[Federal Register Volume 69, Number 124 (Tuesday, June 29, 2004)]
[Notices]
[Pages 38941-38943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14677]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49903; File No. SR-NASD-2004-086]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. to NASD Rule 4200 
to Clarify the Treatment of Certain Non-Preferential, Ordinary-Course 
Payments

June 22, 2004.
    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 June 1, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, the Nasdaq Stock Market, Inc. 
(``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. On June 17, 
2004, Nasdaq submitted Amendment No. 1 to the proposed rule change.\3\ 
The proposed rule change has been filed by Nasdaq as a ``non-
controversial'' rule change under Rule 19b-4 under the Act,\4\ which 
renders the proposal effective upon filing with the Commission.\5\ 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.
    \3\ See letter from Edward S. Knight, Executive Vice President, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated June 16, 2004 
(``Amendment No. 1''). Amendment No. 1 clarified the text of IM-4200 
regarding the three-year ``look back'' periods applicable to certain 
provisions of the definition of ``independent director'' in NASD 
Rule 4200. The change conforms with a recent amendment to the text 
made by Nasdaq in another proposal. See infra note.
    \4\ 17 CFR 240.19b-4.
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to change Rule 4200(a)(15) to clarify the treatment 
of certain non-preferential payments made by financial institutions to 
directors of listed companies and their family members in the ordinary 
course of business. The text of the proposed rule change is below. 
Proposed new language is in italics; proposed deletions are in 
brackets.\6\
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    \6\ Changes are marked based on the text of Rule 4200 as amended 
by File No. SR-NASD-2004-80 and Amendment No. 1 thereto.
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* * * * *

Rule 4200. Definitions

    (a) For purposes of the Rule 4000 Series, unless the context 
requires otherwise:
    (1)-(14) No change
    (15) ``Independent director'' means a person other than an officer 
or employee of the company or its subsidiaries 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. The following persons 
shall not be considered independent:
    (A) No change
    (B) a director who accepted or who has a Family Member who accepted 
any payments from the company or any parent or subsidiary of the 
company in excess of $60,000 during any period of twelve consecutive 
months within the three years preceding the determination of 
independence, other than the following:
    (i)-(iii) No change
    (iv) benefits under a tax-qualified retirement plan, or non-
discretionary compensation; [or]
    (v) loans from a financial institution provided that the loans (1) 
were made in the ordinary course of business, (2) were made on 
substantially the same terms, including interest rates and collateral, 
as those prevailing at the time for comparable transactions with the 
general public, (3) did not involve more than a normal degree of risk 
or other unfavorable factors, and (4) were not otherwise subject to the 
specific disclosure requirements of SEC Regulation S-K, Item 404;
    (vi) payments from a financial institution in connection with the 
deposit of funds or the financial institution acting in an agency 
capacity, provided such payments were (1) made in the ordinary course 
of business; (2) made on substantially the same terms as those 
prevailing at the time for comparable transactions with the general 
public; and (3) not otherwise subject to the disclosure requirements of 
SEC Regulation S-K, Item 404; or
    (vii) loans permitted under Section 13(k) of the Act.
    Provided however, that in addition to the requirements contained in 
this paragraph (B), audit committee members are also subject to 
additional, more stringent requirements under Rule 4350(d).
    (C)-(G) No change
    (16)-(38) No change
    (b) No change

IM--4200 Definition of Independence--Rule 4200(a)(15)

    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. The board has a 
responsibility to make an affirmative determination that no such 
relationships exist through the application of Rule 4200. Rule 4200 
also provides a list of certain relationships that preclude a board 
finding of independence. These objective measures provide transparency 
to investors and companies, facilitate uniform application of the 
rules, and ease administration. Because Nasdaq does not believe that 
ownership of company stock by itself would preclude a board finding of 
independence, it is not included in the aforementioned objective 
factors. It should be noted that there are additional, more stringent 
requirements that apply to directors serving on audit committees, as 
specified in Rule 4350.
    The Rule's reference to a ``parent or subsidiary'' is intended to 
cover entities the issuer controls and consolidates with the issuer's 
financial statements as filed with the Commission (but not if the 
issuer reflects such entity solely as an investment in its financial 
statements). The reference to executive

