Independence of Compensation Committees

General Warning:  Before receiving advice from consultants or outside legal counsel, compensation committees should make an independence determination after receiving their 10C-compliant independence disclosure. Further, this independence disclosure and determination should occur annually.  With questions, contact Mark.

SEC Releases and Authorities

  • SEC 10C Listing Standards for Compensation Committees: 17 CFR 240.10C-1
    • Item 407(e) of Reg. S-K re proxy disclosures by compensation committees concerning their governance and independence.
  • 2012 SEC Fact Sheet for 10C-1 Rules
  • 2012 SEC Release announcing final rules (6/30/2012)

Nasdaq Rule

  • Nasdaq: 2013 SEC Release 34-68640 approving Nasdaq 10C-1 Rules - includes sentence stating that "The Commission anticipates that compensation committees will conduct such an independence assessment at least annually" (1/11/2013).


2012.June.30  SEC Final Rules for Comp. Comm. Independence - A Few Twists
The SEC has given the stock exchanges 90 days within which to propose rules, and one year within which to adopt final rules, implementing final SEC regulations relating to the independence of compensation committees and their advisors. See Paul Hastings Summary.  Regarding the latter, the SEC expanded the final rules in subtle ways, such as by requiring a 6-point independence evaluation of all advisors to the compensation committee (including legal counsel). Here is relevant text from pages 31-32 of the adopting release:

  • Section 10C(b) of the Exchange Act provides that the compensation committee of a listed issuer may select a compensation adviser only after taking into consideration the five independence factors specified in Section 10C(b) as well as any other factors identified by the Commission.  In accordance with Section 10C(b), these factors would apply to the selection of compensation consultants, legal counsel and other advisers to the committee.  The statute does not require a compensation adviser to be independent, only that the compensation committee of a listed issuer consider the enumerated independence factors before selecting a compensation adviser.  Section 10C(b)(2) specifies that the independence factors identified by the Commission must be competitively neutral89 and include, at minimum:
  1. The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser;
  2. The amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;
  3. The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;
  4. Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee; 
  5. Any stock of the issuer owned by the compensation consultant, legal counsel or other adviser; and
  6. any business or personal relationships between the executive officers of the issuer and the compensation adviser or the person employing the adviser.  This would include, for example, situations where the chief executive officer of an issuer and the compensation adviser have a familial relationship or where the chief executive officer and the compensation adviser (or the adviser’s employer) are business partners. [from ¶ with fn 125]

IMPLICATION#1: Compensation committees will need to establish a process by which to make the foregoing determination for Boards, perhaps through amendments to their charters, along with new disclosures in D&O questionnaires. 

IMPLICATION #2: Compensation committees should evaluate the independence of advisors (other than in-house counsel) before seeking advice. See the following text quoted from the SEC release: 

"In response to comments,128 we are including an instruction to the final rule to provide that a compensation committee need not consider the six independence factors before consulting with or obtaining advice from in-house counsel. ... This instruction will not affect the obligation of a compensation committee to consider the independence of outside legal counsel or compensation consultants or other advisers retained by management or by the issuer."

  • "Accordingly, we are including an instruction to the final rule that provides that a listed issuer’s compensation committee is required to conduct the independence assessment outlined in Rule 10C-1(b)(4) with respect to any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee, other than in-house legal counsel." [from ¶ with fn 130]