Document ID: SEC-2012-1202-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-07-25T04:00Z

[Federal Register Volume 77, Number 143 (Wednesday, July 25, 2012)]
[Notices]
[Pages 43618-43620]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-18106]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67468; File No. SR-NASDAQ-2012-062]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change To Modify Its Corporate Governance 
Rules

July 19, 2012.

I. Introduction

    On May 17, 2012, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify an exception to Nasdaq Rule 5605 that 
allows a non-independent director of a listed company to serve on its 
audit committee, compensation committee or nominations committee under 
exceptional and limited circumstances.\3\ The proposal was published 
for comment in the Federal Register on June 5, 2012.\4\ The Commission 
received no comments on the proposal. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra note 9 and accompanying text.
    \4\ See Securities Exchange Act Release No. 67076 (May 30, 
2012), 77 FR 33261 (SR-NASDAQ-2012-062) (``Notice'').
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II. Description of the Proposal

    Nasdaq's listing rules generally require that a listed company's 
audit, compensation and nominations committees consist of ``independent 
directors,'' \5\ as defined in Nasdaq Rule 5605(a)(2). A director is 
specifically prohibited from being considered independent under certain 
circumstances.\6\ For example, a director who is currently, or during 
the prior three years was, employed by the company, or a director who 
is a family member of an individual who is, or at any time during the 
prior three years was, employed as an executive officer \7\ by the 
company, may not be considered independent.\8\
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    \5\ See paragraphs (c)(2)(A), (d), and (e)(1)(B) of Nasdaq Rule 
5605.
    \6\ See Nasdaq Rule 5605(a)(2).
    \7\ ``Executive Officer'' means those officers covered in Rule 
16a-1(f) under the Act, 17 CFR 240.16a-1(f). See Nasdaq Rule 
5605(a)(1).
    \8\ A director is not, however, 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. See 
Nasdaq Rule 5605(a)(2)(C).
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    Nasdaq's listing rules also include an exception (``Exception'') to 
permit a listed company, under exceptional and limited circumstances, 
with proper disclosure, and under specified conditions to allow one 
non-independent director to serve on the audit, compensation, or 
nominations committee for up to two years.\9\ Currently, a listed 
company may not utilize the Exception for a non-

[[Page 43619]]

independent director who would otherwise qualify if that director 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. Nasdaq notes, 
however, that the same family relationship would not otherwise preclude 
a director from being considered independent.\10\ Nasdaq cites to the 
example of 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 
company. The director, under ordinary circumstances, cannot be 
considered independent until three years after the end of the 
director's employment.\11\ Nasdaq notes that it is the director's own 
prior employment relationship that precludes the director from being 
considered independent. The son's employment does not preclude the 
director from being considered independent. Thus, three years after the 
end of the director's employment, the company's board of directors 
(``board'') may determine that the director is independent, even if the 
director's son is still a non-executive employee of the company at that 
time. Nonetheless, under the current rule, if the listed company sought 
to appoint this same director to its audit, compensation, or 
nominations committee 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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    \9\ See paragraphs (c)(2)(B), (d)(3) and (e)(3) of Nasdaq 
Listing Rule 5605. The Exception, however, does not permit a listed 
company to appoint to its audit committee a director who does not 
meet the independence criteria set forth in Section 10A(m)(3) of the 
Exchange Act, 15 U.S.C. 78j-1(m)(3), and Rule 10A-3 thereunder, 17 
CFR. 240.10A-3(b)(1). See also Nasdaq Rule 5605(c)(2)(B)(ii).
    \10\ See paragraphs (a), (c)(2)(B), (d)(3) and (e)(3) of Nasdaq 
Rule 5605.
    \11\ See Nasdaq 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 that this distinction in its listing 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, the Exchange states that it sees no reason to 
preclude a listed company from relying on the Exception for that same 
director where the listed company's board determines that the 
director's membership on the relevant committee is required by the best 
interests of the company and its shareholders.\12\
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    \12\ See Notice, supra note 4.
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    Nasdaq proposes to amend paragraphs (c)(2)(B), (d)(3), and (e)(3) 
of Nasdaq Rule 5605 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 as long as the 
listed company's board concludes that the director's membership on the 
relevant committee is required by the best interests of the company and 
its shareholders. Under the proposed rule change, the board would still 
be required, as under the current version of the Exception, to 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 shareholders. Nasdaq states that it expects the board, 
in making such a determination, to consider any family relationship 
between the non-independent director and a non-executive employee of 
the company.\13\
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    \13\ 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 in Section 10A(m)(3) of the Act and the rules thereunder to 
allow the director to serve on the audit committee. See 15 U.S.C. 
78j-1(m)(3) and 17 CFR 240.10A-3(b)(1).
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    Under the proposed rule change, a listed company, other than a 
foreign private issuer, that relies on the Exception for an audit 
committee member would continue to be required to comply with the 
disclosure requirements set forth in Item 407(d)(2) of Regulation S-
K.\14\ A foreign private issuer that relies on the Exception for an 
audit committee member would continue to be required to 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.\15\
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    \14\ See Nasdaq Rule 5605(c)(2)(B).
    \15\ Id.
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    Similarly, a listed company that relies on the Exception for a 
compensation or nominations committee member would continue to be 
required to disclose either on or through the company's Web site or in 
the proxy statement for the next annual meeting of the company (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.\16\ A listed company that relies on the Exception for a 
compensation or nominations committee member also would continue to be 
required to provide any disclosure required by Instruction 1 to Item 
407(a) of Regulation S-K regarding its reliance on the Exception.\17\
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    \16\ See paragraphs (d)(3) and (e)(3) of Nasdaq Rule 5605.
    \17\ Id.
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    Finally, the proposed rule change would replace the term 
``officer'' with the defined term ``Executive Officer'' in paragraphs 
(c)(2)(B), (d)(3), and (e)(3) of Nasdaq Rule 5605. Nasdaq notes that it 
has always interpreted these terms in the same manner.\18\
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    \18\ See Notice, supra note 4.
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III. Discussion and Commission Findings

