Nasdaq

The New Nasdaq and NYSE Compensation Committee Listing Standards

by Vanessa Schoenthaler on February 11, 2013

Over the next week or so I’ll hopefully be catching up on a few things that I haven’t been able to get to from the last several weeks, the first being the new Nasdaq and NYSE compensation committee listing standards:

By way of background, 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 on September 25, 2012, and thereafter filed amendments to their proposed rule changes.

Last month, on January 11, 2013, the Commission issued orders approving the NYSE and Nasdaq rule changes, as amended, on an accelerated basis. Below is a comparative summary of the rules:

   

NYSE

 

Nasdaq

General Requirements Listed companies must have a compensation committee composed entirely of independent directors.

 

 

 Listed companies must have, and certify that they have and will continue to have, a standing compensation committee composed of at least two members each of whom must be independent directors.
Compensation Committee Charter The compensation committee must adopt a written charter that addresses:

(1) the committee’s purpose and responsibilities, which, at a minimum, must be to have direct responsibility to:

(A) review and approve corporate goals and objectives relevant to the chief executive officer’s compensation, evaluate the chief executive officer’s performance in light of those goals and objectives, and, either as a committee or together with the other independent directors (as directed by the board), determine and approve the chief executive officer’s compensation level based on this evaluation;

(B) make recommendations to the board with respect to non-CEO executive officer compensation, and incentive-compensation and equity-based plans that are subject to board approval; and

(C) prepare the compensation committee disclosures required by Regulation S-K;

(2) an annual performance evaluation of the compensation committee;

(3) the committee’s rights and responsibilities related to compensation  advisers, including that:

(A) the committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser;

(B) the committee be directly responsible for the appointment, compensation and oversight of the work of any compensation adviser retained;

(C) the company must provide for appropriate funding, as determined by the committee, for payment of reasonable compensation to a compensation adviser retained by the committee;

(D) the committee may select a compensation adviser only after taking into consideration, all factors relevant to that person’s independence from management, including the
following:

(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.

 The compensation committee must adopt a written charter and review and assess the adequacy of that charter on an annual basis.

The compensation committee charter must specify:

(1) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements;

(2) the committee’s responsibility for determining or recommending executive compensation;

(3) that the chief executive officer may not be present during voting or deliberation on his compensation; and

(4) the committee’s specific responsibilities and authorities related to compensation advisers, including that:

(A) the committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser;

(B) the 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;

(C) the company must provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee;and

(D) the committee may select, or receive advice from, a compensation adviser, other than with respect to in-house legal counsel, only after taking into consideration the following factors:

(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.
Director Independence  Compensation committee members must be  independent under the general board independence requirements (Listing Standard 303A.02).

In addition, in affirmatively determining the independence of a director who will serve on the compensation committee, a company’s board must consider all factors specifically relevant to whether the director has a relationship to the company which is material to the director’s ability to be independent from management in connection with the duties of a committee member, including, without limitation:

(1) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company; and

(2) whether the director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

Compensation committee members must be  independent under the general board independence requirements (Listing Rule 5605(a)(2)) and not accept, directly or indirectly, any consulting, advisory or other compensatory fee from the company or a subsidiary of the company.

The prohibition on compensatory fees excludes 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.

Under exceptional and limited circumstances,  where there are at least three members of a compensation committee, one may be a non-independent director who is not an executive officer, family member of an executive officer or employee, if the board determines that appointment of the non-independent director is in the best interests of the company and its shareholders. A non-independent director appointed under this exception may not serve longer than two years. In addition the company will be required to make certain disclosures either through its website or in its proxy statement related to the appointment.
Adviser Independence It is not necessary that a compensation adviser actually be independent, only that the compensation committee conduct and independence assessment taking into consideration the independence factors enumerated in the committee’s charter, before selecting, or receiving advice from, a compensation adviser.

However, no independence assessment is required in the case of in-house counsel or a compensation adviser who’s role is limited to:

(1) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor executive officers or directors and is generally available to all salaried employees; and/or

(2) providing information that either is not customized for the company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

 It is not necessary that a compensation adviser actually be independent, only that the compensation committee conduct and independence assessment taking into consideration the independence factors enumerated in the committee’s charter, before selecting, or receiving advice from, a compensation adviser.

