Dodd-Frank Update: PEGCC Files Comment Letter on Independence of Compensation Committees

WASHINGTON, DC, April 28, 2011 – Today, in a letter to the SEC, the PEGCC filed comments on the proposed rule to implement Section 952 of the Dodd-Frank Act, which adds Section 10C to the Securities Exchange Act of 1934. The PEGCC’s comments focus on the provisions of the proposed rule directing the national securities exchanges to establish listing standards that require each member of a listed issuer’s compensation committee to be a member of the board of directors of the issuer and to be “independent.”

The PEGCC has requested that the SEC consider the following in drafting its final rule:

  • The PEGCC hopes that the SEC’s final rule will encourage the exchanges to consider the  positive impact that private equity has in compensation committees to help align compensation practices with the interests of shareholders.  Further, in establishing their own definitions of independence, the exchanges should not prohibit directors affiliated with significant shareholders such as private equity funds from serving on compensation committees.
  • As representatives of private equity firms—whose business model is based on pay for (superior) performance—these directors typically bring to bear an intense focus on and belief in effective compensation practices that are carefully designed to maximize shareholder value over the long-term.
  • The interests of these private equity directors are aligned with the interests of other shareholders in ensuring that compensation is appropriately structured and reasonable in light of executive and company performance.
  • The PEGCC would support strongly a decision by the exchanges to exempt from the compensation committee independence requirements an employee of a private equity firm or other non-management significant shareholder that holds a significant equity stake in a covered issuer, even if that stake is considerably less than 50%.

As recognized by the SEC in its proposing release, “there are concerns, as expressed by several commentators, about a prohibition against allowing directors affiliated with significant investors (such as private equity funds or venture capital firms) to serve on compensation committees.  Some commentators have noted that such directors are highly motivated to rigorously oversee compensation and are well-positioned to exercise independent judgment regarding compensation.  In addition, some commentators have noted that, although there is a need for audit committee members to be able to exercise objective oversight of an issuer’s financial reporting, with respect to the oversight of executive compensation, the interests of representatives of major shareholders are generally aligned with those of other shareholders.”

The Private Equity Growth Capital Council (PEGCC) is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity and growth capital investment industry and its contributions to the national and global economy. Established in 2007 and formerly known as the Private Equity Council, the PEGCC is based in Washington, D.C. The members of the PEGCC are 33 of the world‘s leading private equity and growth capital firms united by their commitment to growing and strengthening the businesses in which they invest.

Click here to read the letter.