Document ID: SEC-2019-0870-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2019-06-18T04:00Z

[Federal Register Volume 84, Number 117 (Tuesday, June 18, 2019)]
[Notices]
[Pages 28379-28381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12788]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86095; File No. SR-NASDAQ-2019-049]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend the Definition of 
Family Member in Listing Rule 5605(a)(2) for Purposes of the Definition 
of Independent Director

June 12, 2019.
    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 29, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III, below, which Items have been prepared by the 
Exchange. 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to modify the definition of a ``Family 
Member'' for purposes of Listing Rule 5605(a)(2).
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized.

The Nasdaq Stock Market Rules

* * * * *
5605. Board of Directors and Committees
(a) Definitions
    (1) No change.
    (2) ``Independent Director'' means a person other than an Executive 
Officer or employee of the Company or any other individual having a 
relationship which, in the opinion of the Company's board of directors, 
would interfere with the exercise of independent judgment in carrying 
out the responsibilities of a director. For purposes of this rule, 
``Family Member'' means a person's spouse, parents, children,[ and] 
siblings, [whether by blood, marriage or adoption, or anyone residing 
in ] mothers and fathers-in-law, sons and daughters-in-law, brothers 
and sisters-in-law, and anyone (other than domestic employees) who 
shares such person's home. The following persons shall not be 
considered independent:
    (A)-(G) No change.
* * * * *
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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. The Exchange 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 is proposing to modify the definition of a ``Family Member'' 
for purposes of director independence under Listing Rule 5605(a)(2) to 
exclude stepchildren by reverting to the language of the rule before it 
was paraphrased. Currently, the rule provides that ``children . . . by 
marriage,'' or stepchildren, are considered Family Members. Nasdaq 
believes this category was added to the definition of a Family Member 
inadvertently and that such an expansion of the definition is 
unwarranted.
    Rule 5605(a) provides a list of certain relationships that preclude 
a board from finding that a director is independent. These objective 
measures provide transparency to investors and companies, facilitate 
uniform application of the rules, and ease administration. Nasdaq's 
rules preclude a director from being considered independent if the 
director has a Family Member who (i) accepted any compensation from the 
Company in excess of $120,000 during any period of twelve consecutive 
months within the three years preceding the determination of 
independence (with certain exceptions); \3\ (ii) is, a partner in, or a 
controlling Shareholder or an Executive Officer of, any organization to 
which the Company made, or from which the Company received, payments 
for property or services in the current or any of the past three fiscal 
years that exceed 5% of the recipient's consolidated gross revenues for 
that year, or $200,000, whichever is more (with certain exceptions); 
\4\ (iii) is, employed as an Executive Officer of another entity where 
at any time during the past three years any of the Executive Officers 
of the Company served on the compensation committee of such other 
entity; \5\ or (iv) is, a current partner of the Company's outside 
auditor, or was a partner or employee of the Company's outside auditor 
who worked on the Company's audit at any time during any of the past 
three years.\6\ Nasdaq's rules also preclude a director from being 
considered independent if such director is a Family Member of an 
individual who is, or at any time during the past three years was, 
employed by the Company as an Executive Officer.\7\
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    \3\ Listing Rule 5605(a)(2)(B).
    \4\ Listing Rule 5605(a)(2)(D).
    \5\ Listing Rule 5605(a)(2)(E).
    \6\ Listing Rule 5605(a)(2)(F).
    \7\ Listing Rule 5605(a)(2)(C).
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    Currently, for purposes of Nasdaq Rules, Family Member means a 
person's spouse, parents, children and siblings, whether by blood, 
marriage or adoption, or anyone residing in such person's home.\8\ This 
definition includes stepchildren, as they are ``children by . . . 
marriage.''
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    \8\ Listing Rule 5605(a)(2).
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    When Nasdaq first adopted this rule in 1999, Family Member was 
defined as a person's spouse, parents, children, siblings, mother-in-
law, father-in-law, brother-in-law, sister-in-law, and anyone who 
resides in such person's home.\9\ The rule was subsequently amended to 
include sons-in-law and daughters-in-law in the definition of a Family 
Member.\10\ At that point, the New York Stock Exchange's (``NYSE'') 
definition of an ``immediate family

