[Federal Register Volume 89, Number 169 (Friday, August 30, 2024)]
[Notices]
[Pages 70674-70679]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19496]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100816; File No. SR-NASDAQ-2024-019]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Granting Approval of a Proposed Rule Change, to Rules 5605, 5615 and 
5810 To Amend Phase-In Schedules for Certain Corporate Governance 
Requirements and Applicability of Certain Cure Periods

August 26, 2024.

I. Introduction

    On May 8, 2024, 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 Exchange Rules 5605, 5615, and 5810 
regarding the phase-in schedules for certain corporate governance 
requirements and the applicability of certain cure periods. The 
proposed rule change was published for comment in the Federal Register 
on May 29, 2024.\3\ On July 12, 2024, the Commission designated a 
longer period for Commission action on the proposed rule change.\4\ The 
Commission has received no comment letters on the proposal. As 
discussed further below, the Commission is approving 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. 100208 (May 22, 
2024), 89 FR 46528 (``Notice'').
    \4\ See Securities Exchange Act Release No. 100523 (July 12, 
2024), 89 FR 58450 (July 18, 2024) (designating August 27, 2024 as 
the date by which the Commission shall either approve, disapprove, 
or institute proceedings to determine whether to disapprove the 
proposed rule change).
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II. Description of the Proposal

    The Exchange proposes to amend the phase-in schedules for 
compliance with the independent board director and committee 
requirements for certain companies and codify its practices regarding 
the applicability of certain cure periods. As discussed below, the 
changes to the phase-in provisions are similar to those previously 
approved for another national securities exchange. The Exchange also 
proposes to renumber several rules and make non-substantive 
clarifications.

A. Modifications to Phase-In Schedules

Initial Public Offerings
    Currently, Exchange Rule 5615(b)(1) references that a company 
listing in connection with an IPO is permitted to phase in its 
independent audit committee requirements in accordance with Rule 10A-
3(b)(1)(iv)(A) under the Act \5\ but does not restate the provisions of 
this rule. Nasdaq proposes to amend Rule 5615(b)(1) by specifically 
restating the phase-in provisions in the text of the rule.\6\
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    \5\ 17 CFR 240.10A-3(b)(1)(iv)(A).
    \6\ See 17 CFR 240.10A-3(b)(1)(iv)(A). Accordingly, a company 
shall be permitted to phase in its compliance with the audit 
committee requirements set forth in Rule 5605(c)(2) as follows: (1) 
one member must satisfy the requirements by the date the company's 
securities first trade on Nasdaq (the ``Listing Date''); (2) a 
majority of members must satisfy the requirements within 90 days of 
the effective date of its registration statement; and (3) all 
members must satisfy the requirements within one year of the 
effective date of its registration statement.
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    Further, Rule 5615(b)(1) currently allows companies listing in 
connection with an IPO to phase in the requirements for their 
independent nominations and compensation committees but requires one 
member to satisfy the requirements at the time of listing. The Exchange 
states that some companies expressed a concern that this requirement 
interferes with a common practice to hold a meeting of a board of 
directors in order to appoint additional independent directors shortly 
after the Listing Date, but prior to the date IPO closes.\7\ Therefore, 
to accommodate this practice, Nasdaq has proposed to amend Rule 
5615(b)(1) to allow companies to comply with the requirement to have 
one independent director on the compensation and nominations committees 
by appointing an independent director to such a committee no later than 
the earlier of the date the initial public offering closes or five 
business days from the Listing Date.\8\ The Exchange is also proposing, 
as to the requirement for a company to have at least two members on the 
compensation committee, that the company have at least one member by 
the Listing Date and at least two members within one year of the 
Listing Date.
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    \7\ See Notice, supra note 3, at 46528. See also, e.g., New York 
Stock Exchange (``NYSE'') IPO Guide, at 41, available at https://www.nyse.com/publicdocs/nyse/listing/nyse_ipo_guide.pdf.
    \8\ See Notice, supra note 3, at 46528.
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    Rule 5605(c)(2)(A) requires a company to have a minimum of three 
members on the audit committee. Nasdaq proposes to amend Rule 
5615(b)(1) to provide that companies listing in conjunction with an IPO 
may also phase in compliance with the three-person minimum on the 
following schedule: at least one member by the Listing Date, at least 
two members within 90 days of the Listing Date and at least three 
members within one year of the Listing Date.
Companies Emerging From Bankruptcy
    Currently, Rule 5615(b)(2) allows a company that is emerging from 
bankruptcy to phase in independent nominations and compensation 
committees and majority independent boards requirements. Nasdaq 
proposes to amend Rule 5615(b)(2) to specifically state that a company 
emerging from bankruptcy must comply with the audit committee 
requirements set forth in Rule 5605(c)(2) \9\ by the Listing Date 
unless an exemption is available pursuant to Rule 10A-3 under the 
Act.\10\ Nasdaq also states that it proposes to make additional 
clarifications to improve the readability of the rule without changing 
its substance, including to provide that the applicable

