March 4, 2013

NYSE and Nasdaq Adopt Listing Standards for Compensation Committees and Compensation Advisers

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Overview

Last month, the Securities and Exchange Commission (SEC) approved amendments to the listing standards of The New York Stock Exchange (NYSE) and The Nasdaq Stock Market (Nasdaq) to implement Rule 10C-1 promulgated by the SEC. Rule 10C-1 originally was proposed in April 2011 and was adopted by the SEC in June 2012.¹

Rule 10C-1 directed the national securities exchanges to establish listing standards to:

define standards of independence applicable to compensation committee members and directors who oversee executive compensation matters outside of the structure of a formal board committee;
require each member of a listed issuer's compensation committee to be an independent member of the board of directors;
require consideration of specified factors by a listed issuer's compensation committee relating to the independence of any compensation advisers; and
specify the authority and responsibilities of the compensation committee over the appointment, compensation, and oversight of the work of any compensation adviser.

The amendments to the NYSE listing standards, which are codified in Sections 303A.00, 303A.02, and 303A.05 of the NYSE Listed Company Manual, are available here. The amendments to the Nasdaq listing standards, which are codified in Rules 5605(d) and 5615, are available here.

Comparison and Considerations

A side-by-side comparison of the amendments to the NYSE and Nasdaq listing standards is contained in Appendix A. Below are a few key points and considerations:

By July 1, 2013:
- Both NYSE- and Nasdaq-listed companies that are not otherwise exempt should evaluate the independence of compensation advisers against the amended listing standards.
- Nasdaq-listed companies that are not otherwise exempt will need to ensure that their compensation committees have authority (by board resolution or through the compensation committee charter) to retain their compensation advisers and that the listed company will provide appropriate funding.
- NYSE-listed companies that are not otherwise exempt will need to include specified provisions in their charters regarding retaining advisers; appointing, compensating, and overseeing such advisers; considering independence factors before selecting and receiving advice from advisers; and receiving funding from the listed company to compensate such advisers.
By the earlier of the 2014 annual meeting occurring after January 15, 2014, and October 31, 2014:
- The enhanced compensation committee independence provisions for both the NYSE and Nasdaq will be effective beginning in 2014, allowing companies time to determine whether their current compensation committee members would be considered independent under the amended listing standards or whether they would need to recruit additional independent directors.
- Nasdaq-listed companies that are not otherwise exempt will need to have a compensation committee and a formal written charter that specifies the committee's responsibilities, including structure, operations, and membership requirements. The charter also will need to include provisions regarding (i) the committee's responsibility for determining (or recommending to the board of directors for determining) the compensation of the CEO and the other executive officers; (ii) the absence of the CEO during voting or deliberations with respect to his or her compensation; (iii) the committee's responsibility and authority for retaining its own advisers and appointing, compensating, and overseeing such advisers; and (iv) the independence factors to be considered by the compensation committee prior to selecting an adviser.
Flexible approach to compensation committee independence. Although the two approaches were not identical, both the NYSE and Nasdaq generally took advantage of the flexibility that the SEC provided in Rule 10C-1 to define independence for compensation committee purposes.
- The amended NYSE listing standards require boards to consider compensatory payments to compensation committee members, other than for board and committee service, and affiliate status of compensation committee members with the listed company when determining a member's independence for compensation committee service, without prohibiting compensatory payments or providing bright-line prohibitions on stock ownership as it relates to affiliate status.
- The amended Nasdaq listing standards prohibit compensatory payments to independent compensation committee members, other than for board and committee service—but like the proposed NYSE listing standards, they provide flexibility with respect to stock ownership as it relates to affiliate status.
Nasdaq requirement for compensation committees. The Nasdaq listing standards previously required that decisions regarding executive officer compensation be made either by a compensation committee comprised of independent directors or by a majority of the independent directors of the board. Under the amended listing standards, Nasdaq companies are required to have a compensation committee comprised of at least two directors meeting the enhanced independence standards outlined in the amended listing standards. In addition, Nasdaq companies will be required to have a written compensation committee charter, will need to certify that it has such a charter to Nasdaq, and will be required to review and reassess the charter on an annual basis.
Cure periods and exceptional and limited circumstances. As required by Rule 10C-1, both the NYSE- and Nasdaq-amended listing standards contain cure periods allowing listed companies time to correct certain deficiencies in compensation committees. In addition, consistent with current Nasdaq listing standards for compensation committees, the amended Nasdaq listing standards permit (under exceptional and limited circumstances) one non-independent member of the compensation committee to serve on the committee for a period of time, provided that there are at least three persons on the compensation committee.
Factors for compensation committees to consider when determining compensation adviser independence. Both the NYSE- and Nasdaq-amended listing standards adopt, and do not add to, the six independence factors set forth in Rule 10C-1 regarding compensation advisers. In so doing, neither the NYSE nor Nasdaq provides additional guidance on how listed companies should interpret these factors. Neither the NYSE nor Nasdaq listing standards require compensation advisers to be independent, only that the compensation committee consider the independence factors prior to selecting a compensation adviser.