[[Page 38942]]

officer means those officers covered in Rule 16a-1(f) under the Act. In 
the context of the definition of Family Member under Rule 4200(a)(14), 
the reference to marriage is intended to capture relationships 
specified in the Rule (parents, children and siblings) that arise as a 
result of marriage, such as ``in-law'' relationships.
    The three year look-back periods referenced in paragraphs (A), (C), 
(E) and (F) of the Rule commence on the date the relationship ceases. 
For example, a director employed by the company is not independent 
until three years after such employment terminates.
    Paragraph (B) of the Rule is generally intended to capture 
situations where a payment is made directly to (or for the benefit of) 
the director or a Family Member of the director. For example, 
consulting or personal service contracts with a director or Family 
Member of the director or political contributions to the campaign of a 
director or a Family Member of the director would be considered under 
paragraph (B) of the Rule. Subparagraph (v) clarifies that a loan from 
a financial institution that was exempt from specific disclosure 
pursuant to Instruction 3 to SEC Regulation S-K, Item 404(c) will not 
preclude a finding of director independence. Subparagraph (vi) 
clarifies that certain payments from financial institutions will not 
preclude a finding of director independence. In particular, 
subparagraph (vi) is intended to capture standard, non-preferential 
payments made by financial institutions in the ordinary course of 
business such as interest payments made by a bank on deposits, 
certificates of deposits, or savings bonds. Furthermore, subparagraph 
(vi) is intended to capture technical ``payments'' made by a financial 
institution to its customers when the financial institution acts as an 
agent for its customers. For example, when a brokerage firm receives 
dividends for securities held by a customer, it will make a ``payment'' 
of the dividend amount to that customer. Likewise, when a brokerage 
firm executes a customer's order to sell the customer's securities, it 
will make a ``payment'' of the proceeds to the customer. Subparagraph 
(vi) clarifies that agency payments, such as those described above, 
shall not preclude a finding of director independence.
    Paragraph (D) of the Rule is generally intended to capture payments 
to an entity with which the director or Family Member of the director 
is affiliated by serving as a partner, controlling shareholder or 
executive officer of such entity. Under exceptional circumstances, such 
as where a director has direct, significant business holdings, it may 
be appropriate to apply the corporate measurements in paragraph (D), 
rather than the individual measurements of paragraph (B). Issuers 
should contact Nasdaq if they wish to apply the Rule in this manner. 
The reference to a partner in paragraph (D) is not intended to include 
limited partners. It should be noted that the independence requirements 
of paragraph (D) of the Rule are broader than Rule 10A-3(e)(8) under 
the Act.
    Under paragraph (D), a director who is, or who has a Family Member 
who is, an executive officer of a charitable organization may not be 
considered independent if the company makes payments to the charity in 
excess of the greater of 5% of the charity's revenues or $200,000. 
However, Nasdaq encourages companies to consider other situations where 
a director or their Family Member and the company each have a 
relationship with the same charity when assessing director 
independence.
    For purposes of determining whether a lawyer is eligible to serve 
on an audit committee, Rule 10A-3 under the Act generally provides that 
any partner in a law firm that receives payments from the issuer is 
ineligible to serve on that issuer's audit committee. In determining 
whether a director may be considered independent for purposes other 
than the audit committee, payments to a law firm would generally be 
considered under Rule 4200(a)(15)(D), which looks to whether the 
payment exceeds the greater of 5% of the recipient's gross revenues or 
$200,000; however, if the firm is a sole proprietorship, Rule 
4200(a)(15)(B), which looks to whether the payment exceeds $60,000, 
applies.
    Paragraph (G) of the Rule provides a different measurement for 
independence for investment companies in order to harmonize with the 
Investment Company Act of 1940. In particular, in lieu of paragraphs 
(A)-(F), a director who is an ``interested person'' of the company as 
defined in Section 2(a)(19) of the Investment Company Act of 1940, 
other than in his or her capacity as a member of the board of directors 
or any board committee, shall not be considered independent.
* * * * *

