NYSE and Nasdaq Propose Listing Standards Related to Compensation Committees

Committee Member Independence

All members of a listed company’s compensation committee must be ​“independent” members of the board of directors of the company, as such term is defined in its exchange’s listed company rules (Rule 10C-1(b)(1)).

Compensation Committee members are already required to be independent; new Section 303A.02(a)(ii) would require boards of directors to consider all factors specifically relevant to independence, including:

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

New Section 5605(d), which allowed for the CEO’s compensation to be determined by either the compensation committee or by an independent committee of the Board, was deleted, which would have the effect of requiring all listed company to actually have compensation committees.

Section 5605 would then require boards of directors to consider sources of compensation and company affiliations of compensation committee members and barred compensation committee members from receiving any fees from the company other than director fees.

Nasdaq has required that compensation committee members be barred from accepting any consulting, advisory or other compensatory fees (other than director fees) from their companies and its subsidiaries under SEC Rule 10A-3, bringing compensation committee member independence standards in line the standards that apply to members of listed companies’ audit committees.^[1]

Authority to Retain Advisors

Compensation committees of listed companies must be granted specific rights detailed by the SEC^[2] to ensure their independence and successful operation (Rule 10C-1(b)(2) – (3)).

New subsections 303A.05(c)(i)-(iii) would incorporate the SEC’s three mandates for compensation committees (listed below).

New subsection 5605(d)(1) would mandate adoption of formal written compensation committee charters that, among other requirements, would incorporate the SEC’s three mandates for compensation committees (listed below).

Review of Factors Impacting Compensation Adviser Independence

Compensation committees must take into consideration specific factors identified by the SEC^[3] (listed below) that affect the independence of compensation advisers before selecting advisers (Rule 10C-1(b)(4)).

New subsection 303A.05(c)(iv) would add the SEC’s six factors to consider when evaluating a compensation advisor’s independence, plus require compensation committees to consider all relevant factors (listed below).

New subsection 5605(d)(3) would incorporate the SEC’s six factors to consider when evaluating a compensation advisor’s independence into new compensation committee charters (listed below).

Cure Period

Listed companies must have a reasonable opportunity to cure any non-compliance regarding the independence of its compensation committee members (Rule 10C-1(a)(3)).

As amended, Section 303A.00 would create a cure period, if a majority of committee members remain independent, until the earlier of the next annual meeting or one year from the loss of independence; prompt notice to the SEC is required.

Section 5605(d)(4) would create a cure period until the earlier of the next annual meeting or one year from the loss of independence, but no less than 180 days; prompt notice to Nasdaq is required.

Effective Date

National securities exchanges must have their listing rules approved by the SEC within one year of Rule 10C-1 initial publication in the Federal Registry (Rule 10C-1(a)(4)).

Companies must comply with the new rules by the earlier of either their first annual meeting after January 15, 2014 or October 31, 2014.

Proposed Rule 5605(d)(3) will be effective on July 1, 2013. Companies must comply with the remaining amended provisions of Rule 5605 by the earlier of either their first annual meeting after January 15, 2014 or October 31, 2014.

Exemptions

National securities exchanges must provide their listed companies a reasonable cure period for noncompliance with the compensation committee independence requirement (Rules 10C-1(b)(1)(iii) and 10C-1(b) (5)).

The rules do not apply to companies that are already exempt from NYSE compensation committee requirements, e.g., controlled companies, limited partnerships, companies in bankruptcy, closed-end and open-end funds registered under the 1940 Act, and passive business organizations.

Smaller reporting companies are exempt only from the  compensation committee member and advisor independence requirements.

The rules do not apply to companies that are already exempt from Nasdaq compensation committee requirements, e.g., asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies, and controlled companies.

Smaller reporting companies must have compensation committees and are exempt only from to the compensation committee member and advisor independence requirements.