[author: Steve Quinlivan]

The NYSE has proposed rules regarding the independence of compensation committee members and factors to be considered regarding the independence of advisers to compensation committees.  The proposed rules are being adopted as a result of the Dodd-Frank Act and final rules adopted by the SEC. The NYSE’s proposed rules are subject to approval by the SEC.

Compensation Committee Independence

The NYSE proposes to amend its rules to provide that in affirmatively determining the independence of any director who will serve on the compensation committee, the board of directors must consider all factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member.  The listed company board must specifically consider:

• a director’s source of compensation, including any consulting, advisory or compensatory fee paid by the issuer; and
• whether a director is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

Commentary to the proposed rule provides 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.  

Similarly, when considering any affiliate relationship a director has with the company or its subsidiaries,  the proposed commentary provides that 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.

The NYSE does not propose to adopt any specific numerical tests with respect to the factors discussed above or to adopt a requirement to consider any other specific factors. In particular, the NYSE does not intend to adopt an absolute prohibition on a board making an affirmative finding that a director is independent solely on the basis that the director or any of the director’s affiliates are shareholders owning more than some specified percentage of the listed company.

Compensation Adviser Independence Factors

As required by SEC Rule 10C-1(b)(4), the proposed NYSE rules require the compensation committee to consider the following factors before selecting  a compensation consultant, legal counsel or other adviser to the compensation committee:

• The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser;
• The amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;
• The policies and procedures of the person that 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 issuer owned by the compensation consultant, legal counsel or other adviser; and
• 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 issuer.

As proposed, the NYSE rule  would not include any specific additional factors for consideration not set forth in the final SEC rule.  The NYSE believes that the list included in NYSE Rule 10C-1(b)(4) is very comprehensive and the proposed listing standard would also require the  compensation committee to consider any other factors that would be relevant to the adviser’s independence from management.

Consistent with the final SEC rule, the proposed NYSE rule would specify that the compensation committee need not engage in an analysis of the independence factors before consulting with or obtaining advice from in-house legal counsel.

Transition Period

The NYSE  proposes to amend its rules to provide that listed companies would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new compensation committee independence standards . Existing compensation committee independence standards would continue to apply pending the transition to the new independence standards.

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