Changes from Original Proposals

Both the NYSE and Nasdaq changed the compliance timetable from their original proposals. They also amended their original proposals to add an exception to the requirement that compensation committees perform an independent assessment prior to selecting a compensation adviser for those compensation advisers who only provide advice in the following limited capacities: (i) consulting on any 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; and (ii) providing information that is either not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the issuer does not provide advice. In addition, the NYSE amended its original proposal providing for a phase-in period for smaller reporting companies to meet the enhanced independence requirements for compensation committee members and to add clarifying language that the listing standards do not require compensation advisers to be independent, only that the compensation committee consider the independence factors prior to selecting a compensation adviser.

What You Should Do Now

Inform your board of directors and compensation committee that the listing standards have been amended and provide them with the timetable for when the listing standards will go into effect.
If you are a Nasdaq-listed company that does not have a compensation committee, prepare to comply with the amended listing standards requiring a listed company to have a compensation committee.
Review the independence of your current compensation committee members against the enhanced listing standards.
Review the independence of your current executive compensation advisers against the amended listing standards.
Update your directors' and officers' (D&O) questionnaires, compensation committee charter and policies, and proxy disclosure.
Provide your compensation committee with a questionnaire to assist the committee in evaluating the independence of compensation advisers.

For any questions or more information on these or any related matters, please contact your regular Wilson Sonsini Goodrich & Rosati attorney or any member of the firm's corporate and securities or employee benefits and executive compensation practices.

