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Both the NYSE and Nasdaq stock exchanges are requiring most issuers to have independent compensation committees by the earlier of their first annual meeting after January 14, 2014, or October 14, 2014.  You can find our NYSE compliance checklist here and our Nasdaq compliance checklist here.

While compliance is not required until the 2014 proxy season, issuers may wish to add relevant questions to their D&O questionnaires for the current proxy season.  The Nasdaq rules prohibit compensation committee members from accepting, directly or indirectly any consulting, advisory or other compensatory fee from the issuer or any subsidiary thereof.  The NYSE rules require an issuer to consider any such compensatory payments to determine independence.  Most issuers will not find it necessary to add a new question to their questionnaires because it will likely already be covered by questions addressed to Exchange Act Rule 16b-3 (which requires non-employee directors to qualify for exemptions from Section 16 rules) and Internal Revenue Code Section 162(m) (which requires certain performance based compensation to be awarded by outside directors to permit tax deductibility).

In making the independence determination, both the NYSE and Nasdaq rules require an issuer’s board to consider whether the director is affiliated with the Company, a subsidiary of the Company or an affiliate of a subsidiary of the Company to determine whether such affiliation would impair the director’s judgment as a member of the compensation committee.  Most issuers will want to ask compensation committee members to identify any such relationships in their questionnaires.  Section 952 of the Dodd-Frank Act did not specify any particular definition of “affiliate” for this purpose.

In addition, By July 1, 2013, most listed issuers must  have a compensation committee charter which provides that a compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser to the compensation committee, other than in-house legal counsel, only after taking into consideration any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee or an executive officer of the issuer.  Although not required, issuers may wish to ask compensation committee members to identify any such relations by use of a question like this:  “[Law firm name and compensation consultant name] are expected to provide advice to the Compensation Committee.  Please advise of any business or personal relationship you have with members and employees of those firms in the space provided below.”  If the size of the firms specified will generate many spurious answers, the question can be narrowed to members and employees of the firm that are expected to provide services to the compensation committee.

Check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.