Document ID: SEC-2006-0752-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2006-06-14T04:00Z

[Federal Register: June 14, 2006 (Volume 71, Number 114)]
[Notices]               
[Page 34408-34410]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn06-142]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53941; File No. SR-NASDAQ-2006-011]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of a Proposed Rule Change To Modify the Cure Period 
Available to an Issuer That Loses an Independent Director or Audit 
Committee Member

June 5, 2006.
    Pursuant to section 19(b)(1) of the Secretaries Exchange Act of 
1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on May 23, 2006, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III 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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[[Page 34409]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to modify the cure period available to a listed 
issuer that loses an independent director or audit committee member 
within approximately six months prior to its annual meeting.\3\ Nasdaq 
will implement the proposed rule immediately upon approval.
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    \3\ On January 26, 2006, the National Association of Securities 
Dealers, Inc. filed a similar proposal, SR-NASD-2006-10, to modify 
the cure period available to an issuer that loses an independent 
director or audit committee member. The instant proposed rule change 
replaces SR-NASD-2006-10, which was withdrawn on May 23, 2006, given 
Nasdaq's expectation that it will begin operating as a national 
securities exchange in the near term. See Securities Exchange Act 
Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) 
(``Exchange Approval Order'').
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    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in [brackets].\4\
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    \4\ Changes are marked to the rule text that appears in the 
electronic manual of The NASDAQ Stock Market, LLC found at http://www.nasdaqtrader.com
, as amended by SR-NASDAQ-2006-007, which was 

effective upon filing on May 8, 2006. See Securities Exchange Act 
Release No. 53799 (May 12, 2006), 71 FR 29195. These rules will 
become effective when Nasdaq fulfills certain conditions and 
commences operations as a national securities exchange, as set forth 
in the Exchange Approval Order.
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* * * * *

4350. Qualitative Listing Requirements for Nasdaq Issuers Except for 
Limited Partnerships

    (a)-(b) No change.
    (c) Independent Directors.
    (1) A majority of the board of directors must be comprised of 
independent directors as defined in Rule 4200. The company must 
disclose in its annual proxy (or, if the issuer does not file a proxy, 
in its Form 10-K or 20-F) those directors that the board of directors 
has determined to be independent under Rule 4200. If an issuer fails to 
comply with this requirement due to one vacancy, or one director ceases 
to be independent due to circumstances beyond their reasonable control, 
the issuer shall regain compliance with the requirement by the earlier 
of its next annual shareholders meeting or one year from the occurrence 
of the event that caused the failure to comply with this requirement; 
provided, however, that if the annual shareholders meeting occurs no 
later than 180 days following the event that caused the failure to 
comply with this requirement, the issuer shall instead have 180 days 
from such event to regain compliance. An issuer relying on this 
provision shall provide notice to Nasdaq immediately upon learning of 
the event or circumstances that caused the non-compliance.
    (2)-(5) No change.
    (d) Audit Committee.
    (1)-(3) No change.
    (4) Cure Periods.
    (A) No change.
    (B) If an issuer fails to comply with the audit committee 
composition requirement under Rule 4350(d)(2)(A) due to one vacancy on 
the audit committee, and the cure period in paragraph (A) is not 
otherwise being relied upon for another member, the issuer will have 
until the earlier of the next annual shareholders meeting or one year 
from the occurrence of the event that caused the failure to comply with 
the requirement; provided, however, that if the annual shareholders 
meeting occurs no later than 180 days following the event that caused 
the vacancy, the issuer shall instead have 180 days from such event to 
regain compliance. An issuer relying on this provision shall provide 
notice to Nasdaq immediately upon learning of the event or 
circumstances that caused the non-compliance.
    (e)-(n) No change.
* * * * *

