Nasdaq Amends Proposal Regarding Compensation Committee Independence and Consultants

By Cydney Posner

Nasdaq has just filed an amendment to its proposed rules relating to compensation committee independence and consultants. The change addresses a troublesome timing problem with the original proposal. 
 
Proposed Rule 5605(d)(3) states that a compensation committee must have the specific responsibilities and authority necessary to comply with Rule 10C-1(b)(2), (3) and (4)(i)-(vi) under the Exchange Act relating to the retention, compensation, oversight and funding of compensation consultants, legal counsel and other compensation advisers, and is required to consider the six independence factors enumerated in Rule 10C-1(b)(4) before selecting, or receiving advice from, these advisers. Originally, these provisions – that is, requiring that the committee be granted the specific authority and responsibility referenced in Rule 5605(d)(3) -- were to have become immediately effective upon approval of the Nasdaq proposal by the SEC, creating some implementation and coordination problems. Under the amended proposal, Rule 5605(d)(3) will become effective on July 1, 2013; by that date, the committee's authority and responsibility under Rule 5605(d)(3) must be reflected in the committee charter, resolutions or other board action, as permitted by state law. (Ultimately, the authority and responsibility under Rule 5605(d)(3) must be included in the charter in accordance with the regular transition schedule for these rules.)  In addition, under the amendment, Nasdaq proposes that companies comply with the remaining provisions of the amended listing rules by the earlier of (1) their first annual meeting after January 15, 2014 or (2) October 31, 2014. This revision is consistent with the NYSE proposal. 
 
Also notable in the amendment is the express deletion of the word  "independent" prior to "legal counsel" to make clear that only in-house counsel are excluded from the requirement to consider independence. In addition,  the original proposal discussed the committee's need to consider the six independence factors in "making an independence determination" regarding compensation consultants, legal counsel and other advisers.  In the amendment, the concept of an "independence determination" has been deleted, with the reference now only to the need to consider the six factors before selecting, or receiving advice from, these advisers.  The deletion may have been intended to emphasize that the committee "is not required to retain an independent compensation adviser."  The addition of the phrase "receiving advice from" makes clear that the analysis cannot be avoided simply by not "selecting" an advisor.
 
The amendment also proposes changes to the phase-in schedule for companies ceasing to be Smaller Reporting Companies, allowing these companies six months, in lieu of the originally proposed 30 days, to certify that they have adopted a formal compensation committee charter. These companies will also be permitted, under the amendment, to phase in fully compliant compensation committees.
 
The proposed form of compensation committee certification is now attached to the amendment to the proposal.  The certification will be due 30 days after the final implementation deadline applicable to the company.

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