However, no independence assessment is required in the case of in-house counsel or a compensation adviser who’s role is limited to:

(1) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor executive officers or directors and is generally available to all salaried employees; and/or

(2) providing information that either is not customized for the company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.
Adviser Recommendations The compensation committee will not be required to implement or act consistently with the advice or recommendations of any compensation adviser, but rather shall retain the ability and obligation to exercise its own judgement in fulfillment of its duties.

 

 The compensation committee will not be required to implement or act consistently with the advice or recommendations of any compensation adviser, but rather shall retain the ability and obligation to exercise its own judgement in fulfillment of its duties.
Cure Period 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:

(1) the next annual shareholders’ meeting; or

(2) one year from the occurrence of the event that caused the member to be no longer independent.

 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:

(1) the next annual shareholders’ meeting; or

(2) 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.

 
Smaller Reporting Companies Smaller reporting companies are required to have a compensation committee composed entirely of independent directors.However, smaller reporting companies are exempt from compliance with the additional independence requirements specific to compensation committee membership, as well as from the requirements that the compensation committee to conduct an independence assessment prior to selecting a compensation adviser. Smaller reporting companies are required to have, and certify that they will continue to have, a compensation committee composed of at least two independent directors and to adopt, and certify that they have adopted, a formal written charter (or board resolution in place of a charter) specifying:

(1) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements;

(2) the committee’s responsibility for determining or recommending executive compensation; and

(3) that the chief executive officer may not be present during voting or deliberation on his compensation.

Smaller reporting companies are exempt from the remaining compensation committee requirements, including the requirements related to specific compensation committee responsibilities and authority.

Smaller reporting companies may avail themselves of the exception for non-independent directors under exceptional and limited circumstances and the cure period.

 
Foreign Private Issuers Foreign private issuers are permitted to follow home country practice in lieu of NYSE’s compensation committee listing standards but must still disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under NYSE listing standards. Foreign private issuers that follow home country practices in lieu of Nasdaq’s compensation committee listing standards must discloses in their annual report:

(1) the reasons they do not have an independent compensation committee;

(2) the requirements they do not follow; and

(3) the home country practices followed in lieu thereof.

 
Transition Period Companies must comply with the requirements related to compensation committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers beginning on July 1, 2013.

Companies will have until the earlier of:

(1) their first annual meeting after January 15, 2014; or

(2) October 31, 2014,

to comply with the independence requirements specific to compensation committee service.

 Companies must comply with the requirements related to compensation committee responsibilities and authority by July 1, 2013.

If a company does not have a standing compensation committee by July 1, 2013, then the independent directors who determine, or recommend to the board for determination, executive compensation must comply with the requirements related to responsibilities and authority.

Companies must comply with the remaining requirements related to compensation committees, including having a written compensation committee charter, by the earlier of:

(1) their first annual meeting after January 15, 2014; or

(2) October 31, 2014.

Companies must certify their compliance with the compensation committee rules to Nasdaq no later than 30 days after the final implementation deadline.

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NYSE and Nasdaq Propose Listing Standards for Compensation Committees and Advisers

by Vanessa Schoenthaler on October 1, 2012

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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Various and Sundry Items From the Last Week

by Vanessa Schoenthaler on June 4, 2012

Nasdaq Proposes Changes to Marketplace Rule 5605 Relating to the Composition of Board Committees

On Wednesday the Commission published a notice soliciting comments on proposed changes to certain subsections of Nasdaq’s Marketplace Rule 5605 relating to the independence requirements of a listed company’s audit, compensation and nominations committees.

Rule 5605 generally requires that a company’s audit, compensation and nominations committees be comprised entirely of independent directors. There is a limited exception to the independence requirements (found in each of subsections (c)(2)(B), (d)(3) and (e)(3) of Rule 5605) that allows for one non-independent director to serve on a committee for up to two years if a company’s board affirmatively finds that the non-independent director’s membership is required by the best interests of the company and its shareholders.

