Meridian Client Update

Transcription

1 VOLUME 3, ISSUE 13R OCTOBER 10, 2012 Meridian Client Update NYSE and NASDAQ Issue Proposed Listing Rules on Compensation Committee Independence Standards Over two years after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ( Dodd-Frank ), the compensation committee independence standards will soon be part of the listing standards of the New York Stock Exchange LLC (NYSE) and The NASDAQ Stock Market LLC (Nasdaq). On September 25, 2012, both the NYSE and Nasdaq submitted proposed revisions to their respective listing standards for approval by the Securities and Exchange Commission (SEC) to implement the compensation committee independence standards. We anticipate the SEC will approve the revisions, as proposed, prior to the end of this year. Background on Compensation Committee Independence Standards The compensation committee independence standards are set forth in Section 10C of the Securities Exchange Act of 1934 ( Exchange Act ), which was added to the Exchange Act under Dodd-Frank. Section 10C of the Exchange Act requires the SEC to adopt rules directing the national securities exchanges and national securities associations (both referred to as national exchanges ) to prohibit the listing of any equity security of an issuer that is not in compliance with compensation committee independence standards set forth in Section 10C of the Exchange Act. In accordance with Section 10C, on June 20, 2012, the SEC adopted Rule 10C-1 that directs the exchanges to implement the compensation committee independence standards through modification of their respective listing standards and to submit by September 25, 2012 the proposed modifications to the SEC for review and approval. Both the NYSE and Nasdaq submitted proposed revisions to their respective listing standards to the SEC on the deadline. Within 45 days of the date the proposed rule change to the NYSE and Nasdaq listing standards are published in the Federal Register, the SEC will either approve the proposed rule change or institute proceedings to determine whether the proposed rule change should be disapproved. The SEC may seek a longer review period of up to 90 days if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the applicable national exchange consents. Highlights and details of the NYSE and Nasdaq proposed rule changes in their listing standards to comply with Rule 10C-1 follow. Highlights of Proposed Rule Changes to NYSE Listing Standards The proposed changes to the NYSE listing standards largely reflect the rules relating to compensation committee independence standards and compensation committee advisers under Rule 10C-1. Highlights of these proposed changes are listed below. Meridian Compensation Partners, LLC PAGE 1 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

2 Members of a listed company s compensation committee would need to satisfy two independence tests: (i) the NYSE s existing independence requirements and (ii) a listed company s board of director affirmative determination that the member s independence is not impaired due to receipt of compensatory fees (other than board fees) paid by the company and the member s affiliation with the company. A listed company would have the opportunity to cure non-compliance with the independence standards applicable to compensation committee members. A listed company s compensation committee would have the right to retain, oversee and fund compensation consultants, independent legal counsel and other advisers A listed company s compensation committee would have the obligation to take into account six independence factors (and any other relevant factors) prior to the selection of an adviser. The six independence factors are identical to those adopted by the SEC in Rule 10C-1. The NYSE did not provide any additional guidance with regard to the meaning or application of any of the six independence factors. A listed company would be required to modify the compensation committee charter to reflect the committee s new responsibilities and obligations under the proposed rules. Newly listed companies (and certain other categories of issuers) would have a phase-in period during which to comply with the new listing rules. If approved by the SEC, the proposed changes to the NYSE listing rules will take effect in accordance with the following schedule: Proposed rule changes relating to independence standards applicable to compensation committee members would become effective the earlier of: The listed company s first annual meeting after January 15, 2014, or October 31, All other proposed rule changes (including those relating to the selection of compensation committee advisers) would become effective on July 1, Meridian Compensation Partners, LLC PAGE 2 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