[[Page 70675]]

phase-in periods will be computed beginning on the Listing Date.\11\
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    \9\ Rule 5605(c)(2) requires a company to have an audit 
committee of at least three members, which must meet certain 
independence, professional competence and other requirements as 
specified in the rule.
    \10\ This is a non-substantive change and simply codifies how 
the current rule works for companies emerging from bankruptcy 
because there is currently no phase-in provision from the audit 
committee requirements of Rule 5605(c)(2) for such companies under 
the Exchange rules. Additionally, Rule 5605(c)(2)(A)(ii) requires a 
listed company to meet the criteria for independence in Rule 10A-
3(b)(1) under the Act subject to the exemptions provided in Rule 
10A-3(c) under the Act. See 17 CFR 240.10A-3.
    \11\ See Notice, supra note 3, at 46529. The proposal makes 
clear that for companies emerging from bankruptcy all the phase in 
periods commence at the beginning of the Listing Date. This is in 
contrast to companies listing in connection with an IPO that are 
permitted to compute the compensation and nominating committee 
phase-in periods by the earlier of the date the IPO closes or five 
business days from the Listing Date.
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Companies Transferring From National Securities Exchanges Registered 
Under Section 12(b) of the Act and Companies Listing Securities 
Previously Registered Under Section 12(g) of the Act
    Currently, Rule 5615(b)(3) provides that companies transferring 
from other markets with a substantially similar requirement shall be 
afforded the balance of any grace period afforded by the other market. 
Rule 5615(b)(3) further provides that companies transferring from other 
listed markets that do not have a substantially similar requirement 
shall be afforded one year from the date of listing on Nasdaq. The 
current rule also states that this transition period is not intended to 
supplant any applicable requirements of Rule 10A-3 under the Act.\12\
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    \12\ See 17 CFR 240.10A-3.
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    Nasdaq proposes to state that the phase-in period currently 
contained in Rule 5615(b)(3) is applicable only to companies that 
transfer securities registered pursuant to Section 12(b) of the Act 
\13\ from another national securities exchange to Nasdaq. The other 
provisions in the rule on any applicable phase-in periods and the 
application of Rule 10A-3 under the Act \14\ will remain the same as in 
the current rule as to companies transferring to the Exchange from 
another national securities exchange.
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    \13\ 15 U.S.C. 78l(b).
    \14\ 17 CFR 240.10A-3.
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    The Exchange is also proposing to specify requirements applicable 
to a company listing securities registered pursuant to Section 12(g) of 
the Act immediately prior to listing.\15\ Nasdaq proposes to modify 
Rule 5615(b)(3) to provide that a company with securities registered 
pursuant to Section 12(g) of the Act \16\ that lists those securities 
on Nasdaq must satisfy the audit committee requirements set forth in 
the Rule 5605(c) except for the requirement to have at least three 
members on the audit committee, as described below, by the Listing 
Date, unless an exemption is available pursuant to Rule 10A-3 under the 
Act.\17\
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    \15\ 15 U.S.C. 78l(g).
    \16\ 15 U.S.C. 78l(g).
    \17\ See 17 CFR 240.10A-3.
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    Nasdaq proposes to modify Rule 5615(b)(3) to also provide that a 
company with securities registered pursuant to Section 12(g) of the Act 
that lists those securities on Nasdaq will be provided a similar phase-
in period as available to companies listing in connection with an IPO, 
other than with respect to the audit committee requirements. The 
Exchange states that, like a company conducting an IPO, these companies 
would not have been subject to another exchange's corporate governance 
standards at the time of their listing.\18\ Therefore, Nasdaq proposes 
to allow these companies a similar phase-in period as currently 
provided to an IPO, other than for the audit committee requirements, 
and require, on the nominations and compensation committee, one 
independent director upon listing, a majority of independent directors 
within 90 days of Listing Date, and a fully independent committee 
within one year of Listing Date.\19\ The company also would have twelve 
months from its Listing Date to comply with the majority independent 
board requirement set forth in Rule 5605(b).
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    \18\ See Notice, supra note 3, at 46529.
    \19\ The independent directors serving on the compensation 
committee would also be required to satisfy the requirements of Rule 
10C-1 under the Act. See 17 CFR 240.10(C)-1.
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    Under the revised rule, for a company with securities registered 
pursuant to Section 12(g) of the Act that lists those securities on 
Nasdaq, only directors who are independent, as defined in Rule 
5605(a)(2), and meet the criteria for independence set forth in Rule 
10A-3(b)(1) under the Act \20\ would be permitted on the audit 
committee during the transition period (unless an exemption is 
available under Rule 10A-3 under the Act \21\).\22\ However, a phase-in 
period would be permitted with respect to the committee size 
requirement: at least one independent director member is required as of 
the date of listing, two independent director members within ninety 
days of the Listing Date, and three independent director members within 
one year of the Listing Date.\23\ The revised rule would also specify 
that a company's compensation committee must have at least one member 
at the time of listing and at least two members within one year of 
listing.\24\
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    \20\ 17 CFR 240.10A-3(b)(1).
    \21\ 17 CFR 240.10A-3.
    \22\ Each member of the audit committee must also: (1) not have 
participated in the preparation of the financial statements of the 
company or any current subsidiary of the company at any time during 
the past three years; and (2) be able to read and understand 
fundamental financial statements, including a company's balance 
sheet, income statement, and cash flow statement. See Rule 
5605(c)(2)(A). See also infra note 23.
    \23\ During the phase-in period a company must comply with the 
requirement in Rule 5605(c)(2)(A) that every listed company's audit 
committee--without distinction as to the committee's size--have at 
least one member who has past employment experience in finance or 
accounting, requisite professional certification in accounting, or 
any other comparable experience or background which results in the 
individual's financial sophistication.
    \24\ See Securities Exchange Act Release No. 68013 (Oct. 9, 
2012), 77 FR 62563, 62569, n.67 (Oct. 15, 2012) (Notice of Filing 
for SR-NASDAQ-2012-109). See also Securities Exchange Act Release 
No. 68640 (Jan. 11, 2013), 78 FR 4554 (Jan. 22, 2013) (approving SR-
NASDAQ-2012-109).
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Companies Listing in Connection With a Carve-Out or Spin-O ff 
Transaction
    Nasdaq proposes to provide that a company listing in connection 
with a carve-out or spin-off transaction will have a similar phase-in 
period as currently available to companies listing in connection with 
an IPO. The Exchange states that, like a company conducting an IPO, 
these companies would not have been subject to another exchange's 
corporate governance standards at the time of their listing. Therefore, 
Nasdaq proposes to adopt Rule 5615(b)(4) \25\ specifying the phase-in 
provisions and stating that a company shall be permitted to phase in 
its compliance with the audit committee requirements set forth in Rule 
5605(c)(2) as follows: (1) one member must satisfy the requirements by 
the Listing Date; (2) a majority of members must satisfy the 
requirements within 90 days of the effective date of its registration 
statement; and (3) all members must satisfy the requirements within one 
year of the effective date of its registration statement.
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    \25\ Nasdaq proposes to renumber current Rule 5615(b)(4) 
regarding phase-in schedule for a company ceasing to be a Smaller 
Reporting Company to Rule 5615(b)(5).
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    Nasdaq also proposes to allow these companies a similar phase-in 
period as an IPO and require that a company listing in connection with 
a carve-out or spin-off transaction shall have twelve months from its 
Listing Date to comply with the majority independent board requirement 
set forth in Rule 5605(b), and, on the nominations and compensation 
committee, one independent director by the date the transaction closes, 
a majority of independent directors within 90 days of the Listing Date, 
and a fully independent committee within one year of the Listing 
Date.\26\ Nasdaq also proposes to provide that, regarding the 
requirement to have at least two

