Document ID: SEC-2012-0872-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-06-05T04:00Z

[Federal Register Volume 77, Number 108 (Tuesday, June 5, 2012)]
[Notices]
[Pages 33261-33263]
From the Federal Register Online via the Government Printing 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 rule-comments@sec.gov. 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