[Federal Register Volume 77, Number 108 (Tuesday, June 5, 2012)]
[Notices]
[Pages 33261-33263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-13513]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67076; File No. SR-NASDAQ-2012-062]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Modify Its Corporate
Governance Rules
May 30, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on May 17, 2012, The NASDAQ Stock Market LLC (``Nasdaq'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I and II below, which Items have been
prepared by Nasdaq. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
Nasdaq proposes to modify the exception that allows a non-
independent director to serve on a listed company's audit committee,
compensation committee or nominations committee under exceptional and
limited circumstances. The text of the proposed rule change is
available on Nasdaq's Web site at http://www.nasdaq.cchwallstreet.com,
at Nasdaq's principal office, and at the Commission's Public Reference
Room. Nasdaq will implement the proposed rule change upon approval.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq's rules generally require that a listed company's audit,
compensation and nominations committees consist of ``independent
directors,'' as defined in Listing Rule 5605(a)(2).\3\ Under this
definition, a company's board must determine affirmatively that a
director does not have any relationship which, in the opinion of the
board, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. In addition, there are
certain categories of directors who cannot be considered independent,
such as a director who is currently, or was during the prior three
years, employed by the company, or a director who is a family member
\4\ of an individual who is, or at any time during the past three years
was, employed as an executive officer \5\ by the company.\6\ A director
is not barred from being independent if he or she has a family member
employed by the company, provided that the family member is not an
executive officer of the company.
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\3\ See Nasdaq Listing Rules 5605(c)(2), 5605(d)(2)(B) and
5605(e)(1)(B).
\4\ ``Family Member'' is defined as ``a person's spouse,
parents, children and siblings, whether by blood, marriage or
adoption, or anyone residing in such person's home.'' Nasdaq Listing
Rule 5605(a)(2).
\5\ ``Executive Officer'' is defined as an officer ``covered in
Rule 16a-1(f) under the [Exchange] Act.'' Nasdaq Listing Rule
5605(a)(1).
\6\ See Nasdaq Listing Rules 5605(a)(2)(A) and 5605(a)(2)(C).
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Nasdaq's rules also include an exception (the ``Exception'') to
permit a listed company, under exceptional and limited circumstances
and with proper disclosure, to allow one non-independent director to
serve on the audit, compensation or nominations committee for up to two
years.\7\ The Exception, which is used infrequently by Nasdaq-listed
companies,\8\ was first adopted for audit committees in December
1999,\9\ when the audit committee requirements were significantly
enhanced following the release of the report of the Blue Ribbon
[[Page 33262]]
Committee on Improving the Effectiveness of Corporate Audit Committees
(the ``Blue Ribbon Report'').\10\ When Nasdaq implemented rules
regarding independent director oversight of executive officer
compensation and director nominations in 2003, these new rules included
the Exception for compensation and nominations committees.\11\
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\7\ See Nasdaq Listing Rules 5605(c)(2)(B), 5605(d)(3) and
5605(e)(3).
\8\ On December 31, 2011, nine companies were using the
Exception: Six companies for the audit committee only, two companies
for the nominations committee only and one company for both the
nominations and compensation committees. In the two-year period from
January 1, 2010 to December 31, 2011, 37 companies used the
Exception for one or more of their committees.
\9\ See Securities Exchange Act Release No. 42231 (December 14,
1999), 64 FR 71523 (December 21, 1999).
\10\ See Report and Recommendations of the Blue Ribbon Committee
on Improving the Effectiveness of Corporate Audit Committees
(February 1999).
\11\ See Securities Exchange Act Release No. 48745 (November 4,
2003), 68 FR 64154 (November 12, 2003).
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The Blue Ribbon Report identified examples of relationships that
may interfere with an audit committee member's exercise of independence
but also specifically recommended adopting an exception for a director
``who has one or more of these relationships'' if the company's board
of directors, under exceptional and limited circumstances, determines
that membership on the committee by the individual is required by the
best interests of the company and its stockholders and the board
discloses, in the next annual proxy statement subsequent to such
determination, the nature of the relationship and the reasons for that
determination.\12\ The Exception allows a listed company greater
flexibility as to board and committee membership and composition. This
is particularly important for a smaller company that may have
relationships with large investors that may require such
flexibility.\13\
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\12\ See the Blue Ribbon Report at 24.
\13\ Id. at 23. The Blue Ribbon Report proposed to exempt
smaller companies (i.e., those with a market capitalization below
$200 million) from the proposed audit committee requirements. Id. at
12 and 23. Thus, while the Blue Ribbon Committee's recommendation to
adopt the Exception was not primarily targeted towards smaller
companies, and the Blue Ribbon Committee recognized the utility of
the Exception for companies of all sizes, the Exception is more
important today for smaller companies given that they are now
subject to all the same board composition requirements as larger
companies.
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Currently, a listed company cannot utilize the Exception for a
director who has a family member who is an employee of the listed
company, even if that family member is not an executive officer of the
company, if the director is not independent for an unrelated reason.
However, that same family relationship would not otherwise preclude the
director from being considered independent.\14\ To provide an example,
consider a director who, until one year ago, was employed by a listed
company and who has a son who is a non-executive employee of the listed
company. That director cannot be considered independent until three
years after the end of her employment.\15\ However, it is solely the
prior employment relationship that precludes her from being considered
independent; the son's employment does not preclude her from being
considered independent and the company's board can determine that she
is independent three years after the end of her employment even if her
son is still a non-executive employee of the company at that time.
