By: Cydney Posner

Nasdaq has filed with the SEC proposed new amendments to its corporate governance requirements, including those related to the definition of independent director. These proposals have not yet been posted by the SEC. The proposals are very similar to ones made in 2005 (see my email of 11/1/05) and, in some respects, conform the rules more closely to those of the NYSE. Although the rules would become effective immediately upon SEC approval, there would be a 90-day transition period for directors deemed not to be independent as a result of the changes.

In particular, the proposals would:

  • Clarify that acceptance by a director or family member of "compensation," as opposed to "payments," of more than $60,000 will taint independence. (Payments to a director's (or family member's) political campaign would be considered direct compensation. Non-preferential payments made in the ordinary course of providing business services, such as payments by financial institutions or insurance companies, would not preclude independence, nor would payments arising solely out of investments in the company's securities or loans permitted under SOX, so long as those payments were non-compensatory in nature. They could be compensatory if they were on terms not generally available to the public.)
  • Clarify that a "non-executive employee" means an employee other than an executive officer as defined in SEC Rule 16a-1(f).
  • Clarify that, for independence purposes, the limitation on receipt by or payment to an organization of which the director is a partner, controlling shareholder or executive officer would apply to payments by or to parents or subsidiaries of the company, as well as by or to the company itself.
  • Clarify that the audit committee requirements are not applicable to companies with a listed parent.
  • Provide that independence would not be impaired by
    • employment by a director as an interim executive officer for no longer than one year (although the director would not be considered independent while serving as an interim officer and, if while serving as an interim officer, the director participated in the preparation of the financial statements, the director would be precluded from service as an audit committee member for three years), or
    • receipt of compensation for former service in that capacity. (However, the board must still consider whether the employment or compensation would interfere with the director's exercise of independent judgment under the more subjective part of the Nasdaq independence test, depending, for example, upon the magnitude of the compensation and the length of service.)

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