October 2, 2012

NYSE and Nasdaq Propose Listing Standards for Compensation Committees and Compensation Advisers

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Overview

The New York Stock Exchange (NYSE) and The Nasdaq Stock Market (Nasdaq) both recently submitted proposed amendments to their respective listing standards to implement Rule 10C-1 promulgated by the Securities and Exchange Commission (SEC). Rule 10C-1 originally was proposed in April 2011 and was adopted by the SEC in June 2012.¹

Rule 10C-1 directed the national securities exchanges to establish listing standards to:

define standards of independence applicable to compensation committee members and directors who oversee executive compensation matters outside of the structure of a formal board committee;
require each member of a listed issuer's compensation committee to be an independent member of the board of directors;
require consideration of specified factors by a listed issuer's compensation committee relating to the independence of any compensation advisers; and
specify the authority and responsibilities of the compensation committee over the appointment, compensation, and oversight of the work of any compensation adviser.

The proposed NYSE listing standards, which would be codified in Sections 303A.00, 303A.02, and 303A.05 of the NYSE Listed Company Manual, are available here. The proposed Nasdaq listing standards, which would be codified in Rules 5605(d) and 5615(b), are available here.

Comparison and Considerations

A side-by-side comparison of the proposed NYSE and Nasdaq listing standards is contained in Appendix A. The following are a few key points and considerations:

Transition rules. While certain aspects of the Nasdaq listing standards would be effective immediately upon SEC approval, the compensation committee independence provisions for both the NYSE and Nasdaq only would be effective in 2014, allowing companies time to determine whether their current compensation committee members would be considered independent under the proposed listing standards or whether they would need to recruit additional independent directors.
Flexible approach to compensation committee independence. Both the NYSE and Nasdaq generally took advantage of the flexibility that the SEC provided in Rule 10C-1 to define independence for compensation committee purposes, although the two approaches are not identical.
- The proposed NYSE listing standards would require boards to consider compensatory payments to compensation committee members, other than for board and committee service, and affiliate status of compensation committee members with the listed company when determining that member's independence for service on the compensation committee, without prohibiting compensatory payments or providing bright-line prohibitions on stock ownership as it relates to affiliate status.
- The proposed Nasdaq listing standards would prohibit compensatory payments to independent compensation committee members, other than for board and committee service, but like the proposed NYSE listing standards, they would provide flexibility with respect to stock ownership as it relates to affiliate status.
Nasdaq requirement for compensation committees. The NYSE listing standards currently require listed companies to have a compensation committee comprised of independent directors. By contrast, the Nasdaq listing standards currently require that decisions regarding executive officer compensation be made either by a compensation committee comprised of independent directors or by a majority of the independent directors of the board. Under the proposed listing standards, Nasdaq companies would be required to have a compensation committee comprised of at least two directors meeting the enhanced independence standards outlined in the proposed listing standards.
Cure periods and exceptional and limited circumstances. As required by Rule 10C-1, both the NYSE- and Nasdaq-proposed listing standards contain cure periods allowing listed companies time to correct certain deficiencies in compensation committees. In addition, consistent with current Nasdaq listing standards for compensation committees, the proposed Nasdaq listing standards would permit, under exceptional and limited circumstances, one non-independent member of the compensation committee to serve on the committee for a period of time.
Factors for compensation committees to consider when determining compensation adviser independence. Both the NYSE- and Nasdaq-proposed listing standards adopt, and do not add to, the six independence factors set forth in Rule 10C-1 regarding compensation advisers. In so doing, neither the NYSE nor Nasdaq provide additional guidance on how listed companies should interpret these factors.
Independence determinations for legal advisers. The proposed NYSE listing standards seem to require a compensation committee to review the six independence standards with respect to any legal counsel that provides advice to the compensation committee. The proposed Nasdaq listing standards, however, would only require such a determination if the compensation committee determined the need to retain independent legal counsel.