3 Highlights of Proposed Rule Changes to Nasdaq Listing Standards The proposed changes to the Nasdaq listing standards are more extensive than the proposed changes to the NYSE listing standards and differ in certain material respects regarding the independence requirements. Highlights of these proposed changes are listed below. A listed company would be required to maintain a standing compensation committee composed of at least two independent directors. Members of a listed company s compensation committee would need to satisfy three independence tests: (i) Nasdaq s existing independence requirements, (ii) a prohibition on the acceptance of any compensatory fees paid by the listed company (other than fees paid for board service), and (iii) a listed company s board of director affirmative determination that the member s independence is not impaired due to the member s affiliation with the company. A listed company would have the opportunity to cure non-compliance with the independence standards applicable to compensation committee members. A listed company s compensation committee would have the right to retain, oversee and fund compensation consultants, independent legal counsel and other advisers A listed company s compensation committee would have the obligation to take into account six independence factors (and any other relevant factors) prior to the selection of an adviser. The six independence factors are identical to those adopted by the SEC in Rule 10C-1. Nasdaq did not provide any additional guidance with regard to the meaning or application of any of the six independence factors. A listed company s compensation committee would be required to adopt a charter that reflects the committee s responsibilities and obligations under the proposed rules. Newly listed companies (and certain other categories of issuers) would have a phase-in period during which to comply with the new listing rules. If the SEC approves the proposed rule changes to the Nasdaq listing standards, Nasdaq-listed companies would be required to comply with the changes in accordance with the following schedule: Immediately upon SEC approval, listed companies must comply with the requirements of Rule 5605(d)(3) relating to compensation committee responsibilities and authorities (including responsibility to consider certain independence factors before selecting a compensation adviser), The remaining rule changes must be implemented by: The second annual meeting held after the date of approval of Nasdaq s proposed rule change, but No later than December 31, Meridian comment. We anticipate that the SEC will approve the rule changes to the NYSE and Nasdaq listing standards, as proposed, prior to year end. The NYSE proposed changes contain no surprises as the changes essentially replicate the requirements of Rule 10C-1. However, Nasdaq proposed changes contain a number of additional provisions, including the requirement that a listed company establish a standing compensation committee and the independence requirement prohibiting members of a compensation committee from receiving compensatory fees paid by a listed company. This latter Meridian Compensation Partners, LLC PAGE 3 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

4 requirement is the same independence requirement currently applicable to audit committee members of Nasdaq-listed companies. The NYSE proposed rule changes do not include such a requirement. Both exchanges proposed rules adopt, without modification, the requirement that compensation committees must consider six independence factors prior to the retention of an adviser. In anticipation of the eventual implementation of compensation committee standards, we have seen many public companies begin to assess the independence of their advisers against the six factors. This assessment will be required prior to the retention of an adviser and, at least annually, to determine whether a conflict has arisen due to the work of the consultant that is subject to disclosure. The SEC adopted final rules on the disclosure of consultant conflicts on June 20, Issuers must comply with the new disclosure rule on consultant conflicts in any proxy or information statement for an annual meeting of shareholders (or a special meeting in lieu of the annual meeting) at which directors will be elected occurring on or after January 1, We recommend that NYSE-listed companies begin to review and revise their compensation committee charters in light of the NYSE proposed rule changes. Additionally, Nasdaq-listed companies should prepare compensation committee charters (or revise existing compensation committee charters) to reflect the Nasdaq proposed rule changes. Proposed Rule Changes to the NYSE Listing Standards NYSE proposes to modify the Exchange Listed Company Manual to comply with the requirements of SEC Rule 10C-1. The proposed modifications primarily address the following subjects: (1) compensation committee independence requirement; (2) compensation committee authority to retain advisers; and (3) compensation committee s obligation to consider independence factors prior to the retention of an adviser. In addition, the proposed revisions to the listing standards provide a cure period for noncompliance with the independence requirement, the effective date for the proposed changes, exemptions from compliance and phase-in periods. On September 25, 2012, NYSE submitted the proposed rule change to its listing standards to the SEC for approval. Independence Requirements for Members of a Listed Company s Compensation Committee Currently, the NYSE requires each listed company to maintain a compensation committee composed entirely of independent directors (Section 303A.05). The NYSE does not subject members of a listed company s compensation committee to a unique set of independence standards. Rather, members of a compensation committee are subject to the same general independence standards applicable to each member of a listed company s board of directors under Section 303A.02. Under current rules, a director qualifies as independent under Section 303A.02 if the following two-part test is met: The board of directors affirmatively determines that the director has no material relationship with the listed company (directly as a partner, shareholder or officer of an organization that has a relationship with the company); and The director has a relationship with the listed company which does not violate any one of the five bright line tests set forth in Section 303A.02(b). Meridian Compensation Partners, LLC PAGE 4 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