If Nasdaq’s proposed rule changes are accepted a non-independent director with a family member who is a non-executive employee would be permitted to serve on a committee under the limited exception. As the rule is currently drafted this is not possible, even though having a family member who is a non-executive employee would not otherwise disqualify an independent director from being independent.

The text of Nasdaq’s proposed rule changes are reproduced below.

The GAO’s Report to Congress on the Commission’s Oversight of FINRA 

Section 964 of the Dodd-Frank Act requires the Government Accountability Office (GAO) to submit a report to Congress evaluating the Commission’s oversight of national securities associations registered under Section 15A of the Exchange Act, of which FINRA is the only one. On Wednesday the GAO released its report, entitled Opportunities Exist to Improve SEC’s Oversight of the Financial Industry Regulatory Authority, which examines, among other things, how the Commission oversees FINRA rule proposals and the effectiveness of FINRA’s rules and how the Commission plans to enhance its oversight of FINRA. The report emphasizes the utility of retrospectives reviews and recommends that the Commission encourage FINRA to conduct its own retrospective rule reviews and that the Commission establish a process for examining those reviews.

The GAO’s full report is reproduced below.

The Commissioners may be Attending Friday’s Meeting of the Advisory Committee on Small and Emerging Companies

On Friday the Commission published a Sunshine Act Meeting Notice related an earlier notice for a public meeting of the Advisory Committee on Small and Emerging Companies to be held this Friday.

The Committee will be discussing the JOBS Act and other matters related to rules and regulations that affect small and emerging companies. The reason for the second, Sunshine Act, notice is that a majority of the Commissioners may be attending Friday’s meeting.

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Exchange Policy and Rule Changes and the Upcoming Meeting of the Advisory Committee on Small and Emerging Companies

by Vanessa Schoenthaler on January 30, 2012

I’m still playing a bit of catch up, but hopefully this is the week that I finally get back to a regular posting schedule … in the meantime, here are a few items from the week that was:

NYSE and Amex Changes to Broker Non-Votes

As has been widely reported, on Wednesday NYSE issued a Information Memo relating the the application of Rule 452, which governs when NYSE and Amex brokers may vote shares without specific shareholder instructions.

Under the new policy brokers will not be permitted to vote uninstructed shares on corporate governance proxy proposals, including proposals related to:

  • de-stagger boards;
  • majority voting in director elections;
  • the elimination of supermajority voting requirements;
  • use of consents;
  • the right to call special meetings; and
  • certain types of anti-takeover provision overrides.

The above list is meant to be illustrative, not exhaustive, and if you have any questions about a specific proposal you should speak to your counsel or contact the NYSE staff.

Additionally, you might recall that the Dodd-Frank Act required the national securities exchanges to adopt rules prohibiting members from voting uninstructed shares on matters related to the election of directors, executive compensation and “other significant matters” as determined by the Commission. The Commission hasn’t yet defined “other significant matters” and, according to its current Dodd-Frank Act implementation schedule, hasn’t yet determined when it will do so. As such, we may continue to see a narrowing of the matters over which broker have discretionary voting authority, which in turn requires that you plan to spend more time on shareholder analysis and voting outreach.

Finally remember that Rule 452 applies to NYSE and Amex member firms, not the companies whose securities are listed on the NYSE and Amex. Meaning that these changes also affect companies with their securities listed on Nasdaq and those that are quoted in the over the counter markets.

Nasdaq Reverts Back to its Two-Tier Fees Structure for Written Interpretations of Listing Rules

On Thursday the Commission published a rule change relating to the fees that Nasdaq charges for written interpretations of its listing rules.

Under the revised rule Nasdaq is reverting back to its previous two-tier fee structure, whereby a company that seeks a written interpretation of the listing rules will be required to submit a $5,000 non-refundable fee for a regular request or, alternatively, can submit a $15,000 non-refundable fee for an expedited request.

For regular requests Nasdaq will generally provide a written response within four weeks of the date that it receives all of the information necessary to respond.  For expedited requests Nasdaq will generally provide a written response by a date that is less than four weeks, but at least one week, after it receives all of the information necessary to respond.

