NYSE, NYSE MKT And Nasdaq Propose Amendments To Compensation Committee Listing Standards - Listing Rules & Flotation

The New York Stock Exchange (NYSE),¹ the NYSE MKT,² and The NASDAQ Stock Market (Nasdaq)³ each recently proposed amendments to their respective compensation committee listing standards to comply with Rule 10C-1 of the Securities Exchange Act of 1934. Rule 10C-1 directs the national securities exchanges to develop listing standards:

requiring each member of a listed issuer's compensation committee to be independent;
establishing independence standards for compensation committee members;
requiring the compensation committee to have authority to retain compensation advisers and listed issuers to fund the engagement of those advisers; and
requiring the compensation committee to assess the independence of compensation advisers.⁴

While the proposals generally adhere to the requirements of Rule 10C-1, Nasdaq's proposal deviates from Rule 10C-1 in two significant ways:

for the first time, listed issuers, including smaller reporting companies, would be required to have a standing compensation committee comprised of at least two independent members; and
subject to limited exceptions, compensation committee members would be prohibited from receiving any consulting, advisory or other compensatory fees from the listed issuer or its subsidiaries.

Unfortunately, the proposals avoid answering some of the most vexing practical interpretative questions, including what it means to "provide advice to the compensation committee" or to be an adviser to the compensation committee for purposes of the proposed requirement to assess the independence of compensation advisers or how the proposed requirement applies to existing compensation advisers. Hopefully, these and other interpretive questions will be answered when the proposed rules are adopted or in future interpretations.

Click here to read a summary of the NYSE's proposed amendments and compliance dates.

Click here to read a summary of the NYSE MKT's proposed amendments and compliance dates.

Click here to read a summary of Nasdaq's proposed amendments and compliance dates.

Click here to read about practical considerations for NYSE-, NYSE MKT- and Nasdaq-listed issuers to consider.

NYSE Proposed Listing Standards

Compliance dates. Issuers would not have to comply with the proposed new compensation committee member independence listing standard discussed below until the earlier of (1) their first annual meeting after January 15, 2014 or (2) October 31, 2014. The other proposed listing standards discussed below would become effective on July 1, 2013. Current compensation committee listing standards would apply pending the transition to the amended listing standards.

The current transition periods available to newly-listed companies and other categories of issuers would apply to the proposed new compensation committee listing standards. Thus, an issuer listing in connection with its initial public offering (IPO) would be required to have one independent compensation committee member by the earlier of the IPO closing date or five business days from the listing date, a majority of independent members within 90 days of the listing date, and a fully independent compensation committee within one year of the listing date.

Compensation committee independence. Current listing standards require that a compensation committee be comprised solely of independent directors, and the board of directors is required to affirmatively determine that a compensation committee member is independent under the general board independence standards set forth in Section 303A.02 of the Manual.

Under the proposed listing standards, in making an affirmative independence determination regarding a compensation committee member, the board would also be required to consider all factors specifically relevant to determining whether a director has a relationship to the issuer that is material to that director's ability to be independent from management in connection with the duties of a compensation committee member, including:

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

The NYSE did not propose any specific numerical or materiality tests with respect to these factors or a requirement to consider any other specific factors. These factors would be considerations for the board rather than bright-line standards. For example, the NYSE does not intend to adopt an absolute prohibition on a board making an affirmative independence finding for a compensation committee member solely because the member or any of his or her affiliates are significant stockholders. The NYSE noted its belief that stock ownership in the issuer aligns the director's interests with those of unaffiliated stockholders, as their stock ownership gives them the same economic interest in ensuring executive compensation is not excessive. While the board would be required to consider the specified factors, it would also be responsible for identifying and considering all additional factors that would be relevant to a compensation committee member's independence from management.

When considering the source of a director's compensation, the board should consider whether the director receives compensation from any person or entity that would impair his or her ability to make independent judgments about the issuer's executive compensation. Likewise, when considering any affiliate relationship, the board should consider whether the relationship places the director under the direct or indirect control of the issuer or its senior management, or creates a direct relationship between the director and senior management, in each case of a nature that would impair the director's ability to make independent judgments about the issuer's executive compensation.