5 The NYSE proposes to amend Section 303A.02 to require that members of a listed company s compensation committee satisfy the foregoing general independence requirements and the additional independence standards set forth in proposed Section 303A.02(a)(ii). This proposed section would require that when a listed company s board of directors affirmatively determines the independence of any director who will serve on the compensation committee it considers all factors specifically relevant to determining whether a director has a relationship to the listed company which is material to that director s ability to be independent from management in connection with the duties of the compensation committee. In making this determination, boards would be required to consider, at a minimum, the following two factors (which mirror the factors explicitly enumerated in Rule 10C-1(b)(ii)): The source of the director s compensation, including any consulting, advisory or other compensatory fee paid by the listed company; and Whether the director has an affiliate relationship with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company. In considering the first factor, NYSE commentary to the proposed rule change provides that boards 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 listed company s executive compensation. With regard to the second factor, NYSE commentary to the proposed rule change provides that boards should consider whether the affiliate relationship places the director under the direct or indirect control of the listed company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair his or her ability to make independent judgments about the listed company s executive compensation. The NYSE did not propose any specific numerical test with respect to the factors specified in the proposed independence standard or adopt a requirement that a listed company s board of directors consider any other specific factor. Additionally, NYSE commentary to the proposed rule change expressly states that the NYSE does not intend to adopt an absolute rule that share ownership of a director or any of the director s affiliates, standing alone, is sufficient to preclude a finding of independence by a listed company s full board. In affirming the views of commenters on the SEC s Rule 10C-1 as originally proposed, the NYSE notes that rather than adversely affecting a director s ability to be independent from management as a compensation committee member share ownership in the listed company aligns the director s interests with those of unaffiliated shareholders, as their stock ownership gives them the same economic interest in ensuring that the listed company s executive compensation is not excessive. Compensation Committee s Right to Retain, Oversee and Fund Compensation Consultants, Independent Legal Counsel and Other Compensation Advisers Current NYSE rules set forth the authority and responsibilities of a compensation committee (Section 303A.05(b)(i)). These rules do not require that a listed company s compensation committee have the express authority to retain compensation consultants, independent legal counsel or other compensation advisers. However, commentary to existing Section 303A.05 does provide that if a compensation consultant is to assist in the evaluation of director, CEO or executive officer compensation, the compensation committee charter should give the committee sole authority to retain and terminate the consulting firm, including sole authority to approve the firm s fees and other retention terms. The foregoing commentary largely reflects the requirements of SEC Rule 10C-1(b)(2) and (3). In the interests of clarity, the NYSE proposes to replace the foregoing commentary by adopting verbatim the Meridian Compensation Partners, LLC PAGE 5 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

6 requirements of Rule 10C-1(b)(2) and (3) as part of a new susbsection (c) to Section 303A.05 which would provide that a listed company s compensation committee must have the following authority: Right to retain. The compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser. (Proposed Section 303A.05(c)(i)). Obligation to Oversee. The compensation committee shall be directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, independent legal counsel or other adviser retained by the compensation committee. (Proposed Section 303A.05(c)(ii)). Obligation to Fund. A listed company must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to an adviser retained by the compensation committee. (Proposed Section 303A.05(c)(iii)). A compensation committee charter must include these new rights and responsibilities of the compensation committee. Independence of Compensation Advisers to the Compensation Committee NYSE proposes that a listed company s compensation committee may select a compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person s independence from management, including the following: Provision of other services. The provision of other services (i.e., non-executive compensation advisory services) to the issuer by the firm that employs the compensation consultant, legal counsel or other adviser. Fees as a percentage of total revenues. The amount of fees received from the issuer by the firm that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of that firm. Anti-conflict policies and procedures. The policies and procedures of the firm that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest. Business and personal relationships with committee members. Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee. Stock owned of issuer. Any stock of the issuer owned by the compensation consultant, legal counsel or other adviser. Business or personal relationship with executive officers. Any business or personal relationship of the compensation consultant, legal counsel, other adviser or the firm employing the adviser with an executive officer of the issuer. Each of the proposed independence factors exactly reflects the independence factors set forth in SEC Rule 10C-1(b)(4). Meridian Compensation Partners, LLC PAGE 6 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

