Last Wednesday, the SEC proposed new rules required by Section 952 of Dodd-Frank Act. Under the proposal, each national securities exchange will be required to adopt new listing standards to prohibit the listing of any issuer that is not in compliance with the exchange’s independence requirements for compensation committees. While compensation committees will need to be comprised entirely of independent directors, each national securities exchange will need to define independence for itself taking into consideration two factors: (1) the source of compensation of a Board member, including any consulting, advisory, or other compensatory fee paid by the issuer to the Board member, and (2) whether a Board member is affiliated with the issuer. It is important to note that, in passing the Dodd-Frank Act, Congress did not infringe on the traditional role of states in defining corporate law. There is neither a requirement to actually have a compensation committee nor a requirement for a compensation committee to approve executive compensation. Any such requirements would be set forth by the national securities exchanges, such as the New York Stock Exchange currently requires.
The independence requirements, as proposed, would be applicable to any committee of the Board that oversees executive compensation, whether or not the committee is formally designated as a “compensation committee.” While this particular requirement of the proposed rules is an attempt to prevent issuers from evading the independence requirements by renaming the