The SEC rule does not define "conflict of interest" but it sets out six criteria which committees can use at a minimum in deciding if a compensation consultant or adviser is subject to a conflict. Most are fairly obvious, such as whether any financial, personal, or business ties exist between a consultant to the compensation committee and the company.
The rule also requires a new "independence assessment" of compensation consultants or advisers hired by the compensation committee. In addition to meeting the six criteria described above, the stock exchanges may include additional factors. However, the SEC has not set out specific thresholds for when independence is compromised. "There are no bright lines. It is all based on facts and circumstances," Barrall notes.
The SEC rule specifies that in-house lawyers are not subject to this independence assessment. However, the independence of outside legal counsel or other persons who provide advice to the compensation committee will have to be assessed.
The SEC's rules go live on January 1. NYSE rules will go into effect July 1, while some of Nasdaq's will go into effect immediately and others over a two-year period.
Meanwhile, says Barrall, there's plenty for companies to do to get ready, including designing independence assessment standards, determining who is affected, reviewing sources of compensation, and amending compensation committee charters.
It looks like a busy year lies ahead.