7 Although the national exchanges are authorized under SEC Rule 10C-1(b)(4) to identify any other relevant independence factors that compensation committees must consider prior to the retention of an adviser, the NYSE elected not to expand the list of independence factors. Additionally, NYSE did not provide any guidance with regard to the meaning or application of any of the six independence factors. NYSE commentary to proposed Section 303A.05(c) provides that the section should not be construed: To require the compensation committee to implement or act consistently with the advice or recommendations of the compensation consultant, independent legal counsel or other adviser to the compensation committee; or To affect the ability or obligation of the compensation committee to exercise its own judgment in fulfilling the duties of the compensation committee (or, if applicable, the independent directors). The foregoing caveats mirror the language in SEC Rule 10C-1(b)(2)(iii). Modification to Compensation Committee Charter As a result of the proposed changes to the NYSE listing standards, the NYSE is proposing a rule change to modify the required content in compensation committee charters. Existing Section 303A.05(b) requires compensation committees to have a written charter. Proposed Section 303A.05(b)(iii) would require the charter to set forth the compensation committee s rights and responsibilities with regard to the retention, oversight, funding and selection of a compensation consultant, independent legal adviser or other adviser. Opportunity to Cure Noncompliance with Independence Standards Under SEC Rule 10C-1(a)(3), the national exchanges are required to adopt appropriate procedures for a listed company to have a reasonable opportunity to cure any noncompliance with the compensation committee independence standards. In accordance with this requirement, NYSE proposes a cure procedure that largely mirrors the procedure set forth in Rule 10C-1(a)(3). Under the proposed cure procedure, if a listed company fails to comply with the compensation committee composition requirements because a member of the compensation committee ceases to be independent for reasons outside the member's reasonable control, that person may remain a member of the compensation committee until the earlier of: The next annual shareholders' meeting of the listed company, or One year from the occurrence of the event that caused the member to be no longer independent, provided that prompt notice of noncompliance is received by the NYSE. However, this cure procedure would be limited to circumstances where the compensation committee continues to have a majority of independent directors. General Exemptions and Phase-in Periods The NYSE is proposing to exempt from the proposed rule changes every category of issuers that is currently exempt from the NYSE s existing compensation committee requirements and those categories of issuers expressly exempt under Rule 10C-1. The category of issuers covered by this exemption includes controlled companies, limited partnerships, companies emerging from bankruptcy and foreign private issuers that follow home country practices. In addition, the NYSE proposes to exempt smaller Meridian Compensation Partners, LLC PAGE 7 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

8 reporting companies from compliance with the proposed independence requirements applicable to compensation committee service. Under current NYSE rules, a newly listed company (e.g., an IPO company, a carve out/spin off company, a company emerging from bankruptcy, a company that ceases to qualify as a controlled company or a foreign private issuer) is required to comply with existing compensation committee governance standards under Section 303A.00 by the end of a prescribed transition period. The NYSE proposes to apply this phase-in period for newly listed companies with respect to compliance with the new compensation committee independence standards. Under the proposed phase-in period, a newly listed company s compensation committee would be required to have (i) at least one independent member at the time of listing; (ii) at least a majority of independent members within 90 days of the listing date; and (iii) all independent members within one year of the listing date. Effective Dates If the SEC approves the proposed rule changes to the NYSE listing standards, NYSE-listed companies would be required to comply with the changes in accordance with the following schedule: Proposed rule changes relating to independence standards applicable to compensation committees would become effective the earlier of: Their first annual meeting after January 15, 2014, or October 31, All other proposed rule changes (including those relating to the selection of compensation committee advisers) would become effective on July 1, Existing compensation committee independence standards would continue to apply pending the transition to the new standards. Proposed Rule Changes to Nasdaq Listing Standards Nasdaq proposes to modify its Listing Rules to comply with the requirements of SEC Rule 10C-1 and to make certain other related modifications. The proposed modifications primarily address the following subjects: (1) requirement to maintain a standing compensation committee; (2) minimum required size of compensation committee; (3) compensation committee independence requirement and exceptions thereto; (4) compensation committee obligation to maintain a charter and the required content of charter; (5) the compensation committee s authority to retain advisers; and (6) compensation committee s obligation to consider independence factors prior to the retention of an adviser. In addition, the proposed revisions to the listing standards provide a cure period for non-compliance with the independence requirement, the effective date for the proposed changes, exemptions from compliance and transition periods. Requirement to Maintain a Compensation Committee Currently, Nasdaq s listing rules do not require that a listed company maintain a standing compensation committee. The rules do require that the compensation of the chief executive officer and all other executive officers of a listed company must be determined, or recommended to the board for determination, either by: (1) a compensation committee comprised solely of independent directors ; or (2) a majority of independent directors in a vote in which only independent directors participate (the Alternative ). Meridian Compensation Partners, LLC PAGE 8 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

