Certification Requirement

Companies listed on the Nasdaq Stock Market must certify that they have complied with Nasdaq's listing standards regarding compensation committees by the earlier of 30 days after their 2014 annual meeting (if that meeting is held after January 15) or October 31, 2014. This certification must be done through the Nasdaq OMX Listing Center. A preview of the certification form is available at the Nasdaq OMX Listing Center.

Nasdaq's Rule 5605(d) requires that companies certify they have complied with:

1. the Nasdaq compensation committee independence standards; and
2. the requirement for a formal written charter that specifies the committee's responsibilities, including structure, operations, and membership requirements.¹

Additional information regarding Nasdaq listing standards for compensation committees can be found in our February 2013 WSGR Alert, available here.

Nasdaq Removes Ban on Compensatory Fees Paid to Compensation Committee Members

Nasdaq filed a proposal with the Securities and Exchange Commission (SEC) to liberalize its listing standards regarding the independence of compensation committee directors on December 11, 2014. The SEC declared that these changes became effective on January 10, 2014. The proposal can be found here.

Under Nasdaq's original Rule 5605(d)(2), approved by the SEC in January 2013, independent compensation committee directors were prohibited from receiving any consulting, advisory, or other compensatory fee from the listed company, except for fees received by the director as (a) a member of the board or any board committee and (b) fixed amounts of compensation under a retirement plan for prior service with the company. Our February 2013 WSGR Alert discussing Nasdaq's listing standards can be found here.

The proposal removes the absolute ban on compensation committee directors receiving compensatory fees. Instead, it requires a listed company's 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. . . ." These factors include, but are not limited to:

1. the source of compensation of the director, including any consulting, advisory, or other compensatory fee paid to the director by the listed company; and
2. whether the director is affiliated with the listed company or that company's affiliates or subsidiaries.

The proposal clarifies that when a listed company's board reviews the sources of a potential compensation committee director's compensation, the board should consider whether such 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."

Further, the proposal clarifies that when a board reviews a director's affiliate relationships, the board should consider "whether the affiliate 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, in each case of a nature that would impair the director's ability to make independent judgments about executive compensation."

Finally, the proposal clarifies that the definition of "company" in the independence test for compensation committee directors encompasses any "parent or subsidiary," including any entity that the company controls and consolidates with its SEC financial statements.

¹ Smaller reporting companies are not required to comply with the additional compensation committee eligibility requirements in Rule 5605(d)(2)(A) or to incorporate into their formal written compensation committee charter or board resolution the specific compensation committee responsibilities and authority set forth in Rule 5605(d)(3).