any representation and should be performed on an annual basis thereafter.
Companies need not evaluate the independence of any consultant or adviser that merely (i) provides advice with respect to broad-based compensation plans that do not discriminate in favor of executive officers or directors of the company, or (ii) provides information to the company that is not customized to the company or that is based on parameters not developed by the adviser and about which the adviser does not provide advice. Additionally, the requirement of an independence assessment does not extend to any in-house legal counsel.
The independence assessment requirement is an important part of the Dodd-Frank regime and the SEC’s rules. Listed companies and their compensation advisers should become familiar with the new requirements and how they can affect the retention of, and relationship with compensation advisers.