PRIA, Government Policy, Made Personal

Summary

The Commission must write rules that stop a stock exchange or association from listing a company’s equity unless the company follows rules about its board’s pay committee. The rules say the pay committee must be made up of people who are on the company’s board and who are independent. When deciding who is “independent,” exchanges must look at things like where a director’s pay comes from (including fees for consulting or advising) and whether the director is tied to the company or its subsidiaries. Exchanges may allow some exceptions for particular relationships or for groups of issuers, taking into account company size. Companies that are controlled companies, limited partnerships, in bankruptcy, open-ended management investment companies registered under the Investment Company Act of 1940, or foreign private issuers that explain yearly why they lack an independent pay committee are not required to follow these rules. The pay committee may hire a compensation consultant, lawyer, or other adviser, but it must consider independence factors the Commission identifies. Those factors include other services the adviser’s firm provides to the company, fees as a share of the firm’s revenue, the firm’s conflict policies, any business or personal ties to committee members, and whether the adviser owns company stock. The committee is responsible for hiring, paying, and overseeing these advisers and must have money set aside to pay them. Proxy materials for meetings on or after 1 year after July 21, 2010 must say whether a consultant was used and whether any conflicts arose. The Commission had to issue the listing rules not later than 360 days after July 21, 2010 and must allow issuers a reasonable chance to fix problems before a listing is barred. Defined term: controlled company — a listed issuer where more than 50 percent of the voting power is held by an individual, a group, or another issuer.

Title 15, §78j–3

Commerce and Trade, Source: USLM XML via OLRC

(a)(1)The Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any equity security of an issuer, other than an issuer that is a controlled company, limited partnership, company in bankruptcy proceedings, open-ended management investment company that is registered under the Investment Company Act of 1940 [15 U.S.C. 80a–1 et seq.], or a foreign private issuer that provides annual disclosures to shareholders of the reasons that the foreign private issuer does not have an independent compensation committee, that does not comply with the requirements of this subsection.

(2)The rules of the Commission under paragraph (1) shall require that each member of the compensation committee of the board of directors of an issuer be—

(A)a member of the board of directors of the issuer; and

(B)independent.

(3)The rules of the Commission under paragraph (1) shall require that, in determining the definition of the term “independence” for purposes of paragraph (2), the national securities exchanges and the national securities associations shall consider relevant factors, including—

(A)the source of compensation of a member of the board of directors of an issuer, including any consulting, advisory, or other compensatory fee paid by the issuer to such member of the board of directors; and

(B)whether a member of the board of directors of an issuer is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

(4)The rules of the Commission under paragraph (1) shall permit a national securities exchange or a national securities association to exempt a particular relationship from the requirements of paragraph (2), with respect to the members of a compensation committee, as the national securities exchange or national securities association determines is appropriate, taking into consideration the size of an issuer and any other relevant factors.

(b)(1)The compensation committee of an issuer may only select a compensation consultant, legal counsel, or other adviser to the compensation committee after taking into consideration the factors identified by the Commission under paragraph (2).

(2)The Commission shall identify factors that affect the independence of a compensation consultant, legal counsel, or other adviser to a compensation committee of an issuer. Such factors shall be competitively neutral among categories of consultants, legal counsel, or other advisers and preserve the ability of compensation committees to retain the services of members of any such category, and shall include—

(A)the provision of other services to the issuer by the person that employs the compensation consultant, legal counsel, or other adviser;

(B)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;

(C)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;

(D)any business or personal relationship of the compensation consultant, legal counsel, or other adviser with a member of the compensation committee; and

(E)any stock of the issuer owned by the compensation consultant, legal counsel, or other adviser.

(c)(1)(A)The compensation committee of an issuer, in its capacity as a committee of the board of directors, may, in its sole discretion, retain or obtain the advice of a compensation consultant.

(B)The compensation committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of a compensation consultant.

(C)This paragraph may not be construed—

(i)to require the compensation committee to implement or act consistently with the advice or recommendations of the compensation consultant; or

(ii)to affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of the duties of the compensation committee.

(2)In any proxy or consent solicitation material for an annual meeting of the shareholders (or a special meeting in lieu of the annual meeting) occurring on or after the date that is 1 year after July 21, 2010, each issuer shall disclose in the proxy or consent material, in accordance with regulations of the Commission, whether—

(A)the compensation committee of the issuer retained or obtained the advice of a compensation consultant; and

(B)the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.

(d)(1)The compensation committee of an issuer, in its capacity as a committee of the board of directors, may, in its sole discretion, retain and obtain the advice of independent legal counsel and other advisers.

(2)The compensation committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of independent legal counsel and other advisers.

(3)This subsection may not be construed—

(A)to require a compensation committee to implement or act consistently with the advice or recommendations of independent legal counsel or other advisers under this subsection; or

(B)to affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of the duties of the compensation committee.

(e)Each issuer shall provide for appropriate funding, as determined by the compensation committee in its capacity as a committee of the board of directors, for payment of reasonable compensation—

(1)to a compensation consultant; and

(2)to independent legal counsel or any other adviser to the compensation committee.

(f)(1)Not later than 360 days after July 21, 2010, the Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the requirements of this section.

(2)The rules of the Commission under paragraph (1) shall provide for appropriate procedures for an issuer to have a reasonable opportunity to cure any defects that would be the basis for the prohibition under paragraph (1), before the imposition of such prohibition.

(3)(A)The rules of the Commission under paragraph (1) shall permit a national securities exchange or a national securities association to exempt a category of issuers from the requirements under this section, as the national securities exchange or the national securities association determines is appropriate.

(B)In determining appropriate exemptions under subparagraph (A), the national securities exchange or the national securities association shall take into account the potential impact of the requirements of this section on smaller reporting issuers.

(g)(1)This section shall not apply to any controlled company.

(2)For purposes of this section, the term “controlled company” means an issuer—

(A)that is listed on a national securities exchange or by a national securities association; and

(B)that holds an election for the board of directors of the issuer in which more than 50 percent of the voting power is held by an individual, a group, or another issuer.

Notes & Related Subsidiaries

Editorial Notes

References in Text

The Investment Company Act of 1940, referred to in subsec. (a)(1), is title I of act Aug. 22, 1940, ch. 686, 54 Stat. 789, which is classified generally to subchapter I (§ 80a–1 et seq.) of chapter 2D of this title. For complete classification of this Act to the Code, see section 80a–51 of this title and Tables.

Statutory Notes and Related Subsidiaries

Effective Date

Section effective 1 day after July 21, 2010, except as otherwise provided, see section 4 of Pub. L. 111–203, set out as a note under section 5301 of Title 12, Banks and Banking.

§78j–3 Compensation Committees