On November 26, 2013, The NASDAQ Stock Market LLC proposed to amend its listing rules on compensation committee composition (Rule 5605(d)(2)(A) and IM-5605-6) to replace the prohibition on the receipt of compensatory fees by compensation committee members with a requirement that a board of directors instead consider the receipt of such fees when determining eligibility for compensation committee membership. NASDAQ cited the feedback that it had received from listed companies as the reason for these changes. The proposed rules are almost identical to the NYSE’s rules related to compensation committee independence and, if adopted, would remove the anomaly of NASDAQ listing rules being more stringent than NYSE rules.
The proposed Rule 5605(d)(2)(A) states that in affirmatively determining the independence of any compensation committee member, the board must consider all factors specifically relevant to determining whether a director has a relationship to the company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to:
- the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the company to such director; and
- whether such director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.
In IM-5605-6, NASDAQ proposes to clarify that when considering the sources of a director’s compensation in determining compensation committee member independence, the board should consider whether the director receives compensation from any person or entity that would impair the director’s ability to make independent judgments about the company’s executive compensation, including compensation for board or board committee services.
The approach to the affiliation prong of the independence analysis is not significantly changed in the proposed rules. However, NASDAQ proposes to revise IM-5605-6 to explain that the board should consider whether the affiliate relationship 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 members of senior management, in each case of a nature that would impair the director’s ability to make independent judgments about the company’s executive compensation.
Companies are required to comply with the compensation committee composition aspects of the NASDAQ rules by the earlier of their first annual meeting after January 15, 2014, or October 31, 2014. Subject to the SEC approval, NASDAQ intends to implement the proposed changes before companies suggest changes to board and committee composition in connection with their 2014 annual meetings.