Tag Archive: Davis Polk

An Update From the SEC

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It is no secret that the Securities and Exchange Commission has been slow to fulfill the rules mandated by Dodd-Frank. As of July 1, the agency had missed over half of the deadlines—56 out of 95 required rulemakings—according to the Davis Polk Dodd-Frank Progress Report. Despite this general lack of news, in late June the SEC released final rules on matters related to the compensation committee to little fanfare.

The rules focus on independence for both compensation committees and their advisors. Companies will now be required to disclose the existence of compensation consultant conflicts of interest and how these conflicts are addressed. Additionally, each national listing exchange is now required to propose heightened standards for independence of compensation committee members and the evaluation of compensation advisor independence. While the style of these new listing standards will be similar to those already existing for the audit committee, the SEC has established that the standards must consider the following two factors:

  • The source of compensation of the director, including any consulting, advisory or other compensatory factors paid by the listed company to the director; and
  • Whether the director is affiliated with the listed company or any of its subsidiaries or their affiliates.

While these rules affect proxy statement disclosures, compensation committee composition and boardroom procedure, they have received little attention. There are many possible explanations for this, including the fact that both the New York Stock Exchange and NASDAQ already address compensation committee director independence to an extent. However, timing is also a factor. The required disclosures of compensation consultant conflicts of interest will be effective for the 2013 proxy season. With respect to the new standards on independence, NYSE and NASDAQ have until Sept. 25, 2012, to propose new guidelines, which the SEC does not have to approve until June 27, 2013.

At NACD’s Compensation Committee Chair Advisory Council meeting in June, SEC Chief Counsel and Associate Director of the Division of Corporate Finance Thomas Kim spoke to the delegation on the SEC’s current activity. In addition to the rules on compensation committee independence, the agency is currently in the process of drafting proposed rules on the required pay ratio disclosure, as well as the “clawback” of executive compensation provision. Similar to the recently released rules, the clawback rules must be proposed and finalized by the SEC, then adopted by the listing exchanges—therefore placing the rules on the horizon, but not in the near future.

At the Advisory Council meeting, a key theme of the discussion was the necessity for boards to create transparent and comprehensive compensation packages. To this end, it was announced that NACD will produce a guide that will help boards develop pay plans to effectively compensate executives and communication strategies that articulate how these plans create long-term shareholder value.

For more information about the guide and the Advisory Council meeting, click here.