The SEC has approved the listing standard changes relating to compensation committee independence and consultants for both Nasdaq and the NYSE.
The proposed listing standards implement Rule 10C-1 under the Securities Exchange Act of 1934, which was added by the Dodd-Frank Act.
With respect to the Nasdaq listing standard changes, most listed companies will be required to comply with the new rules, but Nasdaq has exempted "smaller reporting companies" from compliance. First, by July 1, 2013, the listed company must have a formal written charter that provides:
- The compensation committee will review and reassess the adequacy of the charter on an annual basis;
- The scope of the committee’s responsibilities and how it carries out those responsibilities, including structure, processes, and membership requirements;
- The committee’s responsibility for determining or recommending to the board for determination, the compensation of the CEO and all other executive officers of the company, and provide that the CEO may not be present during voting or deliberations on his or her compensation; and
- The committee’s responsibilities and authority with respect to retaining its own advisers; appointing, compensating, and overseeing such advisers; considering certain independence factors before selecting advisers; and receiving funding from the company to engage them.
The compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser, 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; and
- Any business or personal relationship of the compensation consultant, legal counsel or other adviser or the person employing the adviser with an executive officer of the company.
The rule clarifies that nothing in the rule requires a compensation consultant, legal counsel or other adviser to be independent, only that the committee considered the enumerated independence factors before selecting, or receiving advice from, a compensation adviser. Further, the 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: (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 company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.
By the earlier of a listed company’s first annual annual meeting after January 14, 2014, or October 14, 2014, the company’s compensation committee must comply with the new director independence standards applicable to the compensation committee. The listed company must have a compensation committee composed of at least two members, each of whom must be an independent director as defined in Nasdaq’s rules, and not accept directly or indirectly any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries, not including (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. The board must also consider whether a director is affiliated with the company and whether such affiliation would impair the director’s judgment as a member of the compensation committee.
A listed company must certify to Nasdaq, no later than 30 days after the final implementation deadline applicable to it, that it has complied with the committee charter and independence provisions.