[[Page 70676]]

members on the compensation committee, a company's compensation 
committee must have at least one member by the date the transaction 
closes and at least two members within one year of the Listing 
Date.\27\
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    \26\ The independent directors serving on the compensation 
committee would also be required to satisfy the requirements of Rule 
10C-1 under the Act. See 17 CFR 240.10(C)-1.
    \27\ See Securities Exchange Act Release No. 68013 (Oct. 9, 
2012), 77 FR 62563 (Oct. 15, 2012) (Notice of Filing for SR-NASDAQ-
2012-109) at footnote 67. See also Securities Exchange Act Release 
No. 34-68640 (Jan. 11, 2013), 78 FR 4554 (Jan. 22, 2013) (approving 
SR-NASDAQ-2012-109).
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    Nasdaq states that its current policy is to treat companies listing 
in connection with a carve-out or spin-off transaction as IPOs for 
purposes of phase-in periods.\28\ Thus, Nasdaq allows such companies to 
phase in the requirements for their independent nominations and 
compensation committees but require one member to satisfy the 
requirements at the time of listing.\29\ The Exchange states that some 
companies expressed a concern that this requirement interferes with a 
common practice to hold a meeting of a board of directors in order to 
appoint additional independent directors shortly after the Listing 
Date, but prior to the date a carve-out or spin-off transaction 
closes.\30\ To accommodate this practice, Nasdaq proposes to allow the 
companies to comply with the requirement to have one independent 
director on the compensation and nominations committees by appointing 
an independent director to such a committee no later than the date such 
carve-out or spin-off transaction closes.\31\
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    \28\ See Notice, supra note 3, at 46530.
    \29\ See id.
    \30\ See id.
    \31\ See id.
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    Currently, Rule 5605(c)(2)(A) requires a company to have a minimum 
of three members on the audit committee. Nasdaq proposes to provide 
that companies listing in connection with a carve-out or spin-off 
transaction may also phase in compliance with the three-person minimum 
on the following schedule: at least one member by the Listing Date, at 
least two members within 90 days of the Listing Date and at least three 
members within one year of the Listing Date.\32\
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    \32\ See supra notes 22 and 23. As discussed below, as with an 
IPO, if a company has only one member on the audit committee by the 
Listing Date as permitted by the phase-in periods, that audit 
committee member, in addition to meeting the independence 
requirements in Rule 5605(c)(2), must also meet the requirements to 
have accounting or finance experience and financial sophistication 
in accordance with Rule 5605(c)(2)(iv) as well meet the other 
requirements set forth in 5605(c)(2).
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Companies Ceasing To Qualify as a Foreign Private Issuer
    Currently, Rule 5615(a)(3) provides that a ``Foreign Private 
Issuer,'' as defined pursuant to Rule 3b-4 under the Act,\33\ may 
follow its home country practice in lieu of the requirements of the 
Rule 5600 Series, provided, however, that such a Company must comply 
with, among other requirements,\34\ the requirement to have an audit 
committee that satisfies Rule 5605(c)(3), and ensure that such audit 
committee's members meet the independence requirement in Rule 
5605(c)(2)(A)(ii). A Foreign Private Issuer that ceases to qualify as 
such under Commission rules becomes subject to all relevant corporate 
governance requirements of Rule 5605.
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    \33\ 17 CFR 240.3b-4.
    \34\ See Nasdaq Rule 5615(a)(3) and IM-5615-3 for the other 
requirements under the Exchange's rules a Foreign Private Issuer 
must comply with and cannot follow home country practice.
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    Pursuant to Rule 3b-4 under the Act,\35\ a company must test its 
status as a Foreign Private Issuer on an annual basis at the end of its 
most recently completed second fiscal quarter (for purposes of this 
subsection, the ``Foreign Private Issuer Determination Date''). Nasdaq 
proposes to modify its rules to take into consideration Rule 3b-4 under 
the Act.\36\ Under Rule 3b-4 under the Act \37\ a company's 
determination that it fails to qualify as a Foreign Private Issuer 
governs its eligibility to use the forms and rules designated for 
Foreign Private Issuers beginning on the first day of the fiscal year 
following the determination date, effectively providing the company 
with a six-month grace period. Similarly, Nasdaq proposes to require a 
company that ceases to be a Foreign Private Issuer to be in compliance 
with the domestic company requirements within the same timeframe of six 
months, except for the requirement set forth in Rule 5605(c)(2)(A)(ii).
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    \35\ See id.
    \36\ See id.
    \37\ See id.
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    Specifically, the company shall have six months from the Foreign 
Private Issuer Determination Date to comply with the majority 
independent board and executive sessions requirements set forth in Rule 
5605(b); the independent compensation and nominations committee 
requirements set forth in Rules 5605(d)(2) and (e)(1)(B); and audit 
committee requirements set forth in Rule 5605(c)(2), including the 
three-person audit committee requirement, with the exception of Rule 
5605(c)(2(A)(ii) that, as noted below, must continually be complied 
with by a Foreign Private Issuer. During the phase-in period, a company 
shall have an audit committee that satisfies Rule 5605(c)(3) and 
members of such audit committee shall meet the criteria for 
independence referenced in Rule 5605(c)(2)(A)(ii) (the criteria set 
forth in Rule 10A-3(b)(1) under the Act,\38\ subject to the exemptions 
provided in Rule 10A-3(c) under the Act \39\).
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    \38\ 17 CFR 240.10A-3(b)(1).
    \39\ 17 CFR 240.10A-3(c).
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Companies Ceasing to be a Controlled Company
    Nasdaq proposes to amend Rule 5615(c)(3) to state that the 
applicable phase-in periods for companies ceasing to be a Controlled 
Company for purposes of the independent compensation and nominations 
committees and majority of independent boards will be computed 
beginning on the date the company ceases to be a Controlled 
Company.\40\
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    \40\ Under current Rule 5615(c)(2), Controlled Companies are 
exempt from the requirements of Rules 5605(b) (Independent 
Directors), 5605(d) (Compensation Committee Requirements) and 
5605(e) (Independent Director Oversight of Director Nominations), 
except for the requirements of subsection (b)(2) which pertains to 
executive sessions of independent directors. Under the proposal, 
this provision is being moved unchanged to new Rule 5615(a)(1) 
(Exemptions Afforded to a Controlled Company).
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Noncompliance During the Phase-In Period
    Nasdaq also proposes to codify its current policy that a company 
that demonstrates compliance with a requirement during a phase-in 
period but subsequently falls out of compliance with that requirement 
before the end of the phase-in period, would not be considered 
deficient with the requirement until the end of the phase-in period. 
The Exchange states that this treatment is consistent with treatment of 
a company that relied on a phase-in period throughout its duration 
although, as discussed below, there are differences in the availability 
of a cure period at the end of the phase-in period.