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
    NASD Rule 4200(a)(15)(B) generally provides that a director of a 
listed company will not be considered independent if that director or a 
family member accepted any payments from the company in excess of 
$60,000 per year in a three-year period. According to Nasdaq, the 
purpose of this proposed rule change is to clarify that certain 
standard, non-preferential transactions by financial institutions that 
technically involve ``payments'' by the financial institution to the 
financial institutions' customers will not preclude a finding of 
independence under this rule.
    Nasdaq states that the ordinary business services provided by 
financial institutions, such as banks, often involve ``payments'' to 
the financial institutions' customers. For example, a bank customer 
technically receives ``payments'' from the bank in the form of interest 
payments on deposits, the receipt of a loan check, or the principal and 
interest from a matured savings bonds. A financial institution also may 
make agency ``payments'' to its customers in connection with securities 
transactions. For example, when a brokerage firm's customer receives 
dividends, the brokerage firm may receive the dividend from the issuer 
as the customer's agent, and then make a ``payment'' to the customer 
after it has received the dividend from the issuer. Furthermore, when a 
brokerage firm customer sells securities, the proceeds from the sale 
are first received by the brokerage firm since the securities are 
normally held in its name. Upon receipt of the proceeds from the sale, 
the brokerage firm will make a ``payment'' in the amount of the 
proceeds to the customer.
    Nasdaq believes that these non-preferential and ordinary-course 
``payments'' do not raise independence concerns and, therefore, should 
not preclude a finding of director independence. Any type of 
preferential or compensatory payment to a director or Family Member of 
a director in excess of $60,000 would continue to be considered 
pursuant to that Rule.

[[Page 38943]]

2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\7\ in general, and with 
section 15A(b)(6) of the Act,\8\ in particular, in that it is designed 
to foster cooperation and coordination with persons engaged in 
regulating and processing information with respect to, and facilitating 
transactions in securities, to remove impediments to a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. In particular, the proposed rule 
change will benefit investors, issuers, issuers' counsel, and member 
firms by providing additional transparency to Nasdaq's corporate 
governance standards.
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    \7\ 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The proposed rule change has been designated by Nasdaq as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act 
\9\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    The foregoing proposed rule change: (1) does not significantly 
affect the protection of investors or the public interest, (2) does not 
impose any significant burden on competition, and (3) by its terms does 
not become operative for 30 days after the date of this filing, or such 
shorter time as the Commission may designate, if consistent with the 
protection of investors and the public interest. Furthermore, the NASD 
gave the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing of 
the proposed rule change. Consequently, the proposed rule change has 
become effective pursuant to section 19(b)(3)(A) of the Act \11\ and 
Rule 19b-4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii),\13\ a proposed ``non-
controversial'' rule change does not become operative for 30 days after 
the date of filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest. Nasdaq has requested that the Commission waive the 30-day 
operative delay, to permit the NASD to implement the proposal 
immediately.
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
The Commission believes that the proposed rule change is a reasonable 
clarification of the rules regarding director independence, and that 
acceleration of the operative date should facilitate the application of 
those rules for listed companies. Therefore, the Commission designates 
the proposed rule change to be operative immediately.\14\
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    \14\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\15\
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    \15\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the period to commence on June 17, 2004, 
the date that Nasdaq filed Amendment No. 1.
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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 e-mail to [email protected]. Please include 
File No. SR-NASD-2004-086 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.

    All submissions should refer to File No. SR-NASD-2004-086. 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. 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 No. SR-NASD-
2004-086 and should be submitted on or before July 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14677 Filed 6-28-04; 8:45 am]
BILLING CODE 8010-01-P