Nonetheless, if the listed company sought to appoint this same director
to one of its committees pursuant to the Exception prior to the
expiration of the three-year lookback period, it would be unable to do
so solely because of the son's employment.
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\14\ See Nasdaq Listing Rules 5605(c)(2)(B), 5605(d)(3) and
5605(e)(3).
\15\ See Nasdaq Listing Rule 5605(a)(2)(A), which provides that
a director who is, or at any time during the past three years was,
employed by a listed company may not be considered independent.
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Nasdaq believes this distinction in its rules is incongruous. If
employment of a director's family member, other than as an executive
officer, does not disqualify a director from being considered
independent, Nasdaq sees no policy basis for precluding a listed
company from relying on the Exception for that same director where the
company's board has determined that the director's membership on the
relevant committee is required by the best interests of the company and
its stockholders. Accordingly, Nasdaq proposes to amend Listing Rules
5605(c)(2)(B), 5605(d)(3) and 5605(e)(3) to allow a director who is a
family member of a non-executive employee of a listed company to serve
on the listed company's audit committee, compensation committee or
nominations committee under exceptional and limited circumstances. This
proposed change is consistent with the recommendation contained in the
Blue Ribbon Report, which, as described above, would allow any non-
independent director to serve under exceptional and limited
circumstances with a proper board finding and disclosure.
Under both the current and proposed versions of the Exception, a
listed company's board of directors must make an affirmative
determination that the non-independent director's membership on a
committee is required by the best interests of the company and its
stockholders. In making this determination, Nasdaq expects that a board
of directors would consider any family relationship between the non-
independent director and a non-executive employee of the company.
However, Nasdaq does not believe that the mere existence of this family
relationship alone should create an outright prohibition on the use of
the Exception.
Under both the current and proposed versions of the Exception, a
listed company could not rely on the Exception for a director who has a
family member who is an executive officer of the listed company. In
addition, under both the current and proposed versions of the Exception
for audit committees, a listed company could not rely on the Exception
for a director who does not meet the criteria set forth in Section
10A(m)(3) of the Exchange Act and the rules thereunder to allow the
director to serve on the audit committee.\16\
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\16\ See 15 U.S.C. 78j-1(m)(3) and 17 CFR 240.10A-3(b)(1).
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Finally, under both the current and proposed versions of the
Exception, a listed company, other than a foreign private issuer, that
relies on the Exception for an audit committee member must comply with
the disclosure requirements set forth in Item 407(d)(2) of Regulation
S-K.\17\ A foreign private issuer that relies on the Exception for an
audit committee member must disclose in its next annual report (e.g.,
Form 20-F or 40-F) the nature of the relationship that makes the
committee member not independent and the reasons for the board's
determination to rely on the Exception.\18\ A listed company that
relies on the Exception for a compensation or nominations committee
member must disclose either on or through the company's Web site or in
the proxy statement for the next annual meeting (or, if the company
does not file a proxy, in its Form 10-K or 20-F), the nature of the
relationship that makes the committee member not independent and the
reasons for the determination to rely on the Exception.\19\ A listed
company that relies on the Exception for a compensation or nominations
committee member also must provide any disclosure required by
Instruction 1 to Item 407(a) of Regulation S-K regarding its reliance
on the Exception.\20\
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\17\ See Nasdaq Listing Rule 5605(c)(2)(B).
\18\ Id.
\19\ See Nasdaq Listing Rules 5605(d)(3) and 5605(e)(3).
\20\ Id.
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The proposed rule change also would substitute ``Executive
Officer,'' which is a defined term, for ``officer,'' which is now used
in the Exception but is not defined. Nasdaq always has interpreted
these terms in the same way.
[[Page 33263]]
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\21\ in general, and with
Section 6(b)(5) of the Act,\22\ in particular. Section 6(b)(5)
requires, among other things, that a national securities exchange's
rules must be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest. The proposed rule change would modify Nasdaq's rules
to allow a listed company to utilize the Exception for a very narrow
category of additional directors: Those who have a family member who is
a non-executive employee of the listed company. Nasdaq believes that
the proposed change will reduce confusion about the application of the
Exception, given that the same family relationship does not otherwise
preclude the director from being considered independent, and will
thereby promote just and equitable principles of trade and remove an
impediment to the mechanism of a free and open market. The proposed
rule change is designed to protect investors and the public interest
because a company's board will continue to be required to conclude that
the use of the Exception is in the best interests of the company and
its stockholders and the use of the Exception will continue to be
required to be disclosed as set forth in Listing Rules 5605(c)(2)(B),
5605(d)(3) and 5605(e)(3).
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\21\ 15 U.S.C. 78f.
\22\ 15 U.S.C. 78f(b)(5) and (8).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2012-062 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2012-062. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between 10:00 a.m. and
3:00 p.m. Copies of the filing will also be available for inspection
and copying at Nasdaq's principal office. All comments received will be
posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2012-062 and should be submitted
on or before June 26, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13513 Filed 6-4-12; 8:45 am]
BILLING CODE 8011-01-P