Advisory Committee on Small and Emerging Companies Meets Again on Wednesday

Also on Thursday, the Advisory Committee on Small and Emerging Companies announced the agenda for its meeting this Wednesday and posted a number of useful background materials on the Commission’s website.

Up for discussion and consideration are recommendations related the triggers for public registration and reporting (the 500 shareholder rule) and the suspension of reporting requirements, crowdfunding, Regulation A and the IPO On-Ramp report.

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Various and Sundry From the Last Week

by Vanessa Schoenthaler on January 23, 2012

On Friday the Securities and Exchange Commission released a Small Entity Compliance Guide (as required by the Small Business Regulatory Fairness Act) summarizing and explaining the requirements of the recently finalized Mine Safety Disclosure rules.

Revisions to the Definition of Covered Securities

The Commission also issued a final rule on Friday designating certain securities listed on the BATS Exchange as “covered securities” for purposes of Section 18 of the Securities Act.

Covered securities are exempt from state “blue sky” registration requirements, instead having to comply with the exchange listing standards and federal securities laws, rules and regulations related to the registration and sale of securities.

Once the final rule becomes effective (30 days from its publication in the federal register) the list of covered securities will include those listed, or authorized for listing, on:

  • New York Stock Exchange;
  • NYSE Amex LLC;
  • National Market System of the Nasdaq Stock Market;
  • Tier I of the NYSE Arca, Inc.;
  • Tier I of the Nasdaq OMX PHLX LLC;
  • Chicago Board Options Exchange, Incorporated;
  • Options listed on the International Securities Exchange, LLC;
  • The Nasdaq Capital Market; and
  • Tier I and Tier II of BATS Exchange, Inc.

Nasdaq Updates it Initial Listing Standard

On Tuesday the Commission published notice of a proposed rule change by Nasdaq. The exchange is seeking to adopt a $2 or $3 initial listing bid price as an alternative to the current $4 initial listing bid price on its Nasdaq Capital Market. The change would allow the Nasdaq Capital Market to compete for listings with NYSE Amex, the only other exchange that currently has a $2 or $3 initial listing bid price.

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Proposed Rules Requiring Proposed Listing Standards About Compensation Committees

by Vanessa Schoenthaler on March 31, 2011

Proposed Rules on Compensation Committees and Compensation ConsultantsSection 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amends the Securities Exchange Act of 1934 by adding new Section 10C, requiring the Securities and Exchange Commission to adopt rules directing the national securities exchanges* to prohibit the listing of the equity securities of a company that does not comply with certain compensation committee and compensation advisor requirements. Yesterday the Commission released a set of proposed rules and amendments that are designed to implement Section 952.

As per usual, the Commission is soliciting public comments on the proposed rules and amendments, which are due on or before April 29, 2011.

Updated April 29, 2011:

On April 29, 2011, in response to a request from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, the Commission has extended the comment period through May 19, 2011.

Who do the proposed rules and amendments apply to?

Proposed Rule 10C-1

Proposed Exchange Act Rule 10C-1 requires that the rules of the national securities exchanges prohibit the initial or continued listing of any equity security of a company that does not comply with certain compensation committee and compensation advisor requirements.

As proposed Rule 10C-1 only applies to companies with exchange-listed equity securities, excluding security future products and standardized options. The Commission estimates that there are approximately 76 companies that fall outside of the scope of Rule 10C-1 by virtue of having only exchange-listed debt securities, and is specifically seeking comment on whether these companies should be made to comply with the final rule.

Additionally, by definition, companies with securities quoted through inter-dealer quotation systems in an over the counter market, such as the OTC Bulletin Board or the OTC Markets Group (formerly the Pink Sheets), are excluded from Rule 10C-1, unless, of course, they also have a class of equity securities listed on a national securities exchange.

Proposed Amendments to Item 407 of Regulation S-K

The proposed amendments to Item 407 of Regulation S-K broaden the scope of existing disclosure requirements with respect to compensation advisor and conflict of interest disclosures.

As proposed the amendments apply to all Exchange Act reporting companies that are subject to the proxy rules, this includes companies with securities quoted in an over the counter market, such as the OTC Bulletin Board or the OTC Markets Group, and controlled companies, but excludes foreign private issuers, which are not subject to the proxy rules, and registered investment companies, but only because they are not subject to the disclosure requirements of Item 407 of Regulation S-K.

