SEC Approves New Corporate Governance Listing Standards for Compensation Committees and Advisers

by Davis Wright Tremaine LLP

On Jan. 11, 2013, the Securities and Exchange Commission (the “SEC”) approved amended corporate governance listing standards for the New York Stock Exchange (the “NYSE”) and the Nasdaq Stock Market (the “Nasdaq”). The amended listing standards were adopted pursuant to Section 952 of the Dodd-Frank Act and Rule 10C-1 of the 1934 Exchange Act. These amended listing standards establish new requirements regarding the composition, authority, and responsibilities of compensation committees1.

In this client bulletin we summarize the amended listing standards for the NYSE and Nasdaq and provide practical considerations for companies going forward. Listed companies are required to comply with new standards relating to the responsibilities and authority of compensation committees and the independence of compensation advisers by July 1, 2013. Companies have until the earlier of (1) their first annual meeting after Jan. 15, 2014 or (2) Oct. 31, 2014, to comply with enhanced compensation committee independence standards. The amended listing standards also relate in part to new disclosures required for the 2013 proxy season. Listed companies should therefore start gathering information and reviewing the existing structures and procedures of their compensation committees to comply with the amended listing standards.

Compensation committee independence
Companies listed on the NYSE or Nasdaq will need to assess the composition of their compensation committees to meet enhanced independence requirements that are specific to members of compensation committees.

Both Nasdaq and NYSE already require that compensation committee members meet general independence requirements for directors. The amended listing standards, however, create enhanced independence requirements for compensation committee members by requiring consideration of the following two factors enumerated under Rule 10C-1:2

  • The source of compensation of a member of the board of directors of the company, including any consulting, advisory, or other compensatory fee paid by the company to the director
  • Whether a member of the board of directors of an issuer is affiliated with the issuer, subsidiary of the issuer or an affiliate of a subsidiary of the issuer

NYSE: The NYSE requires the board of directors of a company to consider all factors specifically relevant to determining whether a director has a relationship to the company which is material to that director’s ability to be independent from management in connection with its duties as a compensation committee member, including, but not limited to the two relevant factors enumerated under Rule 10C-1 above.3 As a result, the NYSE does not adopt a bright-line test to determine the independence of compensation committee members. Commentary to the rule, however, instructs the board of directors to consider whether either of the required factors would affect the director’s ability to make independent judgments about the listed company’s executive compensation.

NASDAQ: In contrast, the Nasdaq amended listing requirements adopt a bright-line test for compensation committee independence. Under Nasdaq standards, compensation committee members must not accept any consulting, advisory or other compensatory fee from the company, other than fees received for board or committee service or fixed amounts of compensation received under a retirement plan.4 In adopting this bright-line rule, the Nasdaq harmonized the independence standards for audit and compensation committee members with respect to the acceptance of compensatory fees. In contrast, however, to the requirements for audit committee members, there is no “look back” period; the prohibition on the receipt of compensatory fees by a compensation committee member only begins with the person’s term of service on the compensation committee.  Furthermore, as required by Rule 10C-1, the 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.

Notably neither exchange adopted bright-line rules with regard to determining a director’s affiliate status. Commentary to the Nasdaq rules note, however, that significant stock ownership, by itself, is not a bar to independence as the director’s interests are likely to be aligned with other shareholders in determining executive compensation.5

Cure period
Rule 10C-1 requires that listed companies have a reasonable opportunity to cure any non-compliance regarding compensation committee independence.6

NYSE: Under the NYSE, if a company fails to comply with the compensation committee independence requirements because a member ceases to be independent for reasons outside the member’s reasonable control, that person may remain a member of the compensation committee until the earlier of (1) the next annual shareholders’ meeting or (2) one year from the event causing the member to no longer be independent; provided, that a majority of the members of the compensation committee continue to be independent.7 Prompt notice of non-compliance must be given to the exchange.8 In contrast to the Nasdaq rules, the NYSE does not provide a cure period for the situation where the compensation committee does not meet the amended listing standards due to a vacancy on the committee.

NASDAQ: Under the Nasdaq rules, if a company fails to comply with the enhanced independence standards for compensation committees due to vacancy, or one compensation committee member ceasing to be independent due to circumstances beyond the member’s reasonable control, the company must regain compliance by the earlier of (1) its next annual shareholder meeting or (2) one year from the event that caused the failure to comply; provided, that the company will have at least 180 days to cure noncompliance (even if the annual meeting occurs sooner).9 Immediate notice (compared to prompt notice under the NYSE) must be given to Nasdaq.10

Compensation committee authority and responsibilities with respect to Advisers
Companies listed on the NYSE or Nasdaq will need to review their compensation committee charters, or in absence of a charter, create one, in order to comply with amended listing standards describing the responsibilities and authority of compensation committees.

