On July 2, 2012, we published an alert summarizing the SECs adoption of Exchange Act Rule 10C-1, which required national securities exchanges to adopt rules for listed companies related to compensation committee and compensation advisers.

On September 25, 2012, the New York Stock Exchange (NYSE) and the Nasdaq Stock Market LLC proposed rule changes to their listing standards to comply with the new rule.

Because many of the provisions of the new rules were already found in various sections of the NYSE-listed company manual, the NYSE proposed amendments will effectively conform rule language to the specific language of Rule 10C. However, the Nasdaq proposed rule changes contain several additional requirements resulting in more significant changes.

Compensation Committee Independence. Proposed rules for NYSE and Nasdaq both would require the board of directors to consider the following in determining the independence compensation committee directors:

  • the source of the director’s compensation, including any consulting, advisory or other compensatory fees paid by the listed company
  • whether the director has an affiliate relationship with the company, a subsidiary of the company or an affiliate of a subsidiary of the company

NYSE and Nasdaq do not propose any additional factors, and neither set any specific numerical threshold with respect to any of the above requirements. Nasdaq, however, would prohibit compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fee, other than for board service, from the listed company, similar to the prohibition on audit committee members.

NYSE and Nasdaq specifically declined to impose on committee members equity ownership restrictions similar to restrictions for audit committee members. Both proposals would allow companies in certain circumstances reasonable "cure periods" in which to correct any defects in compensation committee composition.

Compensation Committee Advisers. Although NYSE-listed companies are already required to have independent compensation committees and compensation committee charters, Nasdaq has allowed executive compensation decisions to be made by a majority of the independent directors on the board. Nasdaq's proposed rules would vest executive compensation decisions exclusively with a compensation committee comprised of at least two independent members. Nasdaq's proposed rule would allow a non-independent committee member to sit on a compensation committee of at least three members for up to two years, under exceptional and limited circumstances. Nasdaq's proposed rule also requires the compensation committee to adopt a charter, including the existing Nasdaq prohibition on the CEO being present during any vote or deliberation on the CEO's compensation.

Compensation Adviser Independence Factors. The NYSE and Nasdaq proposed rules adopt the SEC's independence factors to be considered in determining independence of compensation advisers. Under the proposed rules, the compensation committee must consider the following factors:

  • whether and to what extent the adviser provides other services to the listed company
  • the amount of fees received by the adviser from the listed company, as a percentage of the total revenue of the adviser
  • the policies and procedures of the adviser that are designed to prevent conflicts of interest
  • any business or personal relationship of the adviser with a member of the compensation committee
  • any stock of the listed 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

Neither NYSE nor Nasdaq proposes specific additional factors, but both proposals require that all other relevant factors be considered. Although a compensation adviser may not be considered independent after the above analysis, the committee may still retain the adviser if an independence analysis was conducted. In addition, the compensation committee need not engage in an analysis of the independence factors before consulting with, or obtaining advice from, in-house legal counsel.

General Exemptions. Both NYSE and Nasdaq will grant exemptions from the new rules based upon standards and criteria generally consistent with current exemptions, including an exemption from the proposed heightened standards for companies that are currently exempt from all other compensation committee requirements. Smaller reporting companies will also be exempt from the heightened standards, although currently smaller reporting companies generally are required to have a compensation committee of independent directors and a written charter.

Effectiveness. NYSE-listed companies must comply with the new rules by the earlier of the first annual meeting after January 15, 2104, and October 31, 2014. Nasdaq-listed companies must comply with standards relating to authority to retain, and evaluate the independence of, compensation advisers immediately after those standards are adopted, and must comply with the remaining provisions of the amended listing rules by the earlier of (1) their second annual meeting held after approval of the proposal, or (2) December 31, 2014.