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SEC Votes to Seek Comment on Compensation Committee Rule

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March 30 (Bloomberg) -- The U.S. Securities and Exchange Commission voted to seek comment on a measure that would require public companies to disclose possible conflicts of interest involving board members and consultants who set executives’ pay.

SEC commissioners voted 5-0 to approve the measure, part of the agency’s rulemaking under the Dodd-Frank Act, at a meeting in Washington today. The proposal expands on a 2009 rule that requires disclosure of similar conflicts.

Dodd-Frank, the regulatory overhaul enacted in July, took aim at executive compensation after lawmakers faulted incentives that rewarded risk-taking for helping to spark the subprime mortgage crisis. Groups including labor unions have urged regulators to tighten rules for consultants, saying they may recommend larger payouts for top executives to win business.

Under the SEC’s proposal, each member of a compensation committee would also have to be an independent member of the board of directors, the agency said in a statement. When employing a pay adviser, a compensation committee would need to consider whether the adviser has any personal or business relationship with anyone on the compensation panel or the firm, and if so, how much that person has received in related fees.

The proposed rule calls for securities exchanges to adopt standards for listing companies, including criteria to determine whether compensation committee members are independent.

“Many potential conflicts of interest are not covered by the existing listing standards,” Brandon Rees, deputy director of the AFL-CIO labor federation’s investment office, said in an e-mail. “We hope stock exchanges will take this opportunity to strengthen their definitions of director independence.”

The SEC is planning to accept public comment on today’s proposal through April 29.

‘Material Financial Loss’

The agency is already seeking comment on a separate rule that would prohibit pay packages that might lead to “material financial loss” for companies. That measure -- part of a joint rulemaking under Dodd-Frank -- would compel firms with more than $50 billion in assets to defer at least 50 percent of incentive-based executive pay for three years and subject packages to possible clawbacks for company losses.

Agencies including the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency released a joint statement today announcing their comment periods on the proposed rule on incentive pay.

The SEC also voted today to seek comment on a joint-agency measure that would require lenders and bond issuers to keep a 5 percent stake in loans they package for sale to investors. Lawmakers put the risk-retention provision in Dodd-Frank to eliminate weak underwriting practices and risk-based incentives blamed for fueling the subprime mortgage crisis.

To contact the reporter on this story: Joshua Gallu in Washington at jgallu@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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