As discussed in our April 26, 2013 posting on the Gibson Dunn Securities Regulation and Corporate Governance Monitor, under recently amended NYSE Rule 303A.05 and NASDAQ Rule 5605(d), board compensation committees cannot select or receive advice from a compensation consultant, legal counsel or other adviser without first taking into consideration that adviser’s independence, including consideration of the factors enumerated in the rules.  As compensation committees and their advisers are preparing for the July 1 effective date of these new listing standards, three observations are important:

First, a critical issue is what triggers the requirement.  While it will be apparent when a compensation committee has “selected” an adviser, a more difficult issue is determining when a compensation committee will be deemed to have received advice from an outside adviser.  Because the NYSE and NASDAQ listing standards were mandated by Exchange Act Rule 10C-1(b)(4), the SEC staff has been providing informal commentary on the application of the rules.  The staff’s most recent commentary, presented by the chief counsel of the Division of Corporation Finance at a meeting this week with representatives from the Society of Corporate Secretaries and Governance Professionals, reiterated that outside counsel and other advisers may be deemed to provide advice to a compensation committee indirectly--even if the adviser is not meeting with or speaking directly to the compensation committee.  As an example, if in-house counsel reports what outside counsel has advised, that can constitute “receiving advice” from outside counsel.  However, the fact that in-house counsel may have consulted with a number of outside lawyers in developing a recommendation or advice for the compensation committee does not mean that the compensation committee will be deemed to have received advice from each of those outside lawyers.  In other situations, it will be a facts-and-circumstances determination. 

In considering these issues, companies should consider the purpose of the listing standards, which is for compensation committees to be aware of and consider factors that could be viewed as affecting the objectivity of advice they receive.  When that advice is effectively coming from outside counsel, or outside counsel is being invoked as the source for particular advice, the requirements of these new listing standards should be borne in mind.  As we have previously noted, because of the requirement that compensation committees consider an adviser’s independence in advance of receiving advice from the adviser, companies should consider which consultants, outside counsel and other advisers work regularly with the committee or with management on matters that fall within the committee’s areas of responsibility and whether advice from those advisers will be presented to the compensation committee.  If so, those advisers should be requested to provide information on the various factors specified in the listing standards so that the information may be presented for the committee’s consideration.  While this information does not have to be presented to the compensation committee before the July 1 effective date of these new listing standards, it should precede the first post-July 1 instance of the adviser’s advice being presented to the compensation committee.  After the initial assessment, compensation committees should conduct a similar assessment at least annually. 

Second, companies should bear in mind that the independence consideration applies to any compensation consultant, outside counsel or other adviser whose advice is received by the compensation committee, regardless of the nature or subject of that advice.  In other words, the listing standards are not limited to advisers addressing executive compensation matters, but could also apply to advisers addressing director compensation, management succession or other issues that are handled by a board compensation committee. 

Finally, the listing standards do not require that a board compensation committee use only independent advisers.  Moreover, the listing standards do not state that the committee must make a formal determination about whether an adviser is independent, but instead require the compensation committee to consider the adviser’s independence, taking into account certain factors.  We expect that, in connection with conducting the assessment required under the listing standards, many compensation committees will continue the practice of making a formal determination as to whether a compensation consultant that is retained by or provides advice to the compensation committee is independent, and that companies will continue to voluntarily disclose in their proxy statements that a particular compensation consultant has been determined to be independent.  We expect, however, that it will continue to be less common for companies to provide voluntary disclosure addressing other advisers.