9 The SEC compensation committee independence standards do not require that national exchanges adopt listing standards that require listed companies to maintain compensation committees. Nevertheless, in response to SEC Rule 10C-1, Nasdaq proposes to eliminate the Alterative and require Nasdaq-listed companies to maintain a standing compensation committee. Nasdaq is proposing to require each listed company to maintain a compensation committee of at least two members, each of whom must be an independent director as defined under Rule 5605(a)(2) and certain other independence requirements (Proposed Rule 5605(d)(2)) (see discussion below on Independence Requirements for Members of Compensation Committee). Nasdaq s proposed rule reflects the current practice among the vast majority of Nasdaq-listed companies (i.e., only 25 of 2,636 Nasdaq-listed companies relied on the Alternative in lieu of having a standing compensation committee). Independence Requirements for Members of a Listed Company s Compensation Committee Currently, Nasdaq requires that a majority of the members of the board of a listed company be considered independent as defined by Nasdaq Listing Rule 5605(a)(2). Additionally, existing Rule 5605 requires independent directors to oversee compensation of executive officers. Nasdaq does not subject members of a listed company s compensation committee to a unique set of independence standards. Under current rules, a director qualifies as independent under Rule 5605(a)(2) if the following two-part test is met: The board of directors affirmatively determines that each independent director has no relationship that, in the opinion of the board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director; and The director has a relationship with the listed company which does not violate any one of the seven independence tests set forth in Rule 5605(a)(2). Nasdaq proposes to amend interpretative guidance in IM and adopt new Rule 5605(d)(2) to require that compensation committee members satisfy the general independence standards applicable to all board members and the additional independence standards set forth in proposed Rule 5065(d)(2), which would preclude compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fee from the listed company, and any subsidiary of the listed company. For these purposes, compensatory fees do not include (i) fees received as a member of the compensation committee, the board of directors or any other board committee; or (ii) the receipt of fixed amounts of compensation under retirement plan (including deferred compensation) for prior service with the company (provided that such compensation is not contingent in any way on continued service). The proposed rule barring compensatory fees does not include a look-back period. Accordingly, the prohibition on the receipt of compensatory fees by a compensation committee member begins at the start of the member s term of service on the committee. In proposing a complete prohibition on compensatory fees paid to compensation committee members, Nasdaq considered its current listing rules on compensatory fees. In this regard, Nasdaq evaluated the appropriateness of applying to compensation committee members the general independence standards which permit board members to accept compensatory fees in limited circumstances or the specific independence standards relating to audit committee members which prohibit members from accepting any compensatory fees. Nasdaq concluded that there is no compelling justification to have different independence standards for audit and compensation committee members with respect to the acceptance of compensatory fees from a [listed] Company. Meridian Compensation Partners, LLC PAGE 9 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

