[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]
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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
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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.
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\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).
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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:
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\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).
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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
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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.
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\13\ 15 U.S.C. 78f(b)(5).
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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\
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\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.
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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\
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\15\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\16\ See id.
\17\ See id.
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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\
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\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).
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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
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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 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\
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\19\ 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20220 Filed 9-18-19; 8:45 am]
BILLING CODE 8011-01-P