NYSE and Nasdaq listing standards governing the independence of compensation committee members, as required under Dodd-Frank, do not go into effect until companies’ first annual meeting after January 15, 2014 or at the latest by October 31, 2014. Currently, the two exchanges 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, especially given that there are companies in some industries where it is common to have a director who conducts a de minimis amount of business with the issuer. Companies are concerned about having difficulty recruiting a sufficient number of eligible directors to serve, and have informed Nasdaq that this additional burden could influence a company’s choice of listing venue. 

The proposal includes other minor amendments to align with these changes, 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. 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. 

The form of certification that companies will need to provide is in Exhibit 3 of the proposal.