Sunday, June 19, 2011

Consensus Growing for Allowing Exchanges Flexibility in Setting Independence Standards for Compensation Committees

There appears to be strong support for the SEC’s proposal, in implementing Dodd-Frank’s requirement for independent compensation committees, to allow the exchanges to establish their own independence standards based on factors set forth in Section 952 of Dodd-Frank. While CalPers thought that applying a consistent definition of independent director for all exchanges to follow was preferable, a number of other comment letters to the SEC favored exchange flexibility in this area.

For example, the Center on Executive Compensation believes that the SEC’s proposed approach provides exchanges with the flexibility to tailor independence standards appropriately for their member companies based on a listed set of principles. The Center said that this flexibility has allowed different approaches on independence to develop which reflect the differences in the size and types of companies that are traded on those exchanges.

The Society of Corporate Secretaries and Governance Professionals also supports permitting each exchange to establish its own independence criteria. Exchanges possess the necessary experience and expertise to define independence for the purpose of compensation committee membership, according to the Society
The Sullivan & Cromwell firm supports the Commission’s proposal to permit stock exchanges to establish their own independence criteria. The stock exchanges have spent considerable time and resources over the past ten years to develop, interpret and apply listing standards relating to compensation committee independence, noted the firm, which added that they possess a deep and practical understanding of the considerations that should be taken into account in setting broadly applicable rules in this regard.

The Davis Polk firm also supports the Commission’s approach in permitting the exchanges to establish their own independence criteria. As the Commission notes as a point of reference, Section 301 of the Sarbanes-Oxley Act included bright-line prohibitions mandated for members of a board audit committee. However, the Dodd-Frank Act is less prescriptive with respect to the determination of compensation committee independence, stating instead that SEC rules must require that the national securities exchanges consider relevant factors, including certain fees and affiliations with the issuer. The firm agrees with the Commission that this is an important distinction that merits taking a different approach in rulemaking implementation, including permitting the exchanges significant flexibility in developing standards that recognize the differences between audit committees and compensation committees.

The CFA Institute agrees with allowing each exchange to establish its own independence criteria. Exchanges already have their own definitions of director independence which are understood by investors and issuers alike, said the Institute. The definitions of independence required by each exchange may differ slightly, but these definitions of independence are similar enough that the Institute did not feel the need for the Commission to offer one overarching definition of director independence for all board members of listed companies.

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