What does proposed Rule 10C-1 require regarding compensation committees?

Proposed Rule 10C-1 requires that if a company has a compensation committee, or a committee performing the function of a compensation committee (i.e., one that oversees executive compensation), each committee member must also be a member of the company’s board of directors and must be independent. The national securities exchanges are themselves tasked with defining independence in the context of compensation committee membership, but must take into consideration factors such as:

  • sources of compensation paid to a board member, including consulting, advisory and other fees paid by the company; and
  • whether a board member is affiliated with the company or a subsidiary of the company.

Notably, as proposed Rule 10C-1 does not direct the national securities exchanges to adopt listing standards that would require a company to have a compensation committee, or to apply the compensation committee independence standards to the independent members of a board of directors that oversee executive compensation when there is no committee. The Commission is also specifically seeking comment on whether the final rule should instead direct the national securities exchanges to adopt listing standards that simply require compensation committees.

What does proposed Rule 10C-1 require regarding compensation advisors?

Proposed Rule 10C-1 requires that a compensation committee have the discretion and reasonable funds available to retain compensation consultants, independent legal counsel and other advisors, and that the committee be responsible for appointing, compensating and overseeing the work of such advisors, but not be required to follow the their advice or recommendations.

When choosing advisors, proposed Rule 10C-1 does not require that they also be independent, only that the compensation committee, in its selection process, consider:

  • whether the advisor provides other services to the company;
  • the amount of fees the advisor receives from the company as a percentage of the advisor’s total revenues;
  • what policies and procedures the advisor has in place to prevent conflicts of interest;
  • whether the advisor has a business or personal relationship with any member of the compensation committee; and
  • whether the advisor owns any company stock.

In addition to the foregoing, the national securities exchanges may adopt other relevant factors for consideration in their respective listing standards.

Are there any exemptions?

Exchange Act Section 10C exempts five categories of companies from the the compensation committee independence requirements:

  • controlled companies;
  • limited partnerships;
  • companies in bankruptcy proceedings;
  • open-ended management companies; and
  • foreign private issuers that disclose in their annual report the reason they do not have an independent compensation committee.

Proposed Rule 10C-1 also authorizes the national securities exchanges to adopt listing standards that exempt:

  • certain relationships from the compensation committee independence requirements; and
  • entire categories of companies from all of the Section 10C requirements, taking into consideration the potential impact that the requirements may have on smaller reporting companies.

When will the new listing standards take effect?

Procedurally, following the public comment period, and once the final rules and amendments are adopted and published in the Federal Register, the national securities exchanges will have 90 days to propose conforming listing standards, which must then be approved by the Commission within one year of the date on which its final rules and amendments were published in the Federal Register.

To the extent that they do not already do so, the listing standards of the national securities exchanges will have to provide companies with a reasonable opportunity to cure any defects that would otherwise cause their securities to be delisted, or ineligible for listing, based on a failure to meet the new standards.

What new disclosures do the proposed amendments to Item 407 of Regulation S-K require?

As proposed, the amendments to Item 407 of Regulation S-K would require a company to make certain expanded disclosures in any proxy or information statement filed in connection with an annual or special meeting at which directors are elected, regarding whether:

  • management or the company’s compensation committee retained or obtained the advice of a compensation advisor during the most recently completed fiscal year; and
  • the work of the compensation advisor raised any conflicts of interest, and, if so, how the conflicts are being addressed.

When do the new disclosure requirements take effect?

The new disclosure requirements will not take effect until the effective date of the final rules and amendments adopted by the Commission.

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* The proposed rules would also apply to a registered national securities association that lists equity securities in an automated inter-dealer quotation system.  At present, the Financial Industry Regulatory Authority (FINRA) is the only registered national securities association, however, FINRA does not list equity securities and, as such, the new rules do not apply to it.

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The Consequences of a Late Filing

by Vanessa Schoenthaler on March 4, 2011

Exchange Act Report Filing DeadlinesNobody likes a late filer, especially not if the filing is a quarterly report and the reason its late is because of an accounting issue.

