Notice2024-19496
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
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 30, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 169 (Friday, August 30, 2024)</title>
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[Federal Register Volume 89, Number 169 (Friday, August 30, 2024)]
[Notices]
[Pages 70674-70679]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[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 <a href="https://www.nyse.com/publicdocs/nyse/listing/nyse_ipo_guide.pdf">https://www.nyse.com/publicdocs/nyse/listing/nyse_ipo_guide.pdf</a>.
\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
</pre></body>
</html>Indexed from Federal Register on August 30, 2024.
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