KMK Law Corporate & Securities Blog

The SEC recently approved new proposed listing standards for both the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) regarding criteria for compensation committee member independence and compensation consultant independence.

Compensation Committee Member Independence

As required by the Dodd-Frank Act, the SEC instructed the exchanges to establish their own independence criteria for members of compensation committees by considering “relevant factors” including (1) the source of the committee member’s compensation, including any consulting, advisory or other fees paid by the issuer and (2) whether a committee member is affiliated with the issuer or any subsidiary of the issuer. The exchanges are also permitted to consider additional factors.

The NYSE listing standards give the board discretion to determine how consulting, advisory and other compensatory fees and affiliate status may affect a compensation committee member’s independence. The board is required to make an affirmative determination, based on all factors specifically relevant to its determination, whether a director has a relationship to the issuer that is material to that director’s ability to be independent from management in connection with the duties as a member of a compensation committee.  While the NYSE listing standards do not identify any additional factors for determining compensation committee independence, they do not specifically exclude a compensation committee member from having an affiliate relationship with the issuer.

The Nasdaq listing standards now require an issuer to have a compensation committee (i.e., a majority of independent directors will no longer suffice) with at least two members, all of whom must be independent.  The committee must have a charter disclosing that committee’s authority over, and responsibility for, determining or recommending CEO and other executive officer compensation. Like the NYSE listing standards, the Nasdaq rules require the board to consider whether a director has a relationship to the issuer that is material to that director’s ability to be independent from management in connection with the duties as a member of a compensation committee, but do not add any additional factors for determining compensation committee independence.  Unlike the NYSE listing standards, the Nasdaq rules specifically prohibit compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fee from the listed company.  The Nasdaq listing standards also make clear that ownership of issuer stock by itself does not preclude service on the compensation committee.

Compensation Consultant Independence

The SEC instructed the exchanges to require compensation committees to consider the following six factors when selecting compensation consultants (with no one factor being determinative): (1) other services provided to the issuer by the compensation consultant’s employer; (2) the amount of fees received from the issuer by the compensation consultant’s employer, as a percentage of the employer’s total revenue; (3) the policies and procedures of the compensation consultant’s employer that are designed to prevent conflicts of interests; (4) any business or personal relationship of the compensation consultant with a member of the compensation committee; (5) any stock of the issuer owned by the compensation consultant; and (6) any business or personal relationships between the issuer’s executive officers and the compensation consultant or the compensation consultant’s employer. The exchanges are also permitted to consider additional factors.

The NYSE listing standards adopt the six independence factors set forth by the SEC and apply them to the compensation committee’s assessment of compensation consultants, outside counsel and other advisers to the compensation committee. The NYSE listing standards also require the compensation committee to consider any other factors that would be relevant to the consultant’s independence from management.

The Nasdaq listing rules are more explicit than the NYSE listing standards as they require the compensation committee to consider only the six factors set forth by the SEC.  In other words, under the Nasdaq rules compensation committee consultants do not have to be independent, as long as the committee considered the specified independence factors before selecting them.

Timing for Compliance

NYSE companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee member independence, but all other provisions of the NYSE listing standards become effective on July 1, 2013.

Nasdaq companies will be required to establish the compensation committee’s authority and responsibility in the committee charter by July 1, 2013 and will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the remaining provisions of the Nasdaq listing standards.

KMK Blog Posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation.  Please consult with counsel of your choice regarding any specific questions you may have.

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