On January 11, 2013, the SEC approved proposed changes to the NYSE and NASDAQ listing standards of related to compensation committees. Both exchanges created transition periods to comply with the new rules. The following new requirements take effect on July 1, 20131:

Compensati on Committee Charter Amendments

NASDAQ and NYSE listed companies will be required to comply with the new rules relating to the authority of a compensation committee to retain compensation consultants, legal counsel, and other compensation advisers; the authority to fund such advisers; and the responsibility of the committee to consider independence factors before selecting or receiving advice from such advisers2.

NASDAQ. The requirement that such authority and responsibilities of the compensation committee be included in the compensation committee’s written charter does not apply until a later date (see below) for NASDAQ listed companies. Accordingly, NASDAQ listed companies should consider whether to grant such specific responsibilities and authority by July 1, 2013 through the adoption of a charter, the amendment to an existing charter, or by resolution or other board action. The requirement to adopt a compensation committee charter will not have to be complied with by NASDAQ listed companies until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014. 

NYSE. NYSE listed companies will have to amend their existing charters by July 1, 2013 to address these additional rights and responsibilities of the compensation committee related to compensation consultants, legal counsel, and other compensation advisers.

Assessing the Independence of Compensati on Consultants

The new NASDAQ and NYSE rules provide that the compensation committee may only select, or receive advice from, a compensation consultant, legal counsel, or other compensation adviser after considering the following factors3:

  • the provision of other services to the company by the person that employs the adviser; 
  • the amount of fees received from the company by the person or firm that employs the adviser, as a percentage of the total revenue of the person or firm that employs the adviser; 
  • the policies and procedures of the person or firm that employs the adviser that are designed to prevent conflict of interests;
  • any business or personal relationship of the adviser with a member of the compensation committee; 
  • any stock of the company owned by the adviser; and • any business or personal relationships between the executive officers of the company and the adviser or the person or firm employing the adviser.  

Compensation committees must conduct an independence assessment for all of its advisers, with limited exceptions for in-house counsel and compensation advisers that act in a role limited to (i) consulting on broad-based plans that are generally applicable to all salaried employees, or (ii) providing information that is either not customized for the issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.

We note that in evaluating compensation committee adviser independence, the NYSE requires consideration of all factors relevant to an adviser’s independence from management, in addition to the six enumerated factors listed above. NASDAQ does not have a similar catch-all requirement.

Both NASDAQ and NYSE listed companies should assess the independence of their current advisers prior to July 1, 2013. Ordinarily, this assessment will be performed before a potential adviser is selected and will then be re-assessed on an annual basis. We would suggest utilizing a compensation committee questionnaire to solicit information from the compensation consultant in order to complete this assessment