A recent academic study, out of the University of Southern California and New York University, examines the Capital Market Consequences of Filing Late 10-Qs and 10-Ks and finds, as you might have guessed, that capital markets react negatively when a company files a late quarterly or annual report. In addition, and perhaps less intuitively, the study finds that capital markets react more negatively in response to the filing of late quarterly reports than to the filing of late annual reports, and even more so when accounting issues are cited as the reason for the delay. The authors postulate that this is because quarterly reports require less disclosure and are unaudited, and so markets perceive accounting issues associated with the filing of late quarterly reports as more significant than accounting issues associated with the filing of late annual reports.

The study uses change in share price to measure market reaction and observes late filers for a period of eight months following their notice of late filing. In the short term, companies experience an immediate negative reaction when they announce a late filing and a significantly more negative reaction if they miss the Securities Exchange Act Rule 12b-25 filing grace period. Interestingly, companies continue to experience share price declines for several months following a late filing, except when accounting issues are the reason for the delay, because, the authors suggest, investors are better able to interpret and immediately react to accounting-related information.

Beyond the capital market consequences of a late filing, there are a host of other issues to consider:

Filing Deadlines

By way of review, a public company is required to file its quarterly and annual reports with the Securities and Exchange Commission within a certain number of days following a fiscal period’s end:

Quarterly (Form 10-Q) and Annual (Form 10-K) Report Filing DeadlinesNote: these deadlines only apply to domestic companies, foreign private issuers are subject to a different set of filing requirements. For example, they currently have to file annual reports (on a Form 20-F) within 6 months following a fiscal year’s end. However, beginning with fiscal years ending on or after December 11, 2011, this deadline will be pushed up to within 4 months following a fiscal year’s end. Foreign private issuers also have an obligation to file current reports (on a Form 6-K) “promptly” after certain information is made public in accordance with the laws of their own jurisdictions.

Securities Law Consequences of a Late Filing

Exchange Act Rule 12b-25 provides that if a company cannot timely file all, or any portion, of a quarterly or annual report then within one business day after the report’s due date the company must file a Notification of Late Filing (on a Form 12b-25) stating the reason why.*

Rule 12b-25 also provides that if the report could not have been filed by its due date without unreasonable effort or expense, then it may still be deemed to have been timely filed if the company:

  • timely files its Notification of Late filing; and
  • files the late report within the applicable grace period (no later than 5 calendar days in the case of a quarterly report, and no later than 15 calendar days in the case of an annual report, regardless of the company’s filer status).

This is an important detail because if a company has not timely filed all of its Exchange Act filings (with the exception of certain filings required to be made on a Form 8-K) it will lose the ability to file a short form registration statement on Form S-3 (or Form F-3 in the case of a foreign private issuer) for at least a period of 12 months. This will in turn limit the company’s ability to conduct certain types of registered securities offerings.

In addition, until the late report is filed the company will also lose its ability to file a Form S-8 registration statement and its Rule 144 eligibility. Form S-8 is a short form registration statement used for offering securities under an employee benefit plan, and Rule 144 covers unregistered public resales of restricted and control securities. These are temporary consequences, however, because neither Form S-8 nor Rule 144 require that a company’s reports be timely filed, only that they are filed.

As for any currently effective registration statement, a company’s ability continue to rely on that registration statement prior to filing a late report will depend on whether the prospectus and anti-fraud provision of the Securities Act are satisfied, the late filing notwithstanding.

Securities Exchange Consequences of a Late Filing

Where a company’s securities are listed or quoted will also effect what happens when a filing is late.

In the case of a NYSE-listed company, the NYSE Listed Company Manual (Section 802.01E) sets forth a series of procedures that are triggered if a company files a late annual report.

In the case of an AMEX or Nasdaq-listed company, both the AMEX Company Guide (in Section 1101) and Nasdaq Stock Market Rules (in Rule 5250(c)(1)) require that a company file with the exchange copies of reports filed with the Commission on or before their filing deadline. Late filings will result in a company’s receipt of a notice of failure to meet the exchange’s continued listing requirements, which must be disclosed on a Form 8-K, and will require a company to submit a plan for regaining compliance with those requirements. In each case, if a company fails to regain compliance with the exchange’s continued listing requirements, its securities may be suspended from trading or delisted.

