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SEC Approves Nasdaq’s Revised Listing Standards for Compensation Committees and Advisers

January 17, 2013

On January 11, 2013, the Securities and Exchange Commission approved the twice-revised Nasdaq Stock Market proposed listing standards relating to compensation committees and compensation advisers. Nasdaq first proposed these new standards on September 25, 2012, then revising them on December 12, 2012 and January 4, 2013. The new listing standards were mandated by SEC Rule 10C-1 adopted on June 20, 2012 pursuant to the Dodd-Frank Act, as discussed in our earlier Public Company Alert. Rule 10C-1 required the national securities exchanges to adopt rules relating to the independence of compensation committees and compensation advisers. Certain aspects of the new listing standards become effective on July 1, 2013, as discussed below.

Compensation Committee. Under the new listing standards as set out in Nasdaq Rule 5605(d)(3), every listed company must have a compensation committee comprised of at least two directors, each of whom must qualify as an independent director. In addition, in determining whether a director is eligible to serve on the compensation committee, Nasdaq’s new listing standard requires a company’s board to consider the director’s affiliation with the company or its subsidiaries or affiliates of the subsidiaries, and to determine whether such affiliations would impair the director’s judgment as a member of the compensation committee.

Written Committee Charter. As part of its proposal to require listed companies to have a compensation committee, Nasdaq’s new listing standards also require that companies adopt a formal written compensation committee charter. In addition to setting forth the compensation committee’s specific responsibilities and authority over the matters required under SEC Rule 10C-1 (discussed below), the charter must specify (i) the scope of the compensation committee’s responsibilities, and how it carries out those responsibilities, including structure, processes and membership requirements, (ii) the committee’s responsibility for determining, or recommending to the board for determination, the compensation of the CEO and all other executive officers of the company, and (iii) that the CEO may not be present during committee voting or deliberations on the CEO’s compensation.

Responsibilities and Authority. Under Nasdaq Rule 5605(d)(3), compensation committees must have the specific responsibilities and authority necessary to comply with SEC Rule 10C-1(b)(2), (3) and (4)(i)-(vi) relating to the retention, compensation, oversight and funding of compensation consultants, legal counsel and other compensation advisers. This includes a requirement that the compensation committee consider the six independence factors enumerated in Rule 10C-1(b)(4)(i)-(vi) before selecting, or receiving advice from, any compensation consultant, legal counsel or other compensation adviser, other than in-house legal counsel.1 Nothing in the new listing standards, however, requires a compensation consultant, legal counsel or other compensation adviser to be independent, only that the compensation committee consider the enumerated independence factors before selecting, or receiving advice from, a compensation adviser, other than in-house legal counsel. Compensation committees may select, or receive advice from, any compensation adviser they prefer, including ones that are not independent, after considering the six independence factors mentioned above. A compensation committee, however, is not required to conduct an independence assessment for a compensation adviser who merely consults on any broad-based plan that does not discriminate in scope, terms or operation in favor of directors or executive officers, or who provides non-customized information to the compensation committee or customized information based on parameters that were not developed by the adviser.

Effective Dates. In a significant change from the original proposal, the new listing standards requires that a compensation committee must only have the responsibilities and authority required by SEC Rule 10C-1 by July 1, 2013. The original proposal made these requirements effective immediately upon approval by the SEC, which could have put some listed companies unwittingly into default under their respective listing agreements. Depending upon their individual circumstances, companies may have to consider under state corporate law whether to grant the specific responsibilities and authority through a charter revision, board resolution or other board action before the July 1, 2013 deadline.

The remaining compensation committee listing standards, including the requirement to have a compensation committee, the compensation committee independence requirement, and the requirement that the committee’s responsibilities and authorities be specified in a written charter, must be satisfied by a company’s first annual meeting after January 15, 2014 or October 31, 2014. To the extent a listed company does not have a compensation committee, the provisions of Rule 5605(d)(3) shall apply to the independent directors who determine, or recommend to the board for determination, the compensation of the chief executive officer and all other executive officers of the company.

Certification. Finally, listed companies would be required to certify that they have adopted a compensation committee charter and that the compensation committee will “review and reassess” the adequacy of the charter on an annual basis. The certification is required to be provided no later than 30 days after the final implementation deadline applicable to a listed company. Click here to see a form of certification as provided by Nasdaq.

Practical Considerations. Those few companies that do not currently have a separate compensation committee should plan on establishing one as soon as practicable with a written charter that contains the specific responsibilities and authority required before the July 1, 2013 deadline under the new listing standards. All other Nasdaq listed companies should review their compensation committee charters to determine what amendments, if any, might be necessary to specifically address the matters, responsibilities and authority that the new listing standards require. Nasdaq companies should also assess whether any existing or expected future compensation committee member could be disqualified as a result of any direct or indirect compensation arrangements.

For more information about the amended Nasdaq proposed listing standards, please contact the author of this alert, Robert Murphy at 202-906-8721, D. Richard McDonald, who leads Dykema's Public Company practice, at 248-203-0859, or any of the listed attorneys.


1 The independence factors are: (i) the provision of other services to the issuer by the person that employs the adviser (the “Employer”); (ii) the amount of fees received from the issuer by the Employer, as a percentage of the total revenue of the Employer; (iii) the policies and procedures of the Employer that are designed to prevent conflicts of interest; (iv) any business or personal relationship of the adviser with a member of the compensation committee; (v) any stock of the issuer owned by the adviser; and (vi) any business or personal relationship of the adviser or the Employer with an executive officer of the issuer. The Nasdaq proposed listing standards would not require the compensation committee to consider any factors other than the six required by the SEC’s rules.

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2013 Dykema Gossett PLLC

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2018 Dykema Gossett PLLC.