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NYSE and Nasdaq Propose Listing Standards for Compensation Committees and Advisers

Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by adding new Section 10C which requires that the Securities and Exchange Commission adopt rules directing the national securities exchanges to prohibit the listing of a company’s equity securities if that company does not comply with certain compensation committee and compensation adviser requirements. To implement Section 10C, the Commission adopted new Rule 10C-1 and amended Item 407 of Regulation S-K. Rule 10C-1 requires that the national securities exchanges adopt listing rules to effectuate the requirements of Section 10C.

Each of the NYSE and Nasdaq filed proposed rule changes that would implement new Rule 10C-1 last Tuesday and Wednesday, respectively. Below is a comparative summary of those proposed changes:

   

NYSE

 

Nasdaq

General Compensation Committee Requirements No changes. Nasdaq is proposing to require that all listed companies maintain a standing compensation committee comprised of at least two independent directors.The compensation committee would be required to adopt a formal written charter specifying: (i) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements, (ii) the committee’s responsibility for determining or recommending executive compensation, (ii) that the chief executive officer may not be present during voting or deliberation on his compensation, and (iv) the committee’s specific responsibilities and authorities related to compensation advisers.The compensation committee would be required to review and assess the adequacy of its charter on an annual basis.

Nasdaq’s proposed change would eliminate the current compensation committee alternative available in Listing Rule 5605(d)(1)(A), under which company may have a majority of the board’s independent directors determine, or recommend to the board for determination, executive compensation, in lieu of having a compensation committee.

Compensation Committee Director Independence Requirements NYSE is proposing that compensation committee members be required to be independent under the general board independence requirements (Listed Company Manual Section 303A.02), in addition to meeting independence requirements specific to compensation committee service, which would necessitate that, in affirmatively determining independence, a company’s board 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 the duties of a compensation committee member, including, but not limited to, consideration of the director’s compensation and affiliate relationships.NYSE is not proposing to adopt any specific numerical tests or require that boards consider any other specific independence factors.

Nasdaq is proposing that compensation committee members be required to be independent under the general board independence requirements (Listing Rule 5605(a)(2)) and be prohibited from accepting, directly or indirectly, any consulting, advisory or other compensatory fee from the company or a subsidiary of the company, beginning with the director’s term of service on the company’s compensation committee. This prohibition on compensatory fees would exclude fees received as a member of the compensation committee itself and fixed fees received under a retirement plan for prior service to the company.

In addition, in determining whether a director is eligible to serve on the compensation committee, a company’s board also must consider the whether the director has affiliate relationships and whether such affiliations would impair the director’s judgment as a member of the compensation committee.

Nasdaq is not proposing to adopt any specific numerical or bright line tests or require that boards consider any other specific independence factors.

Nasdaq proposes to retain the existing exception which allows a non-independent director serve on a compensation committee for exceptional and limited circumstances.

Compensation Committee Advisers NYSE is proposing that a company’s compensation committee charter specify that: (i) a compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser, (ii) a compensation committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the committee, and (iii) the company provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee. Nasdaq is proposing that a company’s compensation committee charter specify that: (i) a compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser, (ii) a compensation committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the compensation committee, and (iii) the company provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee.

Compensation Committee Adviser Independence NYSE is proposing that a company’s compensation committee charter specify that before a compensation committee selects a compensation adviser, other than with respect to in-house legal counsel, the committee must consider the six independence factors specified in Rule 10C-1(b)(4): (i) other services provided to the company by the compensation adviser’s employer, (ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues, (iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest, (iv) any business or personal relationship of the compensation adviser with a member of the compensation committee (v) any stock of the company owned by the compensation adviser, and (vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.NYSE is not proposing to specify any additional factors.NYSE is proposing to specify in the commentary to proposed Listed Company Manual Section 303A.05 that nothing shall be construed to: (i) require a compensation committee to implement or act consistently with the advice or recommendations of a compensation adviser, or (ii) to affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of its duties. Nasdaq is proposing that a company’s compensation committee charter specify that before a compensation committee selects a compensation adviser, other than with respect to in-house legal counsel, the committee must consider the six independence factors specified in Rule 10C-1(b)(4): (i) other services provided to the company by the compensation adviser’s employer, (ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues, (iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest, (iv) any business or personal relationship of the compensation adviser with a member of the compensation committee (v) any stock of the company owned by the compensation adviser, and (vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.Nasdaq is not proposing to specify any additional factors.

Cure Period NYSE is proposing that if a company fails to meet the compensation committee requirements because a member ceases to be independent for reasons outside of that member’s reasonable control, that person, with prompt notice to NYSE and only so long as a majority of the compensation committee continues to be independent, may remain a compensation committee member until the earlier of: (i) the next annual shareholders’ meeting, or (ii) one year from the occurrence of the event that caused the member to be no longer independent. Nasdaq is proposing that if a company fails to meet the compensation committee requirements because of a vacancy on the committee or because a member ceases to be independent for reasons outside of that member’s reasonable control, the company shall regain compliance by the earlier of: (i) the next annual shareholders’ meeting, or (ii) one year from the occurrence of the event that caused the noncompliance. However, if the annual shareholders’ meeting occurs no later than 180 days following the event that caused noncompliance, the company will instead have 180 days to regain compliance.A company relying on the cure period must immediately notify Nasdaq upon learning of its noncompliance.

Transition Period NYSE is proposing that companies comply with the requirements related to the committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers beginning on July 1, 2013.NYSE is proposing that companies have until the earlier of: (i) their first annual meeting after January 15, 2014, or (ii) October 31, 2014, to comply with the independence requirements specific to compensation committee service. Nasdaq is proposing that companies immediately comply with the requirements related to the compensation committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers.Nasdaq is proposing that companies comply with the remaining requirements, including the formation of a standing compensation committee, adoption of a formal written charter and the independence requirements specific to compensation committee service, by the earlier of: (i) their second annual meeting held after the date of approval of the proposed rules; or (ii) December  31, 2014.

Exemptions NYSE is proposing to exempt smaller reporting companies from compliance with the independence requirements specific to compensation committee service.NYSE is also proposing to exempt companies that only list preferred stock, and the categories of issuers that are exempt under Rule 10C-1, including limited partnerships, companies in bankruptcy, open-ended management investment companies and foreign private issuers that disclose in their annual report the reasons they do not have an independent compensation committee.With respect to foreign private issuers, NYSE is proposing to continue to permit foreign private issuers to follow home country practices in lieu of complying with NYSE compensation committee listing standards.

Nasdaq is proposing to exempt smaller reporting companies from compliance with the independence requirements specific to compensation committee service and the requirements relating to compensation advisers.

Smaller reporting companies will not, however, be exempt from the requirement that they have a standing compensation committee comprised of at least two independent directors and adopt a formal written charter (or board resolution in place of a charter).

Nasdaq is also proposing that its existing exemptions from compensation-related listing rules remain unchanged. Exempt issuers include asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies, and controlled companies.

Nasdaq is proposing to exempt foreign private issuers that follow home country practices in lieu of complying with Nasdaq compensation committee listing standards if they discloses in their annual report: (i) the reasons they do not have an independent compensation committee, (ii) the requirements they do not follow, and (iii) the home country practices followed in lieu thereof.

Update December 1, 2012:
The Commission has designated a longer period for action, until January 13, 2013, to approve or disapprove exchange rule changes related to compensation committees and advisor listing standards.
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