NASDAQ Amends Proposed Listing Standards Regarding Compensation Committee and Consultant Independence | Practical Law

NASDAQ Amends Proposed Listing Standards Regarding Compensation Committee and Consultant Independence | Practical Law

NASDAQ filed an amendment to its proposed listing standards relating to the independence of compensation committees, compensation consultants and other compensation advisers.

NASDAQ Amends Proposed Listing Standards Regarding Compensation Committee and Consultant Independence

by PLC Corporate & Securities
Published on 18 Dec 2012 • USA (National/Federal)
NASDAQ filed an amendment to its proposed listing standards relating to the independence of compensation committees, compensation consultants and other compensation advisers.
On December 12, 2012, NASDAQ filed an amendment (Amendment No. 1) to its proposed listing standards relating to the independence of compensation committees, compensation consultants and other compensation advisers. Amendment No. 1 revises certain provisions in the rule changes first proposed by NASDAQ on September 25, 2012 (see Legal Update, NASDAQ Proposes New Listing Standards Relating to Independence of Compensation Committees).
Amendment No. 1:
  • Clarifies the required independence assessment for compensation advisers.
  • Changes the effective date and transition period for the new rules.
  • Changes the phase-in schedule for a company that ceases to be a smaller reporting company.
  • Provides a form of the compensation committee certification that must be submitted to NASDAQ under the new rules.
The SEC has designated January 13, 2013 as the date by which it will either approve or disapprove of the proposed rule changes.

Clarification of the Required Independence Assessment for Compensation Advisers

As amended by Amendment No. 1, proposed NASDAQ Listing Rule 5605(d)(3) requires a listed company's compensation committee to:

NASDAQ Listing Rule 5605(d)(3) Captures any Legal Counsel Other than In-house Legal Counsel

Amendment No. 1 emphasizes that the intent of Rule 10C-1(b)(4)(i)-(vi) is to require compensation committees to consider the independence factors when selecting any compensation consultant, legal counsel or other compensation adviser, other than in-house legal counsel.
For this reason, in Amendment No. 1 NASDAQ has intentionally deleted the word "independent" before "legal counsel" in proposed Rule 5605(d)(3) to avoid confusion and ensure that the new rules capture any legal counsel other than in-house counsel.

NASDAQ Listing Rule 5605(d)(3) Requires Only an Assessment of Independence

In Amendment No. 1, NASDAQ reiterates that a compensation committee is not required to retain an independent compensation adviser. Rather, a compensation committee is required only to consider the six independence factors enumerated in Rule 10C-1(b)(4) before it either:
  • Selects a compensation adviser.
  • Receives advice from a compensation adviser.

Changes to the Effective Date and Transition Period

In the original rule proposal, the requirements of Rule 5605(d)(3) regarding the responsibilities and authority of the compensation committee and its obligation to undertake independence assessments were to become immediately effective on the date that the SEC approves NASDAQ's proposed rule changes and the other requirements were to become effective by the earlier of:
  • The company's second annual meeting after SEC approval of the proposed rule changes.
  • December 31, 2014.
(See Legal Update, NASDAQ Proposes New Listing Standards Relating to Independence of Compensation Committees: Compliance Dates.)
Under Amendment No. 1, the requirements of Rule 5605(d)(3) would become effective on July 1, 2013. This implementation deadline does not apply to the requirement to have a written compensation committee charter that includes the responsibilities and authority referenced in Rule 5605(d)(3). Rather, NASDAQ proposes to require only that a compensation committee, or independent directors acting instead of a compensation committee, have those responsibilities and authority by July 1, 2013.
Amendment No. 1 would mandate that a listed company comply with all of the other requirements of NASDAQ Listing Rule 5605(d) and IM-5605-6 (including the requirement to have a written compensation committee charter satisfying Rule 5605(d)(3)) by the earlier of:
  • The company's first annual meeting after January 15, 2014.
  • October 31, 2014.
This transition period is identical to the transition period proposed by the New York Stock Exchange for its rules implementing Rule 10C-1 (see Legal Update, NYSE Proposes New Listing Standards Relating to Independence of Compensation Committees).

Phase-In Schedule for a Company that Ceases to be a Smaller Reporting Company

Amendment No. 1 extends the proposed phase-in schedule for a company that ceases to be a smaller reporting company. A company in this position must comply with the requirements of Rule 5605(d)(3) regarding compensation committee responsibilities and authority within six months after the first day (Start Date) of the first full fiscal year after the year in which it makes the determination that it lost smaller reporting company status. The company may phase in its compliance with the compensation committee composition requirements of Rule 5605(d)(2) relating to the receipt of compensatory fees and affiliation as follows:
  • One member must satisfy the requirements by six months from the Start Date.
  • A majority of members must satisfy the requirements by nine months from the Start Date.
  • All members must satisfy the requirements by one year from the Start Date.

Form of Compensation Committee Certification to be Submitted to NASDAQ

Under the proposed listing rules, an officer of a listed company must certify to NASDAQ, no later than 30 days after the final implementation deadline applicable to the company, that the company has complied with the new rules relating to compensation committees. Amendment No. 1 includes as an exhibit the form of compensation committee certification that NASDAQ intends to use. The actual form will be available through NASDAQ's Listing Center website prior to the effective date of the amended rules.