As compensation committees and companies plan their spring and summer meetings, they should consider the following new requirements relating to compensation committees that were imposed by the NYSE and Nasdaq listing standards approved by the SEC in January 2013 and that take effect on July 1, 2013:
- Compensation committees may select or receive advice from a compensation consultant, legal counsel or other adviser to the compensation committee only after taking into consideration the six independence factors set forth in Rule 10C-1 of the Exchange Act.
- NYSE companies need to review and likely amend their compensation committee charters to include certain responsibilities and authorities enumerated under the listing standards, and Nasdaq companies need to clarify or confirm the authority of their compensation committees as relates to such requirements.
NYSE Companies — Compensation Committee Charter Requirements
By July 1, 2013, NYSE companies need to have in place compensation committee charters setting forth the additional responsibilities and authorities of compensation committees as required in the final NYSE rules. Charters will need to specify that:
- Compensation committees may, in their sole discretion, retain or obtain the advice of compensation consultants, independent legal counsel or other advisers and shall be directly responsible for the appointment, compensation and oversight of the work of any such advisers retained by the compensation committee;
- Compensation committees may select compensation consultants, legal counsel or other advisers to the compensation committee only after taking into consideration all factors relevant to that person's independence from management, including the six factors specified in Rule 10C-1;
- Companies will provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to advisers retained by the compensation committee; and
- Compensation committee members are independent in accordance with NYSE rules, which will require boards to consider the source of compensation of a director (subject to exceptions applicable to audit committee members) and whether the director is affiliated with the company. The heightened independence standards for compensation committee members, however, will not apply under NYSE listing standards until the earlier of October 31, 2014 or the company's first annual meeting of stockholders after January 15, 2014.
Nasdaq Companies — Clarification of Authority with Later Charter Changes
By July 1, 2013, Boards of Nasdaq companies are required to delegate to their compensation committees (for example, through Board resolutions or existing charter provisions) the applicable responsibilities and authority set forth under the final Nasdaq listing standards. These generally cover the same areas discussed above with respect to NYSE companies. However, Nasdaq companies are not required to implement specific changes to their compensation committee charters or have compensation committee members satisfy heightened independence standards until the earlier of October 31, 2014 or their first annual meeting of stockholders after January 15, 2014. In addition, those relatively few Nasdaq companies which do not have compensation committees are required to form a compensation committee and adopt compliant compensation committee charters by these 2014 deadlines. Also, unlike the new NYSE rules, Nasdaq adopted a strict prohibition on the receipt of compensatory fees by compensation committee members, similar to the existing requirements for (and subject to the same exceptions as) audit committees. Affiliate status of a compensation committee member must be taken into account in assessing independence but is not a prohibition to an independence determination.
Assessment of Independence of Consultants and Other Advisers
As noted above, effective as of July 1, 2013, compensation committees are required to perform an independence analysis of their compensation consultants and advisers, employing the six factors enumerated in Exchange Act Rule 10C-1 governing conflicts of interest, and any other factors it deems relevant. Under the new NYSE and Nasdaq listing standards, the requirement to assess the independence of compensation advisers does not apply to advice provided by in-house counsel or any adviser whose role is limited to consulting on certain broad-based plans or providing information that is not customized for a particular company. In approving the new listing standards for both exchanges, the SEC made it clear that the independence assessment requirement applies to the selection of, or receipt of advice from, outside legal counsel that provides advice to the compensation committee. The SEC also emphasized that “advice to the compensation committee” is not limited to advice regarding executive compensation. Finally, in addressing timing, the SEC discussed that the analysis should occur before potential advisers are selected and further clarified that it anticipates compensation committees will conduct the independence assessment at least annually. Companies should work with the consultants, legal counsel and other advisers that provide advice to the compensation committee to establish a process for providing the compensation committee with the required information to make this independence assessment.
Below is a link to our Corporate Governance Commentary discussing the Dodd-Frank Act and stock exchange independence rules for compensation committees and their advisers as in effect prior to the January 2013 amendments.