U.S. companies will have to disclose their compensation practices for all employees and their board members' qualifications under rules adopted by the Securities and Exchange Commission on Wednesday.
The SEC voted 4-1 to change how companies govern themselves and provide more information to investors, who have criticized lax boards and lavish executive compensation.
Good corporate governance is a system in which those who manage a company ... are effectively held accountable for their decisions and performance, SEC Chairman Mary Schapiro said at an open meeting.
Amid the worst financial crisis in decades, shareholders have voiced anger over how companies performed and executives are paid. They have taken a more active role in how their companies are governed, pushing for a say on executive pay and seeking an easier way to nominate board directors.
Under the SEC's new rules, companies would be required to tell shareholders more about their pay policies if they create risks that are reasonably likely to have a material adverse effect on the company.
Board members' qualifications and experience would have to be disclosed as well as any enforcement actions against the director for the past 10 years instead of the past five.
New disclosures will include why a company chose a certain leadership structure such as separating the chief executive and chairman position as well as how diversity is considered in identifying director nominees.
They would also be required, in certain circumstances, to disclose fees paid to compensation consultants when they help determine how much an executive or director should be paid.
Industry said some of the measures represented completely new areas for disclosure. The entirety of compensation plans maintained by most companies has never been seen by the board or its compensation committee, said Mike Conover, compensation consultant at BDO Seidman.
RULES FOR INVESTMENT ADVISERS
In the wake of Bernard Madoff's $65 billion fraud, the SEC voted unanimously for rules to hold investment advisers more accountable for their customers' assets.
Madoff, who sent out false statements to his clients, ran a Ponzi scheme over two decades, where earlier investors were paid with money collected from later investors.
Under the SEC rule, some 1,600 investment advisers who physically hold their clients' assets will undergo an annual surprise audit to make sure the assets are really there.
The agency backed down from its original proposal to require about 9,600 of the 11,000 registered investment advisers to undergo such an exam. The proposal had included investment advisers who were deemed to have custody or the ability to deduct fees from their clients' assets.
SEC commissioners and industry agreed that it would be overreaching to force investment advisers who simply deduct fees to undergo surprise audits.
The surprise audit is not tailored to potential risks related to fee deduction and it would have been a costly and time-consuming requirement, said David Tittsworth, executive director with the Investment Adviser Association.
Madoff's investment advisory business was registered with the SEC. He was also registered as a broker-dealer and subject to oversight by the SEC and industry-funded watchdog the Financial Industry Regulatory Authority.
The SEC also will require investment advisers who hold client assets in the firm or through an affiliate to have their internal controls reviewed by an independent accountant who is registered with the Public Company Accounting Oversight Board.
(Reporting by Rachelle Younglai; Editing by Lisa Von Ahn and Matthew Lewis)