Dodd-Frank Q&A: Proposed New NYSE and NASDAQ Compensation Committee Rules

Financial reform is a hot issue in this year’s presidential race (no surprise, of course) – but while the candidates duke it out on the finer points of how they would handle matters, Dodd-Frank marches on.

The latest? Regulations on the independence of compensation committees at companies listed on the nation’s two largest stock exchanges. From Skadden Arps:

“… the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (Nasdaq) recently proposed amendments to their respective listing requirements relating to compensation committees of listed companies. Specifically, the proposed amendments:

  • enhance the independence requirements for compensation committee members;
  • specify compensation committee authority relating to compensation consultants, counsel and other advisers; and
  • specify compensation committee responsibility to consider potential conflicts of interests when selecting compensation consultants, counsel and other advisers.”

For your reference, a Q&A on the proposed Dodd-Frank rules:

1. Is there a standard definition of “independence”?

“The SEC Rules do not include a uniform definition of ‘independence.’ The SEC instructed the exchanges to establish their own independence criteria for members of compensation committees, as well as any other board committee which performs functions typically performed by a compensation committee, including oversight of executive compensation.” (Fenwick & West)

2. How do companies determine compliance?

“Both NYSE and NASDAQ provide for ‘bright line’ independence tests, including that a director who received more than $120,000 in fees not related to board service in any 12-month period within the previous three years may not be deemed independent. The proposed NYSE and NASDAQ rules would allow the board of directors to conclude that a director with a large equity ownership in the company is independent for these purposes.” (Katten Muchin Rosenman)

3. Who is exempt from the new rules?

“Under Rule 10C-1, controlled companies, limited partnerships, companies in bankruptcy proceedings, open-ended management investment companies registered under the Investment Company Act of 1940 and certain foreign private issuers that make certain disclosures are exempt from these compensation committee member independence requirements. In addition, both the NYSE and Nasdaq proposed that entities currently exempt from existing compensation-related listing rules continue to be exempt from the revised rules relating to compensation committees.” (Ropes & Gray)

4. Do the rules apply to companies listing for the first time?

Both the NYSE and Nasdaq proposals generally would provide a phased-in compliance period for newly listed companies. These issuers would be required to have one independent compensation committee member at the time of listing, a majority of independent compensation committee members within 90 days of listing, and all independent compensation committee members within one year of listing.” (Morrison & Foerster)

5. Do the same rules apply to advisers?

“Each of NYSE and Nasdaq’s proposals require compensation committees to have the right and responsibility to retain or obtain the advice of a compensation consultant, independent legal counsel and other adviser in its sole discretion only after considering six independence factors set forth in the Final Rules; neither Exchange elected to expand on those factors. Further, both Exchanges require the compensation committee charter to specify these rights and responsibilities as to compensation advisers.” (Proskauer Rose)

6. What happens if companies are found to be violating the rules?

“The rule requires exchanges to provide appropriate procedures for listed companies to have a reasonable opportunity to cure any noncompliance with the compensation committee standards that could result in the delisting of the company’s securities.” (Ballard Spahr)

7. When will the final changes take effect?

“The SEC will accept comments on the proposed listing standards for approximately three weeks and then will consider whether to approve them or require changes. Given that there are differences between the NYSE and Nasdaq approaches, it is unclear whether the SEC will attempt to have the exchanges harmonize the listing standards in any respect. Rule 10C-1 requires that the proposed listing standards be declared effective by the SEC prior to July 27, 2013.” (Wilson Sonsini)

The updates:


How the Presidential Election Impacts Dodd-Frank

John Savercool, senior lobbyist and managing director of UBS Americas, gives his perspective on how the presidential election could alter the continued implementation of the Dodd-Frank Act. (MarketsReformWiki)

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