Appendix A

Type of Issuer	NYSE	Nasdaq
Large Accelerated, Accelerated, and Non-Accelerated Filers	Compliance Date: July 1, 2013	Compliance Date: July 1, 2013
	Retention and Funding of Compensation Advisers: Compensation committee must have: sole discretion to retain compensation advisers; and direct responsibility for appointment, compensation, and oversight of compensation advisers Listed companies are required to provide appropriate funding, as determined by the compensation committee, for compensation advisers Compensation advisers are not required to be independent	Retention and Funding of Compensation Advisers: Compensation committee must have: sole discretion to retain compensation advisers; and direct responsibility for appointment, compensation, and oversight of compensation advisers Listed companies are required to provide appropriate funding, as determined by the compensation committee, for compensation advisers Compensation advisers are not required to be independent
	Selection of Advisers to Compensation Committee: Compensation committee will be permitted to select a compensation adviser (does not apply to in-house counsel) only after taking into consideration all factors relevant to that person's independence from management, including the factors identified in Rule 10C-1² Compensation committee will not need to take into consideration the factors identified in Rule 10C-1 if the compensation adviser only provides advice in the following limited capacities: (i) consulting on any 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; and (ii) providing information that is either not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the issuer does not provide advice	Selection of Advisers to Compensation Committee: Compensation committee will be permitted to select a compensation adviser (does not apply to in-house counsel) only after taking into consideration the factors identified in Rule 10C-1³ Compensation committee will not need to take into consideration the factors identified in Rule 10C-1 if the compensation adviser only provides advice in the following limited capacities: (i) consulting on any 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; and (ii) providing information that is either not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the issuer does not provide advice
	Compensation Committee Charter: Amended listing standards retain the requirement for compensation committees to have a formal written charter that specifies the committee's responsibilities, including structure, operations, and membership requirements The amended listing standards also require the compensation committee charter to specify additional responsibilities and authority with respect to: retaining advisers; appointing, compensating, and overseeing such advisers; considering independence factors before selecting and receiving advice from advisers; and receiving funding from the listed company to compensate such advisers
Large Accelerated, Accelerated, and Non-Accelerated Filers	Compliance Date: Earlier of First Annual Meeting after January 15, 2014, and October 31, 2014	Compliance Date: Earlier of First Annual Meeting after January 15, 2014, and October 31, 2014
	Enhanced Independence Requirements: Board required to make affirmative determination of independence of compensation committee members Board required to consider all factors specifically relevant to determining whether a director has a relationship to the listed company that is material to that director's ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to: the source of compensation of such director, including any consulting, advisory, or other compensatory fee paid by the listed company to such director;⁴ and whether such director is affiliated with the listed company, a subsidiary of the listed company, or an affiliate of a subsidiary of the listed company⁵	Enhanced Independence Requirements: Compensation committee members will not be permitted to accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any subsidiary thereof, except for fees received for service on the board and board committees and certain retirement plan compensation Board will be required to consider whether the director is affiliated with the listed company, a subsidiary of the listed company, or an affiliate of a subsidiary of the listed company to determine whether such affiliation would impair the director's judgment as a member of the compensation committee⁶
		Compensation Committee Charter: Nasdaq companies will be required to have a written compensation committee charter, will need to certify that it has such a charter to Nasdaq, and will be required to review and reassess the charter on an annual basis. The compensation committee charter must specify: the responsibilities of the compensation committee and how it carries out those responsibilities, including structure, processes, and membership requirements; the compensation committee's responsibility for determining (or recommending to the board of directors for determining) the compensation of the CEO and the other executive officers; that the CEO may not be present during voting or deliberations with respect to his or her compensation; the compensation committee's responsibility and authority for retaining its own advisers and appointing, compensating, and overseeing such advisers; and the independence factors to be considered by the compensation committee prior to selecting an adviser.
		Requirement to Have a Compensation Committee: Listed companies required to have a compensation committee comprised of at least two independent members⁷
Large Accelerated, Accelerated, and Non-Accelerated Filers	Other Information	Other Information
	IPO Transition Rules: Current IPO transition rules continue to apply⁸	IPO Transition Rules: Current IPO transition rules continue to apply⁹
	Cure Period: If a member of the compensation committee ceases to be independent for reasons outside the member's reasonable control, the member may remain a member of the compensation committee until the earlier of the next annual shareholders' meeting of the listed company or one year from the occurrence of the event that caused the member to be no longer independent, with prompt notice to the NYSE and only so long as a majority of the members of the compensation committee continue to be independent	Cure Period: If there is a vacancy on the compensation committee or if one compensation committee member ceases to be independent due to circumstances beyond the member's reasonable control, the listed company will be required to regain compliance with the requirement by the earlier of its next annual shareholders' meeting or one year from the occurrence of the event that caused the failure to comply with this requirement; however, if the annual shareholders' meeting occurs no later than 180 days following the event that caused the failure to comply with this requirement, the listed company instead would have 180 days from such event to regain compliance; the listed company would be required to provide notice to Nasdaq of noncompliance
