United States: New NYSE And NASDAQ Listing Standards Approved: Compensation Committee Independence, Compensation Adviser Engagement And Independence

On January 11, 2013, the U.S. Securities and Exchange Commission (the "SEC") approved new listing standards submitted by the New York Stock Exchange ("NYSE") and the NASDAQ Stock Market ("NASDAQ") concerning the independence of compensation committee members and the engagement and independence of compensation advisers. The new listing standards were required by the Dodd-Frank Act and the SEC rules adopted under the Dodd-Frank Act on June 20, 2012 (the "SEC Rules").

As approved, the new listing standards of the NYSE (the "NYSE Rules") and NASDAQ (the "NASDAQ Rules") are nearly identical to the new listing standards initially proposed by the NYSE and NASDAQ on September 25, 2012.

Effective Date

The NYSE Rules will be effective on July 1, 2013, although companies are not required to comply with the NYSE Rules concerning the independence of compensation committee members until the earlier of (i) the first annual meeting held after January 15, 2014 or (ii) October 31, 2014.

The NASDAQ Rules also will be effective on July 1, 2013, although companies are not required to comply with the NASDAQ Rules concerning the independence of compensation committee members, and the requirement that companies have a formal compensation committee and written compensation committee charter, until the earlier of (i) the first annual meeting held after January 15, 2014 or (ii) October 31, 2014. In connection with these changes, NASDAQ-listed companies are required to certify to NASDAQ, no later than 30 days after the final applicable implementation deadline, that they have complied with the new compensation committee composition and charter requirements.

Compensation Committee Independence

Both the NYSE Rules and the NASDAQ Rules require listed companies to specifically consider additional information when making independence determinations for compensation committee members. In addition, the NASDAQ Rules impose a new objective independence requirement that must be met by compensation committee members.

NYSE Rules

The NYSE Rules do not make any changes in the objective independence requirements for compensation committee members, but they do specifically require the board of directors to consider certain information when making independence determinations for compensation committee members. The NYSE Rules require boards of directors, when making these determinations, to consider all factors specifically relevant to determining whether a director has a relationship to the listed company that is material to that director's ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to:

  • the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the listed company to such director; and
  • whether such director is affiliated with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company.

With respect to a director's affiliation with the listed company, the NYSE clearly stated that it believed share ownership served to align directors' interests with those of unaffiliated shareholders and would not adversely affect a director's ability to be independent from management as a compensation committee member. Additionally, the commentary to the NYSE Rules indicates that the board should consider whether an affiliate relationship places a compensation committee member under the direct or indirect control of the listed company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair his or her ability to make independent judgments about the listed company's executive compensation. As a result, it is clear that having a director who was also a large shareholder or was affiliated with a large shareholder serve as a compensation committee member would not be viewed as inappropriate by the NYSE.

Because the NYSE Rules do not include any new objective independence standards, companies will not necessarily be required to make changes to their compensation committee composition. However, because of the requirement to consider information that may not have been specifically considered in the past, some companies may need to include additional disclosure in their proxy statements to address Item 407(a)(3) of Regulation S-K, which requires companies to describe, by specific category or type, transactions, relationships or arrangements not otherwise disclosed that were considered by the board of directors in making its independence determination.

The NYSE Rules also provide listed companies with an opportunity to cure noncompliance with the compensation committee independence requirement in certain circumstances. If a compensation committee member ceases to be independent for reasons outside the member's reasonable control, that person, with notice by the company to the NYSE, may remain a compensation committee member 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, provided that a majority of the members of the compensation committee continue to be independent.

NASDAQ Rules

The NASDAQ Rules make two principle changes to the existing listing standards relating to the independence of compensation committee members.

First, the NASDAQ Rules prohibit compensation committee members from accepting, directly or indirectly, any consulting, advisory or other compensatory fee from the company or any subsidiary, subject to limited exceptions for director and committee member fees and fixed compensation under a retirement plan (including deferred compensation) for prior service with the company (provided that such compensation is not contingent on continued service).

This prohibition is identical to current prohibitions relating to compensatory fees for audit committee members and, accordingly, there is no "look back" period for the prohibition on receiving compensatory fees. As a result, compensatory fees received by a director prior to the time the director starts serving as a member of the compensation committee would not disqualify that director from serving as a member of the compensation committee.