If a compensation committee member ceases to be independent for reasons outside that member's reasonable control, the member may, with prompt notice by the issuer to the NYSE, remain a compensation committee member until the earlier of (1) the next annual stockholders meeting or (2) one year from the occurrence of the event that caused the member to cease to be independent. This cure provision would be limited to situations where the compensation committee continues to have a majority of independent directors.

Compensation committee authority and responsibilities regarding its compensation advisers. The compensation committee would be:

granted the authority, in its sole discretion, to retain or obtain the advice of a compensation consultant, independent legal counsel⁵ or other adviser (collectively referred to throughout the discussion of the NYSE's proposed listing standards as compensation advisers); and
directly responsible for the appointment, compensation and oversight of any compensation adviser retained by the committee.

These new listing standards would likely not significantly change the authority or responsibilities of the compensation committees of most issuers as current NYSE listing standards provide that if a compensation consultant assists in the evaluation of director, chief executive officer (CEO) or other executive officer compensation, the compensation committee charter should give the committee sole authority to retain and terminate the consultant, including sole authority to approve the consultant's fees and other retention terms.

Before selecting a compensation adviser to the compensation committee other than in-house legal counsel, the compensation committee would be required to consider all factors relevant to that compensation adviser's independence from management, including:

the provision of other services to the issuer by the employer of the compensation adviser;
the amount of fees received from the issuer by the employer of the compensation adviser as a percentage of its total revenue;
the policies and procedures of the employer of the compensation adviser that are designed to prevent conflicts of interest;
any business or personal relationship between the compensation adviser and a compensation committee member;
any issuer stock owned by the compensation adviser; and
any business or personal relationship between either the compensation adviser or the employer of the compensation adviser and an issuer's executive officer.

The NYSE did not propose any specific additional factors or bright-line standards. While compensation committees would be required to consider the foregoing specified factors, they would also be responsible for identifying and considering all additional factors that would be relevant to a compensation adviser's independence from management. After conducting the independence assessment that would be required by the proposed listing standards, compensation committees would be entitled to select any compensation adviser they prefer, even those that are not independent.

The proposed listing standards would not:

require the compensation committee to implement or follow its compensation advisers' advice or recommendations; or
affect the ability or obligation of the compensation committee to exercise its own judgment in fulfilling its duties.

Issuer funding obligation. Issuers would be required to provide appropriate funding (as determined by the compensation committee) for the payment of reasonable compensation to any compensation adviser retained by the compensation committee.

Committee charter requirements. Compensation committee charters would be required to specify the committee's authority and responsibilities regarding its compensation advisers and the issuer's funding obligation.

Exemptions. The proposed compensation committee listing standards would not apply to the following categories of issuers that are exempt from the NYSE's current compensation committee listing standards:

controlled companies (i.e., issuers where more than 50% of the voting power for the election of directors is held by an individual, a group or another issuer);
limited partnerships (for example, master limited partnerships (MLPs));
companies in bankruptcy;
closed-end and open-end funds registered under the Investment Company Act of 1940 (1940 Act);
passive business organizations in the form of trusts (for example, royalty trusts);
derivatives and special purpose securities; and
issuers whose only listed equity security is preferred stock.

Smaller reporting companies (generally issuers with less than $75 million of public equity float) would be exempt from the proposed new compensation committee independence and consideration of compensation adviser independence listing standards. However, these issuers would be subject to the other proposed compensation committee listing standards. An issuer that ceases to qualify as a smaller reporting company would (1) be required to immediately comply with the proposed consideration of compensation adviser independence listing standard and (2) have six months to have a compensation committee consisting entirely of members that satisfy the proposed new compensation committee independence listing standard.

Foreign private issuers that elect to follow home country practice would be exempt from the proposed compensation committee listing standards provided that they comply with the disclosure requirements of current Section 303A.11 of the Manual.

NYSE MKT Proposed Listing Standards

The current transition periods available to newly-listed issuers would apply to the proposed new compensation committee listing standards. Thus, an issuer listing in connection with its IPO would be required to have one independent compensation committee member at the time of listing, a majority of independent members within 90 days of listing, and a fully independent compensation committee within one year of listing.

Compensation committee independence. Current listing standards require that CEO and other executive officer compensation be determined, or recommended to the board of directors for determination, either by a compensation committee comprised solely of independent directors or by a majority of the independent directors.⁶ Moreover, the board must affirmatively determine that each compensation committee member is independent under the general board independence standards set forth in Section 803(A)(2) of the Guide.

