On December 11, 2013, the SEC published a notice of filing and immediate effectiveness of the proposed rule change related to the independence of compensation committee members under the listing standards of The NASDAQ Stock Market LLC (Rule 5605(d)(2)(A) and IM-5605-6). NASDAQ replaced the prohibition on the receipt of compensatory fees by compensation committee members with a requirement that a board of directors instead consider the receipt of such fees when determining eligibility for compensation committee membership. NASDAQ cited the feedback that it had received from listed companies as the reason for these changes. The new rules are almost identical to the NYSE’s rules related to compensation committee independence and, if adopted, would remove the anomaly of NASDAQ listing rules being more stringent than NYSE rules.

The new Rule 5605(d)(2)(A) states that in affirmatively determining the independence of any compensation committee member, the board must consider all factors specifically relevant to determining whether a director has a relationship to the company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to:

  • the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the company to such director; and
  • whether such director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

In IM-5605-6, NASDAQ clarified that when considering the sources of a director’s compensation in determining compensation committee member independence, the board should consider whether the director receives compensation from any person or entity that would impair the director’s ability to make independent judgments about the company’s executive compensation, including compensation for board or board committee services.

The approach to the affiliation prong of the independence analysis is not significantly changed in the new rules. However, NASDAQ revised IM-5605-6 to explain that the board should 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.

Companies are required to comply with the compensation committee composition aspects of the NASDAQ rules by the earlier of the date of their first annual meeting after January 15, 2014, or October 31, 2014