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Nasdaq Proposes More Flexible Compensation Committee Independence Standards

December 4, 2013

The NYSE and Nasdaq listing standards governing the independence of compensation committee members, as required under Dodd-Frank, currently diverge in how they treat directors who receive any compensatory fees, including consulting and advisory fees. For Nasdaq-listed companies, a director who receives such payments is prohibited from being considered independent for purposes of the compensation committee.

Nasdaq has filed a proposed rule change with the SEC to replace this strict prohibition with a requirement that a board of directors instead consider the receipt of such fees when determining eligibility for compensation committee membership, similar to the NYSE standard. In the proposal, Nasdaq indicated that, over the past few months, it has received feedback that the prohibition creates a burden on issuers and that this additional burden could influence a company’s choice of listing venue. 

The proposal includes other amendments, including broadening the general consideration by boards to assess whether the director receives compensation from any person or entity, and whether any affiliate relationships places the director under the direct or indirect control of the company or its senior management or creates a direct relationship between the director and senior management, that in each case would impair the director’s ability to make independent judgments about executive compensation. All fees received by the director, including regular director compensation, would need to be part of the evaluation.

In addition, Nasdaq makes clear that boards must consider all factors specifically relevant to determining whether a director has a relationship to the company which is material to that director’s independence in connection with the duties of a compensation committee member.  This express "catch all" is also contained in the NYSE standards. The form of certification that Nasdaq companies will need to provide is in Exhibit 3 of a prior proposal..

There is a 21-day comment period. However, Nasdaq has made it clear that companies are required to comply with the compensation committee member independence requirements by the earlier of their first annual meeting after January 2014, or October 31, 2014, and has expressed the importance of implementing the proposed changes immediately, before companies initiate changes to board and committee composition in connection with their 2014 annual meetings.


If you have questions regarding this publication, please call any of the lawyers listed below or your regular Davis Polk contact.

Executive Compensation and Employee Benefits

Cynthia Akard 650 752 2045 cynthia.akard@davispolk.com
Jeffrey P. Crandall 212 450 4880 jeffrey.crandall@davispolk.com
Edmond T. FitzGerald 212 450 4644 edmond.fitzgerald@davispolk.com
Kyoko Takahashi Lin 212 450 4706 kyoko.lin@davispolk.com
Jean M. McLoughlin 212 450 4416 jean.mcloughlin@davispolk.com

Corporate Governance

Ning Chiu 212 450 4908 ning.chiu@davispolk.com
William M. Kelly 650 752 2003 william.kelly@davispolk.com
Richard J. Sandler 212 450 4224 richard.sandler@davispolk.com

Also of Interest

First Circuit Sun Capital Decision Increases ERISA Exposure for Private Equity Funds >

Compensation Committee and Adviser Implementation Begins July 1: What to Do Now >

Corporate Governance Blog >

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