B. Unavailability of Cure Periods Following the Expiration of Phase-In 
Periods

    Nasdaq proposes to amend Rules 5605(b)(1), 5605(c)(4), 5605(d)(4), 
and 5810(c)(3)(E) to codify its current position that a company relying 
on any phase-in period in Rule 5615(b) is not eligible for a cure 
period provided by Rule 5810(c)(3)(E), immediately following the 
expiration of the phase-in period, unless the company complied with the 
audit committee composition

[[Page 70677]]

requirement in Rule 5605(c)(2)(A), the compensation committee 
composition requirement in Rule 5605(d)(2)(A), or the majority 
independent board requirement in Rule 5605(b)(1), as applicable, during 
such phase-in period but fell out of compliance with such requirement 
after having complied with the requirement before the end of the phase-
in period. Nasdaq also proposes to codify its current policy that, if a 
company demonstrated compliance with the applicable requirement during 
the phase-in period, but subsequently fell out of compliance before the 
end of the phase-in period, for purposes of computing the applicable 
cure period, the event that caused the failure to comply is the event 
causing the company to fall out of compliance after having complied 
with the requirement, and not the end of the phase-in period. In these 
circumstances, as described above, the company would not be considered 
deficient with the requirement until the end of the phase-in period.
    In a situation where a company lists on Nasdaq or becomes subject 
to the requirements after it lists, relies on the phase-in period for 
one of the independent committees or the independent board 
requirements, and allows the phase-in period to run out without 
demonstrating compliance with the rule, the Exchange states that it is 
not appropriate for the company to rely on the grace period immediately 
thereafter because it would effectively extend the phase-in period.\41\ 
In such a case, Nasdaq states that it will issue a Staff Delisting 
Determination letter to delist the Company's securities.\42\
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    \41\ See Notice, supra note 3, at 46531.
    \42\ See id.
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    Nasdaq also proposes to amend Rule 5810(c)(3)(E) to provide that if 
a company fails to meet the compensation committee composition 
requirement under Rule 5605(d)(2)(A) due to one vacancy, or one 
compensation committee member ceases to be independent due to 
circumstances beyond the member's reasonable control, the Listing 
Qualifications Department will promptly notify the company and inform 
it has until the earlier of its next annual shareholders meeting or one 
year from the occurrence of the event that caused the failure to comply 
with this requirement to cure the deficiency. However, if the company's 
next annual shareholders' meeting is held sooner than 180 days after 
the event that caused the deficiency, then the company has 180 days 
from the event that caused the deficiency to cure it.

