SEC Adopts New Rules Calling for Greater Independence Standards for Compensation Committees And Their Advisers

SEC Adopts New Rules Calling for Greater Independence Standards for Compensation Committees And Their Advisers

by Gregory C. Schick

On June 20, 2012, the SEC published final rules for compensation committee independence requirements. The Final Rules compels Exchanges to establish listing standards requiring each member of a listed issuer's compensation committee to be:(i) a board member and (ii) "independent." Listed companies may wish to review the independence and potential conflicts of interest for each of their compensation committee members in light of the Final Rules.


In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act") for adopting regulations required by section 952 of the Reform Act, the Securities and Exchange Commission (the "SEC") on June 20, 2012 issued a press release and published final rules (Release No. 33-9330) (the "Final Rules") for compensation committee and compensation adviser independence requirements.

As we have previously commented, the Reform Act implemented numerous new laws affecting executive compensation and corporate governance at publicly-held companies. Section 952 of the Reform Act added Section 10C to the Securities Exchange Act of 1934 (the "Exchange Act"). Among other things, Section 10C required the SEC to adopt rules directing the national securities exchanges and national securities associations (the "Exchanges") to prohibit the listing of any equity security of an issuer that is not in compliance with Section 10C's compensation committee and compensation adviser independence requirements.

Section 10C essentially provides that limited partnerships, companies in bankruptcy proceedings, registered open-end management investment companies registered under the Investment Company Act of 1940, and foreign private issuers that provide annual disclosures to shareholders of the reasons why the foreign private issuer does not have an independent compensation committee will not be subject to the Exchanges' listing requirements regarding compensation committee member independence. Section 10C further expressly provides that controlled companies are exempt from its requirements. The Final Rules provide a slightly modified definition of a "controlled company" for purposes of these rules and which more closely tracks the definition currently used by the NYSE and Nasdaq. [footnotes omitted]

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Gregory C. Schick is a partner in Sheppard Mullin's Tax, Employee Benefits and Estate Planning Practice Group in the firm's San Francisco office.

Gregory Schick's practice focuses primarily in the executive compensation, corporate securities laws and corporate governance areas. Mr. Schick also has appeared as an expert witness in civil litigation.

Mr. Schick advises both public and privately held companies as well as individual clients. He negotiates, prepares and reviews equity compensation and change of control plans/agreements, Rule 10b5-1 trading plans along with proxy statements, prospectuses, and other filings required by the 1933/1934 Securities Acts and the national stock exchanges. Mr. Schick also regularly represents senior level executives and companies in employment and separation agreement matters and management teams in change of control transactions and has co-authored a portfolio for The Bureau of National Affairs (BNA) titled, "Executive Employment Agreements."

Greg has developed numerous quantitative models to analyze, among other things, golden parachutes, personal aircraft use and other executive compensation arrangements. He has also developed automated tools for complying with the SEC's executive compensation disclosure rules.

Mr. Schick's experience also includes working in corporate business development where he participated in creating business plans, private placement offerings, deal structuring and in developing several high-tech international start-up initiatives.