The New York Stock Exchange ("NYSE") and NASDAQ Stock Market ("NASDAQ") released their proposed compensation committee and compensation adviser independence listing standards on September 25, 2012. The proposed listing standards would implement the Securities and Exchange Commission (the "SEC") rules adopted under Section 10C of the Securities Exchange Act of 1934 (the "Exchange Act"), as mandated by Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). The proposed NYSE listing standards (as amended on October 1 to correct a technical error) are available here. The proposed NASDAQ listing standards are available here. The proposals were published in the Federal Register on October 15, 2012, and comments are due by November 5, 2012. The stock exchanges must adopt final listing standards no later than June 27, 2013.
As adopted by the SEC, new Rule 10C-1 requires U.S. stock exchanges to adopt listing standards that: (1) establish heightened independence requirements for compensation committee members; (2) require issuers to grant compensation committees the authority to retain, be directly responsible for and pay for compensation advisers; and (3) require the compensation committee to assess the independence of any compensation adviser that provides advice to the committee. The SEC's rules setting forth the requirements for NYSE's and NASDAQ's listing standards are described in more detail in our July 2, 2012 client alert, available here.
NYSE and NASDAQ have proposed different approaches with respect to independence standards for compensation committee members, each of which some companies might find problematic. As expected, neither the NYSE nor NASDAQ have specified additional factors, beyond those addressed in Dodd-Frank and under the SEC rules, for evaluating independence of compensation committee members or compensation advisers. However, NYSE's proposal would mandate an open-ended inquiry into the independence of compensation committee members, while NASDAQ's proposal would impose a bright-line independence element for compensation committee members. Separately, neither proposal provides helpful guidance on the scope of the SEC's broad mandate requiring that compensation committees assess the independence of compensation consultants, outside legal counsel or other advisers prior to obtaining their advice, and neither exchange proposes a cure process in case a compensation committee fails to conduct an independence assessment in advance of receiving advice from a compensation adviser.
While the proposed listing standards in large part simply implement mandated standards under Dodd-Frank and the SEC's rules, there are a number of nuances to how the exchanges have proposed to satisfy these requirements. We set forth below an explanation of the proposals and related observations that are relevant as companies consider whether to comment on the proposals, and we recommend steps that companies should take in anticipation of the rules being adopted. Because there is a short comment period and the rules have implications for the operation of compensation committees, companies should carefully study the proposals and consider submitting comments to their applicable exchange.
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