[[Page 28380]]

member,'' which is still in effect, and Nasdaq's definition of the 
Family Member became nearly identical.\11\
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    \9\ See Securities Exchange Act Release No. 41982 (October 6, 
1999), 64 FR 55510 (October 13, 1999).
    \10\ See Securities Exchange Act Release No. 42231 (December 14, 
1999), 64 FR 71523 (December 21, 1999).
    \11\ Section 303A.02 of the NYSE Listed Company Manual states 
that ``An ``immediate family member'' includes a person's spouse, 
parents, children, siblings, mothers and fathers-in-law, sons and 
daughters-in-law, brothers and sisters-in-law, and anyone (other 
than domestic employees) who shares such person's home.''
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    In 2002, Nasdaq undertook a comprehensive review of its corporate 
governance rules and adopted a package of corporate governance 
reforms.\12\ At about the same time, NYSE implemented similar changes 
to its listing standards.\13\ The Commission discussed and approved 
both the Nasdaq Independent Director Proposal and the NYSE Corporate 
Governance Proposal in one order (the ``Order'').\14\
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    \12\ On October 9, 2002, the NASD, through its subsidiary, The 
Nasdaq Stock Market, Inc., filed with the Commission a proposed rule 
change to amend NASD Rules to modify requirements relating to board 
independence and independent committees. See Securities Exchange Act 
Release No. 47516 (March 17, 2003), 68 FR 14451 (March 25, 2003) 
(SR-NASD-2002-141) (``Nasdaq Independent Director Proposal'').
    \13\ See Securities Exchange Act Release No. 47672 (April 11, 
2003) 68 FR 19051 (April 17, 2003) (``NYSE Corporate Governance 
Proposal'').
    \14\ See Securities Exchange Act Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003).
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    As part of the Nasdaq Independent Director Proposal, Nasdaq changed 
the definition of Family Member to mean ``a person's spouse, parents, 
children and siblings, whether by blood, marriage or adoption, or 
anyone residing in such person's home.'' This change was meant to 
simplify the existing definition of a Family Member, while not 
introducing any substantive changes and Nasdaq did not discuss any 
potential substantive change to the definition in its rule filing. 
Similarly, NYSE retained unchanged the definition of the immediate 
family member in the NYSE Corporate Governance Proposal. In the Order, 
the Commission reviewed and analyzed both Nasdaq's new definition of 
the Family Member and the NYSE's existing definition and did not note 
any potential differences.\15\
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    \15\ Id.
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    Over time, Nasdaq has heard from its listed companies and their 
legal counsel that the change to the definition of a Family Member did 
not simplify the application of the rule. Instead, while preparing 
director and officer questionnaires the companies' legal counsel often 
need to analyze potential differences in the meaning of Nasdaq's 
definition of a Family Member and NYSE's definition of an immediate 
family member. In particular, this burdensome analysis occurs when a 
company transfers its listing from one national securities exchange to 
another. In such case, a director may have already filled out an annual 
questionnaire based on the exchange's definition of a family member, 
but may need to answer additional questions because the definition of 
the exchange the listing is transferred to is phrased differently.
    In particular, Nasdaq has discovered that the revised definition of 
a Family Member was broader than the prior version and now 
inadvertently includes stepchildren of a director because such 
individuals are ``children . . . by marriage'' even though they are not 
``sons-in-law'' or ``daughters-in-law'' or any other category from the 
old definition. In one situation that Nasdaq observed the director 
married a person who had an adult child. Because the director never 
acted in any capacity as a parent of this stepchild, and the stepchild 
never shared the director's household, the director and stepchild had 
an attenuated relationship. Accordingly, Nasdaq believes that such a 
relationship should not preclude a director from being considered 
independent in all circumstances.
    Nasdaq believes that the analysis of the potential differences in 
the definition of family members is an unnecessary and unintentional 
burden on listed companies because Nasdaq's current definition of a 
Family Member was meant to paraphrase the then-existing definition of a 
Family Member, while not introducing any substantive changes. In 
addition, as described above, the Commission reviewed and analyzed both 
Nasdaq's new definition of a Family Member and the NYSE's existing 
definition of an immediate family member, which is nearly identical to 
the Nasdaq's old definition of a Family Member, and did not note any 
potential differences. Accordingly, Nasdaq is proposing to modify the 
definition of a Family Member for purposes of director independence 
under Listing Rule 5605(a)(2) to revert to the language of the rule 
before it was paraphrased.
    Nasdaq is also proposing to modify the definition of a ``Family 
Member'' for purposes of director independence under Listing Rule 
5605(a)(2) to exclude domestic employees who share a director's home. 
Nasdaq believes that the definition of a Family Member should not 
include a domestic employee who shares a director's home because this 
definition is intended to capture familial, not commercial, 
relationships.
    Notwithstanding these changes, Nasdaq notes that a company's board 
must, under the Rule and IM-5605, affirmatively determine that no 
relationship exists that would interfere with the exercise of 
independent judgment in carrying out the director's responsibilities. 
Nasdaq believes that it is appropriate for the board to review a 
potential relationship between a director and a domestic employee or a 
child of the director's spouse under such facts and circumstances test.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\17\ in particular, in that it is designed 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, by removing the impediments to a free in [sic] open market 
where a ``bright line'' independence test prohibits some directors from 
being deemed independent in circumstances where the relationship with a 
Family Member is attenuated, non-existent, or commercial in nature. 
Nasdaq also believes that the proposed rule change is designed to 
remove impediments to and perfect the mechanism of a free and open 
market by aligning Nasdaq's and NYSE's corporate governance 
requirements more closely, by contrast to current differently phrased 
definitions of a Family Member on Nasdaq and an immediate family member 
on NYSE and inclusion of a domestic employee who shares the director's 
home in Nasdaq's definition of a Family Member, where such differences 
pose an unnecessary burden on listed companies.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    Specifically, Nasdaq listing rules currently prohibit a director 
from being deemed independent in certain circumstances by including 
stepchildren of the directors' spouse [sic] in the definition of a 
Family Member, as described in more detail above. The rule also 
prohibits a domestic employee who shares the director's home from being 
deemed independent by including such employee in the definition of a 
Family Member.
    Independent directors over time became a linchpin in the American 
corporate governance. It is important for investors to have confidence 
that individuals serving as independent directors do not have a 
relationship with the listed company that would impair their 
independence. As the

