A Checklist To Comply With The New Nasdaq Compensation Committee Independence Rules

by Stinson Leonard Street - Dodd-Frank and the Jobs Act
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The SEC has approved Nasdaq’s compensation committee independence rules.  By July 1, 2013, most listed issuers must comply with the following:

  • Have a compensation committee charter which provides:
    • The compensation committee will review and assess the adequacy of the formal written charter on an annual basis;
    • The scope of the compensation committee’s responsibilities, 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 for determination, the compensation of the chief executive officer and all other executive officers of the Company;
    • That the chief executive officer may not be present during voting or deliberations on his or her compensation;
    • The compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser;
    • The compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, legal counsel and other adviser retained by the compensation committee;
    • The Company must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to a compensation consultant, legal counsel or any other adviser retained by the compensation committee;
    • The compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser to the compensation committee, other than in-house legal counsel, only after taking into consideration the following factors:
      • The provision of other services to the Company by the person that employs the compensation consultant, legal counsel or other adviser;
      • The amount of fees received from the Company by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;
      • The policies and procedures of the person that 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 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 Company;
      • Commentary to the rule provides the compensation committee is required to conduct the independence assessment outlined above with respect to any compensation consultant, legal counsel or other adviser that provides advice to the compensation committee, other than in-house legal counsel. However, nothing requires a compensation consultant, legal counsel or other compensation adviser to be independent, only that the compensation committee consider the enumerated independence factors before selecting, or receiving advice from, a compensation adviser; and
      • Commentary to the rule also provides the compensation committee is not required to conduct an independence assessment for a compensation adviser that acts in a role limited to the following activities for which no disclosure is required under Item 407(e)(3)(iii) of Regulation S-K: (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the Company, and that is available generally to all salaried employees; and/or (b) providing information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.

Most listed companies will have until the earlier of their first annual meeting after January 14, 2014, or October 14, 2014, to comply with the new director independence standards with respect to their compensation committees:

  • Each Company must have, and certify that it has and will continue to have, a compensation committee of at least two members, each of whom must:
    • Be an independent director as otherwise defined under Nasdaq rules; and
    • Not accept directly or indirectly any consulting, advisory or other compensatory fee from the Company or any subsidiary thereof. Compensatory fees shall not include: (i) fees received as a member of the compensation committee, the board of directors or any other board committee; or (ii) the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the Company (provided that such compensation is not contingent in any way on continued service).
    • In determining whether a director is eligible to serve on the compensation committee, a Company’s board also must consider whether the director is affiliated with the Company, a subsidiary of the Company or an affiliate of a subsidiary of the Company to determine whether such affiliation would impair the director’s judgment as a member of the compensation committee.
  • A Company must certify to Nasdaq, no later than 30 days after the final implementation deadline applicable to it, that it has complied with the compensation committee charter and independence provisions.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

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Stinson Leonard Street - Dodd-Frank and the Jobs Act
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