March 31, 2011

SEC Proposal: Use of Compensation Consultants and Other Advisors and Conflicts of Interest

Yesterday, as noted in this press release, the SEC unanimously proposed rules to implement Section 952 of Dodd-Frank that would direct the exchanges to adopt listing standards relating to compensation committees regarding their use of compensation consultants and other advisors as well as conflicts of interest. These rules ultimately will provide a more detailed definition of “independence” in the compensation context.

From scanning the proposing release that was posted last night, the proposed rules would not add much to Section 952, much to the chagrin of those who emailed me after the meeting and were expecting the SEC to come up with a rules package that the exchanges could just adopt. But even if the exchanges are charged with fleshing out the statute, the SEC surely will be heavily involved behind the scenes as often happens with new listing standards since the SEC must approve them.

Dodd-Frank requires that final rules in this area be adopted by July and the deadline for comments is April 29th. Even if final rules are adopted timely by the SEC, it’s still possible that listing standards may not be in place before the 2012 proxy season since I believe the July deadline doesn’t apply to the exchanges. Memos on the proposal are being posted in’s “SEC Rules” Practice Area.

ISS Policy Change re: Section 162(m) Equity Plan Proposals

Here is something that Cooley’s Amy Muecke blogged a few days ago on’s “The Advisors’ Blog“:

Recently, I learned that ISS has made a mid-proxy season policy change that may affect vote recommendations for equity plans submitted to stockholders solely for purposes of Section 162(m) approval. Historically, ISS has always supported these proposals agreeing that it is in the best interests of the stockholders for the company to be able to grant awards under a plan that satisfies the 162(m) requirements for performance-based compensation that is excludable from the $1M deductibility limitation.

Effective immediately, ISS will no longer automatically support Section 162(m) proposals submitted by “IPO companies” – that is, companies whose public company stockholders have not previously approved their equity plans. Instead, ISS will further analyze the plan and proposal to determine whether any problematic features are more detrimental than the potential loss of tax deductions and if so, ISS will recommend voting against the proposal.

Going forward, ISS signaled that it also may also further scrutinize Section 162(m) proposals submitted by non-IPO companies (i.e., companies whose public company stockholders have previously approved their plans), but it suggested that this year it is primarily concerned with Section 162(m) plans submitted by IPO companies.

Shareholder Proposals: Incentive Compensation & Risk Report Excludable If Too Broad

And here is something that I blogged last week on’s “The Advisors’ Blog“:

Recently, Corp Fin posted this no-action response to Wells Fargo regarding a shareholder proposal that asked the company to prepare a report “to describe the board’s actions to ensure that employee compensation does not lead to excessive and unnecessary risk-taking that may jeopardize the sustainability of the company’s operations. It further states that the report must disclose specified information about the compensation paid to the 100 highest paid employees.”

The Corp Fin response is interesting. It notes that incentive compensation paid by a major financial institution to those that are in a position to cause the company to take inappropriate risks is a “significant policy issue” – but then the Staff goes on to note that the proposal relates to the compensation paid to a large number of employees, thus falling into the “general employee compensation” line of no-action letters since it was not limited to senior executive officers. As a result, the Staff allowed the company to exclude the proposal under (i)(7) as an ordinary business matter.

This letter is interesting also because it presented the Staff with the opportunity to take the position that the general compensation practices that lead to excessive and unnecessary risk taking (and board actions to avoid such risk taking) raise significant policy issues, which would arguably bring its no-action positions in line with the disclosures that the SEC recently concluded should be required in proxy materials. Even though some might disagree with the Staff’s position, it at least avoided yet another exception to the general rule that proposals relating to general employee compensation relate to ordinary business matters and may be excluded under (i)(7). Thanks to Keir Gumbs of Covington & Burling for pointing this letter out!

– Broc Romanek