As discussed in our previous memo, in January 2013, the SEC approved amendments to the NYSE and Nasdaq listing standards relating to compensation committees and their advisers. Unless they have already done so, companies should begin implementing the new requirements with respect to compensation committees and their advisers that take effect on July 1, 2013. Compensation committee action is required in order to comply with these requirements.

Companies should note that, while the new rules require compensation committees to consider the independence of their advisers, the rules do not require that such advisers be independent, nor is any aspect of the mandated independence review required to be disclosed publicly (other than proxy disclosure concerning compensation consultants to a company or its compensation committee).

Companies should also note that this independent assessment applies only to advisers; there will be a separate independence assessment of directors required later, as noted below.

…continue reading: Compensation Committee and Adviser Implementation Begins July 1, 2013

Today’s column focuses on new rules of the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (NASDAQ) concerning independence requirements for directors who are members of compensation committees. The new rules must be complied with by listed companies by the earlier of the first annual meeting of shareholders after Jan. 15, 2014, or Oct. 31, 2014. [1]

NYSE Section

NYSE Listed Company Manual Section 303A.02(a)(ii) contains the following requirements regarding compensation committee member independence (references to an NYSE Listed Company Manual Section hereinafter will be referred to as NYSE Section):

[I]n affirmatively determining the independence of any director who will serve on the compensation committee of the listed company’s board of directors, the board of directors must 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:

…continue reading: Exchange Rules on Independence of Compensation Committee Members

The NASDAQ Stock Market LLC (Nasdaq) recently filed with the Securities and Exchange Commission (SEC) a proposed rule [1] requiring listed companies to establish and maintain an internal audit function. [2] The SEC is soliciting comments on the proposed rule through March 29, 2013. [3]

Under the proposed rule, the internal audit function would be required to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. In addition, new Rule 5645 would require the audit committee to:

• meet periodically with the company’s internal auditors (or other personnel responsible for this function); and
• discuss with the outside auditors the responsibilities, budget, and staffing of the company’s internal audit function.

Companies would be permitted to outsource their internal audit function to a third-party service provider other than their independent auditor. For companies that choose to outsource this function, Nasdaq has stated that the company’s audit committee maintains sole responsibility to oversee the internal audit function and may not allocate or delegate this responsibility to another board committee.

According to Nasdaq, the proposed rule is designed to:

…continue reading: Proposed NASDAQ Rule Requires Internal Audit Function at Listed Companies

The Conference Board, NASDAQ OMX and NYSE Euronext jointly released the 2013 edition of Director Compensation and Board Practices, a benchmarking study with more than 150 corporate governance data points searchable by company size (measurable by revenue and asset value) and 20 industrial sectors.

The report is based on a survey of public companies registered with the U.S. Securities and Exchange Commission. The Harvard Law School Forum on Corporate Governance and Financial Regulation, Stanford University’s Rock Center for Corporate Governance, the National Investor Relations Institute (NIRI), the Shareholder Forum and Compliance Week also endorsed the survey by distributing it to their members and readers.

The following are the major findings from the 2013 edition of the study:

…continue reading: The 2013 Director Compensation and Board Practices Report

Several noteworthy developments recently occurred regarding director independence. First, on August 8, 2008, the Securities and Exchange Commission (the SEC) approved amendments to the definition of “independent director” under the NASDAQ Stock Market Rules, which have gone into effect. Second, on August 12, 2008, the New York Stock Exchange (the NYSE) filed rule changes with the SEC to amend two of its director independence tests; these rules do not require SEC approval and apply beginning September 11, 2008. Finally, on August 5, 2008, the SEC announced the settlement of an enforcement action involving a former director who failed to disclose a business relationship with the auditor of three companies on whose boards he served, thereby causing the companies to violate the federal securities laws.

NASDAQ Amendments

The SEC approved an amendment to NASDAQ Rule 4200(a)(15), which sets forth several tests to determine whether a director of a listed company is independent.[1] Prior to the amendment, Rule 4200(a)(15)(B) provided that a director would not be considered independent if the director or an immediate family member accepted any compensation from the listed company in excess of $100,000 during any period of 12 consecutive months within the three years preceding the determination of independence (excluding compensation for board or board committee service, compensation paid to an immediate family member as a non-executive employee, benefits paid under a tax-qualified retirement plan and non-discretionary compensation). The amendment increased the dollar threshold from $100,000 to $120,000. This amendment was adopted in response to the SEC’s 2006 amendment to Item 404 of Regulation S-K, which increased to $120,000 the dollar threshold applicable to disclosure of related party transactions. The NASDAQ rule change has gone into effect.

New York Stock Exchange Amendments

The NYSE amendments modify the bright line independence tests set forth in Section 303A.02(b) of the NYSE Listed Company Manual in two respects.[2] The first amendment modifies Section 303A.02(b)(ii) to increase from $100,000 to $120,000 the amount of direct compensation (other than director or committee fees and pension or other forms of deferred compensation for prior service), that a director or members of a director’s immediate family may receive from a listed company in a 12-month period within the prior three years and still be considered an independent director. As with the similar NASDAQ amendment, the NYSE’s amendment was adopted to align the NYSE rules with the disclosure requirements set forth in Item 404 of Regulation S-K.

…continue reading: Recent Developments Regarding Director Independence

In a paper entitled Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices Over Time, Craig Doidge, G. Andrew Karolyi, and I show that Sarbanes-Oxley (“SOX”) cannot be blamed for the decrease in foreign listings on the New York Stock Exchange and NASDAQ.  A recent revision of the paper, posted here, provides additional supporting evidence for our conclusions.  Before reviewing that additional evidence, I summarize the main results of the paper below.

A popular explanation for the decrease in foreign listings on the exchanges in New York is that the passage of SOX has made U.S. listings significantly less attractive to foreign companies–so much so, it is argued, that many listed firms would delist and deregister if it were easy to do so.  (That explanation, among others, is set forth in a recent report entitled Sustaining New York’s and the US’s Global Financial Services Leadership, prepared for Senator Charles Schumer of New York.)  The argument is that SOX makes a U.S. listing less advantageous because it imposes severe costs on companies and their managers, especially through the compliance requirements of Section 404.  (Section 404 aims to reduce the market impact of accounting “errors” by assuring effective management control over reporting; and, in turn, creates significant legal exposure for companies as well as executives.)

For this popular explanation to be correct, it would have to be that firms that would have chosen to list in the U.S. before SOX are no longer willing to do so.  Our paper shows that:

…continue reading: Has SOX Made New York Less Competitive in Global Markets?