Last week, the SEC proposed new rules required by Section 952 of Dodd-Frank Act.  Under the proposal, compensation committees may engage a compensation consultant or other advisor, including legal counsel, only after taking into consideration the following factors, and any other factors determined by the national securities exchanges:

1) provision of other services to the issuer by the person that employs the advisor;

2) amount of fees received from the issuer by the person that employs the advisor, as a percentage of the total revenue of the person that employs the advisor;

3) policies and procedures of the person that employs the advisor that are designed to prevent conflicts of interest;

4) any business or personal relationship of the advisor with a member of the compensation committee; and

5) any stock of the issuer owned by the advisor.

The SEC has not proposed any bright-line tests or numerical thresholds to assist in determining whether a conflict of interest exists.

In addition, each issuer must disclose in any proxy or consent solicitation for an annual meeting at which directors are to be elected, whether (1) the compensation committee has retained or obtained the advice of a compensation consultant or other advisor, including legal counsel, and (2) the work of the advisor has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.  These disclosure rules would apply to all Exchange Act registrants subject to the SEC’s proxy rules.

To review the proposed rules, click here.