Under the proposed listing standards, the board would also be required to affirmatively determine that all of the compensation committee members (or all of the independent directors if an issuer does not have a compensation committee) are independent for compensation committee purposes. To make this determination, the board would be required to consider all factors specifically relevant to determining whether a director has a relationship to the issuer that is material to that director's ability to be independent from management in connection with the duties of a compensation committee member, including:

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

The NYSE MKT did not propose any specific numerical or materiality tests with respect to these factors or a requirement to consider any other specific factors. These factors would be considerations for the board rather than bright-line standards. For example, the NYSE MKT does not intend to adopt an absolute prohibition on a board making an affirmative independence finding for a compensation committee member solely because the member or any of his or her affiliates are significant stockholders. The NYSE MKT noted its belief that stock ownership in the issuer aligns the director's interests with those of unaffiliated stockholders, as their stock ownership gives them the same economic interest in ensuring executive compensation is not excessive. While the board would be required to consider the specified factors, it would also be responsible for identifying and considering all additional factors that would be relevant to a compensation committee member's independence from management.

The NYSE MKT proposed that going forward only smaller reporting companies would be permitted to rely on the current exception that allows one non-independent director to serve on the compensation committee under exceptional and limited circumstances, even for a director who fails the proposed new compensation committee independence rules. Under this exception, one non-independent director may be appointed to the compensation committee if:

the committee consists of at least three members;
the non-independent director is not currently an executive officer, employee, or an immediate family member of an executive officer or employee;
the board, under exceptional and limited circumstances, determines that the individual's membership is required by the best interests of the issuer and its stockholders; and
the non-independent director serves for no longer than two years.

An issuer relying on this exception would be required to provide certain disclosures required by NYSE MKT listing standards in the proxy statement for the next annual meeting following the determination (or annual report on Form 10-K if a proxy statement is not required), and the disclosures required by Instruction 1 to Item 407(a) of Regulation S-K regarding reliance on the exception.

If a compensation committee member ceases to be independent for reasons outside that member's reasonable control, the member may, with prompt notice by the issuer to the NYSE MKT, remain a compensation committee member until the earlier of (1) the next annual stockholders meeting or (2) one year from the occurrence of the event that caused the member to cease to be independent. This cure provision would be limited to situations where the compensation committee continues to have a majority of independent directors.

Compensation committee authority and responsibilities regarding its compensation advisers. The compensation committee would be:

granted the authority, in its sole discretion, to retain or obtain the advice of a compensation consultant, independent legal counsel⁷or other adviser (collectively referred to throughout the discussion of the NYSE MKT's proposed listing standards as compensation advisers); and
directly responsible for the appointment, compensation and oversight of any compensation adviser retained by the committee.

the provision of other services to the issuer by the employer of the compensation adviser;
the amount of fees received from the issuer by the employer of the compensation adviser as a percentage of its total revenue;
the policies and procedures of the employer of the compensation adviser that are designed to prevent conflicts of interest;
any business or personal relationship between the compensation adviser and a compensation committee member;
any issuer stock owned by the compensation adviser; and
any business or personal relationship between either the compensation adviser or the employer of the compensation adviser and an issuer's executive officer.

The NYSE MKT did not propose any specific additional factors or bright-line standards. While compensation committees would be required to consider the foregoing specified factors, they would also be responsible for identifying and considering all additional factors that would be relevant to a compensation adviser's independence from management. After conducting the independence assessment that would be required by the proposed listing standards, compensation committees would be entitled to select any compensation adviser they prefer, even those that are not independent.

The proposed listing standards would not:

require the compensation committee to implement or follow its compensation advisers' advice or recommendations; or
affect the ability or obligation of the compensation committee to exercise its own judgment in fulfilling its duties.

Exemptions. The proposed compensation committee listing standards would not apply to the following categories of issuers that are exempt from the NYSE MKT's current compensation committee listing standards:

controlled companies (i.e., issuers where more than 50% of the voting power is held by an individual, a group or another issuer);
limited partnerships (for example, MLPs);
companies in bankruptcy;
closed-end and open-end funds registered under the 1940 Act;
asset-backed issuers and other passive business organizations (for example, royalty trusts);
derivatives and special purpose securities; and
issuers whose only listed equity security is preferred stock.