C. Renumbering of Certain Rules and Non-Substantive Clarifications

    Nasdaq proposes to renumber Rules 5615(c)(1), 5615(c)(2), and 
5615(c)(3) as 5615(a)(7)(A), 5615(a)(7)(B), and 5615(b)(7), 
respectively. Nasdaq also proposes to amend the title of the proposed 
Rule 5615(b)(7) to improve the readability of the rule without changing 
its substance and update cross references to account for renumbering of 
the rules.
    Additionally, Nasdaq proposes to amend the title of Rule 
5615(b)(4), concerning companies that cease to be a Smaller Reporting 
Company, and renumber it to Rule 5615(b)(5) and add an introductory 
sentence to improve the readability of the rule without changing its 
substance.
    Nasdaq is also proposing to correct a misleading rule reference in 
Rule 5615(b)(1), which makes references to the nominations committee's 
responsibilities under Rule 5605(b). The responsibilities of the 
nominations committee are found in Rule 5605(e), not Rule 5605(b). 
Accordingly, new Rule 5615(b)(1)(C) allows a majority of the 
Independent Directors to discharge responsibilities of the nominations 
committee outlined in Rule 5605(e).
    Further, Nasdaq proposes to eliminate the reference to Rule 5625 in 
Rule 5615(b)(1). which states that: ``For purposes of . . . Rule 5625, 
a Company shall be considered to be listing in conjunction with an 
initial public offering only if it meets the conditions in Rule 10A-
3(b)(1)(iv)(A) under the Act, namely, that the Company was not, 
immediately prior to the effective date of a registration statement, 
required to file reports with the Commission pursuant to Section 13(a) 
or 15(d) of the Act.'' By its terms, Rule 5625 (Notification of 
Noncompliance) applies to any company listed on Nasdaq, including in 
conjunction with an IPO, and requires that a ``Company must provide 
Nasdaq with prompt notification after an Executive Officer of the 
Company becomes aware of any noncompliance by the Company with the 
requirements of this Rule 5600 Series.'' Moreover, Rule 5615(b)(1) does 
not provide an exemption from Rule 5625 for any company. Accordingly, 
Nasdaq states it is proposing to eliminate the references to Rule 5625 
in Rule 5615(b)(1) to eliminate potential confusion without any 
substantive impact.
    Finally, Nasdaq proposes to add an introductory paragraph to the 
phase-in rules in Rule 5615(b). The Exchange believes the change will 
improve the readability of the rules without changing its 
substance.\43\
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    \43\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\44\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\45\ 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 and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    \44\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \45\ 15 U.S.C. 78f(b)(5).
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    The development and enforcement of meaningful listing standards for 
a national securities exchange is of critical importance to financial 
markets and the investing public.\46\ Meaningful listing standards are 
especially important given investor expectations regarding the nature 
of companies that have achieved an exchange listing for their 
securities, and the role of an exchange in overseeing its market and 
ensuring compliance with its listing standards.\47\ The corporate 
governance standards embodied in the listing rules of national 
securities exchanges, in particular, play an important role in

[[Page 70678]]

