March 2013 AMENDMENTS TO NASDAQ RULES ON COMPENSATION COMMITTEES Summary. The Securities and Exchange Cmmissin recently apprved the fllwing amendments t the NASDAQ listing rules relating t cmpensatin cmmittees: Effective July 1, 2013, a cmpany s cmpensatin cmmittee must have certain respnsibilities and authrity relating t the retentin f cmpensatin cnsultants, legal cunsel and ther advisrs t the cmmittee ( cmpensatin advisers ), including a requirement t cnsider specified factrs befre retaining r receiving advice frm a cmpensatin adviser. Effective n the earlier f (i) the cmpany s first annual meeting after January 15, 2014 r (ii) Octber 31, 2014, a cmpensatin cmmittee must have a charter (if it des nt have ne already) specifying certain items, including the cmmittee s respnsibilities and authrity relating t the retentin f cmpensatin advisers. Effective n the earlier f (i) the cmpany s first annual meeting after January 15, 2014 r (ii) Octber 31, 2014, a cmpany must have a frmal cmpensatin cmmittee with tw r mre members and can n lnger fulfill the cmpensatin cmmittee functin by a majrity vte f independent directrs. As f the applicable effective date, in additin t being an independent directr under the general definitin f that term in the NASDAQ rules, a cmpensatin cmmittee member may nt, while serving n the cmpensatin cmmittee, accept directly r indirectly any cnsulting, advisry r ther cmpensatry fee frm the cmpany, ther than fees fr bard r cmmittee service r fixed amunts under a retirement plan fr prir service with the cmpany. There are partial exemptins fr smaller reprting cmpanies. Set frth belw is a discussin f the amendments. Exhibit A t this memrandum cntains a chart summarizing the steps that must be taken by the applicable deadlines. If yu have any questins cncerning the materials discussed in this article, please feel free t cntact any f ur attrneys listed belw. James S. Fleischer (202) 295-4507 Jim@sftlaw.cm Craig M. Scheer (202) 295-4525 Craig@sftlaw.cm This infrmatin is nt intended as legal advice. Readers shuld seek specific legal advice befre acting with regard t the subjects mentined herein. Silver, Freedman & Taff, a Washingtn D.C. based law firm, was funded with a special fcus n advising financial institutins natinwide, including cmmercial banks, savings institutins, trust cmpanies and credit unins, in cnnectin with a full spectrum f regulatry, crprate and securities matters. This cmmunicatin is intended t bring relevant develpments t the attentin f ur clients and ther interested parties. 2013 Silver, Freedman & Taff, L.L.P., 3299 K Street NW, Washingtn, DC 20007. All rights reserved.
New Cmpensatin Cmmittee Respnsibilities and Authrity Effective July 1, 2013, a cmpensatin cmmittee must have the fllwing specific respnsibilities and authrity: the cmpensatin cmmittee may, in its sle discretin, retain r btain the advice f a cmpensatin adviser; the cmpensatin cmmittee must be directly respnsible fr the appintment, cmpensatin and versight f the wrk f any cmpensatin adviser retained by the cmpensatin cmmittee; the cmpany must prvide fr apprpriate funding, as determined by the cmpensatin cmmittee, fr payment f reasnable cmpensatin t a cmpensatin adviser retained by the cmpensatin cmmittee; befre selecting, r receiving advice frm, a cmpensatin adviser, ther than inhuse legal cunsel, the cmpensatin cmmittee must cnduct an independence assessment by cnsidering the fllwing six factrs: the prvisin f ther services t the cmpany by the persn that emplys the cmpensatin adviser; the amunt f fees received frm the cmpany by the persn that emplys the cmpensatin adviser, as a percentage f the ttal revenue f the persn that emplys the cmpensatin adviser; the plicies and prcedures f the persn that emplys the cmpensatin adviser that are designed t prevent cnflicts f interest; any business r persnal relatinship f the cmpensatin adviser with a member f the cmpensatin cmmittee; any stck f the cmpany wned by the cmpensatin adviser; and any business r persnal relatinship f the cmpensatin adviser r the persn emplying the adviser with an executive fficer f the cmpany. The cmpensatin cmmittee must cnduct the independence assessment with respect t any cmpensatin cnsultant, legal cunsel r ther adviser that prvides advice t the cmpensatin cmmittee, ther than (1) in-huse legal cunsel r (2) an adviser whse rle is limited t (i) cnsulting n any plan that des nt discriminate in favr f executive fficers r directrs and that is available generally t all salaried emplyees r (ii) prviding infrmatin