10 As part of a corporate board s evaluation of a director s suitability to serve on the compensation committee, Nasdaq is also proposing that the board must consider whether the director is affiliated with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company, and if such affiliation would impair the director s judgment as a member of the compensation committee. (Proposed Rule 5605(d)). In evaluating a compensation committee member s affiliation, boards will not be required to apply a look-back period, but will only be required to consider a compensation committee member s affiliations that occur during the member s term of service. In developing rules on affiliation, Nasdaq chose not to propose a complete prohibition on affiliations or implement a bright line rule. Nasdaq notes that a board may conclude that it is appropriate for a director who is an affiliate to serve on the compensation committee, especially if the affiliation is due to ownership of the listed company s stock. In that regard, Nasdaq expressly states in proposed commentary to the listing rules that it does not believe that ownership of a listed company s stock by itself, or possession of a controlling interest by itself, precludes a board from finding that it is appropriate for a director to serve on the compensation committee. Emphasizing this point, Nasdaq further notes that it may be appropriate for certain affiliates, such as representatives of significant stockholders, to serve on compensation committees since their interests are likely aligned with those of other stockholders in seeking an appropriate executive compensation program. (Proposed IM ). Under current Nasdaq rules, a board committee may include a non-independent director under exceptional and limited circumstance. This exception is also available to a listed company s compensation committee. With minor edits, Nasdaq proposes to retain this existing exception for compensation committees. Under proposed Rule 5605(d)(2)(B), a listed company would be permitted to have one non-independent director serve on its compensation committee under the following circumstances: The compensation committee consists of at least three members; The one director who is not an independent director is not currently an executive officer or employee or a family member of an executive officer of the listed company; The non-independent director may be appointed to the compensation committee if: The listed company s board, under limited and exceptional circumstances, determines that such individual s membership on the committee is required by the best interests of the company and its shareholders; The listed company discloses either on or through the company s website or in the proxy statement for the next annual meeting subsequent to such determination, the nature of the relationship and the reasons for the determination; The non-independent director serves for no more than two years. Nasdaq notes that while the exception to the independence requirement is infrequently used by listed companies, Nasdaq believes the independence exception is an important means to allow a listed company flexibility as to board and committee membership and composition in unusual circumstances, especially for smaller listed companies. Meridian Compensation Partners, LLC PAGE 10 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

11 Requirement to Maintain a Compensation Committee Charter Currently, Nasdaq does not require compensation committees of listed companies to maintain a charter. However, in conjunction with the proposed rule change that will require listed companies to maintain a standing compensation committee, Nasdaq is proposing that compensation committees maintain a charter. (Proposed Rule 5605(d)(1). Under its proposed rule change, Nasdaq will require each listed company to certify that it has 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. The proposed rule further provides that the compensation committee charter must specify (Proposed Rule 5605(d)(1)): The scope of the compensation committee s responsibilities, and how it carries out those responsibilities, including structure, processes and membership requirements; The compensation committee s responsibility for determining, or recommending to the board for determination, the compensation of the chief executive officer and all other executive officers of the listed company; That the chief executive officer of the listed company may not be present during voting or deliberations by the compensation committee on his or her compensation; and The specific compensation committee responsibilities and authority set forth in proposed Nasdaq Listing Rule 5605(d)(3), which implements the requirements of SEC Rule 10C-1(b)(2), (3) and (4) as discussed below (i.e., compensation committee authority to retain, oversee and fund advisers and obligation to evaluate advisers independence). The requirement for the compensation committee charter to specify the scope of the compensation committee s responsibilities, and how it carries out those responsibilities, including structure, processes and membership requirements is similar to listing rules relating to audit committee charters. The requirement for the charter to specify (i) the compensation committee s responsibility for determining, or recommending to the board for determination, the compensation of the chief executive officer and all other Executive Officers of the Company and (ii) that the CEO may not be present during voting or deliberations by the compensation committee on his or her compensation, is based upon Nasdaq s current compensation-related listing rules. Right to Retain, Oversee and Fund Compensation Consultants, Independent Legal Counsel and Other Compensation Advisers Nasdaq is proposing that a listed company s compensation committee must have the specific responsibilities and authority to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) relating to the: Authority to retain compensation consultants, independent legal counsel and other compensation advisers; Authority to fund such advisers; and Responsibility to consider certain independence factors before selecting such advisers, other than inhouse legal counsel. (Proposed Rule 5605(d)(3)). As noted above, these responsibilities and authority of the compensation committee must be set forth in the committee s charter, as proposed by Nasdaq. Meridian Compensation Partners, LLC PAGE 11 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

