10/1/12

Securities Alert: NYSE, NASDAQ Propose Rules Regarding Compensation Committee and Adviser Independence

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On September 25 and 26, 2012, respectively, New York Stock Exchange LLC (NYSE) and The NASDAQ Stock Market LLC (NASDAQ) proposed amendments to their listing standards to comply with the requirements of Section 10C of the Securities Exchange Act of 1934 (the Exchange Act), as set forth in Exchange Act Rule 10C-1, relating to the independence of compensation committees and compensation advisers. 

Background

Exchange Act Rule 10C-1 requires that the national securities exchanges and associations adopt listing standards requiring that:

These requirements are summarized below.

Independence of the Compensation Committee

Exchange Rule 10C-1(b)(1) requires that each member of the compensation committee (or, in the absence of a committee, those directors who oversee executive compensation on behalf of the board) be independent.  The determination of “independence” must, at a minimum, consider:

Access to and Independence of Compensation Advisers

Exchange Act Rules 10C-1(b)(2), (3) and (4) require that the compensation committee have access to compensation advisers who are independent.  For this purpose, the compensation committee must:

Rule 10C-1 does not require that an independence assessment be performed prior to obtaining advice from in-house legal counsel.

Amendments to NYSE Corporate Governance Standards

To comply with the requirements of Exchange Act Section 10C and Exchange Act Rule 10C-1, NYSE has proposed the following revisions to its Corporate Governance Standards:

Amendments to NASDAQ Listing Rules

To comply with the requirements of Exchange Act Section 10C and Exchange Act Rule 10C-1, NASDAQ has proposed to revise its Listing Rule 5605(d) in its entirety as follows:

In determining whether a director is eligible to serve on the compensation committee, issuers must also consider whether the director is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer to determine whether such affiliation would impair the director’s judgment as a member of the compensation committee. 

Opportunity to Cure

As required by Exchange Act Rule 10C, both the NYSE and NASDAQ proposals provide flexibility to issuers in the event that a compensation committee member ceases to be independent for reasons outside the member’s reasonable control.   In each case, the individual may continue serving on the compensation committee until the earlier of the next annual shareholders’ meeting or one year from the occurrence of the event that caused the member to be no longer independent (except that the NASDAQ rules shorten this period to 180 days if the next annual shareholders’ meeting occurs within 180 days of such event). 

Exemptions 

In addition to the exemptions described in Exchange Act Rule 10C-1, both NYSE and NASDAQ propose to exempt smaller reporting companies from the enhanced compensation committee independence requirements and from having to assess the independence of compensation advisers.  However, the NASDAQ rules do not relieve smaller reporting companies from the obligation to maintain a compensation committee or adopt a compensation committee charter.

Effective Dates

Following SEC approval, the proposed amendments to the NYSE Corporate Governance Standards become effective July 1, 2013; however, issuers will have until the earlier of their first annual meeting after January 15, 2014 or October 31, 2014 to comply with the new listing standards as they relate to the independence of compensation committee members.[3]

The proposed amendments to NASDAQ Listing Rule 5605(d), relating to the compensation committee’s authority to retain and fund compensation advisers and the responsibility to assess compensation adviser independence, become effective immediately upon SEC approval of those amendments.  However, issuers would then have until their second annual meeting after the date on which the proposed amendments are approved by the SEC (but in no event later than December 31, 2014) to comply with the provisions relating to compensation committee independence and the adoption of a formal written compensation committee charter.  

In addition, a NASDAQ listed company will be required to certify to NASDAQ, no later than 30 days after the implementation deadline applicable to it, that such listed company has complied with the amended Listing Rules on compensation committees.


[1] NASDAQ proposes to let one director (who is not an executive officer or a family member of an executive officer) who does not satisfy the independence criteria in proposed Listing Rule 5605(d)(2)(A) continue serving on the compensation committee under exceptional and limited circumstances, provided that the compensation committee consists of at least two others members each of whom is independent.

[2] In adopting this prohibition, NASDAQ noted that it was intentionally intended to align the proposed standards applicable to the compensation committee with the existing standards applicable to the audit committee.

[3] On October 1, 2012, NYSE published an updated rule filing clarifying the effectiveness of the new listing standards.  The original rule filing indicated that issuers would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with all listing standards.