United States: NASDAQ Amends Compensation Committee Independence Rules

Last Updated: January 17 2014
Article by David A. Sirignano and Albert Lung

Amendment eliminates prohibition on the receipt of compensatory fees and aligns NASDAQ listing rules with NYSE standards.

On December 11, 2013, NASDAQ Stock Market LLC amended its listing standards relating to the independence of compensation committee members to remove the prohibition of the receipt of compensatory fees by compensation committee members.1 The amended rules would require the board of directors of NASDAQ-listed companies to only consider the receipt of compensatory fees as a factor in determining director independence for purposes of serving on the compensation committee. The amendment also provides additional guidance on the amended listing standards, including the application of the second part of the independence test relating to the director's affiliate relationship with the company. As a result of this amendment, NASDAQ's compensation committee independence rules are now aligned with the standards adopted by the New York Stock Exchange (NYSE) and other major exchanges.

Under the existing implementation timeline, NASDAQ-listed companies must comply with the independence requirements of compensation committee members by the earlier of (a) the first annual meeting after January 15, 2014 or (b) October 31, 2014. This amendment should make it easier for companies to comply with such requirements. In addition, NASDAQ-listed companies are required to provide NASDAQ with a certification to confirm their compliance with the compensation committee independence and charter requirements no later than 30 calendar days from this deadline.


In January 2013, the Securities and Exchange Commission (SEC) approved final rules implementing the listing standards of NASDAQ and NYSE relating to the independence of compensation committee members as directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added section 10C to the Securities and Exchange Act of 1934, as amended (Exchange Act).2 Section 10C-1 required the exchanges to adopt rules mandating companies to consider the following two factors relating to the independence of compensation committee members prior to listing:

  • Any compensation received by the director from any person or entity (including any consulting, advisory, or other compensatory fee paid by the company to such director).
  • The director's affiliate relationship with the company, its subsidiary, or an affiliate of a subsidiary of the company.

While section 10C-1 only required the consideration of compensatory fees when determining the independence of compensation committee membership, NASDAQ adopted a more stringent standard, under which the receipt by a director of any fees from the company, even a de minimis amount, would bar service on the compensation committee. This approach is similar to the audit committee independence requirements under the Sarbanes-Oxley Act, which also imposes a mandatory prohibition on the receipt of compensatory fees. Following the adoption of final rules, NASDAQ received significant negative feedback from listed companies complaining about the higher standard that made it more difficult to recruit qualified directors. In response to this feedback and confronted with the prospect of companies migrating to NYSE and other exchanges that have not deviated from the section 10C-1 requirements, NASDAQ decided to amend the listing rules to follow more closely the mandate of section 10C-1.

Summary of Amended Rules

The amended rules replace the prohibition on the receipt of compensatory fees by compensation committee members with the requirement that, in determining the independence of those members, the board must consider the source of compensation of the director, including any consulting, advisory, or compensatory fees paid by the company to the director. The amendment also clarifies that, when considering the sources of a director's compensation, the board should consider "whether the director receives compensation from any person or entity that would impair the director's ability to make independent judgments about the company's executive compensation."

The amendment also eliminated the two previous exceptions of compensatory fees that could be excluded from the analysis: (i) fees received as a member of the board or a committee of the board and (ii) the receipt of fixed amounts of compensation under a retirement plan for prior service with the company. As a result, the board must now consider all of these fees, together with all other sources of compensation received by the director, to determine whether the director is independent.

In addition, the amendment added language to clarify the general approach to analyzing the independence of compensation committee members. Specifically, NASDAQ would require the board to consider "all factors specifically relevant to determining whether a director has a relationship to the company which is material to that director's ability to be independent from management in connection with the duties of a compensation committee member." This language is consistent with the current NYSE standard. It is important to note that the amendment does not affect NASDAQ's existing listing standards that prohibit an independent director from receiving compensation from the company in excess of $120,000 during any 12-month period within the prior three years, except fees for service on the board or committee.

The amendment also provides interpretive guidance relating to the second part of the section 10C-1 test with respect to affiliate relationships. Under the amended rules, when considering any affiliate relationship a director has with the company, a subsidiary, or an affiliate of a subsidiary, the board should consider whether such relationship places the director under the direct or indirect control of the company or its senior management, or creates a direct relationship between the director and members of senior management, that would impair the director's ability to make independent judgments about executive compensation.

Practical Considerations

As a result of this amendment, NASDAQ-listed companies should reexamine the composition of their compensation committees to ensure compliance with amended listing rules prior to the implementation deadline. NASDAQ-listed companies should also review their committee charters, directors' and officers' (D&O) questionnaires, and corporate governance guidelines or policies to determine whether any changes are required. For example, companies may need to update their D&O questionnaires for the 2014 proxy season to include additional questions soliciting information on the sources of compensation of directors and, if applicable, remove the exemption of fixed amounts of compensation under a retirement plan from existing questions relating to fees received by directors.


1. View the amended rules at here.

2. For more information on the NYSE and NASDAQ listing standards approved by the SEC, see our February 5, 2013 LawFlash, "SEC Approves Final NYSE and NASDAQ Compensation Committee Rules," available at here.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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.

Similar Articles
Relevancy Powered by MondaqAI
Kilpatrick Townsend & Stockton LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Kilpatrick Townsend & Stockton LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions