On January 11, 2013, the Securities and Exchange Commission (SEC) approved the listing standards proposed by the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (Nasdaq) relating to the independence of compensation committee members and the selection of compensation committee consultants and advisors. The proposed listing standards, as amended, were adopted without any changes by the SEC. The now final listing standards had been proposed to comply with Rule 10C-1, which was adopted by the SEC to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
See our alert discussing the NYSE and Nasdaq's initial proposed listing standards.
COMPENSATION COMMITTEE INDEPENDENCE
Rule 10C-1 directs exchanges to require that listed companies' compensation committee members be independent directors and to develop a definition of independence after considering relevant factors, including, but not limited to:
- the source of compensation of the director (other than standard director fees), including any consulting, advisory or other compensatory fee paid by the issuer to the director; and
- whether the director is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer.
The final listing standards for each of the NYSE and Nasdaq adopt these two factors without setting forth any additional factors for consideration. However, compensation committee members of issuers on both the NYSE and Nasdaq must also satisfy the previously existing general independence tests for directors of issuers on those exchanges.
Nasdaq's final listing standards prohibit compensation committee members from receiving, directly or indirectly, any consulting, advisory or other compensatory fee (other than standard director fees) paid by the issuer. In contrast, the NYSE does not prohibit such payments and instead requires a board to consider whether a director receives compensation from any source that impairs his or her ability to make independent judgments regarding compensation (subject to the NYSE's $120,000 bright-line threshold above which compensation renders a director not independent).
Nasdaq's listing standards now require issuers to have a compensation committee with at least two members, each of whom is independent, and a formal written charter. Nasdaq's new listing standards also eliminate the option of having independent directors constituting a majority of the independent directors on an issuer's board determine executive officer compensation.
Both the NYSE and Nasdaq refrained from adopting absolute prohibitions against affiliates of the issuer, such as significant stockholders, serving on the compensation committee.
COMPENSATION COMMITTEE ADVISORS
In accordance with Rule 10C-1, the final listing standards of the NYSE and Nasdaq include the following rules regarding advisors to compensation committees:
- Authority to Retain Advisors - the issuer must provide the compensation committee with full authority to retain or obtain a compensation consultant, independent legal counsel or other advisor;
- Responsibility for Advisors - the compensation committee must be directly responsible for the appointment, compensation and oversight of those advisors;
- Funding for Advisors - the compensation committee must be provided with appropriate funding from the issuer, as determined by the compensation committee, to compensate those advisors; and
Independence of Advisors - the compensation committee must take into consideration the following factors that affect the independence of those advisors:
- the provision of other services to the issuer by the person who employs the advisor;
- the amount of fees received from the issuer by the person who employs the advisor;
- the policies and procedures of the person that employs the advisor for preventing conflicts of interest;
- any business or personal relationships of the advisor with a member of the compensation committee;
- any stock of the issuer owned by the advisor; and
- any business or personal relationships of the advisor or the person who employs the advisor with an executive officer of the issuer.
Notwithstanding these mandated considerations, the final listing standards for both the NYSE and Nasdaq state that nothing requires a compensation committee to retain independent advisors. The factors listed above do not apply to in-house legal counsel.
In addition, the final listing standards for both the NYSE and Nasdaq exempt issuers from assessing the independence of advisors that act in roles limited to the following activities for which no disclosure is required under Item 407(e)(3)(iii) of Regulation S-K: (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation in favor of executive officers or directors of the issuer, and that is available generally to all salaried employees; or (b) providing information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice. Each of the NYSE and Nasdaq amended its initial proposed listing standards to incorporate this exemption.
EXEMPTIONS FOR CERTAIN ISSUERS
Under Rule 10C-1, exchanges are authorized to exempt specific categories of issuers from the requirements related to compensation committees and their advisors. The final NYSE and Nasdaq listing standards generally exempt from the new requirements those issuers presently exempt from their current compensation committee rules, including controlled companies, limited partnerships and companies in bankruptcy, funds registered under the Investment Company Act of 1940, passive business trusts and issuers who list only derivatives, special purpose securities or preferred stock. Both the NYSE and Nasdaq listing standards continue to allow foreign private issuers to follow their home country rule regarding compensation committees, but require such foreign private issuers to disclose differences in corporate governance practices (if they exist). Nasdaq also requires foreign private issuers to disclose why they do not have compensation committees.
Additionally, both the final NYSE and Nasdaq rules exempt smaller reporting companies from the additional independence requirements for compensation committees and compensation committee advisors, while still requiring such issuers to have compensation committees meeting the general independent director standards.
The NYSE and Nasdaq listing standards allow directors losing independent status to remain members of compensation committees until the earlier of the next annual meeting or one year from the occurrence of the event that caused the director to no longer be independent. The ability to cure is contingent upon the director losing independence for reasons outside the director's reasonable control and providing notice of such an occurrence to the NYSE or Nasdaq. The NYSE limits the ability to cure to circumstances in which a compensation committee would still have a majority of independent directors. Under Nasdaq's listing standards, if the next annual shareholders meeting occurs no later than 180 days following an event of noncompliance, an issuer would have 180 days to cure.
The final NYSE and Nasdaq listing standards both require issuers to comply with the new rules regarding independence of compensation committee members by the earlier of October 31, 2014, or the issuer's first annual meeting after January 15, 2014. Nasdaq's new requirements for issuers to have separate compensation committees and compensation committee charters must also be complied with in this time frame. The NYSE and Nasdaq each require issuers to comply with the new rules related to compensation committee authority and advisors by July 1, 2013. Nasdaq's initial proposed listing standards were amended in order to harmonize these timing requirements.
Issuers should begin reviewing their existing compensation committee charters for compliance with the new listing standards of the NYSE and Nasdaq, as applicable, and begin revising or drafting compliant charters as necessary. In addition, issuers should begin to review information about compensation committee members and advisors and begin to establish policies and procedures related to the necessary independence determinations to be made for each.