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 Rule 4350 requires each listed issuer to have a majority 
independent board and an audit committee that consists of at least 
three independent members. Issuers who lose an independent board or 
audit committee member, either because the member ceases to be 
independent for reasons outside the member's reasonable control, or 
because a vacancy arises, are afforded a cure period. The cure period 
lasts until the earlier of the company's next annual shareholders' 
meeting or one year from the date of the event that caused the non-
compliance. This cure period tracks language in Rule 10A-3 under the 
Act,\5\ which states that a self-regulatory organization may provide a 
cure period to allow a director who ceases to be independent through 
reasons outside the audit committee member's reasonable control to 
remain on the audit committee ``until the earlier of the next annual 
shareholders meeting of the listed issuer or one year from the 
occurrence of the event that caused the member to be no longer 
independent.'' \6\
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    \5\ 17 CFR 240.10A-3.
    \6\ 17 CFR 240.10A-3(a)(3).
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    The cure period in Nasdaq Rules 4350(c) and 4350(d)(4)(B) has 
caused anomalous results.\7\ For example, if a director who serves on 
the audit committee resigns just after the company's annual meeting, 
thus creating a vacancy on the board and the audit committee, the 
company would have almost a year to recruit a new director and regain 
compliance. At the other extreme, if the same situation occurs just 
before the company's annual meeting, the company would have only days 
or weeks to recruit a new director. Similarly, if a company fails to 
meet the majority independent board requirement because a director 
ceases to be independent through no fault of the director, the timing 
of the event causing the director to cease to be independent, in 
relation to the timing of the annual meeting, could result in widely 
varying cure periods. This can create a hardship, particularly on 
smaller companies, which may have more difficulty attracting and 
recruiting new independent directors. In addition, the annual 
shareholder meeting has little to do with the date by which a company 
can add a new independent director or audit committee member, since new 
board and committee members generally can be appointed by the existing 
board of directors without a shareholder meeting.
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    \7\ Nasdaq's experience with these rules comes from its 
application of the identical NASD rules, under which Nasdaq has 
operated. See NASD Rules 4350(c) and 4350(d)(4)(B).
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    Given the disparate periods available under the existing cure 
period, Nasdaq proposes to adopt a minimum 180-day cure period in cases 
where within 180 days before the company's annual meeting: (i) A 
vacancy arises on the audit committee or board, or (ii) the company 
ceases to have a majority of independent directors on its board because 
a director loses his or her independence through no fault of the 
director.\8\ The 180-day minimum will

[[Page 34410]]

help assure adequate time for companies (particularly small to mid-size 
companies) who lose an independent director just before their annual 
meeting to conduct an appropriate search process for a qualified 
replacement independent director and/or audit committee member. It 
would not, however, shorten the compliance time for companies who fall 
out of compliance just after their annual meeting, since those 
companies will still have as long as a year to regain compliance. The 
180-day minimum would not apply to allow a non-independent director to 
remain on the audit committee beyond the period contemplated in Rule 
10A-3 under the Act; \9\ this provision is codified in Nasdaq Rule 
4350(d)(4)(A), which is not being modified.
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    \8\ This 180-day minimum period is consistent with: (i) Nasdaq's 
understanding that the process of recruiting and retaining an 
independent board member, particularly an audit committee member 
with financial expertise, can take four to five months or more; and 
(ii) Nasdaq's analysis of the length of time it has taken for Nasdaq 
listed companies that have fallen out of compliance with the 
independent director and/or audit committee requirements to regain 
compliance.
    \9\ 17 CFR 240.10A-3.
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    Upon approval of this proposed rule change, Nasdaq will allow any 
company then eligible to utilize the new 180-day minimum period from 
the date of the vacancy or the event that caused non-compliance, even 
if the vacancy or non-compliance arose before the date of approval, 
provided that such company has not exceeded the cure period provided 
for in the rule as in effect prior to the proposed rule change.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 6 of the Act,\10\ in general and with section 
6(b)(5) of the Act,\11\ in particular, which requires that Nasdaq's 
rules be designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market, and to protect investors and the public interest. Nasdaq 
believes that the proposed change is consistent with these requirements 
in that it will facilitate transparent application of Nasdaq's rules, 
while allowing issuers a sufficient cure period.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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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 purpose 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

    With 35 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 Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested person are invited to submit written data, view, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASDAQ-2006-011 on the subject line.

Paper comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASDAQ-2006-011. 
This file number should be included on the subject line if e-mail 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 inspection 
and copying in the Commission's Public Reference Room. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2006-011 and should be submitted on or before 
July 5, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 06-5374 Filed 6-13-06; 8:45 am]

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