Foreign private issuers that seek an exemption from the NYSE MKT's compensation committee requirements on the basis that they follow home country practice would be exempt from the proposed compensation committee listing standards as long as they comply with the requirements of current Section 110 of the Guide.

Nasdaq Proposed Listing Rules

Compliance dates. Issuers would be required to comply with the proposed compensation committee listing rule discussed below that would require compensation committees to have the authority to retain and fund compensation advisers and the responsibility to consider independence factors before selecting compensation advisers on the date that the SEC approves the proposed listing rules. For those issuers without a standing compensation committee, this rule would apply to the independent directors who determine, or recommend to the board of directors to determine, the compensation of the executive officers. While the SEC must approve the proposed listing rules by June 27, 2013, the SEC generally must approve or disapprove of the proposed listing rules within 45 days of the publication of the Nasdaq Proposal in the Federal Register (i.e., by November 29, 2012). While the SEC may extend this deadline under certain circumstances, Nasdaq-listed issuers should be prepared to comply with these proposed listing rules as soon as possible. Issuers would not have to comply with the remaining proposed compensation committee listing rules discussed below, including the compensation committee composition, member independence and charter requirements, until the earlier of (1) their second annual meeting held after the date of approval of the proposal (likely to be the 2014 annual meeting) or (2) December 31, 2014. Current listing rules would apply until an issuer is required to comply with the amended compensation committee listing rules.

Issuers would be required to certify within 30 days after the relevant implementation deadline, on a form to be provided by Nasdaq, that they have complied with the amended compensation committee listing rules.

While issuers listing in connection with their IPO would be subject to the proposed listing rules, they would be allowed to phase-in compliance with the compensation committee composition requirements in accordance with current phase-in schedules. Thus, these issuers would be required to have one independent compensation committee member at listing, a majority of independent members within 90 days of listing and a fully independent compensation committee within one year of listing.

Compensation committee composition. Nasdaq's current listing rules require that an issuer's executive officer compensation must be determined, or recommended to the board for determination, either by:

a compensation committee comprised solely of independent directors; or
independent directors constituting a majority of the board's independent directors in a vote in which only independent directors participate.⁸

Nasdaq proposed to eliminate the second alternative and require issuers, including smaller reporting companies, to have a standing compensation committee comprised of at least two members.

Compensation committee independence. Consistent with current listing rules, the compensation committee would be required to be comprised solely of "independent directors" (as defined in current Listing Rule 5605(a)(2)), and boards would be required to make an affirmative determination that no independent director has a relationship that, in the board's opinion, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

In addition to satisfying the requirement that each compensation committee member be an independent director, each member would be prohibited from accepting directly or indirectly any consulting, advisory or other compensatory fee from the issuer or any of its subsidiaries. Thus, Nasdaq's proposal would adopt the same bright-line prohibition against compensatory fees applicable to audit committees. The proposed listing rule would not include a "look-back" period. "Compensatory fees" would not include:

fees received for board or board committee service; or
the receipt of fixed amounts of compensation under a retirement plan, including deferred compensation, for prior service with the issuer (provided that the compensation is not contingent in any way on continued service).

In addition, the board would be required to consider whether a compensation committee member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer to determine whether any affiliation would impair the member's judgment. Unlike the proposed prohibition regarding compensatory fees, this requirement would not impose a bright-line prohibition on affiliation, but rather would impose a requirement to consider such affiliations when making an independence determination. Thus, ownership of issuer stock by itself, or possession of a controlling interest through ownership of issuer stock by itself, would not preclude a board from finding that it is appropriate for a director to serve on the compensation committee. In fact, a board would be permitted to conclude that it is appropriate for a director who is an affiliate (for example, representatives of significant stockholders) to serve on the compensation committee when the director's interests are likely aligned with those of other stockholders in seeking an appropriate executive compensation program. When considering any affiliate relationship, the board would not be required to apply a "look-back" period.

Nasdaq did not propose any specific numerical or materiality tests with respect to these new independence factors or a requirement to consider any other specific factors.