In the case of a company with securities quoted in an over the counter market, like the OTC Bulletin Board, there are no listing requirements. However broker-dealers participating in the OTC Bulletin Board markets are members, and governed by the rules, of the Financial Industry Regulatory Authority (FINRA).  FINRA Rule 6530(e) prohibits members from quoting the securities of a company that has failed to timely file a required report three times in any 2-year period, or that has had its securities removed from the OTC Bulletin Board quotation service twice in a 2-year period for failing to file a required report within 30 days of the filing deadline. Once a company’s securities are prohibited from being quoted on the OTC Bulletin Board the company must timely file all required reports for a period of one year before it can regain eligibility.

Other Consequences of a Late Filing

Late filings occur for all kinds of reasons and under certain circumstances may simply be unavoidable. In addition to these general capital market, securities law and securities exchange consequences, late filers also need to be aware of and consider company-specific consequences, such as whether a late filing will trigger an event of default or violate any other contractual covenants.

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* In gathering and investigating data for their Capital Market’s study, the authors communicated with Wayne Carnall, Chief Accountant of  the Commission’s Division of Corporation Finance, regarding discrepancies in the number of reported late filings that appeared in different data sources.  The authors noted that Mr. Carnall “suggested that it is very rare for late filers not to file [a Form 12b-25], and that he would be very interested in knowing of any … ” non-filers they were able to identify.

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The Anatomy of a Shareholder Vote Calculation

by Vanessa Schoenthaler on February 11, 2011

Shareholder Meeting - Tabulating and Calculating Votes

(Note: I’ve since updated this post here)

Counting up the votes from a shareholder meeting is not as easy as one might think.

First off, there are four different sources that dictate how the votes are tabulated: the federal securities laws, the corporate laws of the state in which a company is organized, the rules of the national securities exchanges and a company’s charter documents.

On top of that there are five different categories of votes to consider: votes for and against a proposal, which are self-explanatory, broker non-votes, abstentions and withheld votes (more on these latter three in a second).

Then there’s a quorum requirement to be met, and, finally, the approval threshold for each proposal has to be considered, which can range from a plurality of the votes cast to a super majority of the votes present and entitled to vote, and anything in between.

Broker Non-Votes

A broker non-vote occurs when a broker has not received voting instructions from the beneficial owner of shares held in street name and the broker does not have, or declines to exercise, discretionary authority to vote the shares. Brokers only have discretionary authority to vote uninstructed shares on routine matters, such as the ratification of a company’s auditing firm.

Under the laws of most states broker non-votes are considered present at a meeting, and, as such, are included in the calculation of whether a quorum exists, however, they are not considered entitled to vote, and so have no effect on the outcome of a proposal.

The Dodd-Frank Changes to Broker Non-Votes

Following enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, national securities exchanges were required to adopt rules prohibiting members from voting uninstructed shares on matters related to the election of directors, executive compensation and other significant matters as determined by the rules of the Securities and Exchange Commission.

In September 2010, the Commission approved amendments to New York Stock Exchange Rule 452, and corresponding Section 402.08 of the Listed Company Manual, and Nasdaq Stock Market Rule 2251, to implement the Dodd-Frank Act’s requirements. At present, the Commission anticipates proposing rules to define “other significant matters” sometime between April and July of 2011.

Among other things, the NYSE and Nasdaq Dodd-Frank-imposed rule changes have added uncontested director elections (formerly considered a routine matter), shareholder advisory votes on executive compensation and shareholder advisory votes on the frequency of advisory votes on executive compensation to the category of non-routine matters.

It is also worth noting that these rule changes relate to NYSE and Nasdaq member firms, not to the companies whose securities are listed on the NYSE or Nasdaq markets, so the changes effect all companies, even those with securities quoted in over the counter markets like the OTC Bulletin Board and the reporting tiers of the OTC Pink Markets.

Abstentions

An abstention occurs when a shareholder affirmatively chooses not to vote on a proposal.

