As previously described, in the fall of 2012 the NYSE and NASDAQ markets previously issued rules concerning the independence of compensation committee members and advisers as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules were approved by the Securities and Exchange Commission in January 2013. They impose certain requirements on publicly listed companies traded on these exchanges which take effect July 1, 2013 and others which may require corporate action in advance to ensure future compliance.

  1. Assessment of Advisers

By July 1, 2013, the compensation committee of a company must assess the independence of every compensation consultant, legal counsel or any other adviser (collectively herein, “advisers”) to the committee. Many companies may have already made this assessment in connection with their disclosures concerning compensation consultant conflicts of interest made in 2013 proxy statements. After July 1, 2013, the compensation committee must assess the independence of advisers before their selection and must evaluate the independence of existing advisers annually. Although compensation committees are required to evaluate the independence of advisers, neither listing exchange requires that advisers actually be independent. In evaluating independence, the compensation committee must take into consideration the following factors set forth in Exchange Act Rule 10C-1(b)(4)1:

  • 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 that employs the adviser, as a percentage of that person’s total revenue;
  • The policies and procedures designed to prevent conflicts of interest of the person that employs the adviser;
  • Any business or personal relationship of the adviser with a member of the compensation committee;
  • Any stock of the company owned by the adviser;
  • Any business or personal relationship of the adviser or the person employing the adviser with an executive officer of the listed company; and
  • Any other related factors.

Both the NSYE and NASDAQ markets provide exceptions from the independence assessment requirement for any adviser that:

  • Acts in a capacity limited to consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors, and that is available generally to all salaried employees; and/or
  • Provides information that either is not customized for a particular company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.

A compensation committee should prepare for these assessments by gathering information from its advisers relevant to the above factors. In the future, the committee may wish to coordinate its independence assessments with its disclosure determination as to the existence of any conflicts of interest with regard to compensation consultants required in the company’s proxy statement. Although not required, a compensation committee may memorialize its assessments in the minutes of its meetings.

  1. Compensation Committee Charter

By July 1, 2013, the board of directors should ensure its compensation committee charter meets the requirements of Exchange Act Rule 10C-1(b)(4)2. This rule requires:

  • The compensation committee to have the authority to retain or obtain the advice of an adviser;
  • The compensation committee be directly responsible for the appointment, compensation and oversight of the work of any adviser;
  • Appropriate funding, as determined by the compensation committee, be provided for the payment of advisers; and
  • The compensation committee to select an adviser only after having taken into consideration that adviser’s independence as described above.

If necessary, the board of directors should amend its charter by July 1, 2013 to meet these requirements.

  1. Independence of Directors Serving on Compensation Committee

By the earlier of (i) a company’s first annual meeting of shareholders occurring after January 15, 2014 or (ii) October 31, 2014, the company must have a compensation committee comprised entirely of independent directors. To ensure future compliance with this rule, companies should:

  • Consider the independence of its compensation committee members under the relevant listing standards of the exchange on which it is listed;
  • Revise Director & Officer Questionnaires and take similar steps to facilitate the collection of information necessary for such evaluations and the preparation of required public disclosures; and
  • Consider steps to reconstitute the compensation committee with independent directors, if necessary.