Issuers, including smaller reporting companies, would be permitted to rely on the current exception that allows one non-independent director to serve on the compensation committee under exceptional and limited circumstances, even for a director who fails the proposed new compensation committee independence rules. Under this exception, one non-independent director may be appointed to the compensation committee if:

the committee consists of at least three members;
the non-independent director is not currently an executive officer, employee, or a family member of an executive officer;
the board, under exceptional and limited circumstances, determines that the individual's membership is required by the best interests of the issuer and its stockholders; and
the non-independent director serves for no longer than two years.

An issuer relying on this exception would be required to provide certain disclosures required by Nasdaq listing rules either on its website or in the proxy statement for the next annual meeting following the determination (or annual report if a proxy statement is not required), and the disclosures required by Instruction 1 to Item 407(a) of Regulation S-K regarding reliance on the exception.

If an issuer, including a smaller reporting company, fails to comply with the compensation committee composition requirements due to one vacancy, or one compensation committee member ceases to be independent for reasons beyond that member's reasonable control, the issuer would be permitted to regain compliance by the earlier of (1) its next annual stockholders meeting or (2) one year from the occurrence of the event that caused the non-compliance. If the stockholders meeting occurs within 180 days following the event causing the non-compliance, the issuer would instead have 180 days from the event to regain compliance. An issuer relying on the cure period would be required to provide notice to Nasdaq immediately upon learning of the event or circumstances that caused the non-compliance.

Committee charter requirements. Issuers would be required to certify that they have adopted a formal written compensation committee charter and that the compensation committee will review and reassess the adequacy of the formal written charter on an annual basis.⁹

The compensation committee charter would be required to specify:

the scope of the committee's responsibilities and how it carries out those responsibilities, including structure, processes and membership requirements;
the committee's responsibility for determining, or recommending to the board for determination, the compensation of the issuer's CEO and all other executive officers;
that the CEO may not be present during voting or deliberations by the committee on his or her compensation; and
the specific committee responsibilities and authority set forth in Rule 10C- 1(b)(2), (3) and (4)(i)-(vi) relating to:
- the compensation committee's authority to retain compensation advisers;¹⁰
- the issuer's obligation to fund such compensation advisers; and
- the compensation committee's responsibility to consider specific independence factors before selecting such compensation advisers, other than in-house legal counsel.

Smaller reporting companies would be permitted to adopt either a formal written compensation committee charter or a board resolution that specifies only the matters in the first three bullets above. These issuers would not be required to specify the compensation committee responsibilities and authority set forth in the fourth bullet above or to certify that it will review and reassess the adequacy of the charter or board resolution on an annual basis.

Compensation adviser independence factors. Before selecting a compensation adviser other than in-house legal counsel, the compensation committee would be required to consider the following independence factors:

the provision of other services to the issuer by the employer of the compensation adviser;
the amount of fees received from the issuer by the employer of the compensation adviser as a percentage of its total revenue;
the policies and procedures of the employer of the compensation adviser that are designed to prevent conflicts of interest;
any business or personal relationship between the compensation adviser and a compensation committee member;
any issuer stock owned by the compensation adviser; and
any business or personal relationship between either the compensation adviser or the employer of the compensation adviser and an issuer's executive officer.

Nasdaq did not propose any specific additional factors or bright-line standards. After considering these independence factors, compensation committees would be entitled to select any compensation adviser they prefer, even those that are not independent.

Exemptions. The proposed listing rules would not apply to the following categories of issuers that are exempt from Nasdaq's current compensation-related listing rules:

asset-backed issuers and other passive issuers;
cooperatives;
limited partnerships (for example, MLPs);
management investment companies registered under the 1940 Act; and
controlled companies (i.e., issuers where more than 50% of the voting power for the election of directors is held by an individual, a group or another company).

Smaller reporting companies (generally issuers with less than $75 million of public equity float) would be exempt from the proposed compensation committee listing rules, except as follows:

they would be required to have (and certify that they will continue to have) a formal compensation committee comprised of at least two independent members based on the current independent director definition in Listing Rule 5605(a)(2), but not the proposed new compensation committee independence requirements; and
they would be required to adopt a formal written compensation committee charter or board resolution as discussed above.

An issuer that ceases to qualify as a smaller reporting company would have 30 days after the due date of the SEC filing in which it is required to report that it is no longer a smaller reporting company to certify that it (1) has adopted a formal written compensation committee charter, including all of the matters specified in proposed Listing Rule 5605(d)(1), and (2) has, or will within the phase-in schedule afforded to issuers listing in connection with their IPO, comply with the additional compensation committee independence requirements.

