On January 11, 2013, the Securities and Exchange Commission (the "SEC") approved the listing standards proposed by the New York Stock Exchange (the "NYSE") and the NASDAQ Stock Market ("Nasdaq") regarding compensation committee member independence and authority and responsibilities in retaining compensation advisers.1 The exchanges proposed these listing standards pursuant to the requirements of Rule 10C-1 of the Exchange Act of 1934, as amended (the "Exchange Act"), which was promulgated under Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Our bulletin, dated October 11, 2012, summarizing the key provisions of these proposed listing standards is available here. Subsequent to our October 11, 2012 bulletin, each of the NYSE and Nasdaq issued amendments to their respective proposed listing standards.2 The SEC approved each of the exchange’s proposed listing standards, as amended.
The new listing standards for both the NYSE and Nasdaq provide for consideration of the new independence factors for compensation committee members; provide that compensation committees must have authority to retain compensation consultants, legal counsel or other advisers; set forth six "independence" factors to be considered by the committee in respect of its retention of advisers; and require listed companies to provide appropriate funding for payment to advisers retained by the committee.
This bulletin summarizes the listing standards as approved by the SEC, sets out the relevant compliance dates and suggests steps that listed companies should take now in response to the new standards.
The New Listing Standards
Under the new listing standards, independence of compensation committee members must be determined by taking into account two new statutory considerations of (1) compensation of the director (including any consulting, advisory or other compensatory fee paid by the issuer to the director); and (2) whether the director is affiliated with the issuer or any affiliate of the issuer. Additionally, in the case of the new NYSE listing standards, the board must also take into account all other specifically relevant factors to determine whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management as a compensation committee member.
The new considerations are similar to the requirements in Exchange Act Rule 10A-3 for audit committees, except that the NYSE listing standards do not absolutely prohibit directors receiving consulting, advisory or other compensatory fees from the issuer from being considered independent for service on the compensation committee, and neither the NYSE nor Nasdaq listing standards strictly prohibit directors that are affiliates of the issuer from being considered independent for service on the compensation committee.
In addition, the new listing standards of both exchanges address the authority of the compensation committee to retain compensation consultants, legal counsel and other advisers (collectively, "advisers") and codify the requirement that committees make adviser selections only after considering the six "independence" factors set out in Rule 10C-1.3 In the case of the NYSE, consideration of any other factors relevant to an adviser’s independence from management must also be taken into account. The listing standards of the NYSE and Nasdaq do not preclude compensation committees from retaining non-independent advisers.
Each of the NYSE and Nasdaq listing standards include exceptions to the requirement that compensation committees consider the independence factors before selecting an adviser. Such consideration is not required by a compensation committee for any adviser whose role is limited to those activities for which no disclosure is required under Item 407(e)(3)(iii) of Regulation S-K, namely (i) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the issuer, and that is available generally to all salaried employees; and (ii) providing information that is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.
Both the NYSE and Nasdaq listing standards require that issuers subject to the enhanced independence requirements for compensation committee members comply with such heightened standards by the earlier of the issuer’s first annual meeting after January 15, 2014 or October 31, 2014. The listing standards of both exchanges regarding expanded compensation committee authority and responsibilities pertaining to advisers, and consideration of the independence factors prior to retention of an adviser, are effective on July 1, 2013. Except as provided below, compensation committee charters will also need to be amended to provide for such authority, responsibilities and consideration of the independence factors by July 1, 2013.
Nasdaq’s additional compensation committee requirements, consisting of the requirement that an issuer have a separate compensation committee (in lieu of an issuer’s ability to presently have a majority of the independent directors on the board make executive compensation determinations in a vote in which only independent directors participate), and that a charter be adopted providing for the specified authority and responsibilities of a newly formed compensation committee, are required to be complied with by the earlier of an issuer’s first annual meeting after January 15, 2014 or October 31, 2014. Nasdaq issuers that continue to have independent directors making executive compensation determinations are still required to grant the specific authority, responsibilities and consideration of the independence factors to such group by July 1, 2013.
NYSE and Nasdaq issuers should take the following steps in order to prepare for compliance with the new compensation committee listing standards:
- Review and modify compensation committee charters in order to incorporate the required responsibilities and authority of the compensation committee relating to retention of advisers and required factors for consideration prior to retaining an adviser;
- Establish or modify procedures to identify any actual or potential conflicts of interest involving advisers, such as supplementing directors and officers’ questionnaires, preparing questionnaires for advisers and requiring advisers to address conflicts in connection with engagements or when rendering advice; and
- Update diligence procedures for determining the independence of compensation committee members, including supplementing directors and officers’ questionnaires.
As noted in our October 11, 2012 bulletin, disclosure of conflicts of interest with compensation consultants in issuers’ proxy statements for stockholder meetings occurring on or after January 1, 2013 is required pursuant to Item 407(e)(3)(iv) of Regulation S-K. Item 407(e)(3)(iv) requires that issuers consider, among other factors, whether a conflict of interest exists with a compensation consultant based upon the six factors specified for consideration under Rule 10C-1 (listed above). As a result, issuers should be establishing or modifying diligence procedures now to determine if there are any required disclosures of compensation consultant conflicts of interest in proxy statements for 2013 annual meetings.