assuring that companies listed for trading on the exchanges' markets 
observe good governance practices,\48\ including the maintenance of 
fair and impartial boards and on key committees such as the audit, 
compensation, and nominating committees. The Commission believes that 
Nasdaq's proposal will foster greater transparency, accountability, and 
objectivity in the oversight of listed companies.
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    \46\ See, e.g., Securities Exchange Act Release Nos. 99238 (Dec. 
26, 2023), 89 FR 113, 116 (Jan. 2, 2024) (SR-NYSE-2023-34) and 
81856, (Oct. 11, 2017), 82 FR 48296, 48298 (Oct. 17, 2017) (SR-NYSE-
2017-31). Among other things, the Commission has stated that listing 
standards provide the means for an exchange to screen issuers that 
seek to become listed, and to provide listed status only to those 
that are bona fide companies and that have or will have sufficient 
public float, investor base, and trading interest likely to generate 
depth and liquidity sufficient to promote fair and orderly markets. 
See e.g., Securities Exchange Act Release No. 93256 (Oct. 4, 2021), 
86 FR 56338, 56342 (Oct. 8, 2021) (``SR-NASDAQ-2021-007 Approval 
Order'').
    \47\ See SR-NASDAQ-2021-007 Approval Order, supra note 46, at 
56342. The Commission has also stated that adequate listing 
standards, by promoting fair and orderly markets, are consistent 
with Section 6(b)(5) of the Act, in that they are, among other 
things, designed to prevent fraudulent and manipulative acts and 
practices, promote just and equitable principles of trade, and 
protect investors and the public interest. See id. at 56342, n.59.
    \48\ See e.g., Securities Exchange Act Release No. 48745 (Nov. 
4, 2003), 68 FR 64154, 64175 (Nov. 12, 2003) (relating to approval 
of corporate governance rule filings SR-NYSE-2002-33, SR-NASD-2002-
77, SR-NASD-2002-80, SR-NASD-2002-138, SR-NASD-2002-139, and SR-
NASD-2002-141).
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    As described above, the Exchange proposes to amend, or adopt new, 
phase-in schedules for certain listed companies to comply with 
corporate governance requirements relating to audit, compensation and 
nominating committees and majority independent boards. Specifically, 
the proposal would clarify and amend existing phase-in schedules for 
companies listing in connection with an IPO; companies emerging from 
bankruptcy,\49\ and companies transferring from other national 
securities exchanges with or without substantially similar 
requirements. The Exchange is also proposing to adopt new rules that 
provide certain corporate governance phase-in schedules for companies 
(i) listing securities that were, immediately prior to listing, 
registered pursuant to Section 12(g) of the Act; (ii) listing in 
connection with a carve-out or spin-off transaction; or (iii) ceasing 
to qualify as a Foreign Private Issuer. The Exchange states in support 
of the changes to, or additions of, these phase-in periods that they 
are substantially similar to those available for similar companies 
listing under the NYSE.\50\
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    \49\ See supra note 10.
    \50\ See Notice, supra note 3, at 46531. See also Section 
303A.00 (Introduction) of the NYSE Listed Company Manual. See also 
Securities Exchange Act Release No. 61067 (Nov. 25, 2009), 74 FR 
63808 (Dec. 4, 2009) (approving SR-NYSE-2009-89) (``NYSE 2009-89 
Approval Order'').
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    Consistent with the Commission's previous order approving NYSE's 
analogous corporate governance requirements,\51\ the Commission 
believes phase-in periods for specified companies newly listing on the 
Exchange or newly becoming subject to certain corporate governance 
listing standards as a result of a change in status are reasonable. The 
proposal would permit a phase-in schedule similar to that allowed under 
the current rules for a company listing in conjunction with an IPO, and 
would extend such a phase-in schedule appropriately, to companies 
listing in connection with a carve-out or spin-off transaction.\52\ As 
the Commission has previously stated in reference to approving similar 
NYSE rule changes, the proposed rules offer an acceptable minimal 
tolerance for the special circumstances of each of these types of new 
listings with respect to the point in time that the standards would 
begin to apply.\53\ The proposal provides a listed company with a 
limited phase-in period to assure that the listed company's board of 
directors and key committees are comprised in a manner that is designed 
to provide an objective oversight role and are consistent with phase-in 
periods previously approved by the Commission.\54\ Further, the 