[[Page 28381]]

importance of independent directors for listed companies increased, so 
did the directors' workload and the risk of litigation. In this 
environment, Nasdaq believes that it is appropriate not to prohibit 
directors from being considered independent based on certain commercial 
or attenuated familial relationships, but instead allow the board to 
review such a relationship and affirmatively determine a relationship 
exists that would interfere with the exercise of independent judgment 
in carrying out the director's responsibilities.
    Additionally, as proposed, Listing Rule 5605(a)(2) would remain 
consistent with the SEC Rule 10A-3 promulgated under the Act.\18\ In 
particular, Rule 10A-3(e)(8) provides that a director is no longer 
considered independent for audit committee service upon, among other 
things, indirect acceptance of compensatory payments to ``spouses, 
minor children or stepchildren or children or stepchildren sharing a 
home with the member.'' Thus, the SEC's audit committee independence 
rule focuses only on payments to ``minor children or stepchildren'' or 
``stepchildren sharing a home with the member'' and would not capture 
the activities of a stepchild of a director, particularly one who does 
not nor has ever shared a household. Similarly, Rule 10A-3 does not 
capture the activities of directors' domestic employees.
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    \18\ 17 CFR 240.10A-3.
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    Following the proposed rule change, Nasdaq's definition of the 
Family Member will be became identical with the NYSE's definition of an 
``immediate family member,'' the definition that the Commission has 
previously approved.\19\
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    \19\ See footnote 14, above.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change would 
eliminate requirements that burden issuers without an offsetting 
benefit in protecting shareholders. All listed companies would be 
affected in the same manner by these changes. As such, these changes 
are neither intended to, nor expected to, impose any burden on 
competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or 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 Exchange consents, the Commission shall: (a) By order approve 
or disapprove such 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 rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2019-049 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2019-049. 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 website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly.
    All submissions should refer to File Number SR-NASDAQ-2019-049 and 
should be submitted on or before July 9, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12788 Filed 6-17-19; 8:45 am]
 BILLING CODE 8011-01-P