The New York Stock Exchange (NYSE) and Nasdaq recently filed proposals with the SEC setting forth standards to determine the independence of (a) a member of a compensation committee, and (b) a compensation consultant, legal counsel, or other advisor to a compensation committee.  The exchanges’ proposals generally follow Rule 10C-1, which the SEC adopted in June 2012.  However, the Nasdaq proposal would impose a stricter standard in one significant respect: a director would not be considered independent under any circumstances if the director accepts any compensatory fee from the company, other than board and committee fees and fixed amounts under a retirement plan for prior service.  In addition, Nasdaq would, for the first time, require listed companies to have a separate compensation committee which must consist of at least two directors and which must have a charter. 

The SEC’s Rule 10C-1 was adopted pursuant to Section 952 of the Dodd-Frank Act.  That rule requires exchanges to adopt or modify their listing standards to require fully-independent compensation committees, and to require compensation committees to consider specified “independence” factors when engaging compensation consultants, legal counsel and other advisers.  Neither Rule 10C-1 nor the exchanges’ proposed listing standards, however, would preclude compensation committees from engaging, or receiving advice from, non-independent consultants or advisers.

The proposed changes to the NYSE and Nasdaq listing standards to implement Rule 10C-1 are generally similar, and generally are consistent with the standards articulated in Rule 10C-1 itself.  For example, neither the NYSE nor Nasdaq materially changed or added to the six independence factors to be considered by compensation committees when engaging compensation consultants, legal counsel or other advisers.  Further, both exchange’s proposals confirm that a director who owns a significant amount of the company’s stock (or is a representative of a significant stockholder) is not, per se, precluded from being deemed independent for purposes of serving on the compensation committee.

Nasdaq’s proposal departed in one significant way from Rule 10C-1.  Whereas Rule 10C-1 provides that a director’s source of compensation is merely a factor to be considered by the Board in determining whether a director may be deemed independent for purposes of serving on the compensation committee, Nasdaq’s proposal would preclude a finding of independence if the director accepts, directly or indirectly, any consulting, advisory or other compensatory fee from the company (other than Board and committee fees and fixed amounts under a retirement plan for prior service).  This approach parallels Rule 10A-3 for members of the audit committee.

In addition to implementing the requirements of Rule 10C-1, Nasdaq’s proposal would also require, for the first time, all Nasdaq-listed companies to have a separate compensation committee of at least two members, and would require the compensation committee to have a charter addressing specified topics.  

The NYSE’s proposed changes regarding the independence of compensation committee members would not require compliance until the earlier of (i) the first annual meeting after January 15, 2014 or (ii) October 31, 2014.  However, the proposed changes requiring the compensation committee to consider specified independence factors before engaging consultants, legal counsel and other advisers would become effective on July 1, 2013.

Nasdaq’s proposed changes requiring a separate compensation committee and regarding the independence of compensation committee members would not require compliance until the earlier of (i) the second annual meeting after the adoption of the new standards or (ii) December 31, 2014.  The proposed changes requiring the compensation committee to consider specified independence factors before engaging consultants, legal counsel and other advisers would become effective upon adoption.

Public companies are reminded that the amendments to Item 407(e)(3)(iv) of Regulation S-K adopted by the SEC this past June will be in place for the 2013 proxy season.  This will require disclosure of any conflicts of interest raised by the work of any compensation consultant and how any such conflicts were addressed.  Companies will need to assess whether any such conflicts exist by using the same six “independence” factors laid out in Rule 10C-1.