A summary of the proposed rules, which adhere closely to the original text of Section 952, are set forth below. The deadline for the submission of comments to the proposed rules is April 29th, and the Dodd-Frank Act requires that final rules in this area be adopted by July of this year. However, there will be additional delay before the various listing standards described below are implemented by the exchanges, so it is unknown whether the requirements will be in place for next year's proxy season; the SEC has requested that the exchanges provide proposed rules within 90 days after the SEC's final rules are published. As with all listing standards, the exchanges will need to seek the approval of the SEC before adopting the listing standards or any exemptions from them. Final listing standards are to be in place no later than one year after the SEC's final rules are published.

Independence Requirements

The proposed rules would require the exchanges to establish listing standards requiring each member of a listed company's compensation committee (or any committee of the board that oversees executive compensation, even if not formally designated as a "compensation committee") to be a member of the board of directors and to be "independent." Although what constitutes "independent" is not defined in the proposed rules, the SEC provided factors that the exchanges must consider in developing their own definition of independence in this context, and include (i) the sources of compensation of a director, including any consulting, advisory or compensatory fee paid by the company to such member of the board of directors and (ii) affiliations that the member has with the company, its subsidiaries or affiliates. These factors are similar to those utilized in the audit committee context, though the SEC notes that exchanges are only required to consider the factors rather than applying them in a bright-line context as is the case with audit committee membership. The SEC notes that the exchanges may desire to permit directors who are affiliated with significant investors to serve on compensation committees.

Compensation Advisors

As it relates to compensation advisors, the exchange's listing standards must specify that compensation committees may, in their sole discretion, retain or obtain the advice of a compensation adviser, and that the committee would be directly responsible for any such appointment, payment and oversight of compensation advisers, which must be appropriately funded by the listed company. Prior to selecting a compensation consultant, legal counsel or other adviser, a compensation committee would be required to consider five independence factors. Three of these factors to be considered relate to the entity that employs the individual who will provide the compensation, legal or other advice: (i) whether the entity is providing any other services to the company, (ii) the amount of fees received by the entity from the company, as a percentage of the entity's total revenue, and (iii) whether policies and procedures have been adopted by the entity to prevent conflicts of interest. Two factors to be considered relate to the individual who will provide the compensation, legal or other advice to the compensation committee: (i) any business or personal relationship such individual has with any member of the compensation committee and (ii) any ownership of stock of the company by such individual. The exchanges would also be able to impose additional considerations.
Disclosure Requirements

Since late 2009, companies have been required to disclose certain information about their use of compensation consultants, including specific information about fees paid to consultants. The proposed rules would broaden the disclosure obligations from those currently set forth in Item 407 of Regulation S-K to require proxy disclosure whenever a compensation committee has retained or obtained the advice of a compensation consultant, regardless of the specific services to be provided, and whether the work performed by a compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed. The proposed rules retain the obligations regarding fee disclosure (including the current disclosure exemptions), but would eliminate the current disclosure carve-out for services that are limited to consulting on broad-based plans and the provision of non-customized benchmark data.

As directed by the Dodd-Frank Act, the rules as proposed would require the exchanges to exempt certain categories of companies from the compensation committee independence requirements, including (i) controlled companies, (ii) limited partnerships, (iii) companies in bankruptcy proceedings, (iv) open-end management investment companies registered under the Investment Company Act of 1940 and (v) foreign private issuers that discloses in their annual report the reasons that the foreign private issuer does not have an independent compensation committee. The exchanges would also have authority to exempt a particular relationship from the independence requirements applicable to compensation committee members, and to exempt any category of company from all of the requirements of the new compensation committee listing standards.