On November 26, 2013, the Nasdaq Stock Market submitted to the Securities and Exchange Commission (SEC) proposed amendments to its listing rules regarding the independence of compensation committee members. The amendments became effectively immediately upon filing. The amendments relax certain bright line tests for determining compensation committee member independence that were adopted by Nasdaq in its Listing Rules earlier this year and make the Nasdaq Listing Rules consistent with the New York Stock Exchange (NYSE) and other stock exchange listing rules.

For a discussion of the Nasdaq rules adopted earlier this year, please refer to our February 2013 Client Alert titled ‘‘SEC Approves NYSE and Nasdaq Listing Rules on Compensation Committee and Adviser Independence’’ available here.

Prior Rules

Under the prior Nasdaq Listing Rule 5605(d)(2)(A) and IM-5605-6, compensation committee members would have been prohibited from receiving (directly or indirectly) any consulting, advisory or other compensatory fee, from the listed company or any of its subsidiaries. The prior rules contained exceptions for board service or fixed amounts under a retirement plan for prior service with the company, but did not contain an exception for de minimis compensation. While this prohibition was consistent with Nasdaq’s requirements governing audit committee independence, it went beyond the requirements under Rule 10C-1 and the listing rules of the NYSE, which only require that compensation be considered as part of the compensation committee independence determination. A number of listed companies commented to Nasdaq that such a bright line prohibition on compensatory fees created a burden on a listed company’s ability to recruit eligible directors, especially for those in certain industries such as energy and banking where it is common for directors to engage in a de minimis amount of business with the company.

Amendments

As a result of such feedback, Nasdaq has amended Rule 5605(d)(2)(A) to:

  • Replace the bright line prohibition on compensation for compensation committee members with a requirement that the company’s board of directors consider the source ofCLIENT ALERT 2 all compensation accepted by the director, including board or board committee service fees and retirement compensation.
  • Add language requiring the company’s board of directors, in affirmatively determining the independence of a director who will serve on the compensation committee, to contemplate “all factors specifically relevant to determining whether a director has a relationship to the company which is material to the director’s ability to be independent from management in connection with the duties of a compensation committee member.” Nasdaq also revised IM-5605-6 to state that when considering any affiliate relationship a director has with the company, a subsidiary, or an affiliate of a subsidiary, the company’s board of directors must consider “whether the affiliate relationship places the director under the direct or indirect control of the company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair the director’s ability to make independent judgments about the company’s executive compensation.”

It is important to note, however, that the amendments do not change the requirement that compensation committee members be “Independent Directors” within the meaning of Nasdaq Listing Rule 5605(a)(2). Under this rule, an individual cannot be an “Independent Director” if he or she: (1) accepted any compensation from the company in excess of $120,000 during any period of twelve consecutive months within the prior three years; or (2) is a partner in, or a controlling shareholder or an executive officer of, any organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more.

Effective Date and Comment Period

The amendments to the Nasdaq listing rules became effective immediately pursuant to Rule 19b- 4(f)(6) under the Exchange Act. Although the amendments became effective immediately, comments on the rules may still be provided during a 21 day comment period from the date of publication in the Federal Register. The rules were made effective immediately to enable listed companies to meet the deadline for complying with the Nasdaq listing rules on compensation committee director independence, which remains the earlier of (1) the company’s first annual meeting held after January 15, 2014; or (2) October 31, 2014.

A complete copy of the amendments is available here.