The NYSE and NASDAQ have proposed respective rule changes to comply with new SEC Rule 10C-1, which requires the Exchanges to create new listing standards requiring each member of a listed company’s compensation committee to be independent. Rule 10C-1 implements provisions of the Dodd-Frank Act that also require additional standards regarding compensation consultants.
The new NYSE listing standards require the board of directors to consider all material factors relevant to independence from management when determining the independence of a compensation committee member, including:
- the source of the director’s compensation (consulting, advisory, other compensation fees, etc.) and whether such compensation would impair the director’s ability to make independent judgments about executive compensation; and
- affiliate relationships and whether the director is under the control of the listed company and its management as a result of such relationships.
The new NASDAQ rules require listed companies to have a compensation committee of at least two independent directors, both of whom are prohibited from accepting any consulting, advisory or other compensatory fee from the issuer or any subsidiary. In determining compensation committee members, the board must consider affiliations with the company to ensure no affiliations might affect the director’s judgment about management compensation.
Both the NYSE and NASDAQ rules require a compensation committee charter that specifies consideration of the six factors described in Rule 10C-1 when retaining compensation consultants, including:
- provision of other services to the company by the person that employs the compensation consultant;
- amount of fees paid by the company to the person that employs the compensation consultant, as a percentage of that person's total revenue;
- policies and procedures of the person that employs the compensation consultant regarding the prevention of conflicts of interest;
- any business or personal relationship of the compensation consultant with any member of the committee;
- ownership by the compensation consultant of the company's stock; and
- any business or personal relationship between the compensation consultant or the person that employs the compensation consultant and any executive officer of the company.
Assuming SEC approval, NYSE listed companies must comply by the earlier of (i) the company’s first annual meeting after January 15, 2014, or (ii) October 31, 2014. NASDAQ listed companies must comply by the earlier of (i) the second annual meeting after the date of SEC approval or (ii) December 31, 2014.