Foreign private issuers that follow their home country practice would be exempt from the proposed listing rules provided that they comply with the disclosure requirements in current Listing Rule 5615(a)(3). Nasdaq also proposed to require foreign private issuers that follow their home country practice in lieu of having an independent compensation committee as required by Nasdaq listing rules to disclose in their annual reports filed with the SEC the reasons why they do not have an independent compensation committee.

Practical Considerations

Although the final listing standards may differ from the proposed listing standards, NYSE-, NYSE MKT- and Nasdaq-listed issuers and their boards and compensation committees that would be subject to the proposed listing standards should consider the following matters.

Follow any developments regarding the proposed listing standards until approved by the SEC, including any amendments in response to SEC or public comment.
Nasdaq-listed issuers and their boards should consider whether to grant the specific compensation committee responsibilities and authority that would be effective on the date the SEC approves the proposed listing rules, which could occur at any time by November 29, 2012 unless the SEC extends the approval deadline, through a committee charter, resolution or other board action.
As Rule 10C-1 and the proposed listing standards are not clear on what it means to "provide advice to the compensation committee" or to be an adviser to the compensation committee or how the independence assessment requirement applies to existing compensation advisers, issuers and their compensation committees should discuss with each of their existing and potential compensation advisers to determine whether the rules would apply to that engagement. Nasdaq-listed issuers and their compensation committees should have these conversations as soon as possible due to the possibility that the responsibility to conduct such compensation adviser independence assessments could be in effect in the next few weeks.
As specifically noted by the SEC in its adopting release for Rule 10C-1, create policies and procedures for collecting and analyzing information about compensation advisers before the compensation committee can select or receive advice from those advisers. Steps issuers could take include (1) collecting information internally on the services provided by compensation advisers, including identifying the individual compensation advisers that perform services for the issuer, and the fees paid for such services, (2) having the compensation advisers complete a questionnaire to solicit the information necessary for the compensation committee to consider the specified factors set forth in the proposed listing standards and Rule 10C-1 along with any other information deemed important to the compensation committee, and (3) updating their director and officer questionnaires to determine the existence of any business or personal relationship with any compensation adviser and employer of a compensation adviser. Ensure that any policies and procedures developed are consistent with the compensation committee charter and other issuer procedures. Nasdaq-listed issuers and their compensation committees should begin to develop these policies and procedures due to the possibility that the responsibility to conduct such compensation adviser independence assessments could be in effect in the next few weeks.
Assess the independence of existing compensation advisers, other than the issuer's in-house legal counsel, that provide advice to the compensation committee where it is determined that the rules would apply to the engagement, even those advisers retained by management or the issuer. As the proposed Nasdaq listing rule imposing the independence assessment responsibility could be effective in the next few weeks, Nasdaq-listed issuers should be prepared to conduct the assessments as soon as possible. As part of this exercise, boards of NYSE- and NYSE MKT-listed issuers should identify and consider any factors in addition to the six specified factors that would be relevant to a compensation adviser's independence from management. While the NYSE and NYSE MKT requirement would not be effective until July 1, 2013, such listed issuers should consider conducting the assessment in 2012. Conducting the assessment in 2012 would not only help uncover any possible independence concerns, but all issuers subject to the SEC's proxy rules, including smaller reporting companies, must conduct a similar assessment for compensation consultants, but not other compensation advisers, to determine whether there are any "conflicts of interest" to disclose pursuant to Item 407(e)(3) of Regulation S-K in the proxy statements for their annual meetings held in 2013.¹¹
Consider assessing the independence of compensation committee members in light of the proposed listing standards, and developing contingency plans in the event one or more of the members is no longer deemed independent (for example, in the case of a Nasdaq-listed issuer if a member receives any compensatory fees from the issuer or its subsidiaries that are not excepted from the prohibition). As part of this exercise, boards of NYSE- and NYSE MKT-listed issuers should identify and consider any factors in addition to the two specified factors that would be relevant to a compensation committee member's independence from management.
Consider what changes to director and officer questionnaires will be necessary to address the proposed new compensation committee independence listing standards and proposed requirement to consider compensation adviser independence.
For Nasdaq-listed issuers without a formal compensation committee or compensation committee charter, consider how to put these items in place.
Consider what changes to the compensation committee independence policies included in compensation committee charters or other issuer policies will be necessary to address the proposed new compensation committee independence listing standards.
Consider what changes to the compensation committee charter will be necessary to address the proposed listing standards' retention authority, compensation adviser independence assessment, compensation adviser appointment, compensation and oversight responsibility, and funding requirements.

