On January 11, 2013, the U.S. Securities and Exchange Commission (SEC) approved new listing standards for companies listed on the New York Stock Exchange (NYSE) or the NASDAQ Stock Market (NASDAQ) regarding independence requirements for compensation committees and compensation advisers.1 The NYSE and NASDAQ released their original proposals regarding independence requirements for compensation committees and compensation advisers on September 25, 2012, which we discussed in detail in separate Foley Legal News Alerts, dated October 3, 2012 and October 8, 2012, respectively.2 Foley will issue two additional Legal News Alerts in the coming days that will include more detailed summaries of the new listing standards. The following are matters of note relative to the SEC’s action for NYSE and NASDAQ companies:
NYSE Companies
By no later than July 1, 2013, a U.S. NYSE-listed company must ensure that its compensation committee charter includes the required authority and responsibilities of the committee with respect to the oversight of compensation consultants, outside legal counsel, and other advisers.
As of the same date, a compensation committee of an NYSE-listed company may no longer select, or receive advice from, an adviser unless it has conducted the six-factor independence assessment as the new listing standards require. Although not in the NYSE rules, the SEC order approving the new listing standards indicates that the SEC anticipates that a committee will conduct the required independence assessment not less than annually.
Consistent with the disclosure exception set forth in Item 407(e)(3)(iii) of Regulation S-K, a compensation committee need not conduct an independence assessment with respect to any compensation adviser whose role is limited to:
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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
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Providing information that is not customized for a particular company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice
NYSE commentary to the new listing standards clarifies that a compensation committee is not precluded from selecting or receiving advice from a compensation adviser that is not independent.
New requirements regarding the independence of compensation committee members will not take effect until the earlier of a company’s first annual meeting of shareholders after January 15, 2014, or October 31, 2014.
NASDAQ Companies
By July 1, 2013, the compensation committee of a NASDAQ-listed company must possess the expanded authority and responsibilities with respect to the oversight of compensation consultants, outside legal counsel, and other advisers; however, the requirement to include such responsibilities in the committee charter technically does not apply until the 2014 annual meeting of shareholders. Thus, a company may rely upon board resolutions (or comparable action permitted under applicable state law) prior to such time.
As of the same date, a compensation committee of a NASDAQ-listed company may no longer select, or receive advice from, an adviser unless it has conducted the six-factor independence assessment as the new standards require. Although not in the NASDAQ rules, the SEC order approving the new listing standards indicates that the SEC anticipates that a committee will conduct the required independence assessment not less than annually.
A compensation committee of a NASDAQ-listed company need not conduct an independence assessment with respect to compensation advisers that fall within the two exceptions contained in Item 307(e)(3)(iii) of Regulation S-K, as summarized above.
An amendment to the original NASDAQ proposal deleted the word “independent” prior to “legal counsel” in NASDAQ Rule 5605(d)(3), thus clarifying that compensation committees of NASDAQ-listed companies are required to consider the independence factors specified in SEC Rule 10C-1(b)(4)(i) – (vi) under the Securities Exchange Act of 1934 when selecting, or receiving advice from, any legal counsel (other than in-house legal counsel). It is important to note, however, NASDAQ made clear in commentary “that a compensation committee is not required to retain an independent compensation adviser; rather, a compensation committee is required only to consider the six independence factors enumerated in SEC Rule 10C-1(b)(4) before selecting, or receiving advice from, a compensation adviser.”
Rule 5605(d)(3), as amended, clarifies that a compensation committee is not precluded from selecting or receiving advice from a compensation adviser that is not independent.
New requirements regarding the independence of compensation committee members will not take effect until a company’s 2014 annual meeting of shareholders. Within 30 days following the effective date of Rule 5605(d), each NASDAQ-listed company must submit to NASDAQ a certification, signed by an officer of the company, that the company has complied with Rule 5605(d). The form of the certification was set forth in an amendment to the NASDAQ proposal, and NASDAQ will send it to NASDAQ-listed companies.
