Earlier this week, the NYSE filed proposed rule changes with the SEC related to compensation committee independence and the hiring of compensation advisers. The NYSE proposed such rules to comply with Exchange Act Rule 10C-1 adopted in June. Rule 10C-1 requires national securities exchanges to adopt listing standards which effectuate the compensation committee and committee adviser independence requirements of Section 952 of the Dodd-Frank Act. The NYSE’s proposed rules do not expand upon or vary much from the SEC rules. The NYSE proposed to have its new listing standards effective on July 1, 2013; however, companies would have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the such new standards. Set forth below is a summary of the NYSE’s proposed rules:
Compensation Committee Independence
The NYSE proposed rules do not establish any new bright line standards specific to compensation committee independence. Instead, the NYSE proposed rules require that, in affirmatively determining the independence of any director who will serve on a compensation committee, a listed company’s board “consider 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 a compensation committee member, including, but not limited to, the two 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 to such director; 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.
The proposing release specifically provides that the NYSE does not believe that board compensation should be considered as part of the independence determination. Further, commentary to the proposed NYSE rules provides that “the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company’s executive compensation. Similarly, when considering any affiliate relationship a director has with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company, in determining his independence for purposes of compensation committee service,. . . the board 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 ability to make independent judgments about the listed company’s executive compensation.”
Compensation Committee Adviser Independence
The NYSE proposed rules related to compensation committee advisers provide that prior to hiring a compensation adviser, the compensation committee must consider the six factors set forth in Rule 10C-1(b)(4). The NYSE proposed rules do not add any factors for a compensation committee to consider prior to hiring an adviser, as the “Exchange believes that the list included in Rule 10C-1(b)(4) is very comprehensive and the proposed listing standard would also require the compensation committee to consider any other factors that would be relevant to the adviser’s independence from management.”
The NYSE’s proposed new rules are subject to SEC review and comment. We believe it is unlikely that the SEC will have many objections to the proposed rules, as they essentially mirror the SEC’s rules. In light of the NYSE proposed rules, NYSE listed companies should be reviewing their compensation committee charters, the composition of the compensation committee and their relationships with the compensation advisers in order to identify whether any modifications or changes may be in order to comply with the coming NYSE standards.