Nasdaq Proposes Amendments to Compensation Committee Member Independence Rules

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On November 26, 2013, the NASDAQ Stock Market LLC (Nasdaq) filed a proposed rule change with the Securities and Exchange Commission (SEC) to amend its listing rules relating to compensation committee member independence. The proposed rule change will more closely align the Nasdaq compensation committee independence rules with the requirements of Rule 10C-1 of the Securities Exchange Act of 1934, as amended, and rules of the New York Stock Exchange (NYSE).

Nasdaq's current listing rules 5605(d)(2)(A) and IM-5605-6 prohibit any director from serving on the compensation committee of a listed company if the director receives any direct or indirect consulting, advisory or other compensatory fee from the company or its subsidiaries, apart from fees received for service as a member of the company's board or committees thereof, or receipt of fixed amounts of compensation under a retirement plan for prior service with the company. This bright-line test prohibits a director who has even a de minimis business relationship with the listed company from serving on its compensation committee, regardless of whether the relationship affects the director's independence. Although rule 5605(d) and IM-5605-6 went into effect on January 11, 2013, a listed company is not required to begin complying with the rules until either the company's first annual meeting after January 15, 2014, or October 31, 2014, whichever comes earlier.

Nasdaq's proposed rule change would eliminate the bright-line test and replace it with a more flexible standard. The proposed rule change provides that the board of directors of a listed company may take a director's receipt of any consulting, advisory or other compensatory fees into consideration when assessing the independence of the director for purposes of serving on the company's compensation committee. Therefore, a director would not be automatically disqualified from serving on the compensation committee of a listed company if the director received consulting, advisory or other compensatory fees from the company or any of its subsidiaries. Instead, the company's board of directors would consider the source and amount of the compensatory fees as factors in determining whether the director was independent from management for purposes of serving on the compensation committee.

The decision to amend the current compensation committee independence rules was the result of Nasdaq receiving negative feedback from companies that complained the rules imposed a burden in excess of the requirements of Rule 10C-1 and the standards adopted by peer exchanges. Nasdaq's proposed rule change aligns its compensation committee independence rules with the minimum mandate of Rule 10C-1 and the language of NYSE Listing Standard 303A.02(a)(ii)(A).

Nasdaq's proposed rule change also adds language to listing rule 5605(d)(2)(A) to clarify that the board of directors of a listed company must consider all factors specifically relevant to determining whether a compensation committee member has a relationship with the company that is material to the director's ability to be independent from management in connection with the director's duties. While this change is not substantive because Nasdaq already requires members of compensation committees to be "independent directors" (as defined in the Nasdaq listing rules), Nasdaq believes the revisions help clarify the rule.

The proposed rule change calls for comments to be submitted within 21 days after the date it is published in the federal register.

Proposed rule change: http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2013/SR-NASDAQ-2013-147.pdf