		Non-Independent Committee Member under Exceptional and Limited Circumstances: Consistent with current Nasdaq listing standards for compensation committees, the amended listing standards permit (under exceptional and limited circumstances) one non-independent, non-executive member of the compensation committee to serve on the committee if the compensation committee consists of three or more directors and if the individual's membership on the committee is required by the best interest of the company and its shareholders. Any director serving on the compensation committee under this exception may not serve for longer than two years. A company relying on the exception must also make certain disclosures on its website or proxy statement regarding the nature of the relationships resulting in such director being non-independent and the reasons for determining that such director's service on the committee is required by the best interest of the company and its shareholders.
Smaller Reporting Companies	Compliance Date: July 1, 2013	Compliance Date: Earlier of First Annual Meeting after January 15, 2014, and October 31, 2014
	Retention and Funding of Compensation Advisers: Compensation committee must have: sole discretion to retain compensation advisers; and direct responsibility for appointment, compensation, and oversight of compensation advisers Listed company required to provide for appropriate funding, as determined by the compensation committee, for compensation advisers
		Requirement to Have a Compensation Committee: Smaller reporting companies required to have and certify that they will have a compensation committee comprised of at least two independent members
		Compensation Committee Charter or Board Resolution: Smaller reporting companies will be required to have a written compensation committee charter or board resolution, which must specify: the responsibilities of the compensation committee and how it carries out those responsibilities, including structure, processes, and membership requirements; the compensation committee's responsibility for determining (or recommending to the board of directors for determining) the compensation of the CEO and the other executive officers; and that the CEO may not be present during voting or deliberations with respect to his or her compensation
		Cure Period: If there is a vacancy on the compensation committee or if one compensation committee member ceases to be independent due to circumstances beyond the member's reasonable control, the listed company will be required to regain compliance with the requirement by the earlier of its next annual shareholders' meeting or one year from the occurrence of the event that caused the failure to comply with this requirement; however, if the annual shareholders' meeting occurs no later than 180 days following the event that caused the failure to comply with this requirement, the listed company instead would have 180 days from such event to regain compliance; the listed company would be required to provide notice to Nasdaq of noncompliance
		Non-Independent Committee Member under Exceptional and Limited Circumstances: Consistent with current Nasdaq listing standards for compensation committees, the amended listing standards permit (under exceptional and limited circumstances) one non-independent, non-executive member of the compensation committee to serve on the committee if the compensation committee consists of three or more directors and if the individual's membership on the committee is required by the best interest of the company and its shareholders. Any director serving on the compensation committee under this exception may not serve for longer than two years. A company relying on the exception must also make certain disclosures on its website or proxy statement regarding the nature of the relationships resulting in such director being non-independent and the reasons for determining that such director's service on the committee is required by the best interest of the company and its shareholders.
		IPO Transition Rules: Current IPO transition rules continue to apply
	Transition Provisions: Companies that lose smaller company status reporting will be required to comply with amended listing standards within the following timeframes: Within six months from the start of the fiscal year in which it is no longer a smaller reporting company, the listed company will need to comply with the requirement that the compensation committee consider independence factors before selecting a compensation adviser. Beginning six months from the start of the fiscal year in which it is no longer a smaller reporting company, the listed company will need to comply with the following phase-in schedule relating to compensation committee composition: (i) one member must satisfy the enhanced independence requirements within six months from the beginning of its fiscal year in which it is no longer a smaller reporting company; (ii) a majority of the members must satisfy the enhanced independence requirements within nine months from the beginning of its fiscal year in which it is no longer a smaller reporting company; and (iii) all members must satisfy the enhanced independence requirements within one year from the beginning of its fiscal year in which it is no longer a smaller reporting company	Transition Provisions: Companies that lose smaller company reporting status will be required to comply with the new listing standards within the following timeframes: Within six months from the start of the fiscal year in which it is no longer a smaller reporting company, the listed company will need to comply with the provisions relating to the authority of the compensation committee to retain compensation advisers and the requirement that the compensation committee consider the independence factors before selecting a compensation adviser and certify to Nasdaq that it has adopted a formal written compensation committee charter with specified provisions and that it has complied with or will comply with the following phase-in schedule relating to compensation committee composition: (i) one member must satisfy the enhanced independence requirements within six months from the beginning of its fiscal year in which it is no longer a smaller reporting company; (ii) a majority of the members must satisfy the enhanced independence requirements within nine months from the beginning of its fiscal year in which it is no longer a smaller reporting company; and (iii) all members must satisfy the enhanced independence requirements within one year from the beginning of its fiscal year in which it is no longer a smaller reporting company
Foreign Private Issuers	Amended Standards Do Not Apply A company may follow home country practices; however, it is required to disclose in its annual report significant ways in which its corporate governance practices differ from those followed by domestic companies under the listing standards	Amended Standards Do Not Apply A company may follow home country practices; however, a foreign private issuer without an independent compensation committee will be required to disclose in its annual report the reasons why it does not have an independent compensation committee
Controlled Companies	Amended Standards Do Not Apply	Amended Standards Do Not Apply

