United States:
NYSE And NASDAQ Adopt Final Rules For Compensation Committees
04 February 2013
Milbank LLP
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On June 20, 2012, in furtherance of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, the Securities and
Exchange Commission adopted new Rule 10C-1 under the Securities
Exchange Act of 1934 and amendments to Item 407 of Regulation S-K
that, among other things, focused on ensuring the independence of
compensation committee members by directing the national securities
exchanges to "establish listings standards that ... require
each member of a listed issuer's compensation committee to be
... 'independent' as defined in the listing standards of
the exchange." In response to this SEC release, on January 11,
2013, each national securities exchange adopted new listing
standards to comply with new Rule 10C-11.
The requirements of Rule 10C-1 and the new listing standards of
each of the NYSE and NASDAQ are summarized below.
|
Rule 10C-1
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NYSE Adopted Rules
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NASDAQ Adopted Rules
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Committee Member Independence Standards
|
- Requires each member of a compensation committee to be
"independent", but the SEC rules neither define
independence nor impose specific standards
- Directs exchanges to develop their own definitions after
considering "relevant factors" including (i) "any
consulting, advisory, or other compensatory fee paid by the
issuer to [a] member" and (ii) whether any director "is
affiliated with the issuer, a subsidiary of the issuer, or an
affiliate of a subsidiary of the issuer"
|
- In addition to its current requirements2, when
determining independence, the new rules require a board to consider
all relevant factors including the two new factors in Rule
10C-1
- While neither Rule 10C-1 factor will preclude a director from
being deemed independent, each new factor must be considered
- There is no absolute prohibition on a director being deemed
independent solely based on being an "affiliate" as a
result of share ownership (which is seen as giving that director
the same economic interests in ensuring that executive compensation
is not excessive)
|
- In addition to its current requirements3, when
determining independence, the new rules (i) prohibit any director
from accepting directly or indirectly any consulting, advisory or
other compensatory fees other than for board service (which is the
same as Rule 10A 3 for audit committee members) and (ii) require a
board to consider whether a director is affiliated with the
Company
- There is no blanket prohibition regarding affiliated directors
because certain affiliates (e.g., large stockholders) are likely
aligned with other stockholders in seeking appropriate compensation
programs
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Committee Role
|
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- The new rules do not modify the existing NYSE rules that
currently require a listed company to have a compensation committee
comprised entirely of independent directors and to adopt a formal
written charter
|
- While not required by Rule 10C-1, the new rules require (i) a
standing compensation committee comprised of at least two
independent directors and (ii) adoption of a formal committee
charter, subject to annual review4
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Advisor Access and Independence
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- Committee must have authority to retain or obtain advice of
consultants, be directly responsible for overseeing and
compensating its advisers, and be provided with appropriate
funding
- While advisers are not required to be independent, committees
must consider six independence factors5 before retaining
an adviser (as well as any other factors identified by the
applicable exchange)
|
- The new rules require the compensation committee to have
responsibilities and authority necessary to comply with Rule 10C-1,
including by requiring that the committee have the authority to
retain and pay advisers
- The new rules adopt the SEC's six factor independence test
without adding any new factors or requiring that the adviser be
independent (simply that an independence assessment be
conducted)
- However, a compensation committee is not required to conduct an
independence assessment of an adviser that acts in a limited role
(e.g., consulting on any broad-based plan that does not
discriminate in favor of executive officers or directors or
providing non customized information)
|
- The new rules require the compensation committee to have
responsibilities and authority necessary to comply with Rule 10C-1,
including by requiring that the committee have the authority to
retain and pay advisers
- The new rules adopt the SEC's six factor independence test
without adding any new factors or requiring that the adviser be
independent (simply that an independence assessment be
conducted)
- However, a compensation committee is not required to conduct an
independence assessment of an adviser that acts in a limited role
(e.g., consulting on any broad-based plan that does not
discriminate in favor of executive officers or directors or
providing non customized information
|
Effectiveness
|
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- Listed companies will have until the earlier of their first
annual meeting after January 15, 2014 or October 31, 2014 to comply
with the new compensation committee independence standards
- All other new rules will become effective on July 1, 2013
Proposed rules would not become operative until July 1, 2013
|
- New rules pertaining to committee's authority to retain and
pay advisers and the rule to consider the six factor independence
test before retaining an adviser will be effective July 1,
2013
- All other new rules will require compliance by the earlier of
the first annual meeting after January 15, 2014 or October 31,
2014
|
Footnotes
1 For a further discussion on (a) the SEC's adopting
release for Rule 10C-1 and amendments to Item 407 of Regulation
S-K, please see our Client Alert entitled "SEC Adopts New
Rules Requiring Stock Exchange Listing Standards For Compensation
Committees " (June 27, 2012 and (b) the proposed rule releases
for each national securities exchange, please see our Client Alert
entitled "NYSE and Nasdaq Issue Proposed Rules for
Compensation Committees" (October 18, 2012).
2 When determining "independence" under its
current listing standards, the NYSE rules (a) require a board to
affirmatively determine that a director has no material
relationship to the company and (b) provide that a director may not
be independent if a relationship exists that would violate five
"bright line" tests.
3 When determining "independence" under its
current standards, the NASDAQ rules (a) require a board to
affirmatively determine that a director does not have a
relationship that would interfere with the exercise of independent
judgment in carrying out that director's responsibilities and
(b) provide that certain categories of director, based on certain
identified relationships, cannot be independent.
4 In adopting this approach, NASDAQ has eliminated its
alternative rule permitted a majority of independent directors, in
lieu of having a standing compensation committee, determine
executive compensation.
5 The six factors set forth in Rule 10C-1 include (i) the
provision of other services to the company by the compensation
committee adviser, (ii) the percentage of the adviser's total
revenue that is represented by the fees received from the company,
(iii) the policies and procedures of the adviser that are designed
to prevent conflicts of interest, (iv) any business or personal
relationship of the adviser with an executive officer, (v) any
business or personal relationship of the adviser with a member of
the compensation committee and (vi) any stock of the company owned
by the adviser.
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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