Although the NASDAQ Rules do not specifically define what constitutes "indirect" acceptance of a compensatory fee, we expect NASDAQ to interpret this phrase in the same manner as it does for audit committee members, which includes acceptance of such a fee by a spouse, a minor child or stepchild or a child or stepchild sharing a home with the member or by an entity in which such member is a partner, member, an officer such as a managing director occupying a comparable position or executive officer, or occupies a similar position (except limited partners, non-managing members and those occupying similar positions who, in each case, have no active role in providing services to the entity) and which provides accounting, consulting, legal, investment banking or financial advisory services to the listed company or any subsidiary of the listed company.

Second, in addition to the prohibition on receiving compensatory fees, the NASDAQ Rules also require the board of a listed company to consider whether the director is affiliated with the listed company, a subsidiary of the listed company, or an affiliate of a subsidiary, to determine whether any affiliation would impair the director's judgment as a member of the compensation committee. In the commentary to the NASDAQ Rules, NASDAQ noted that "it may be appropriate for certain affiliates, such as representatives of significant stockholders, to serve on compensation committees since their interests are likely aligned with those of other stockholders in seeking an appropriate executive compensation program." In other words, a director who is a large shareholder or is affiliated with a large shareholder should not be automatically precluded from serving on the compensation committee solely as a result of that affiliation.

The NASDAQ Rules also provide an opportunity to cure noncompliance with the compensation committee composition requirements in certain circumstances. If a listed company fails to comply with the compensation committee composition requirements due to one vacancy, or one compensation committee member ceases to be independent due to circumstances beyond the member's reasonable control, the listed company will have until the earlier of the next annual shareholders' meeting or one year from the occurrence of the event to regain compliance, provided that if the annual shareholders' meeting occurs no later than 180 days following the event that resulted in the failure, the listed company will have 180 days from the date of the event to regain compliance. A listed company relying on this cure period is required to provide notice to NASDAQ immediately upon learning of the noncompliance. This cure period is the same as the cure period provided by current NASDAQ listing standards with respect to the majority independent board requirement.

The NASDAQ Rules also continue to allow a listed company to have a non-independent director serve on the compensation committee under exceptional and limited circumstances.

Compensation Adviser Engagement and Independence

NYSE Rules and NASDAQ Rules

With respect to the retention of compensation consultants, legal counsel or other advisers ("compensation advisers") by a compensation committee and the requirement that the compensation committee consider specific independence factors prior to selecting a compensation adviser, both the NYSE Rules and the NASDAQ Rules generally mirror the corresponding requirements of the SEC Rules in mandating the following:

  • The compensation committee may, in its sole discretion, retain or obtain the advice of compensation advisers.
  • The compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of a compensation adviser retained by the compensation committee.
  • The company must provide for appropriate funding, as determined by the compensation committee, for the payment of reasonable compensation to any compensation advisers retained by the compensation committee.
  • Before selecting any compensation adviser, the compensation committee must take into consideration the following six independence criteria and, in the case of NYSE-listed companies, all other factors relevant to that person's independence from management:

    • The provision of other services to the company by the person that employs the compensation adviser.
    • The amount of fees received from the company by the person that employs the compensation adviser, as a percentage of that person's total revenue.
    • The policies and procedures adopted by the person that employs the compensation adviser that are designed to prevent conflicts of interest.
    • Any business or personal relationship of the compensation adviser with a member of the compensation committee.
    • The compensation adviser's ownership of the company's stock.
    • Any business or personal relationship between an executive officer of the company and the compensation adviser or person employing the adviser.

In addition, both the NYSE Rules and the NASDAQ Rules require companies' compensation committee charters to include these specific rights and responsibilities. Although NASDAQ-listed companies have until the earlier of (i) the first annual meeting held after January 15, 2014 or (ii) October 31, 2014 to put in place a written compensation committee charter, the compensation committee is required to have the specific rights and responsibilities described above by July 1, 2013. Whether those rights and responsibilities are granted through the charter or a board resolution or other action is left to the company's discretion, per the NASDAQ Rules.

