As required by the Dodd-Frank Act and related SEC rules, Nasdaq has issued proposed new listing standards related to compensation committee independence and responsibilities. While Nasdaq’s proposed listing standards largely reflect the SEC’s rules in this regard, they go beyond those requirements in several significant ways. Among other things, if the amendments are adopted as proposed, Nasdaq compensation committee members would be prohibited from accepting directly or indirectly any consulting, advisory or other compensatory fee from the company or its subsidiaries. Further, Nasdaq proposes to require listed companies to have a formal compensation committee consisting of at least two independent members, eliminating the option for companies to have compensation matters handled by the independent directors in lieu of a formal compensation committee.

We note that the NYSE has also issued its corresponding proposed new listing standards, which differ in significant ways from Nasdaq’s proposal. For example, the NYSE does not add any additional mandatory standards for compensation committee membership, and instead proposes additional factors for the board to consider in determining compensation committee member independence. For more information on the NYSE proposals, see our memorandum on that topic at http://www.paulweiss.com/media/1203603/1-oct-12_nyse.pdf.

Compensation Committee Structure and Independence

Existing Nasdaq rules allow companies the option of having compensation matters overseen by either independent directors or a formal compensation committee. Nasdaq’s proposed rules would eliminate the former option and require that all listed companies have a compensation committee consisting of at least two directors, each of whom must meet enhanced independence requirements.

In addition to existing independence requirements, Nasdaq proposes to prohibit compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fee from the company or its subsidiaries (other than directors fees or fixed compensation under a retirement plan (including deferred compensation) for prior service and that is not contingent on continued service). Further, Nasdaq would require boards, in determining whether a director is eligible to sit on the compensation committee, to consider whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company in such a way as would impair the director’s judgment as a compensation committee member. The proposed rules continue to state Nasdaq’s position that stock ownership by itself, even a large share position, does not preclude compensation committee membership and in fact aligns a director’s interests with those of the shareholders.

Nasdaq’s existing rules allowing companies to have one non-independent director on the compensation committee in limited and exceptional circumstances remain unchanged. Nasdaq has proposed a new cure period whereby if a member of the compensation committee ceases to be independent for reasons beyond the member’s reasonable control, the company may cure the deficiency by the earlier of its next annual meeting or one year from the occurrence of the event that caused the director no longer to be independent for compensation committee purposes, provided that the company has at least 180 days from such event to regain compliance.

Compensation Committee Responsibilities

The compensation committee would be required to have a formal written charter that specifies the scope of the compensation committee’s responsibilities, and how it carries out those responsibilities, including structure, processes and membership requirements. In addition to the compensation committee’s existing responsibilities under Nasdaq rules, the compensation committee must have the responsibilities and authority as set forth in the SEC’s Rule 10C-1(b)(2), (3) and (4)(i)-(vi). These responsibilities and authority include the following:

  • Authority and funding by the company to retain or obtain the advice of compensation consultants, independent legal counsel and other compensation advisors;
  • Responsibility for the appointment, compensation and oversight of the work of those advisors; and
  • Authority to engage advisors (other than in-house legal counsel) only after considering the six specified independence factors below:
    • the provision of other services to the company by the advisor’s employer;
    • the fees received from the company by the advisor’s employer, as a percentage of the total revenue of the employer;
    • the policies and procedures of the advisor’s employer that are designed to prevent conflicts of interest;
    • any business or personal relationship of the advisor with a member of the compensation committee;
    • any stock of the company owned by the advisor; and
    • any business or personal relationship of the advisor or the advisor’s employer with an executive officer of the company.

Further, the compensation committee must review and assess the adequacy of its charter annually.

The SEC’s rules specify that the compensation committee is not required to implement or act consistently with the advice or recommendations of any advisor that it retains nor do its rules affect the ability or obligation of the compensation committee to exercise its own judgment in fulfilling its duties.

Exemptions

Any entities that are exempt from or have extended transition periods to comply with Nasdaq’s compensation committee rules (e.g., controlled companies, foreign private issuers, limited

partnerships, cooperatives, newly listed companies, companies emerging from bankruptcy or controlled company status, companies transferring from other exchanges) would continue to have those same accommodations generally. Also, special accommodations and transition rules apply to smaller reporting companies.

Implementation

Nasdaq proposes that the amendments to effect the SEC’s Rule 10C-1(b)(2), (3) and (4)(i)-(vi) regarding compensation committee responsibilities would be effective immediately upon approval, and would also apply to independent directors who determine or recommend to the board for determination of CEO and other executive officer compensation in lieu of a compensation committee. Companies then have until the earlier of their second annual meeting held after the rules are approved or December 31, 2014, to comply with the remaining provisions. In our experience, many existing Nasdaq companies have compensation committee structures, which already grant the committees the necessary authority and funding with respect to retaining advisors. Thus, most of the changes that boards will need to consider will center on any compensation committee membership, charter or procedure changes necessary to address the compensation committee and compensation committee advisor independence requirements.

These rules have not yet been published by the SEC for public comment.

For a copy of the Nasdaq rule proposal, see:

http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2012/SR-NASDAQ-2012-109.pdf