Nasdaq Proposes Rules Regarding Independence of Compensation Committees

by Stinson Leonard Street - Dodd-Frank and the Jobs Act

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Nasdaq has proposed rules regarding the independence of compensation committees in response to final rules issued by the SEC under the Dodd-Frank Act.  The Nasdaq proposed rules are far more complex than the NYSE’s proposed rules.  The Nasdaq proposed rules, like the NYSE proposed rules, must be approved by the SEC.

In General

Some principal changes from Nasdaq’s current rules regarding compensation committees include:

  • Companies must have a compensation committee consisting of at least two members, each of whom must be an Independent Director as defined under Nasdaq’s current listing rules;
  • compensation committee members must not accept directly or indirectly any consulting, advisory or other compensatory fee, other than for board service, from a Company or any subsidiary thereof;
  • in determining whether a director is eligible to serve on a compensation committee, a Company’s board 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;
  • explicit requirements regarding the compensation committee charter and factors to be considered when engaging advisers which are discussed below;
  • Companies must review and reassess the adequacy of the compensation committee charter on an annual basis;
  • Smaller reporting companies must have a compensation committee comprised of at least two Independent Directors and a formal written compensation committee charter or board resolution that specifies the committee’s responsibilities and authority, but such Companies are not required to adhere to the compensation committee eligibility requirements relating to compensatory fees and affiliation, or the requirements relating to compensation consultants, independent legal counsel and other compensation advisers that Nasdaq is proposing to adopt.

Compensation Committee Charters

Nasdaq proposes to require each Company to certify that it has adopted a formal written compensation committee charter and that the compensation committee will review and reassess the adequacy of the formal written charter on an annual basis. Nasdaq proposes that the compensation committee charter must specify:

  • 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 of the Company may not be present during voting or deliberations by the compensation committee on his or her compensation; and
  • that a compensation committee must have the specific compensation committee responsibilities and authority necessary to comply with SEC rules relating to the (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.

Selecting a Compensation Consultant, Legal Counsel or Other Adviser

Nasdaq concluded that the six independence factors enumerated in SEC Rule 10C-1 were sufficient to  provide compensation committees with a broad and sufficient range of facts and circumstances to consider in making an independence determination regarding a compensation consultant, legal counsel or other adviser.  Accordingly, when selecting advisers the compensation committee must consider:

  • the provision of other services to the issuer by the person that employs the adviser (the “Employer”);
  • the amount of fees received from the issuer by the Employer, as a percentage of the total revenue of the Employer;
  • the policies and procedures of the Employer that are designed to prevent conflicts of interest;
  • any business or personal relationship of the adviser with a member of the compensation committee;
  • any stock of the issuer owned by the adviser; and
  • any business or personal relationship of the adviser or the Employer with an executive officer of the issuer.

Nasdaq emphasizes that a compensation committee is not required to retain an independent compensation adviser.  Rather, a compensation committee is required only to conduct the independence analysis described above before selecting a compensation adviser.


Nasdaq proposes that Rule 5605(d)(3), relating to compensation committee responsibilities and authority, shall be effective immediately. Specifically, this proposed rule states that a compensation committee must have the specific compensation committee responsibilities and authority necessary to comply with SEC Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act relating to the: (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.

Nasdaq proposes that Companies must comply with the remaining provisions of the amended listing rules on compensation committees by the earlier of (i) their second annual meeting held after the date of approval of Nasdaq’s amended listing rules; or (2) December 31, 2014.

A Company must certify to Nasdaq, no later than 30 days after the implementation deadline applicable to it, that it has complied with the amended listing rules on compensation committees. Nasdaq will provide Companies with a form for this certification.

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

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.

© Stinson Leonard Street - Dodd-Frank and the Jobs Act | Attorney Advertising

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