United States: NASDAQ Amends Compensation Committee Independence Requirements

The NASDAQ Stock Market (NASDAQ) recently amended its listing rules on compensation committee independence1 that were adopted earlier this year to implement Rule 10C-1 of the Securities Exchange Act of 1934.2 Specifically, NASDAQ is amending Listing Rule 5605(d)(2)(A) and IM-5605-6 to eliminate the bright-line prohibition on the receipt of compensatory fees by compensation committee members from the listed company and its subsidiaries.

The bright-line prohibition will be replaced by a requirement that a board of directors consider the source of a director's compensation, including the receipt of compensatory fees from the company and its subsidiaries, when affirmatively determining independence for compensation committee membership. The amendments align NASDAQ's compensation committee independence listing rule with Rule 10C-1, which does not require a prohibition on the receipt of compensatory fees, and the compensation committee listing standards of the New York Stock Exchange and NYSE MKT.

The amendments are immediately effective. However, the compliance deadline for companies with NASDAQ-listed equity securities that are subject to the compensation committee listing rules3 is the same as for the current compensation committee independence requirements – the earlier of their first annual meeting after January 15, 2014, or October 31, 2014.


NASDAQ indicated that over the past few months it has received feedback from listed companies and others that the compensatory fee prohibition creates a burden on listed companies, especially in industries such as energy and banking where it is common to have directors who conduct a de minimis amount of business with the issuer and would be ineligible to serve on a listed company's compensation committee. According to NASDAQ, listed companies and their representatives have indicated that this additional burden could influence a company's choice of listing venue. As a result of this feedback, NASDAQ determined to remove the compensatory fee prohibition.

The following chart compares the current compensation committee independence rule and the amendments.

For purposes of the amended compensation committee independence tests, "company" includes any parent or subsidiary of the listed company, including entities the company controls and consolidates with its financial statements as filed with the SEC (but not if the entity is included solely as an investment in the company's financial statements).

Even under the amended rule, a compensation committee member may not receive unlimited fees from a company as the member must continue to be an "independent director." NASDAQ Listing Rule 5605(a)(2) defines "independent director," in part, to exclude any director who (1) accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the prior three years or (2) is a partner in, or a controlling shareholder or an executive officer of, any organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more. As a result, boards must consider, based on the company's and the director's unique circumstances, whether the receipt of any fees (including those for board or committee service), even if below the caps, would impair the director's ability to make independent judgments about the company's executive compensation.

Next Steps

Conduct compensation committee independence determinations. NASDAQ-listed companies that are subject to the compensation committee listing rules should:

  • update their director and officer questionnaires to reflect the amendments;
  • review their compensation committee members to ensure they satisfy the amended compensation committee independence standards to determine whether any changes are needed due to a member not being deemed independent; and
  • ensure that by the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, all compensation committee members satisfy the amended compensation committee independence standards.

Revise compensation committee charters as necessary. NASDAQ-listed companies subject to the compensation committee listing rules must revise, if necessary, by the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, their compensation committee charter and other relevant governance documents to reflect the amendments. Many listed companies amended their compensation committee charters to comply with Listing Rule 5605(d)(1) and may need to further amend the charters in response to the rule amendments. Those companies should ensure that they comply with Regulation S-K Item 407(e)(2) and Instruction 2 to Item 407 by (1) posting the revised charter on their website and disclosing in their 2014 proxy statement that a current copy of the charter is available on the website and the website address or (2) including the revised charter as an appendix to their 2014 proxy statement.

Listed companies that adopted or will adopt a formal compensation committee charter for the first time in response to NASDAQ's new compensation committee listing rules should remember to (1) post the charter on their website and disclose in their 2014 proxy statement that a current copy of the charter is available on the website and the website address or (2) include the charter as an appendix to their 2014 proxy statement.

Prepare and file compensation committee compliance certificate. As part of their 2014 proxy planning checklist, NASDAQ-listed companies subject to the compensation committee listing rules should include the requirement to file with NASDAQ a Compensation Committee Certification within 30 days after the earlier of the company's first annual meeting after January 15, 2014, or October 31, 2014. NASDAQ previously provided a form of Compensation Committee Certification in Exhibit 3 to this compensation committee rule filing. However, companies should wait until NASDAQ releases a final form before attempting to complete the certification as NASDAQ will need to update the form based on the rule amendments. The actual form will be available in January 2014 through NASDAQ's Listing Center website.

Based on the sample certification form noted above, asset-backed and other passive issuers, cooperatives, limited partnerships (including MLPs) and management investment companies registered under the Investment Company Act of 1940 are exempt from NASDAQ's compensation committee listing rules and are not required to submit the certification. However, smaller reporting companies, foreign private issuers and controlled companies would need to complete and file the certification even though they are exempt from some or all of the compensation committee listing rules. Similarly, listed companies relying on the "exceptional and limited circumstances" exception or a phase-in schedule (for example, IPO issuers) must complete and file the certification.


1. The NASDAQ Stock Market LLC, Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend the Listing Rules on Compensation Committee Composition, Release No. 34-71037 (Dec. 11, 2013), 78 Fed. Reg. 76179 (Dec. 16, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-12-16/pdf/2013-29802.pdf. The text of the rule amendments can be found here.

2. For more information, please see our client alert dated February 22, 2013, SEC Approves NYSE, NYSE MKT and NASDAQ Compensation Committee Listing Standards.

3. The compensation committee listing rules do not apply to the following issuers: (a) asset-backed issuers and other passive issuers; (b) cooperatives; (c) limited partnerships (for example, MLPs); (d) management investment companies registered under the Investment Company Act of 1940; and (e) controlled companies (i.e., issuers where more than 50% of the voting power for the election of directors is held by an individual, a group or another company). Smaller reporting companies are exempt from many of the compensation committee listing rules. Foreign private issuers that follow their home country practice are exempt provided that they comply with the disclosure requirements in Listing Rule 5615(a)(3).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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