There are several important practical considerations for listed companies to be aware of in considering the impact of these new listing standards:

  • First, as was made clear in the release adopting the SEC Rules, these rules do not prohibit a compensation committee from receiving advice from, or otherwise utilizing a compensation adviser that is not specifically retained by the compensation committee (for example, a company's regular outside counsel that is retained by management), nor do these rules require a compensation committee to be directly responsible for the appointment, compensation or oversight of compensation advisers that are not retained by the compensation committee.
  • Second, the compensation committee must consider the compensation adviser independence criteria with respect to any compensation adviser that provides advice to the compensation committee, whether or not retained by the compensation committee, other than (i) in-house legal counsel or (ii) a compensation adviser that acts in a role limited to consulting on a broad-based plan that does not discriminate in scope, terms or operation in favor of executive officers or directors of the company and that is available generally to all salaried employees, or providing information that is not customized for the company or is customized based on paramaters that are not developed by the adviser, and about which the adviser does not provide advice.
  • Third, the compensation committee is not required to make a formal determination regarding independence, and the compensation committee is not prohibited from selecting or otherwise obtaining advice from a compensation adviser that is not considered to be independent.

NASDAQ Compensation Committee and Compensation Committee Charter Requirements

The NASDAQ Rules made two changes to NASDAQ's existing listing standards that are not specifically related to items that were required to be addressed by the SEC Rules. The NASDAQ Rules require most domestic listed companies to have a formal compensation committee consisting of at least two independent directors and to have, and at least annually review and reassess the adequacy of, a written compensation committee charter that complies with the requirements of the NASDAQ Rules. Current NASDAQ listing standards require independent director oversight of executive officer compensation, but do not require listed companies to establish a formal compensation committee or to have a written compensation committee charter.

General Exemptions

Both the NYSE Rules and the NASDAQ Rules exempt (i) controlled companies, (ii) foreign private issuers (subject, in the case of the NYSE Rules, to certain additional disclosure requirements) and (iii) certain other listed companies from the new listing standards.

The NYSE Rules generally exempt smaller reporting companies from the new compensation committee independence requirements and the requirement for compensation committees to consider independence factors in connection with the selection of compensation advisers.

The NASDAQ Rules generally exempt smaller reporting companies from the new compensation committee independence requirements, the requirements relating to the retention of compensation advisers by the compensation committee, the requirement for compensation committees to consider independence factors in connection with the selection of compensation advisers and the requirement to have a written charter. The NASDAQ Rules do require that smaller reporting companies have a formal compensation committee of at least two members who satisfy current NASDAQ director independence requirements.

Summary of Actions to Take

Listed companies should prepare for the effectiveness of the NYSE Rules and the NASDAQ Rules by taking the following actions:

  • Reviewing and revising the company's compensation committee charter by July 1, 2013, as needed, in order to comply with the final rules.
  • Establishing procedures by July 1, 2013 addressing the required consideration by the compensation committee of factors relating to compensation adviser independence. The procedures adopted should ensure that all required information relating to the independence of a compensation adviser is gathered and presented to the compensation committee before it receives advice from the compensation adviser.
  • Reviewing engagements with current compensation advisers retained by the compensation committee to ensure that the compensation committee is directly responsible for their appointment, their compensation and oversight of their work. Note that engagements do not need to be in writing. Furthermore, as noted above, not every compensation adviser that provides advice to the compensation committee will have been, or needs to be, retained by the compensation committee (for example, a company's regular outside counsel that is retained by management).
  • Reviewing the company's current compensation committee membership and structure in light of the final rules. If changes to a company's compensation committee membership will be required, the company should begin planning early to ensure such changes will be in place on or before the applicable deadline, which will be the 2014 annual meeting for most companies.
  • Modifying the company's director eligibility and information gathering documents (such as director independence questionnaires) to gather the information necessary to evaluate the company's current compensation committee membership and structure in light of the final rules. Some companies may desire to do this earlier than they usually would for the 2014 annual meeting in order to have time to address any changes to compensation committee composition that may be needed in advance of the 2014 annual meeting.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2013 Goodwin Procter LLP. All rights reserved.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.