Tax Law

The New NYSE and Nasdaq Listing Standards: What Should Companies Be Doing?

It has been nearly two months since the NYSE and Nasdaq listing standards became effective that require compensation committees to assess the independence of their consultants, legal counsel and other advisors. Arising out of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and the SEC’s implementing Rule 10C-1, this new listing requirement is intended to promote the independence of compensation committee consultants and advisors. Effective as of July 1, 2013, compensation committees are now required to perform an independence analysis of their compensation consultants and advisers by considering the following six factors, which the SEC has determined to bear upon independence:

  • the provision of other services to the listed company by the adviser entity;
  • the amount of fees received from the listed company by the adviser entity, as a percentage of the total revenue of the adviser entity;
  • the policies and procedures of the adviser entity that are designed to prevent conflicts of interest;
  • any business or personal relationship between an individual employee or member of the adviser entity actually providing advice and a member of the compensation committee;
  • any stock of the listed company owned by any such individual providing advice or an immediate family member; and
  • any business or personal relationship between any individual providing advice or the adviser entity and an executive officer of the listed company.

Although the Dodd-Frank listing standard requires an assessment of advisor independence under the foregoing six factors, compensation committees are not required to select compensation consultants, legal counsel or other advisers that are actually “independent.” They are required just to make an “independence assessment” for each advisor and make appropriate disclosures in the event a compensation consultant played a role in determining or recommending the amount or form of executive compensation that may have resulted in a conflict of interest, and to provide further disclosure as to how the conflict was addressed (note that this latter requirement does not apply to legal counsel).

The “nonbinding” nature of the independence assessment requirement has caused much confusion for compensation committees seeking to discharge their obligation to comply with the new listing rules. The SEC emphasized that the independence assessment should occur before potential advisers are selected and that compensation committees should conduct the assessment at least annually. Thus it is an ongoing process. To comply with the new requirements, we recommend that:

  • companies determine which advisory services are subject to the new requirements; for example, the requirement to assess independence does not apply to an adviser whose role is limited to consulting on certain broad-based plans or providing information that is not customized for a particular company;
  • companies work with their consultants, legal counsel and other advisers that provide advice to the compensation committee to establish a process for providing the compensation committee with the required information to make the independence assessment; and
  • the assessment should be appropriately documented and certified by the Committee before any adviser is selected and retained, and a review of adviser independence should occur at least annually regardless of whether any new advisers are being considered.

The NYSE and Nasdaq specify that the listing standards do not require a compensation consultant, counsel or other adviser to be independent, only that the compensation committee consider the six factors before receiving advice. The NYSE and Nasdaq have explicitly stated compensation committees are free to obtain advice from their preferred advisers, regardless of independence.



pursuant to New York DR 2-101(f)

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