Rule 10C-1 is authorized by new Section 10C of the Exchange Act enacted by Dodd-Frank. The rule requires national securities exchanges to establish listing standards that, among other things, require each member of a listed issuer's compensation committee to be a member of the board of directors and to be "independent," as defined by the listing standards of the applicable national securities exchange.
The term "independent" is not defined in Section 10C. Rather, Section 10C(a)(3) provides that each exchange must determine "independence" requirements, upon consideration of the following relevant factors: (1) a director's source of compensation, including any consulting, advisory or other compensatory fee paid by the issuer to the director; and (2) whether a director is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer. Certain issuers are not required to comply with the rule, including 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 it does not have an independent compensation committee. In addition to the above exemptions, exchanges may exempt a particular relationship with respect to the members of the compensation committee, as each exchange deems appropriate, taking into consideration the size of an issuer and any other relevant factors.
Under Rule 10C-1, exchanges must adopt listing standards that provide for the following requirements relating to compensation committees and compensation consultants, independent legal counsel and other advisers (collectively, "compensation advisers"):
Compensation committees must have the authority and sole discretion to retain or obtain the advice of compensation advisers.
Before selecting any compensation adviser, the compensation committee must take into consideration specific factors identified by the SEC that affect the independence of compensation advisors.
The compensation committee must be directly responsible for the appointment, compensation and oversight of the work of compensation advisers.
Each listed issuer must provide appropriate funding for the payment of reasonable compensation, as determined by the compensation committee, to compensation advisers.
Amendments to Item 407 of Regulation S-K
New Section 10C(c)(2) of the Exchange Act mandated amendments to Item 407 of Regulation S-K, requiring each issuer to disclose the following in any proxy or consent solicitation material for an annual meeting of shareholders (or special meeting in lieu of the annual meeting) at which directors are to be elected:
whether the issuer's compensation committee retained or obtained the advice of a compensation consultant
whether the work of the compensation consultant has raised any conflict of interest
if there is a conflict, the nature of the conflict and how the conflict is being addressed
Rule 10C and amendments to Item 407 of Regulation S-K were published in the Federal Register on June 27, 2012, and will be effective July 27, 2012, 30 days after publication in the Federal Register. Each national securities exchange must provide to the SEC proposed rule changes that comply with Rule 10C by September 25, 2012. Exchanges must have in place final rules or amendments approved by the SEC by June 27, 2013, one year after publication in the Federal Register.
The changes to Item 407 of Regulation S-K regarding disclosure requirements apply to any proxy or information statement for an annual meeting of shareholders (or a special meeting in lieu of the annual meeting) at which directors will be elected occurring on or after January 1, 2013.
SEC Release: http://www.sec.gov/rules/final/2012/33-9330.pdf
SEC Press Release: http://www.sec.gov/news/press/2012/2012-115.htm
Federal Register: http://www.gpo.gov/fdsys/pkg/FR-2012-06-27/pdf/2012-15408.pdf