BACKGROUND INFORMATION AND EFFECTIVE DATES

On September 25, 2012, the NASDAQ Stock Market LLC (Nasdaq) proposed changes to its listing standards related to compensation committees. Nasdaq proposed new compensation committee rules in response to the SEC’s Rule 10C-1, which became effective on July 27, 2012 and which, in its turn, was promulgated in response to Section 952 of the Dodd-Frank Act that required the SEC to direct the national securities exchanges to prohibit the listing of any equity security of an issuer, subject to certain exemptions, that does not comply with the Dodd-Frank Act’s requirements relating to compensation committees and compensation advisers.  

Proposed Nasdaq Listing Rule 5605(d)(3), which requires compensation committees to have the specific responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Securities Exchange Act of 1934, will be effective immediately upon the SEC’s approval of the Nasdaq’s proposal as discussed below under Compensation Committee Responsibilities.  

Nasdaq-listed companies must comply with the remaining amended listing rules by the earlier of: (1) their second annual meeting held after the date of approval of the proposed rules; or (2) December 31, 2014. A company must certify to Nasdaq, no later than 30 days after the implementation deadline applicable to it, that it complied with the amended listing rules on compensation committees (Nasdaq will provide a form for this certification). During the transition period, companies that are not yet required to comply with the amended listing rules on compensation committees must continue to comply with Nasdaq’s existing listing rules, which have been redesignated as Listing Rule 5605A(d) and IM-5605A-6 in Nasdaq’s proposal.  

COMPENSATION COMMITTEE COMPOSITION AND CHARTER

Generally, Nasdaq’s proposal has almost closed the bridge between its compensation committee and audit committee rules, and many requirements applicable to audit committees of Nasdaq-listed companies will be applicable to their compensation committees. (Please see a chart on page 4 comparing Nasdaq’s current compensation committee rules, its proposed compensation committee rules and current audit committee rules.)

Click here to view the table.

CONTENTS OF THE COMPENSATION COMMITTEE CHARTER

Under the Nasdaq’s proposal, the compensation committee charter must specify the following:

  • the scope of the compensation committee’s responsibilities, and how it carries out those responsibilities, including structure, processes and membership requirements;
  • the compensation committee’s responsibility for determining, or recommending to the board for determination, the compensation of the executive officers of the company;
  • that the chief executive officer of the company may not be present during voting or deliberations by the compensation committee on his or her compensation; and
  • the specific compensation committee responsibilities and authority set forth in proposed Nasdaq Listing Rule 5605(d)(3).

These matters represent a combination of (i) some of the requirements applicable to the audit committee charter and (ii) compensation committee responsibilities under current Nasdaq rules.

Smaller reporting companies may adopt either a formal written compensation committee charter or a board resolution that specifies the committee’s responsibilities and authority, except for the matters set forth in proposed Nasdaq Listing Rule 5605(d)(3).

COMPENSATION COMMITTEE RESPONSIBILITIES

Proposed Nasdaq Listing Rule 5605(d)(3) states that a compensation committee must possess the specific responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Dodd-Frank Act relating to the: (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers (other than in-house legal counsel).

Because this rule will be effective upon the SEC approval of Nasdaq’s proposal, Nasdaq-listed companies should consider now whether to grant these specific responsibilities and authority through an amendment to the charter, resolution or other board action. To the extent a company does not have a compensation committee, the provisions of this rule will apply to the independent directors who determine, or recommend to the board for determination, the compensation of the executive officers of the company. While Nasdaq proposes that companies must eventually have a written compensation committee charter that includes, among others, these responsibilities and authority, companies may implement such a charter on the schedule discussed above. Smaller reporting companies are exempt from this requirement.  

WHAT SHOULD WE DO NOW?

Below is a list of suggested action items in connection with Nasdaq’s proposals:

  • If you do not have a compensation committee and a majority of independent directors is making, or recommending to the board, compensation decisions related to executive officers of the company, start evaluating potential candidates for compensation committee membership.
  • If you have a compensation committee consisting of one director, start evaluating potential candidates to expand the compensation committee to two members, as required by the proposed rule, or even to three members in order to avoid giving each director a veto power.
  • Consider whether existing members of the compensation committee or potential members of the compensation committee are getting any compensatory fees from the company or any of its subsidiaries or are affiliated with the company or a subsidiary of the company or an affiliate of a subsidiary of the company. Evaluate whether any changes to the current composition of the compensation committee are necessary.
  • Implement new responsibilities and authority applicable to compensation committees, or independent directors involved in compensation decisions, relating to: (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers through a charter amendment or board resolution.
  • Draft a new, or revise an existing, compensation committee charter.