Exchanges Propose Compensation Committee Independence Standards: No New Bright-Line Tests Under NYSE Proposal; Nasdaq Proposal Would Prohibit All Compensatory Fees Other Than Director Fees and Require Formal Compensation Committee and Written Charter

Sullivan & Cromwell LLP - October 2, 2012

Certain U.S. securities exchanges have filed with the SEC proposed revisions to their equity listing standards regarding compensation committee and compensation adviser independence, as required by SEC rules issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The New York Stock Exchange proposal would not impose any new bright-line tests on compensation committee members, but would include additional considerations for the board’s subjective independence determination. The proposal by the Nasdaq Stock Market would impose a new bright-line test for compensation committee members by prohibiting their receipt of any compensatory fees from the company other than director fees and fixed payments for prior service. In addition, Nasdaq would, for the first time, require listed companies to have a standing compensation committee consisting of at least two independent directors and a formal written compensation committee charter. Both the NYSE and Nasdaq proposals confirm that being, or being affiliated with, a significant stockholder would not be a bar to service on the compensation committee.

In addition, as contemplated by the statute and the SEC rules, both the Nasdaq and NYSE proposals require that compensation committees have broad authority, and adequate funding, to engage advisers, and that compensation committees consider certain independence factors before engaging a compensation consultant, independent legal counsel or other adviser. These responsibilities must be reflected in the committee charter.

The stock exchange proposals have not yet been published by the SEC for public comment, and are ultimately subject to SEC comment and approval. In the past, the SEC has sought to harmonize differences in stock exchange governance listing standards and it may seek to do so here. SEC rules require the new listing standards to be approved by the SEC by June 27, 2013. Neither proposal is expected to affect the 2013 proxy season, although the Nasdaq changes relating to compensation committee responsibilities and authority would be effective immediately on SEC approval.

These proposals are separate from the SEC’s proxy disclosure requirements adopted in June 2012 relating to compensation consultants’ conflicts of interest. Those requirements are imposed by SEC rules and will take effect for meetings in 2013.