12 Independence of Compensation Advisers to the Compensation Committee Nasdaq proposes that a listed company s compensation committee must take into consideration the six independence factors enumerated in SEC Rule 10C-1(4) prior to selecting a compensation consultant, legal counsel or other adviser. (Proposed Rule 5605(d)(3)). The proposed rule incorporates, by reference, the independence factors. The Nasdaq proposed rule change does not include any additional independence factors a compensation committee must consider before selecting a compensation adviser. Like the NYSE, Nasdaq did not provide any additional guidance on the meaning or application of any of the six independence factors. In commentary to the proposed rule change, Nasdaq emphasizes that a compensation committee is not required to retain an independent compensation adviser. Opportunity to Cure Noncompliance with Independence Standards SEC Rule 10C-1(a)(3) directs the national exchanges to adopt rules that provide for appropriate procedures for a listed issuer to have a reasonable opportunity to cure any defects that would result in noncompliance with independence standards. Currently, Nasdaq maintains a cure process that permits a listed company to remedy noncompliance with the requirement to maintain a board of directors with a majority of independent members. Nasdaq is proposing to adopt this cure process for remedying noncompliance with the compensation committee independence requirements. Under the proposed cure procedure, if a listed company fails to comply with the compensation committee composition requirement due to one vacancy, or one compensation committee member ceases to be independent due to circumstances beyond the member s reasonable control, the Company must regain compliance by the earlier of: Its next annual shareholders meeting, or One year from the occurrence of the event that caused the failure to comply with this requirement; provided, however, that if the annual shareholders meeting occurs no later than 180 days following the event that caused the failure to comply with this requirement, the listed company shall instead have 180 days from such event to regain compliance. (Proposed Rule 5605(d)(4)). A listed company relying on the cure provision must provide notice to Nasdaq immediately upon learning of the event or circumstance that caused the noncompliance. General Exemptions and Phase-in Periods Nasdaq is proposing to exempt from the proposed rule changes every category of issuers that is currently exempt from Nasdaq s existing compensation committee requirements. The category of issuers covered by this exemption includes controlled companies, limited partnerships, and foreign private issuers that follow home country practices and meet certain disclosure requirements. In addition, Nasdaq proposes to exempt smaller reporting companies from compliance with the proposed independence proposed rule changes, except for the proposed requirement to maintain a standing compensation committee and adopt a charter for its compensation committee. Under current Nasdaq rules, a newly listed company (e.g., an IPO company, a carve out/spin off company, a company emerging from bankruptcy, a company that ceases to qualify as a controlled company) is required to comply with existing compensation committee composition requirements by the end of a prescribed transition period. Nasdaq proposes to apply this phase-in period for newly listed companies with respect to compliance with the new compensation committee independence standards. Under the proposed phase-in period, a newly listed company s compensation committee would be Meridian Compensation Partners, LLC PAGE 12 VOLUME 3, ISSUE 13R OCTOBER 10, 2012

13 required to have (i) at least one independent member at the time of listing; (ii) at least a majority of independent members within 90 days of the listing date; and (iii) all independent members within one year of the listing date. This phase-in period would also apply with respect to a new listed company s compliance with the minimum committee size requirement and additional eligibility requirements adopted pursuant to Rule 10C-1. The phase-in period is not applicable to the requirement to adopt a written compensation committee charter. Effective Dates If the SEC approves the proposed rule changes to the Nasdaq listing standards, Nasdaq-listed companies would be required to comply with the changes in accordance with the following schedule: Immediately upon SEC approval, listed companies must comply with the requirements of Rule 5605(d)(3) relating to compensation committee responsibilities and authorities (including responsibility to consider certain independence factors before selecting a compensation adviser), The remaining rule changes must be implemented by: The second annual meeting held after the date of approval of Nasdaq s proposed rule change, but No later than December 31, A listed company must certify to Nasdaq, no later than 30 days after the implementation deadline applicable to it, that it has complied with the amended listing rules on compensation committees. * * * * * The Client Update is prepared by Meridian Compensation Partners Technical Team led by Donald Kalfen. Questions regarding this Client Update or executive compensation technical issues may be directed to Donald Kalfen at or dkalfen@meridiancp.com. This report is a publication of Meridian Compensation Partners, LLC, and provides general information for reference purposes only, and should not be construed as tax, legal or accounting advice or a tax, legal or accounting opinion on any specific facts or circumstances. The information provided herein should be reviewed with appropriate advisers concerning your own particular situation and issues. Meridian Compensation Partners, LLC PAGE 13 VOLUME 3, ISSUE 13R OCTOBER 10, 2012