NYSE and NASDAQ Propose Rules Establishing Listing Standards for Compensation Committees and Selection of Compensation Advisers
On September 25, 2012, the New York Stock Exchange (NYSE) and NASDAQ issued proposed rules to adopt listing standards relating to compensation committees and compensation advisers. Once finalized, these listing standards will complete the requirements of Section 10C of the Dodd-Frank Act and the requirements of the SEC's final rule (Rule 10C-1) adopted on June 20, 2012. For more information, see our previous legal alert regarding the SEC’s final rule. The NYSE proposed rules and NASDAQ proposed rules are subject to public comment and SEC approval.
Compensation Committee Independence Requirements
SEC Rule 10C-1(b)(1): The rule requires the national securities exchanges to establish listing standards requiring members of a company’s compensation committee to be independent. In defining “independence,” exchanges are required to consider relevant factors, including a director’s sources of compensation and whether the director is affiliated with the company.
NYSE-Proposed Rules: The proposed rules do not create any additional bright-line tests for assessing the independence of compensation committee members. NYSE-listed companies will need to apply existing board independence requirements and consider “all factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with duties of a compensation committee member.” These factors include, but are not limited to, the factors listed in the SEC rule, including an assessment of any affiliations with the listed company. Under the NYSE rules, each listed company must identify factors it deems relevant for evaluating independence status.
NASDAQ-Proposed Rule: For the first time, NASDAQ is adding a requirement for a listed company to have a compensation committee, comprised of at least two members. Under the proposed rule, NASDAQ-listed companies must assess compensation committee member independence using existing board independence requirements. The rule also prohibits a compensation committee member from receiving, directly or indirectly, any consulting, advisory, or other compensatory fees, other than compensation for board service. This approach is consistent with the standards applicable to audit committees. The Board must also consider a director’s affiliations with the company in determining independence. In addition, the rule establishes a requirement to adopt a compensation committee charter, and to review and assess the adequacy of such charter on an annual basis.
Compensation Advisers Independence Factors
SEC Rule 10C-1(b)(4): Section 10C of the Dodd-Frank Act requires that compensation committees consider certain factors prior to selecting a compensation adviser, including compensation consultants, legal counsel, or other advisers (other than in-house counsel). SEC Rule 10C-1(b)(4) directed the exchanges to adopt listing standards that require compensation committees to consider the following factors:
- The provision of other services to the issuer by the person that employs the compensation adviser
- The amount of fees received from the issuer (as a percentage of the total revenue) by the person who employs the compensation adviser
- Policies and procedures of the person who employs the compensation adviser that are designed to prevent conflicts
- Any business or personal relationship of the compensation adviser with a member of the compensation committee
- Any stock of the issuer owned by the compensation adviser
Neither the NYSE-proposed rules nor the NASDAQ-proposed rule add any additional factors to the Dodd-Frank Act-mandated list. The NASDAQ-proposed rule highlights the need for compensation committees to consider all factors that are relevant to the adviser’s independence from management.
Opportunity to Cure Defects
SEC Rule 10C-1(a)(3):The rule requires exchanges to provide appropriate procedures for listed companies to have a reasonable opportunity to cure any noncompliance with the compensation committee standards that could result in the delisting of the company’s securities. The listing standards may also provide that if a member of the compensation committee ceases to be independent for reasons outside of the member’s reasonable control, that person, with notice by the company to the applicable exchange, may remain on the compensation committee until the earlier of the next annual meeting of shareholders or one year from the occurrence of the event.
NYSE-Proposed Rules: The NYSE adopted the SEC’s cure period. However, it limits the use of the cure period to situations where the compensation committee continues to have a majority of independent directors.
NASDAQ-Proposed Rule: NASDAQ adopted the SEC’s cure period, but has modified it so that if the annual shareholders’ meeting occurs within 180 days following the event that caused the noncompliance, the company will instead have 180 days from the date of the event to cure the noncompliance.
NYSE-Proposed Rules: Classes of listed companies currently exempt from the NYSE compensation committee requirements will continue to be exempt. Smaller reporting companies will be exempt from the heightened independence requirements, but will otherwise be required to comply with the compensation committee requirements.
NASDAQ-Proposed Rule: The exemption from meeting the independence requirements in “exceptional and limited circumstances” remains in place. Smaller reporting companies are exempt from all of these proposed rules except for the need to have a compensation committee comprised of at least two members and the charter requirement.
Anticipated Effective Dates and Transition Period
NYSE-Proposed Rules: Subject to SEC approval, the final rules would become effective on July 1, 2013. Listed companies would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new independence standards for compensation committees and compensation advisers.
NASDAQ-Proposed Rule: The proposed rule relating to the compensation committee’s responsibilities and authority, including the responsibility to consider the independence of compensation advisers, would be effective immediately following SEC approval. The remaining provisions, including compensation committee independence requirements, would become effective the earlier of the company’s second annual meeting held after the date of approval of the proposed rules, or December 31, 2014.