Killing Conflict of Interest in Compensation Committees Pressed on in SEC Ruling

Jack Humphrey, Regulatory journalist
March 31, 2011 /

Stock trading regulators proposed Wednesday to enforce among national securities exchanges a listing standards that would ensure no conflict of interest weighs on the members of the traded companies’ compensation committee and compensation advisers.

The Securities and Exchange Commission was all thumbs up when its officials voted for the proposal whose mandate has been drawn from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Part of the requirements under the proposal is that companies duly disclose how they use compensation consultants and whether there exists a conflict of interest in them.

The proposal will strengthen the independence of compensation committee and compensation adviser in a traded company as the listing standards require for the sole delegation of power to the committee to appoint, pay and retain its adviser, to avoid conflict of interest.

Factors involved when considering the committee’s independence include the sources of director’s pay, and whether company director is affiliated with the company or a subsidiary of it.

Additionally, the provision requires each company to disclose in its proxy material for an annual meeting of shareholders whether its board’s compensation committee retained or obtained the advice of a compensation consultant.

The provision also requires a company to disclose whether the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.

As part of the provision in the Dodd-Frank Act, companies must meet these standards once effective for their shares to be continuously traded in exchanges.

However such entities as controlled companies, limited liability partnerships, firms in receivership, open-end management investment companies registered under the Investment Company Act of 1940, are exempted from the rulings of the proposal.

The SEC seeks public comment on the proposal only until April 29, 2011.

 

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