    After carefully reviewing the proposed rule change, the Commission 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\19\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\20\ which, among other things, requires that the rules of a 
national securities exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating transactions in securities, 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.\21\
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    \19\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ The Commission notes that it recently adopted new Rule 10C-
1 under the Act, relating to the independence of compensation 
committees of listed issuers. See Securities Exchange Act Release 
No. 67220 (June 20, 2012), 77 FR 28422 (June 27, 2012). In 
accordance with Section 10C of the Act, which was added by Section 
952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
of 2010, new Rule 10C-1 directs each national securities exchange to 
establish listing standards that, among other things, require each 
member of a listed issuer's compensation committee to be a member of 
the board of directors and to be ``independent,'' as defined in the 
listing standards of the exchange adopted in accordance with Rule 
10C-1. The exchanges must file with the Commission, no later than 
September 25, 2012, proposed rule changes that comply with the 
requirements of Rule 10C-1, and must have final rules or rule 
amendments that comply with Rule 10C-1 approved by the Commission no 
later than June 27, 2013. The Commission expects that, in submitting 
a proposed rule change in compliance with Rule 10C-1, Nasdaq will 
discuss whether and how its proposed rule change would relate to the 
Exception and the Exchange's instant proposed rule change with 
respect to compensation committees.
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    As the Exchange notes, in ordinary circumstances, when a family 
member of a director is employed by the listed company, but not as an 
executive officer, the director may still be deemed independent. The 
Exchange believes that it is incongruous for the same relationship to 
preclude a company from relying on the Exception where the requirements 
of the Exception otherwise

[[Page 43620]]

are satisfied. The Commission believes that the Exchange's view is not 
unreasonable. In approving the proposed rule change, the Commission 
notes that in any instance in which a listed company relies on the 
Exception, the company's board would continue to be required under the 
proposal to affirmatively determine that the 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.\22\
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    \22\ See Nasdaq Rule 5605(a)(2).
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    The Commission further notes that a listed company is permitted to 
use the Exception only if its board, 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 
shareholders. Moreover, the Commission notes that any time an issuer 
relies on the Exception, it is required to make the public disclosures 
indicated above.
    Finally, the Commission believes that replacing the undefined term 
``officer'' with the defined term ``Executive Officer,'' in keeping 
with the Exchange's longstanding interpretation of its listing rules, 
clarifies the applicability of the listing rules.
    For the reasons discussed above, the Commission finds that the rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-NASDAQ-2012-062), be, and it 
hereby is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18106 Filed 7-24-12; 8:45 am]
BILLING CODE 8011-01-P