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Frequently Asked Questions
  Staff Interpretation Letter 2004-7
Identification Number 908
Rule 4200(a)(15):  “Independent director” means a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Rule 4350(c)(4)(D):  Independent director oversight of director nominations shall not apply in cases where the right to nominate a director legally belongs to a third party.  However, this does not relieve a company’s obligation to comply with the committee composition requirements under Rules 4350(c) and (d).
Relevant Facts:  A Governance Agreement exists between the company and Entity A that provides Entity A with the right to designate directors to the company’s board.  Two of the directors nominated, pursuant to the governance agreement, are not employed by Entity A or its affiliates.  Neither director has received any compensation from the company other than for board service, nor do they fall under other provisions that would disqualify them under Listing Rule 4200(a)(15).
Two other directors nominated pursuant to the governance agreement received compensation, either directly or indirectly, from the company for activities other than board service, in the prior fiscal year.  One of these directors received compensation in an amount less than $60,000 for consulting work.  The company may pay the director for consulting services in the current year in an amount less than $60,000.  The other director is “Of Counsel” to a law firm, which provides legal services to the company.  For the past three fiscal years, the law firm has not received fees from the company in excess of the greater of $200,000 or 5% of the law firm’s consolidated gross revenues for each year.
Issue:  Can the directors designated by Entity A be considered independent pursuant to Listing Rule 4200(a)(15)?
Determination:  Pursuant to Listing Rule 4200(a)(15), the directors designated by Entity A are not precluded from being found independent by the company’s board.  They are also not subject to the additional requirements of Listing Rule 4350(c)(4)(A), which set forth the requirements for the nomination of directors by independent directors.  NASDAQ’s determination is based on the fact that the Governance Agreement assigns the right to nominate these directors to Entity A.  Notwithstanding this finding, the company must comply with the independent board and committee composition requirements set forth in Rules 4350(c) and (d).
Issue:  Are the directors who provided services (directly and indirectly) considered independent under Listing Rule 4200(a)(15)?
Determination:  The director who provided consulting services for the company would not be precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(B), because the payments received are less than $60,000.  Additionally, future payments for consulting services in an amount under $60,000 per year likewise would not preclude a board finding of independence under the provisions of Listing Rule 4200(a)(15).  However, such future payments would preclude the director from service on the Audit Committee, pursuant to Listing Rule 4350(d)(2)(A) and IM 4350-4.
Similarly, the director, who is “Of Counsel” to a law firm providing services to the company, is not precluded from serving as an independent director, pursuant to Listing Rule 4200(a)(15)(D), because the payments received are less than the greater of $200,000 or 5% of the law firm’s consolidated gross revenues for each year.  Any such on-going payments, however, would make the director ineligible to serve on the Audit Committee, pursuant to Listing Rule 4350(d)(2)(A) and IM 4350-4.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 908
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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