Under the laws of most states abstentions are considered present and entitled to vote at a meeting, and, as such, are included in the calculation of whether a quorum exists. However, abstentions are not generally considered votes cast, meaning that where a proposal requires the approval of “a majority of the votes cast” abstentions will have no effect, but, where a proposal requires the approval of “a majority of the votes present” or “a majority of the votes present and entitled to vote” abstentions will have the same effect as votes cast against the proposal.

Withheld Votes

A withheld vote is a category of vote that has come about as a result of the Commission’s proxy rules.

Securities Exchange Act Rule 14a-4 requires that a proxy for the election of directors include an option for shareholders to withhold authority to vote for a director nominee.  The rule does not, however, require that a proxy include an option for shareholders to vote against a director nominee, unless the laws of the state in which the company is organized give effect to such a vote (most don’t).

Under the laws of most states directors are elected by a plurality vote, meaning that the director nominee receiving the highest number of votes, regardless of the number of votes withheld, is elected (i.e., a  director nominee can receive 1 for vote, while 999 votes are withheld, and still be elected).  As a consequence, over the last half dozen or so years, companies have started to amend their charter documents and implement governance policies to give effect to withheld votes.  For example, one approach has been to require a director to tender their resignation, which may or may not be accepted, if they receive a greater number of withheld votes than for votes.  Another approach has been to simply adopt a majority voting standard for the election of directors.

Tallying it All Up

Has the quorum requirement been satisfied?

Before any business can be transacted at a shareholder meeting there must be a quorum present.

By default most states define a quorum as the presence of a majority of the shares entitled to vote in person or by proxy.  A company can modify the default requirement in its charter documents, subject to certain limitations imposed by state law (e.g., in Delaware a quorum cannot be less than one-third of the shares entitled to vote) and by the rules of the exchange on which the company’s securities are listed (e.g., Nasdaq requires a quorum of at least 33.33% of a company’s outstanding common voting stock; NYSE generally requires a quorum of not less than a majority of a company’s outstanding shares).Quorum Requirement - Shareholder MeetingOnce it is established that a quorum exists, the approval thresholds applicable to each proposal have to be considered and the related votes tabulated and counted. Let’s look at this in the context of the shareholder advisory vote on executive compensation and the shareholder advisory vote on the frequency of advisory votes on executive compensation.  Remember these are non-routine matters for which brokers do not have discretionary voting authority, so shares represented by broker non-votes count as present for purposes of establishing a quorum but not as shares entitled to vote on the proposals.

What approval threshold is applicable to the shareholder advisory vote on executive compensation?

There is no approval threshold required for the shareholder advisory vote on executive compensation.  As of this writing, of the companies that have reported results for their advisory votes on executive compensation, most have considered the proposal approved if it received the affirmative vote of a majority of the shares present and entitled to vote, with abstentions having the same effect as a vote cast against the proposal, though in three instances companies have specified that both abstentions and broker non-votes have the same effect as votes cast against the proposal.

Shareholder Meeting Vote

Most of the remaining companies have considered the proposal approved if it received the affirmative vote of a majority of the votes cast, with abstentions having no effect.Shareholder Meeting VoteIn a few cases companies have not disclosed an approval threshold at all, though in each a majority of the shares present and entitled to vote did approve the proposal.

What approval threshold is applicable to the shareholder advisory vote on the frequency of advisory votes on executive compensation?

There is no approval threshold required for the shareholder advisory vote on the frequency of advisory votes on executive compensation. However, if a company wishes to exclude certain shareholder proposals that seek advisory votes on executive compensation or that relate to the frequency of advisory votes on executive compensation, then its shareholders must approve a single frequency choice by a majority of the votes cast, with abstentions having no effect, and the company must adopt a policy that is consistent with that shareholder choice.

As of this writing, of the companies that have reported results for their advisory votes on the frequency of votes on executive compensation, most have considered the frequency receiving a plurality of the votes cast as the frequency approved by shareholders.  Though, there have been a handful of companies that have considered the frequency receiving a majority of the votes cast as the frequency approved by shareholders. If companies in this latter group then adopt policies that are consistent with their shareholders’ vote, they may exclude future shareholder proposals related to advisory votes on executive compensation or the frequency of advisory votes on executive compensation.

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