Rule 10C-1 requires that compensation committees have the authority to retain or obtain the advice of compensation consultants, independent legal counsel or other advisers (collectively, “Advisers”).11 The compensation committee must be directly responsible for the compensation and oversight of the work of any Adviser.12 Companies are obligated to provide appropriate funding for the Advisers as determined by the compensation committee.13

Prior to selecting or receiving advice from an Adviser, the compensation committee must undertake an independence analysis of the Adviser. In its analysis, the compensation committee must consider the following six factors:14

  • Provision of other services to the company by the person that employs the Adviser
  • Amount of fees paid by the company to the person that employs the Adviser, as a percentage of that person's total revenue.
  • Policies and procedures of the person that employs the Adviser regarding the prevention of conflicts of interest.
  • Any business or personal relationship between the Adviser and any member of the committee
  • Ownership by the Adviser of the company's stock.
  • Any business or personal relationship between the Adviser or the person that employs the Adviser and any executive officer of the company.

Note there is no requirement that the Adviser actually be independent, only that the above six factors be considered by the compensation committee. Furthermore, the compensation committee is not required to act consistently with the advice or recommendation of the Adviser. The amended listing standards do not affect the ability or obligation of the compensation committee to exercise its own judgment.

Rule 10C-1 gives exchanges the discretion to require consideration of additional factors in the Adviser independence analysis. The NYSE requires that the compensation committee take into consideration all factors relevant to the person’s independence from management, including the six factors enumerated in the rule.15 In comparison, the Nasdaq considered whether to adopt additional independence factors, but ultimately concluded that the six factors enumerated under Rule 10C-1 were sufficient to making an independence determination.16

New NASDAQ charter requirements

Under the amended listing requirements, Nasdaq now requires listed companies to have a standing compensation committee with at least two independent directors that meet the enhanced independence requirements for compensation committee members.17 Further aligning itself with the NYSE, Nasdaq listed companies will also be required to adopt a formal written charter for their compensation committee that is reviewed on an annual basis.18 The charter must specify the following:

  • 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; and
  • The specific compensation committee responsibilities regarding Advisers described above.

Rule 10C-1 exempts controlled companies19 entirely from compensation committee independence and Adviser requirements.20 Certain enumerated types of companies are also exempt from the compensation committee independence requirements under Rule 10C-1.21

The exchanges are granted discretion to exempt other categories of companies. Both the NYSE and Nasdaq have adopted rules allowing companies currently exempt from certain corporate governance standards to remain exempt from the new compensation committee requirements.22

Foreign private issuers: Under the NYSE and Nasdaq rules, a foreign private issuer may follow its home country practice in lieu of the listing standards requirements regarding independent compensation committees. However, a foreign private issuer listed on the Nasdaq must disclose why it does not have an independent compensation committee.23 Under the NYSE rule, the foreign private issuer must disclose the significant ways in which the home country practice differs from the listing standards.24

Smaller reporting companies: Under the new exchange rules and pursuant to Rule 10C-1(a)(5)(ii), smaller reporting companies are exempt from the enhanced independence standards for compensation committee members and the Adviser independence assessment requirements. Smaller reporting companies will, however, be subject to new listing standards relating to the responsibilities and authority of compensation committees (other than the independence assessment of compensation Advisers).25

Smaller reporting companies listed on the Nasdaq will be required to have a compensation committee of at least two members, each of whom must be an independent director.26 The Nasdaq rules also provide that a smaller reporting company may adopt a board resolution in lieu of a formal written charter to specify the compensation committee’s responsibilities.27 Both exchanges provide a phase-in period for companies that cease to qualify as a smaller reporting company.

Initial public offerings: Companies listed on an exchange in connection with their initial public offerings are permitted to phase-in their compliance with compensation committee listing standards.28

Compliance dates
Companies have until July 1, 2013 to comply with the amended listing standards related the authority and responsibilities of compensation committees to (i) retain compensation Advisers; (ii) fund such Advisers and (iii) consider certain independence factors before selecting or obtaining advice from such Advisers. If a Nasdaq listed company does not have a compensation committee by that date, these requirements must be complied with by the independent directors who oversee executive officer compensation.29

Compensation committee members must meet enhanced independence standards by the earlier of the first annual meeting after Jan. 15, 2014 or Oct. 31, 2014. Nasdaq companies that do not yet have a compensation committee and written charter must have them in place by the earlier of the first annual meeting after Jan. 15, 2014 or Oct. 31, 2014.