Footnotes

1. New York Stock Exchange LLC, Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Amending Sections 303A.00, 303A.02(a) and 303A.05 of the Exchange's Listed Company Manual to Comply with the Requirements of Securities and Exchange Commission Rule 10C-1, Release No. 34-68011 (Oct. 9, 2012), 77 Fed. Reg. 62541 (Oct. 15, 2012), available at https://federalregister.gov/a/2012-25278 . Specifically, the NYSE proposed amendments to Sections 303A.00, 303A.02(a) and 303A.05 of its Listed Company Manual (Manual).

2.NYSE MKT LLC, Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Amending Sections 110, 801, 803 and 805 of the Exchange's Company Guide To Comply With the Requirements of Securities and Exchange Commission Rule 10C-1, Release No. 34-68007 (Oct. 9, 2012), 77 Fed. Reg. 62576 (Oct. 15, 2012), available at https://federalregister.gov/a/2012-25222. Specifically, the NYSE MKT proposed amendments to Sections 110, 801, 803 and 805 of its Company Guide (Guide).

3.The NASDAQ Stock Market LLC, Notice of Filing of Proposed Rule Change to Modify the Listing Rules for Compensation Committees to Comply with Rule 10C-1 under the Exchange Act and Make Other Related Changes, Release No. 34-68013 (Oct. 9, 2012), 77 Fed. Reg. 62563 (Oct. 15, 2012), available at https://federalregister.gov/a/2012-25281 (Nasdaq Proposal). Specifically, Nasdaq proposed amendments to compensation committee-related Listing Rules 5605(d) and 5615 and added new Listing Rule 5605A. Nasdaq also proposed conforming amendments to its listing rules relating to audit and nominations committees in Listing Rules 5605(c)(1) - (3) and 5605(e)(3) and corrections of typographical errors in other listing rules.

4. Please see our client alert dated July 9, 2012, SEC Adopts Rules Implementing Dodd-Frank Requirements for Compensation Committees and Compensation Advisers.

5.While not clarified in the NYSE's proposal, in its adopting release for Rule 10C-1 the Securities and Exchange Commission (SEC) noted that the rule does not require compensation committees to retain or obtain advice only from independent advisers.

6.For the remainder of the discussion of the NYSE MKT's proposed listing standards, references to compensation committee are meant to refer to an issuer's independent directors as a group where the issuer does not have a compensation committee.

7.While not clarified in the NYSE MKT's proposal, in its adopting release for Rule 10C-1 the SEC noted that the rule does not require compensation committees to retain or obtain advice only from independent advisers.

8.In practice, the vast majority of Nasdaq-listed issuers have standing compensation committees. As of June 30, 2012, only 25 of the 2,636 Nasdaq-listed issuers relied on the alternative in lieu of having a standing compensation committee. See Nasdaq Proposal n.14 at 62565.

9.Nasdaq also proposed amendments to its audit committee listing rules, which would require listed issuers to proactively certify that the audit committee "will review and reassess" the adequacy of the audit committee charter on an annual basis. Current listing rules require the certification to provide that the audit committee "has reviewed and reassessed" the adequacy of the audit committee's charter on an annual basis. Nasdaq noted that this proposed change is consistent with its current interpretation of the audit committee charter requirements and would harmonize the audit committee charter requirements with the proposed compensation committee charter requirements.

10.While not clarified in Nasdaq's proposal, in its adopting release for Rule 10C-1 the SEC noted that the rule does not require compensation committees to retain or obtain advice only from independent advisers.

11.For more information on this SEC disclosure requirement, please see our client alert dated July 9, 2012, SEC Adopts Rules Implementing Dodd-Frank Requirements for Compensation Committees and Compensation Advisers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

United States: NYSE, NYSE MKT And Nasdaq Propose Amendments To Compensation Committee Listing Standards

NYSE Proposed Listing Standards

NYSE MKT Proposed Listing Standards

Nasdaq Proposed Listing Rules

Practical Considerations

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