Author(s):
Andrew MacDougall, Sandra Cohen, James Lurie
Jan 28, 2013
On January 11, 2013, the U.S. Securities and Exchange Commission (SEC) approved the New York Stock Exchange’s (NYSE) and the NASDAQ Stock Market’s (NASDAQ) listing standards relating to the independence of compensation committees, compensation consultants and other compensation advisers.1 The final listing rules, which implement SEC Rule 10C-1, were adopted substantially as proposed by the exchanges in September 2012; those proposed rules and suggested action items were discussed in the October 2012 Osler Corporate Review. As discussed below, during the review and comment period, certain clarifying amendments were made to the rules and NASDAQ revised its implementation date requirements to harmonize with the NYSE requirements.
Implementation Dates
- NYSE companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee director independence. All other provisions, including those related to funding and authority of the compensation committee and the independence assessment of compensation committee advisers, will become effective on July 1, 2013 for NYSE companies.
- NASDAQ companies are required to implement the provisions relating to funding and authority of the compensation committee and the independence assessment of compensation committee advisers in the committee charter, resolutions or other board action by July 1, 2013 (ultimately, the company must adopt a compensation committee charter which includes these authorities and responsibilities). NASDAQ companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the remaining provisions of the NASDAQ rule, including those requiring a separate compensation committee and requiring such committee to have a charter. The final NASDAQ rules also require a certification to NASDAQ, no later than 30 days after the final implementation deadline applicable to the company, that the company has complied with the new rules relating to compensation committees. The actual form of certification will be available through NASDAQ’s Listing Center website.
- The final NASDAQ and NYSE rules also revised the phase-in schedule for companies ceasing to be Smaller Reporting Companies.
Clarifying Changes and Other Highlights
Director Independence
In its approval orders, the SEC expressly noted that compliance with the NYSE and NASDAQ compensation committee member independence standards requires consideration of factors that include any personal and business relationships and related party transactions, because compensation committee members must meet an exchange’s general independence requirements under existing listing standards in addition to the Rule 10C-1 Independence Factors.
In response to comments that directors’ fees be considered for independence purposes, the NYSE noted that it did not believe that directors’ fees would be relevant to an independence analysis. However, “excessive” director compensation may need to be evaluated as possibly impairing independence, as the listing standards require the consideration of all relevant factors. The NYSE did not suggest what might constitute excessive board compensation. In response to other comments, the NYSE also specifically confirmed that a single factor or relationship considered in the independence analysis could be sufficiently material to render a director non-independent.
In response to comments, NASDAQ confirmed that there is no bright-line prohibition with respect to director affiliation with the company, a subsidiary of the company or an affiliate of a subsidiary of the company. NASDAQ sees its general independence standards as a sufficient requirement to have a listed company’s board make an affirmative determination that no affiliate relationships exist that would impact independence.
Compensation Adviser Independence Assessments
As adopted, both the NYSE and the NASDAQ rules clarify that the standards do not require compensation committees to conduct an independence assessment with respect to any compensation adviser that only (i) consults on a broad-based plan that does not discriminate in scope, terms or operation in favor of executive officers or directors and that is generally available to all salaried employees; or (ii) provides information that is not customized for a particular company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice. These changes mirror the existing exception from the requirement in Item 407(e)(3)(iii) of Regulation S-K to disclose any role of compensation consultants in determining or recommending the amount and form of a company's executive and director compensation.
The final NASDAQ and NYSE rules also clarify that the standards do not preclude a compensation committee from selecting or receiving advice from a non-independent compensation adviser. Instead, the committee must consider the six independence factors specified in the rules before selecting or receiving advice from a compensation committee adviser (including any outside legal counsel, such as the company’s regular securities and tax counsel), other than in-house counsel. In addition, the SEC noted that the independence assessment is required for a compensation consultant, legal counsel or other advisor who provides advice to the compensation committee, and is not limited to advice concerning executive compensation.
In response to comments, the NYSE noted that it did not believe the existence of indemnification agreements or limitations on liability provisions is relevant to the adviser independence analysis. The NYSE, however, expressed no view on the desirability of such agreements
During the comment process, the NYSE reaffirmed that in evaluating compensation committee adviser independence, the NYSE requires consideration of all factors relevant to an adviser’s independence, in addition to six enumerated factors. NASDAQ does not have a similar catch-all requirement and clarified that companies need only consider the six specified independence factors when evaluating adviser independence.
In its approval orders, the SEC stated that it expects companies to review compensation committee adviser independence at least annually.
1 The NYSE approval order can be found here and the NASDAQ approval order can be found here.