The Securities and Exchange Commission recently approved the NASDAQ listing rules (.PDF) to comply with the SEC's Rule 10C-1 under the Securities Exchange Act of 1934, as amended.  Rule 10C-1 (.PDF) was adopted, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, to require securities exchanges to adopt rules regarding the independence of compensation committees and advisers to compensation committees. The approved NASDAQ listing rules are not materially different than the proposed listing rules described in the Fromthesoxup entry on October 29, 2012, though those proposed rules were somewhat revised in December 2012 and early-January 2013.  Unlike as proposed, however, the approved or final listing rules are not immediately effective.

One of the requirements is that a compensation committee (a) have the authority and resources to retain and pay compensation advisers, (b) assess or consider, when selecting any such adviser, the six independence factors stated in Rule 10C-1 (which are also stated in the approved or final listing rules), which indicate a conflict of interest on the part of such adviser, and (c) be responsible for overseeing and compensating its advisers. The approved or final listing rules clarify that:

  • A compensation committee must evaluate each adviser (other than those who are exempt) under the six independence standards at least annually, but is not prohibited from engaging an adviser who is not independent under those standards; and
  • Advisers who are exempt from such assessment are in-house counsel and any compensation adviser whose role is limited to (i) consulting on a broad-based plan that is available generally to salaried employees and does not discriminate in favor of directors and executive officers or (ii) providing either non-customized information or information customized based on parameters not developed by the adviser and (in either case) about which the adviser does not provide advice.

This requirement will be effective on July 1, 2013. Accordingly, a NASDAQ-listed issuer should, by that effective date, (a) review and, as necessary, revise the charter of its compensation committee (if any) or the resolutions authorizing a majority of its independent directors to determine executive compensation to ensure that the compensation committee or the majority of independent directors, as the case may be, has the required authority, resources, direction, and responsibilities and (b) conduct an assessment of each of its advisers (other than those who are exempt) with respect to the independence standards. A NASDAQ-listed issuer will be obligated to certify compliance with this requirement to NASDAQ within 30 days after the deadline.

The second requirement is that each compensation committee member be independent not only under NASDAQ’s current independence standards, but also by not accepting (or having accepted while a committee member) any consulting or advisory fee or other compensation from the issuer, other than for board or committee service. The board of a NASDAQ-listed issuer must also consider whether a compensation committee member is affiliated with the issuer, but affiliation is not a prohibition against serving on the compensation committee.

The third requirement is that a NASDAQ-listed issuer have a compensation committee consisting of two or more independent directors and have a formal written committee charter, subject to annual review.

The last two requirements will be effective for a NASDAQ-listed issuer by the issuer's first annual meeting after January 15, 2014 or, if earlier, October 31, 2014.  Again, an issuer will be obligated to certify compliance with these requirements to NASDAQ within 30 days after the deadline. Accordingly, a NASDAQ-listed issuer has a few months to prepare for compliance with those requirements. If the issuer does not have a compensation committee with a written charter, it should work toward the establishment and appointment of such a committee and the adoption of such a charter. Whether or not the issuer currently has a compensation committee, it should begin to assess the qualifications of current or prospective compensation committee members in light of the new independence requirements.A NASDAQ-listed issuer that is a smaller reporting company is exempt from these new requirements, except for most of the third requirement (i.e., having a compensation committee of at least two directors who are independent under the current listing standards). A smaller reporting company, unlike other NASDAQ-listed issuers, will not be required annually to review and assess the adequacy of its compensation committee charter.

OUR TAKE: Fortunately, NASDAQ and the SEC have attempted to provide NASDAQ-listed issuers adequate time to comply with the new requirements of the final listing rules.  It would be prudent for each NASDAQ-listed issuer to take the time to review those rules and prepare for compliance.