that either is nt custmized fr the cmpany r that is custmized based n parameters that are nt develped by the adviser, and abut which the adviser des nt prvide advice. An independence assessment wuld be required fr the cmpany s utside legal cunsel if it prvides advice t the cmpensatin cmmittee. In its rder apprving the amendments t the NASDAQ rules, the SEC indicated that it expects that these assessments will be cnducted at least annually. The rules d nt specify hw the cmpensatin cmmittee is suppsed t cnduct the independence assessment, thugh ne pssibility wuld be fr each cmpensatin adviser t cmplete a questinnaire cvering the six independence factrs abve. There is n requirement that a cmpensatin adviser actually be independent, nly that the cmpensatin cmmittee have cnsidered the six independence factrs befre selecting, r receiving advice frm, a cmpensatin adviser. The cmmittee may utilize any cmpensatin adviser that it prefers, as lng as it has cnsidered the six independence factrs. As nted abve, a cmpany s cmpensatin cmmittee must have the specific respnsibilities and authrity relating t cmpensatin advisers by July 1, 2013. While the mst lgical means f accmplishing this may be t amend the cmpensatin cmmittee charter by that date (r adpt a charter by that date, if the cmpensatin cmmittee des nt already have ne), a cmpany can instead adpt a bard reslutin fr this prir t July 1, 2013 and defer amending the charter until the date by which the cmpany must cmply with the new cmpensatin cmmittee charter requirement (see belw). If the cmpany des nt have a frmal cmpensatin cmmittee and fulfills the cmpensatin cmmittee functin by majrity vte f the independent directrs, then the independent directrs must be cnferred with the respnsibilities and authrity relating t cmpensatin advisers. As nted belw under Changes t Cmpensatin Cmmittee Cmpsitin Requirements, effective n the earlier f (i) the cmpany s first annual meeting after January 15, 2014 r (ii) Octber 31, 2014, a cmpany must have a frmal cmpensatin cmmittee. Cmpensatin cmmittees f smaller reprting cmpanies need nt be prvided with the respnsibilities and authrity relating t cmpensatin advisers. Cmpensatin Cmmittee Charter While SEC rules require a cmpany t disclse whether r nt it has a cmpensatin cmmittee charter, there is n requirement under current NASDAQ rules t actually have ne. Under the amended NASDAQ rules, by the earlier f (i) the cmpany s first annual meeting after January 15, 2014 r (ii) Octber 31, 2014, a cmpany must have a cmpensatin cmmittee charter and the cmpensatin cmmittee must review and assess the adequacy f the charter n an annual basis. The charter must specify: the scpe f the cmpensatin cmmittee's respnsibilities, and hw it carries ut thse respnsibilities, including structure, prcesses and membership requirements; the cmpensatin cmmittee's respnsibility fr determining, r recmmending t the bard fr determinatin, the cmpensatin f the CEO and all ther executive fficers; 2
that the CEO may nt be present during vting r deliberatins n his r her cmpensatin; and the specific cmpensatin respnsibilities and authrity relating t cmpensatin advisers, as described abve under New Cmpensatin Cmmittee Respnsibilities and Authrity. A smaller reprting cmpany may adpt a bard reslutin specifying the items in the first three bullet pints abve in lieu f having a cmpensatin cmmittee charter. The furth item need nt be included in the cmpensatin cmmittee charter r bard reslutin f a smaller reprting cmpany, as smaller reprting cmpanies are exempt frm the requirement f giving the cmpensatin cmmittee the respnsibilities and authrity relating t cmpensatin advisers. Changes t Cmpensatin Cmmittee Cmpsitin Requirements Under current NASDAQ rules, cmpensatin f executive fficers must be apprved, r recmmended t the bard fr its apprval, by a cmmittee cmprised slely f independent directrs (under the general definitin f that term in the NASDAQ rules) r by a majrity f the independent directrs withut the participatin f any nn-independent directrs. There currently is n requirement that the bard actually have a cmpensatin cmmittee. Nr is there a minimum n the