Next Steps

The SEC will accept comments on the proposed listing standards for approximately three weeks and then will consider whether to approve them or require changes. Given that there are differences between the NYSE and Nasdaq approaches, it is unclear whether the SEC will attempt to have the exchanges harmonize the listing standards in any respect. Rule 10C-1 requires that the proposed listing standards be declared effective by the SEC prior to July 27, 2013.

What You Should Do Now

Inform your board of directors and compensation committee that the listing standards have been proposed and provide them with the expected timetable for approval and effectiveness.
Consider commenting on the proposed listing standards before the deadline.
If you are a Nasdaq-listed company that does not have a compensation committee, prepare to comply with the proposed listing standards requiring a listed company to have a compensation committee.
Review the independence of your current compensation committee members against the proposed listing standards. Consider voluntarily disclosing in your next proxy statement whether your current compensation committee members would be independent under the proposed listing standards.
Review the independence of, and conflicts of interest with, your current executive compensation consultants against the proposed listing standards.
Prepare to update your D&O questionnaires, compensation committee charter and policies, and proxy disclosure following adoption of the proposed listing standards.

For any questions or more information on these or any related matters, please contact your regular Wilson Sonsini Goodrich & Rosati attorney or any member of the firm's corporate and securities or employee benefits and executive compensation practices.

Appendix A

The following is a side-by-side comparison of the proposed NYSE and Nasdaq listing standards.

Topic	NYSE	Nasdaq
General
Effectiveness and Transition Rules	Proposed listing standards would be effective on July 1, 2013 Listed companies would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply Current IPO transition rules continue to apply² Companies that lose smaller company reporting status or foreign private issuer status would have six months to comply with listing standards	Proposed listing standards would be effective upon SEC approval Listed companies would be required to comply with: the compensation committee independence requirements described below by the second annual meeting held after SEC approval, but no later than December 31, 2014, and to certify such compliance; and the compensation adviser requirements described below immediately upon SEC approval, and to certify such compliance Current IPO transition rules continue to apply³ Companies that lose smaller company reporting status would be required to comply with listing standards within the IPO transition rules timeframe
Applicability of New Listing Standards	Listing standards would not apply to controlled companies or smaller reporting companies Compensation committee independence standards would not apply to foreign private issuers	Listing standards would not apply to controlled companies or smaller reporting companies⁴ Compensation committee independence standards would not apply to foreign private issuers
Compensation Committees and Independence
Existence of Compensation Committee	Listed companies currently required to have compensation committee comprised of independent members Listed companies currently required to have compensation committee charter with specified provisions	Listed companies would be required to have compensation committee comprised of at least two independent members⁵ Listed companies would be required to have compensation committee charter with specified provisions
Compensation Committee Independence	Board would be required to make affirmative determination of independence of compensation committee members Board would be required to consider all factors specifically relevant to determining whether a director has a relationship to the listed company that 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: the source of compensation of such director, including any consulting, advisory, or other compensatory fee paid by the listed company to such director;⁶ and whether such director is affiliated with the listed company, a subsidiary of the listed company, or an affiliate of a subsidiary of the listed company⁷	N/A Compensation committee members would not be permitted to accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any subsidiary thereof, except for fees received for service on the board and board committees and certain retirement plan compensation Board would be required to consider whether the director is affiliated with the listed company, a subsidiary of the listed company, or an affiliate of a subsidiary of the listed company to determine whether such affiliation would impair the director's judgment as a member of the compensation committee⁸
Non-Independent Committee Member under Exceptional and Limited Circumstances	N/A	Consistent with current Nasdaq listing standards for compensation committees, the proposed listing standards would permit, under exceptional and limited circumstances, one non-independent, non-executive member of the compensation committee to serve on the committee
Cure Period	If a member of the compensation committee ceases to be independent for reasons outside the member's reasonable control, the member may remain a member of the compensation committee until the earlier of the next annual shareholders' meeting of the listed company or one year from the occurrence of the event that caused the member to be no longer independent, with prompt notice to the NYSE and only so long as a majority of the members of the compensation committee continue to be independent	If there is a vacancy on the compensation committee or one compensation committee member ceases to be independent due to circumstances beyond the member's reasonable control, the listed company would be required to regain compliance with the requirement by the earlier of its next annual shareholders' meeting or one year from the occurrence of the event that caused the failure to comply with this requirement; provided, however, that if the annual shareholders' meeting occurs no later than 180 days following the event that caused the failure to comply with this requirement, the listed company instead would have 180 days from such event to regain compliance; the listed company would be required to provide notice to Nasdaq
Compensation Advisers
Retention and Funding of Advisers to Compensation Committee	Compensation committee would have: sole discretion to retain compensation advisers; and direct responsibility for appointment, compensation, and oversight of compensation advisers Listed company would be required to provide for appropriate funding, as determined by the compensation committee, for compensation advisers Compensation advisers would not be required to be independent	Compensation committee would have: sole discretion to retain compensation advisers; and direct responsibility for appointment, compensation, and oversight of compensation advisers Listed company would be required to provide for appropriate funding, as determined by the compensation committee, for compensation advisers Compensation advisers would not be required to be independent
Selection of Advisers to Compensation Committee	Compensation committee would be permitted to select a compensation adviser (except for in-house counsel) only after taking into consideration all factors relevant to that person's independence from management, including the factors identified in Rule 10C-1⁹ Compensation committee to review the six independence standards with respect to any legal counsel that provides advice to the compensation committee.	Compensation committee would be permitted to select a compensation adviser (except for in-house counsel) only after taking into consideration the factors identified in Rule 10C-1¹⁰ Compensation committee to review the six independence standards with respect to independent legal counsel to be retained by the committee.