Further, Nasdaq requires companies to certify no later than 30 days after the applicable implementation deadline that is has complied with the amended listing rules on compensation committees. The NYSE does not require such certification.

Next steps
Review the composition of compensation committees: Companies should review the independence of compensation committee members in light of the enhanced independence requirements to determine if steps need to be taken to comply with the new independence rules.

Determine if any conflicts of interest need to be disclosed for the 2013 proxy season: Although there is no requirement that compensation committee Advisers be independent, companies have an obligation to determine and disclose whether any work with a compensation consultant raises a conflict of interest under Item 407(e)(3)(iv) of Regulation S-K. This obligation is separate from the compensation committee’s obligation to assess the independence of its Advisers, but requires use of the same set of six factors.

Update the D&O questionnaire: Companies should implement new procedures to collect the information needed to assess the independence of compensation committee members and Advisers. For instance, D&O questionnaires should inquire about business or personal relationships with compensation consultants, legal counsel, and other Advisers. Questionnaires should also address the source of compensation for compensation committee members and their affiliate status.

Establish procedures for reviewing compensation committee Adviser independence: Compensation committees should set up procedures to ensure that the required six factors are considered prior to engaging or receiving advice from an Adviser. Companies should consider developing questionnaires or certifications that can be distributed to compensation committee Advisers.

Establish a compensation committee: Nasdaq-listed companies must establish a formal compensation committee by the earlier of (i) the first annual meeting after Jan. 15, 2014 or (ii) Oct. 31, 2014.

Review compensation committee charters: Companies should review compensation committee charters to ensure they reflect the required responsibilities and authority under the amended listing standards.


1 The text of the approved changes to the current NYSE listing standards can be found at Text of the amended Nasdaq listing standards can be found on the Nasdaq website at
2 Exchange Act Rule 10C-1(b)(1)(ii).
3 NYSE Listed Company Manual, Section 303A.02.
4 Nasdaq Listing Rule 5605(d)(2)(A). The Nasdaq rules allow a company to have a non-independent director on the compensation committee under “exceptional and limited circumstances.” If a compensation committee has at least three members, one director who is not independent may serve as committee member for up to two years, provided that such a person is not currently an executive officer, employee or family member of an executive officer and the board determines that having such individual on the compensation committee is in the best interests of the company. Nasdaq Listing Rule 5605(d)(2)(B).
5 See Nasdaq Listing Rule IM-5605-6 (“Nasdaq does not believe that ownership of stock by itself…precludes a board finding that it is appropriate for a director to serve on the compensation committee.”).
6 Exchange Rule 10C-1(a)(3)
7 NYSE Listed Company Manual, Section 303A.00.
8 Id.
9 Nasdaq Listing Rule 5605(d)(4).
10 Id.
11 Exchange Rule 10C-1(b)(2)(i).
12 Exchange Rule 10C-1(b)(2)(i).
13 Exchange Rule 10C-1(b)(3).
14 Exchange Rule 10C-1(b)(4).
15 NYSE Listed Company Manual, Section 303A.05(c)(iv).
16 See Nasdaq Listing Rule 5605(d)(3)(D).
17 Nasdaq Listing Rule 5605(d)(2).

18 The NYSE does not require annual review of compensation committee charters. See NYSE Listed Company Manual, Section 303A.05.
19 The term “controlled company” means an issuer that is listed on a national securities exchange or by a national securities association and of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company. Exchange Act Rule 10C-1(c)(3).
20 Exchange Act Rule 10C-1(b)(5).
21 The following listed issuers are exempt under Rule 10C-1(b)(1)(iii) from compensation committee independence requirements: limited partnerships; companies in bankruptcy proceedings; open-end management investment companies registered under the Investment Company Act of 1940; any foreign issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee. 
22 NYSE Listed Company Manual, Section 303A.00; Nasdaq Listing Rule 5615(a). Such exempted listed companies include controlled companies; limited partnerships; companies in bankruptcy; management investment companies registered under the Investment Company Act of 1940; passive business organizations; asset-backed issuers; and cooperatives.
23 Nasdaq Listing Rule 5615(a)(3).
24 NYSE Listed Company Manual, Section 303A.11.
25 NYSE Listed Company Manual, Section 303A.00; Nasdaq Listing Rule 5605(d)(5).
26 Nasdaq Listing Rule 5605(d)(5).
27 Id. 
28 Nasdaq Listing Rule 5615(b)(1); NYSE Listed Company Manual, Section 303A.00.
29 Nasdaq Listing Rule 5605(d)(3).


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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