number f directrs cmprising a cmpensatin cmmittee, shuld a bard chse t have ne. Under the amended NASDAQ rules, effective beginning n the earlier f (i) the cmpany s first annual meeting after January 15, 2014 r (ii) Octber 31, 2014, a cmpany s bard must have a cmpensatin cmmittee cmprised f tw r mre members. Each cmpensatin cmmittee member must (1) be an independent directr and (2) nt accept directly r indirectly any cnsulting, advisry r ther cmpensatry fee frm the cmpany r any subsidiary f the cmpany while serving n the cmpensatin cmmittee. A cmpensatry fee des nt include fees fr bard r cmmittee service r the receipt f fixed amunts under a retirement plan (including deferred cmpensatin) fr prir service with the cmpany that are nt cntingent n cntinued service. The additinal independence requirement fr cmpensatin cmmittee members is substantially the same as the additinal independence requirement currently in effect fr audit cmmittee members, but differs in ne significant respect. An audit cmmittee member cannt be an affiliated persn f the cmpany, which fr all practical purpses precludes a directr frm serving n the audit cmmittee if he r she is, r is assciated with, a greater than 10% stckhlder f the cmpany. Under the amended NASDAQ rules, while a bard must cnsider whether any such affiliatin wuld impair the directr s judgment as a member f the cmpensatin cmmittee, the affiliatin alne des nt preclude the directr frm serving n the cmpensatin cmmittee. NASDAQ nted that it may be apprpriate fr representatives f significant stckhlders t serve n the cmpensatin cmmittee, since their interests are likely aligned with thse f stckhlders generally n executive cmpensatin matters. A smaller reprting cmpany will be required t have a cmpensatin cmmittee f tw r mre members, and will n lnger be able t fulfill this functin by vte f a majrity f the independent directrs. Smaller reprting cmpanies will, hwever, be exempt frm the 3
additinal independence requirement prhibiting a cmpensatin cmmittee member frm accepting any cnsulting, advisry r ther cmpensatry fee frm the cmpany and frm the requirement that the bard cnsider the affiliated status f a directr befre appinting him r her t the cmpensatin cmmittee. 4
Exhibit A Steps t be Taken Under Amendments t NASDAQ Rules By July 1, 2013 By earlier f (i) first annual meeting after January 15, 2014 r (ii) Octber 31, 2014 By earlier f (i) first annual meeting after January 15, 2014 r (ii) Octber 31, 2014 All Cmpanies Other Than Smaller Reprting Cmpanies Give cmpensatin cmmittee respnsibilities and authrity relating t the retentin f cmpensatin advisers, including requirement t cnsider specified independence factrs befre retaining r receiving advice frm a cmpensatin adviser. D this either by adpting r amending the cmmittee s charter r adpting a bard reslutin. Cmpensatin cmmittee must have a charter (if it des nt have ne already) specifying certain items, including the cmmittee s respnsibilities and authrity relating t the retentin f cmpensatin advisers. Must have a frmal cmpensatin cmmittee with tw r mre members and can n lnger fulfill the cmpensatin cmmittee functin by a majrity vte f independent directrs. Smaller Reprting Cmpanies Nt required. Cmpensatin cmmittee must have a charter (if it des nt have ne already) r bard reslutin specifying the same items, except fr respnsibilities and authrity relating t the retentin f cmpensatin advisers, as this is nt required fr smaller reprting cmpanies. Same. A-1
By earlier f (i) first annual meeting after January 15, 2014 r (ii) Octber 31, 2014 All Cmpanies Other Than Smaller Reprting Cmpanies Each cmpensatin cmmittee member (1) must be an independent directr and (2) cannt, while serving n the cmmittee, accept directly r indirectly any cnsulting, advisry r ther cmpensatry fee frm the cmpany, ther than fees fr bard r cmmittee service r fixed amunts under a retirement plan fr prir service with the cmpany. In additin, in assessing the eligibility f a directr t serve n the cmpensatin cmmittee, the bard must cnsider whether the directr is affiliated with the cmpany (e.g., as, r as a nminee f, a large stckhlder) and whether any such affiliatin wuld impair the directr s judgment as a cmpensatin cmmittee member. Smaller Reprting Cmpanies Only requirement is that each cmpensatin cmmittee member be an independent directr. A-2