Document ID: SEC-2019-1349-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market. LLC
Posted Date: 2019-09-19T04:00Z

[Federal Register Volume 84, Number 182 (Thursday, September 19, 2019)]
[Notices]
[Pages 49353-49356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20220]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86969; File No. SR-NASDAQ-2019-049]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Disapprove Proposed 
Rule Change To Amend the Definition of Family Member in Listing Rule 
5605(a)(2) for Purposes of the Definition of Independent Director

September 13, 2019.

I. Introduction

    On May 29, 2019, 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 amend the definition of ``Family Member'' for 
purposes of determining the independence of directors under Exchange 
Listing Rule 5605(a)(2). The proposed rule change was published for 
comment in the Federal Register on June 18, 2019.\3\ On August 1, 2019, 
the Commission extended the time period within which to either approve 
the proposed rule change, disapprove the proposed rule change, or 
institute

[[Page 49354]]

proceedings to determine whether to approve or disapprove the proposed 
rule change, to September 16, 2019.\4\ The Commission has received no 
comment letters on the proposal. This order institutes proceedings 
under Section 19(b)(2)(B) of the Act to determine whether to approve or 
disapprove the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86095 (June 12, 
2019), 84 FR 28379 (``Notice'').
    \4\ See Securities Exchange Act Release No. 86545 (August 1, 
2019), 84 FR 38704 (August 7, 2019).
---------------------------------------------------------------------------

II. Background and Description of the Proposal

    Nasdaq has proposed to amend the definition of Family Member in 
Nasdaq Rule 5605(a)(2), which is used for purposes of determining 
whether a director of a listed company qualifies as an Independent 
Director, to exclude stepchildren of directors from the Family Member 
definition.
    Nasdaq listing rules have certain requirements for Independent 
Directors, including that a majority of the board of the directors of 
the company (the ``Board'') be Independent Directors, and that the 
company's audit, compensation and nominating committees \5\ be 
comprised solely of Independent Directors.\6\ ``Independent Director'' 
is defined in Nasdaq Rule 5605(a)(2) to mean 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, 
would interfere with the exercise of independent judgment in carrying 
out the responsibilities of a director. Rule 5605(a)(2) also provides a 
list of certain relationships that preclude a Board finding of 
independence, including the following:
---------------------------------------------------------------------------

    \5\ If the company does not have a nominating committee, under 
Nasdaq Rule 5605(e)(1) nominees for directors must be selected or 
recommended by Independent Directors constituting a majority of the 
Board's Independent Directors in a vote in which only Independent 
Directors participate.
    \6\ See Nasdaq Rule 5605(b)-(e).
---------------------------------------------------------------------------

     A director who accepted or who has a Family Member who 
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, 
including a Family Member who is an employee other than an executive 
officer); \7\
---------------------------------------------------------------------------

    \7\ Nasdaq states in its rules that this criterion is generally 
intended to capture situations where a compensation is made directly 
to (or for the benefit of) the director or a Family Member of the 
director. See Nasdaq Rule IM-5605.
---------------------------------------------------------------------------

     A director who 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;
     A director who is, or has a Family Member who 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);
     A director of the company who is, or has a Family Member 
who 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 serve on the compensation committee of such other entity; and
     A director who is, or has a Family Member who 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.\8\
---------------------------------------------------------------------------

    \8\ Additional criteria of independence apply with respect to 
Board members and members of the audit and compensation committees, 
but are not relevant here. See Nasdaq Rule 5605.
---------------------------------------------------------------------------

    Nasdaq Rule 5605(a)(2) currently defines Family Member as ``a 
person's spouse, parents, children and siblings, whether by blood, 
marriage or adoption, or anyone residing in such person's home.'' As 
Nasdaq noted in its proposal, this definition includes stepchildren, as 
they are ``children by . . . marriage.'' \9\ Nasdaq proposes to re-
define Family Member as ``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.'' The same definition is used in the 
corresponding listing rules of the New York Stock Exchange 
(``NYSE'').\10\ Nasdaq assumes, without elaboration, that the term 
``children'' excludes stepchildren.\11\ Nasdaq also proposes to exclude 
domestic employees who share a director's home, on the ground that the 
term is intended to capture familial, not commercial, 
relationships.\12\
---------------------------------------------------------------------------

    \9\ See Notice, supra note 3, at 28379.
    \10\ See Section 303A.02 of the NYSE Listed Company Manual. For 
clarity, note that NYSE Section 303A.02 uses, and defines, the term 
``immediate family member'', which corresponds to Nasdaq's term 
``Family Member''. See also Securities Exchange Act Release No. 
48745 (November 4, 2003), 68 FR 64154 (November 12, 2003) (File 
Numbers SR-NYSE-2002-33 and SR-NASD-2002-141) (Commission order 
approving the current texts of the NYSE and Nasdaq definitions 
(``2003 Approval Order'')).
    \11\ Nasdaq stated in its proposal that the category of 
``children . . . by marriage'' was added to the definition of a 
Family Member inadvertently in the context of changes it adopted in 
2003. See Notice, supra note 3, at 28379. See also 2003 Approval 
Order. According to Nasdaq, those changes were meant to simplify the 
existing definition of Family Member while not introducing any 
substantive differences, but did not succeed in doing so and 
resulted in an unwarranted expansion of the definition. See Notice 
at 28380.
    \12\ See id.
---------------------------------------------------------------------------

    Nasdaq acknowledges that Independent Directors over time have 
become a linchpin in American corporate governance and that 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. In support of its 
proposal, Nasdaq indicates that including stepchildren within the 
definition of Family Member could capture attenuated relationships, 
such as where a director marries a person who has an adult child, and 
so has never acted in any capacity as a parent of that child. Nasdaq 
believes that, rather than prohibiting all stepchildren from being 
deemed independent, it would be appropriate for the Board to review 
these relationships on a facts and circumstances basis as contemplated 
by general provisions of the Independent Director definition. Nasdaq 
also states that it has heard from listed companies and their legal 
counsel that it can be burdensome to analyze potential differences in 
the meaning of the Nasdaq and NYSE definitions. Finally, Nasdaq asserts 
that its proposal is consistent with SEC Rule 10A-3, which addresses 
director independence for audit committee service, and which focuses 
only on payments to minor children or stepchildren, or stepchildren 
sharing a home with the director.