¹ Our previous discussions of Rule 10C-1 as proposed and as adopted can be found in this WSGR Alert and this WSGR Alert. Our previous discussions of the NYSE and Nasdaq proposals can be found in this WSGR Alert.

^{2, 3} Rule 10C-1 identified the following factors to be considered in determining compensation adviser independence:

The provision of other services to the listed company by the person who employs the compensation consultant, legal counsel, or other adviser
The amount of fees received from the listed company by the person who employs the compensation consultant, legal counsel, or other adviser, as a percentage of the total revenue of the person who employs the compensation consultant, legal counsel, or other adviser
The policies and procedures of the person who employs the compensation consultant, legal counsel, or other adviser that are designed to prevent conflicts of interest
Any business or personal relationship of the compensation consultant, legal counsel, or other adviser with a member of the compensation committee
Any stock of the listed company owned by the compensation consultant, legal counsel, or other adviser
Any business or personal relationship of the compensation consultant, legal counsel, other adviser, or the person employing the adviser with an executive officer of the listed company

⁴ The commentary to the NYSE listing standard states: "When considering the sources of a director's compensation in determining his independence for purposes of compensation committee service, the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company's executive compensation."

⁵ The commentary to the NYSE listing standard states: "Similarly, when considering any affiliate relationship a director has with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company, in determining his independence for purposes of compensation committee service, the board should consider whether the affiliate relationship places the director under the direct or indirect control of the listed 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 his ability to make independent judgments about the listed company's executive compensation."

⁶ The commentary to the Nasdaq listing standard states: "In that regard, while a board may conclude differently with respect to individual facts and circumstances, Nasdaq does not believe that ownership of Company stock by itself, or possession of a controlling interest through ownership of Company stock by itself, precludes a board finding that it is appropriate for a director to serve on the compensation committee. In fact, it may be appropriate for certain affiliates, such as representatives of significant stockholders, to serve on compensation committees since their interests are likely aligned with those of other stockholders in seeking an appropriate executive compensation program."

⁷ Currently, Nasdaq-listed companies are required to have compensation decisions for executive officers determined either by an independent compensation committee or by a majority of the independent members of the board of directors.

⁸ The NYSE requires that a listed company have at least one independent compensation committee member upon the earlier of the closing date of the IPO or five business days from the listing date, at least a majority of independent compensation committee members within 90 days of the listing date, and a fully independent compensation committee within one year of the listing date.

⁹ The Nasdaq requires that a listed company that has a compensation committee must have at least one independent compensation committee member upon listing, at least a majority of independent compensation committee members within 90 days of listing, and a fully independent compensation committee within one year of listing.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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NYSE and Nasdaq Adopt Listing Standards for Compensation Committees and Compensation Advisers

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