Tuesday, June 15, 2010

Financial Reform Base Conference Bill Carves Out Exemptions from Mandate of Independent Compensation Committees

The baseline conference bill contains the Senate corporate governance provisions. But the provision mandating independent compensation committees contains substantive differences in the baseline conference bill from the bill that passed the Senate last month. In a major corporate governance improvement, the legislation does mandates independent board compensation committees. The SEC must adopt rules requiring for exchange listing that compensation committees include only independent directors. This provision is designed to strengthen their independence from the executives they are rewarding or punishing. In determining the independence of compensation committee members, SEC rules must require exchanges to consider the source of compensation and any affiliation with the company or any of its subsidiaries.

Both bills add new Section 10C to the Exchange Act. But unlike the bill that passed the Senate, the baseline conference bill specifically exempts, in Section 10C(a), registered mutual funds, controlled companies, companies in bankruptcy, limited partnerships and foreign private issuers that provide annual disclosures to shareholders of the reason that they do not have an independent compensation committee.

The baseline text defines a controlled company for purposes of the exemption as an issuer that is listed on a national securities exchange or by a national securities association and
that holds an election for the board of directors in which more than 50 percent of the voting power is held by an individual, a group, or another issuer.

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