¹ Our previous discussions of Rule 10C-1 as proposed and as adopted can be found in this WSGR Alert and this WSGR Alert.

² The NYSE requires that a listed company have at least one independent compensation committee member upon the earlier of the closing date of the IPO or five business days from the listing date, at least a majority of independent compensation committee members within 90 days of the listing date, and a fully independent compensation committee within one year of the listing date.

³ The Nasdaq requires that a listed company that has a compensation committee must have at least one independent compensation committee member upon listing, at least a majority of independent compensation committee members within 90 days of listing, and a fully independent compensation committee within one year of listing.

⁴ Separate from the requirements of Rule 10C-1, the Nasdaq is proposing that smaller reporting companies be required to have a compensation committee of at least two members, each of whom must be an "independent director" as defined under Rule 5605(a)(2).

⁵ Currently, Nasdaq-listed companies are required to have compensation decisions for executive officers determined either by an independent compensation committee or by a majority of the independent members of the board of directors.

⁶ The commentary to the proposed NYSE listing standard states: "When considering the sources of a director's compensation in determining his independence for purposes of compensation committee service, the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company's executive compensation."

⁷ The commentary to the proposed NYSE listing standard states: "Similarly, when considering any affiliate relationship a director has with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company, in determining his independence for purposes of compensation committee service, the board should consider whether the affiliate relationship places the director under the direct or indirect control of the listed company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair his ability to make independent judgments about the listed company's executive compensation."

⁸ The commentary to the proposed Nasdaq listing standard states: "In that regard, while a board may conclude differently with respect to individual facts and circumstances, Nasdaq does not believe that ownership of Company stock by itself, or possession of a controlling interest through ownership of Company stock by itself, precludes a board finding that it is appropriate for a director to serve on the compensation committee. In fact, it may be appropriate for certain affiliates, such as representatives of significant stockholders, to serve on compensation committees since their interests are likely aligned with those of other stockholders in seeking an appropriate executive compensation program."

^{9, 10} Rule 10C-1 identified the following factors to be considered in determining compensation adviser independence:

The provision of other services to the listed company by the person who employs the compensation consultant, legal counsel, or other adviser
The amount of fees received from the listed company by the person who employs the compensation consultant, legal counsel, or other adviser, as a percentage of the total revenue of the person who employs the compensation consultant, legal counsel, or other adviser
The policies and procedures of the person who 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 listed company owned by the compensation consultant, legal counsel, or other adviser
Any business or personal relationship of the compensation consultant, legal counsel, other adviser, or the person employing the adviser with an executive officer of the listed company

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