Nasdaq Proposes Changes To Compensation Committee Independence Requirements

When implementing SEC Exchange Act Rule 10C-1 regarding the independence of compensation committee members, Nasdaq adopted a prohibition on the receipt of compensatory fees by compensation committee members, which is the same standard applicable to audit committee members under Nasdaq’s listing rules and Rule 10A-3 under the Exchange Act.

Over the past few months, however, Nasdaq has received feedback from listed companies and others that the prohibition on compensatory fees creates a burden on issuers at a time when regulatory burdens are higher than ever before.  For example, there are companies in some industries (e.g., the energy and banking industries) where it is common to have directors who do a de minimis amount of business with the issuer and would, therefore, be ineligible to serve on the compensation committee under the Nasdaq rules.  These companies may have difficulty recruiting a sufficient number of eligible directors to serve on their boards, given the different requirements for board, audit committee and compensation committee composition.

After weighing these comments, Nasdaq has proposed to remove the prohibition on the receipt of compensatory fees by compensation committee members. Nasdaq proposes to state instead that in affirmatively determining the independence of any director who will serve on the compensation committee, a company’s board must consider the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company to the director.

In IM-5605-6, Nasdaq also proposes to state that when considering the sources of a director’s compensation in determining independence for purposes of compensation committee service, the board should consider whether the 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.