Commission notes that the Exchange's proposal on the phase-in periods 
does not make any changes to the requirements for companies to comply 
with any of the provisions of Rule 10A-3 under the Act.\55\
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    \51\ NYSE 2009-89 Approval Order, supra note 50, at 63810-12.
    \52\ Id.
    \53\ Id.
    \54\ See NYSE 2009-89 Approval Order, supra note 50.
    \55\ See 17 CFR 240.10A-3. As the Exchange states, the proposal 
also makes no adjustments for compliance with Rule 10C-1 under the 
Act as well. See Notice, supra note 3, at 46532.
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    The proposal also would allow companies listing in conjunction with 
an IPO, a carve-out, or a spin-off, in addition to companies listing 
securities previously registered under Section 12(g) of the Act, a 
phase-in period with respect to the Exchange requirement that the audit 
committee have a minimum of three members. As the Commission previously 
stated in approving NYSE's similar phase-in provisions, permitting a 
company to have only one member on its audit committee by the listing 
date, at least two members within 90 days of the listing date and at 
least three members within a year of the listing date, affords a 
reasonable accommodation for such companies.\56\
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    \56\ Under existing Exchange Rule 5615(b)(1) companies listing 
in connection with an IPO are allowed to phase in the requirements 
for independent compensation and nomination committees and must have 
one independent director member at the time of listing. Consistent 
with NYSE rules, Nasdaq is also proposing to provide that companies 
listing in connection with an IPO can comply with the requirement to 
have one independent director on the compensation and nomination 
committee no later than the earlier of the date the IPO closes or 
five business days from the Listing Date and for purposes of the 
listing of carve-outs and spin-offs that such committees have an 
independent director by the date the transaction closes. The 
Commission believes this is reasonable and has previously approved 
similar NYSE rules as consistent with the Act. See Section 303A.00 
(Introduction) of the NYSE Listed Company Manual; NYSE 2009-89. 
Approval Order, supra note 50.
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    The Commission further states that the proposed rule change does 
not grant an exemption or phase-in period to any newly-listed company 
with respect to the provision set forth in Rule 5605(c) that requires 
every listed company's audit committee, and without distinction as to 
the committee's size, to have at least one member who has past 
accounting or finance experience and other comparable experience or 
background which results in financial sophistication.\57\ In addition, 
Rule 10A-3 under the Act \58\ requires at least one member of a listed 
company's audit committee to be independent as of the listing date, 
even when the company is allowed a phase-in period with respect to the 
independence of other audit committee members.\59\ Thus, if a newly-
listed company that is eligible for a phase-in period with respect to 
the size requirement chooses to have initially only one member on its 
audit committee, that member would need to be independent and also have 
to meet the Exchange's financial sophistication requirement.
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    \57\ See Notice, supra note 3, at 46532.
    \58\ 17 CFR 240.10A-3.
    \59\ See 17 CFR 240.10A-3(b)(1)(iv).
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    The Exchange is also proposing, as described above, to provide a 
phase-in to certain corporate governance requirements for companies 
that cease to be Foreign Private Issuers. As the Exchange explained in 
its proposal, Foreign Private Issuers can follow home country practice 
for certain corporate governance provisions.\60\ The Exchange is 
proposing to allow a Foreign Private Issuer that ceases to qualify as 
such to comply with certain corporate governance requirements (e.g. the 
majority independent board requirement), six months after the date it 
was determined to no longer qualify as a Foreign Private Issuer.\61\ 
Foreign Private Issuers are not permitted to follow home country 
practice with respect to the independent audit committee requirements 
under Rule 5605(c)(2)(A)(ii) and the audit committee requirements in 
Rule 5605(c)(3) \62\ and the phase-in rule for Foreign Private Issuers 
makes clear that the company must continue to have an audit committee 
meeting these requirements during any phase in for other corporate 
governance requirements provided for in the new

