[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 [email protected]. 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