Mike Melbinger

September 27, 2012

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Follow-Up on NYSE and Nasdaq Proposed Rules on the Independence of Compensation Committee Advisers

As I noted yesterday, both the NYSE and Nasdaq have issued proposed rules on the independence of compensation committees and their advisers, as required by Dodd-Frank Act Section 952 and the SEC’s final rule from June 2012.* As promised, this Blog will elaborate on the new independence rules for compensation committees and their advisers published this week by the NYSE and Nasdaq. I found the following three aspects of the new rules interesting.

First, neither the NYSE nor Nasdaq provide any additional guidance on how compensation committees should interpret or apply the six independence factors set forth in the SEC’s rule factors, concluding that the SEC rule provides committees with a sufficient range of facts and circumstances to consider when making their independence determination as to consultants and counsel.

Second, Nasdaq is proposing to require listed companies to establish and maintain a formal independent compensation committee, and review and reassess the adequacy of the charter on an annual basis. Currently, Nasdaq listing requirements do not even require Nasdaq-listed companies to maintain a compensation committee, let alone a written charter. Nasdaq’s current listing requirement provide that compensation of the chief executive officer and all other executive officers of a company must be determined, or recommended to the board for determination, either by: (i) a compensation committee comprised solely of independent directors; or (ii) independent directors constituting a majority of the board’s independent directors in a vote in which only independent directors participate. As of June 30, 2012, 25 of the 2,636 Nasdaq listed companies relied on independent directors and did not have a compensation committee.

Under Nasdaq’s proposed rules, even “Smaller Reporting Companies” would be required to (a) have a compensation committee comprised of at least two independent directors and (b) adopt a formal written compensation committee charter – although Smaller Reporting Companies may include this content in a board resolution, rather than a compensation committee charter, and Smaller Reporting Companies are not required to reassess the adequacy of the charter (or board resolution) annually. The charter (or board resolution must) specify the same content as other Nasdaq-listed companies, except that Smaller Reporting Companies are not required to specify the (i) authority to retain compensation consultants, independent legal counsel and other compensation advisers; (ii) authority to fund such advisers; and (iii) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel.

Finally, Nasdaq is proposing that certain of its proposed standards relating to the compensation committee's responsibilities and authority be effective immediately (presumably, once the SEC has approved the proposal and any amendments to it). This would include, among other things, the consideration of the independence of any advisers to the compensation committee. Therefore, Nasdaq companies may need to act now.

*NYSE: http://www.nyse.com/nysenotices/nyse/rule-filings/pdf;jsessionid=474035BE3B197D71B5150C5D1911BB0F?file_no=SR-NYSE-2012-49&%20seqnum=1. Nasdaq: http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2012/SR-NASDAQ-2012-109.pdf

On September 27, 1942, Douglas Munro became the only member of the Coast Guard to earn the Medal of Honor. Munro was the officer in charge of five boats evacuating a battalion of marines under heavy fire on Guadalcanal. When the last of the Marines appeared to be trapped on the beach, Munro positioned his boat to cover the Marines' withdrawal and draw fire. He was killed and awarded the Medal posthumously.