[[Page 70679]]

provision. The phase-in provisions for companies ceasing to be Foreign 
Private Issuers are consistent with NYSE rules and appear to be a 
reasonable accommodation.
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    \60\ See Notice, supra note 3, at 46530.
    \61\ See supra section II.A, ``Companies Ceasing to Qualify as a 
Foreign Private Issuer.''
    \62\ See Nasdaq IM-5615-3 (Foreign Private Issuers).
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    The amended rules will also address the treatment of companies that 
wish to avail themselves of a cure period following the expiration of a 
phase-in period with respect to the independence requirements 
applicable to the board of directors, audit committee and compensation 
committee, the permissibility of which the rules are currently 
silent.\63\ In prohibiting a cure period following the expiration of a 
phase-in period (unless the company demonstrated compliance with the 
applicable requirement during such phase-in period and then fell out of 
compliance before the expiration of the phase-in period), the Exchange 
states it seeks to limit the maximum time a company may remain listed 
without fully complying with independent committees or the independent 
board requirements. The Commission believes, given the importance of 
these requirements to assure adequate oversight, that it is reasonable 
not to provide a cure period under such circumstances because the 
company has already had a phase-in period and failed to comply 
throughout that period.\64\ The greater clarity and uniformity of 
treatment afforded by the proposal can help to foster accountability of 
companies' corporate governance practices.
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    \63\ The Exchange states it is codifying its current position. 
See Notice, supra note 3, at 46532. The Exchange proposal is also 
amending Rule 5810(c)(3)(E) to describe procedures for administering 
a cure period if one member of the compensation committee fails to 
comply with the compensation requirement in Rule 5605(d)(2)(A) in 
certain circumstances. See also Rule 5805(d)(4) (Cure Period for 
Compensation Committee).
    \64\ While the Exchange is proposing to allow a cure period if 
the company came into compliance and then fell out of compliance 
during the phase-in period, any cure period will be measured from 
the earlier period when the company fell out of compliance as 
opposed to end of the phase-in period.
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    In addition, the Commission believes that the renumbering of 
certain rules and other non-substantive changes, clarifications and 
corrections will add clarity to the Exchange's corporate governance 
listing rules, as well as remove any confusion regarding the 
application of phase-in periods.
    Finally, as described above, many of the changes proposed by Nasdaq 
are similar to rules that were previously approved for the NYSE and 
found to be consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\65\ that the proposed rule change (SR-NASDAQ-2024-019) be, and hereby 
is, approved.
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    \65\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\66\
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    \66\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-19496 Filed 8-29-24; 8:45 am]
BILLING CODE 8011-01-P