III. Proceedings To Determine Whether To Disapprove SR-NASDAQ-2019-049 
and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposed rule change 
should be approved or disapproved. Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposal, as discussed below. Institution of disapproval 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved.
    Pursuant to Section 19(b)(2)(B), the Commission is providing notice 
of the grounds for disapproval under

[[Page 49355]]

consideration. The Commission is instituting proceedings to allow for 
additional analysis and input concerning the proposed rule change's 
consistency with the Act, and, in particular, with Section 6(b)(5) of 
the Act,\13\ which requires, among other things, that the rules of a 
national securities exchange 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.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Nasdaq is proposing to define a Family Member, for purposes of 
determining whether a director of a listed company qualifies as an 
Independent Director, as ``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,'' and to interpret the term ``children'' 
as excluding stepchildren. Nasdaq provides an example where the 
stepchild relationship could be attenuated, namely where a person has 
become a stepchild of a director as an adult. In such cases, where 
there has never been a parental relationship, Nasdaq believes the 
blanket exclusion from a finding of independence is unwarranted. 
Nasdaq, however, does not address other scenarios captured by its 
proposal where the relationship between a director and the stepchild 
may be less attenuated, such as where the stepchild has been raised by 
the director from a young age but no longer shares the same home, or 
explain why those closer relationships no longer continue to be 
appropriate for the blanket exclusion.
    Nasdaq also expresses concern that the differences between the 
Nasdaq and NYSE rules create unnecessary burdens on listed companies 
attempting to analyze potential differences in their meaning. 
Accordingly, Nasdaq is proposing to make the language of its definition 
of Family Member identical to the corresponding definition in NYSE 
rules. Nasdaq notes that, prior to the time it proposed its current 
definition of Family Member in 2003, the Nasdaq definition of Family 
Member and its NYSE counterpart were nearly identical. Nasdaq states 
that its current rule was intended to simplify the prior definition of 
Family Member without introducing any substantive changes from the 
prior rule.\14\
---------------------------------------------------------------------------

    \14\ In approving the current NYSE and Nasdaq rules in 2003, the 
Commission noted that they were intended to ``conform the Nasdaq and 
NYSE proposals more closely'' and ``harmonize more closely various 
provisions of their proposals to reduce the possibility of differing 
regulatory treatment.'' See 2003 Approval Order, supra note 10, at 
64176.
---------------------------------------------------------------------------

    Nasdaq further takes the position that the inclusion of 
stepchildren in its current rule was inadvertent and unwarranted, and 
this is the basis for its proposed interpretation that the term 
``children'' excludes stepchildren. As noted above, however, Nasdaq 
also affirms the fact that the current Nasdaq rule (which includes 
stepchildren in the definition of Family Member) was not intended to 
differ substantively from the NYSE rule, which uses the same language 
Nasdaq is proposing to adopt. This would appear to lead to the 
conclusion that the term ``children'' should be interpreted as 
including stepchildren, rather than excluding them. Nasdaq does not 
explain this apparent contradiction, or the basis for its view that the 
express inclusion of stepchildren in its current rule was inadvertent. 
Nasdaq also does not address why its proposal that the term 
``children'' be interpreted as excluding stepchildren, which 
potentially would create a situation where the Nasdaq and NYSE rules 
use identical language but have different interpretations, would not 
increase confusion and burdens on listed companies seeking to assess 
potential differences in the meanings of the Nasdaq and NYSE rules, 
rather than alleviate those burdens.
    Finally, as noted above, Nasdaq asserts that its proposal is 
consistent with SEC Rule 10A-3, which addresses director independence 
for audit committee service, and which focuses only on payments to 
minor children or stepchildren, or stepchildren sharing a home with the 
director. The Commission notes that Nasdaq's proposal in fact is more 
permissive than SEC Rule 10A-3, as it would permit a finding of 
independence if there is a company relationship with a minor stepchild 
of a director who is not sharing his or her home.
    The Commission notes that, under the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization [`SRO'] that 
proposed the rule change.'' \15\ The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis of 
its consistency with applicable requirements must all be sufficiently 
detailed and specific to support an affirmative Commission finding,\16\ 
and any failure of an SRO to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rules and regulations.\17\
---------------------------------------------------------------------------

    \15\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \16\ See id.
    \17\ See id.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission believes it is 
appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of 
the Act to determine whether the proposal should be approved or 
disapproved.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is inconsistent with Section 6(b)(5) or any other provision of the Act, 
or the rules and regulation thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\18\
---------------------------------------------------------------------------

    \18\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and 
arguments regarding whether the proposed rule change should be 
disapproved by November 4, 2019. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 18, 2019.
    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

[[Page 49356]]

     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 such 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 October 10, 2019. Rebuttal comments should be submitted by 
October 24, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20220 Filed 9-18-19; 8:45 am]
 BILLING CODE 8011-01-P