On January 11, 2013, the Securities and Exchange Commission approved final rules proposed by the NYSE1 and Nasdaq2 in response to SEC rules adopted in June 2012 that implemented Section 952 of the Dodd-Frank Act.3 Both the NYSE and the Nasdaq rules address:
Independence of Compensation Committee Members
Both the NYSE and Nasdaq rules4 have added only the two new “independence” factors for compensation committee members that were required by the SEC rules:
While the NYSE rules require only a consideration of the Fees Factor, Nasdaq’s rules will bar from the compensation committee any director who directly or indirectly receives any consulting, advisory or other compensatory fee (other, of course, than regular director and committee fees) from the listed company or any subsidiary, which is the same standard that has applied to audit committee members since the Sarbanes-Oxley Act.
As to the Affiliation Factor, both the NYSE and Nasdaq rules require only that it be considered, and their commentaries make clear that a member’s association with a large stockholder need not be considered an impediment to “independence.”
Nasdaq has taken the occasion to eliminate an alternate provision in its corporate governance rules that has permitted Nasdaq issuers to dispense with a compensation committee, if executive compensation is approved by a majority of the board’s independent directors, voting separately. Nasdaq issuers that had been relying on that alternative will have to establish a compensation committee of at least two members, with a charter covering specified matters, by the final compliance deadline discussed below.
Compensation Committee Engagement of Advisers
Both the NYSE and Nasdaq rules state that (i) the compensation committee must have authority, but is not required to, retain or obtain the advice of one or more compensation advisers5; (ii) the compensation committee will be responsible for the appointment, compensation and oversight of services provided by advisers it retains; and (iii) the company must provide funding to compensate advisers retained by the committee. (NYSE rules already contained substantially similar requirements.)
Consideration of Independence of Advisers
Both the NYSE and Nasdaq rules require consideration by the compensation committee only of the six “independence” factors specified by the SEC rules before the committee decides to engage or obtain advice from a compensation adviser:
Both rules state clearly that the committee is free to take advice from any adviser, whether independent or not. The compensation committee must, however, consider these factors when engaging both compensation consultants and outside legal advisers and also when receiving advice from consultants or legal advisers engaged by management. Advice provided by in-house legal staff is not covered. Also exempted is any adviser who consults only on broad-based plans or provides only non-customized information, which mirrors an exemption from the recently adopted proxy disclosure requirements as to conflicts of interest of compensation consultants.6 These rules will require many law firms that advise compensation committees to provide information to public company clients that they have not provided before.
The NYSE and Nasdaq have harmonized their compliance deadlines, adopting a two-step approach under which some requirements must be satisfied by July 1, 2013, and the others by the later of the company’s first annual meeting after January 15, 2014, or October 31, 2014 (Final Compliance Deadline). They differ, however, in which requirements must be satisfied by which deadline.
The NYSE rules require all requirements to be satisfied by July 1, 2013, other than the new compensation committee member independence requirements, to which the Final Compliance Deadline applies.
The Nasdaq rules require the provisions relating to authority of the compensation committee (or independent directors) to retain advisers and responsibility to consider the “independence factors” to be satisfied by July 1, 2013. The rules indicate that this need not be done through an amendment to the compensation committee charter by that date, however, if state law permits implementation by a board resolution. The other requirements, including new committee member independence requirements, need to amend the compensation committee charter and, for those companies that have not had a compensation committee, establishment of the committee and adoption of a charter, are subject to the Final Compliance Deadline.
All listed companies will need to take some action to reflect the new requirements by July 1, 2013, unless they have already done so. Compensation committee charter amendments, or for Nasdaq issuers at least a board resolution, with respect to the “authority” and “independence of advisers assessment” requirements are likely to be necessary, and “independence assessment” homework will be necessary as to any covered adviser who will be providing advice to the committee on or after July 1, 2013.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:OBrien-Michael
This article was originally published by Bingham McCutchen LLP.