December 2013

Nasdaq reverses course on independence standardsApparently, corporate governance cannot be dictated by the stock exchanges.  As we had blogged about last year, Section 952 of Dodd-Frank required each national securities exchange to review its independence standards for directors who serve on an issuer’s compensation committee.  Each national securities exchange had to ensure that its independence definition considered relevant factors such as (i) the source of the director’s compensation, including any consulting, advisory, or other compensatory fees paid by the listed company and (ii) whether the director has an affiliate relationship with the company.

As it turns out, Nasdaq interpreted the Dodd-Frank requirement to be much stricter than the NYSE.  At the time I suggested that Nasdaq was trying to “out corporate governance” the NYSE by layering on an extra independence requirement of prohibiting any director serving on the compensation committee from accepting “directly or indirectly any consulting, advisory, or other compensatory fee” from the issuer.  I still think that is the case.  As we have blogged about before, the NYSE and Nasdaq are fierce competitors in their attempts to obtain an issuer’s listing.  In fact, Nasdaq stresses that its stringent corporate governance requirements are a reason why an issuer should list on Nasdaq rather that the NYSE.

Well, I thought that Nasdaq’s stringent interpretation of the rule made little sense and that the burden simply outweighed any limited improvement in corporate governance, especially for community banks where directors often maintain some limited business with the issuer.  Apparently, Nasdaq-listed issuers agreed with me and “based on feedback” and indications that the stringent interpretation of Section 952 of Dodd-Frank “could influence a company’s choice of listing venue” Nasdaq quickly reversed course.

Nasdaq has proposed to eliminate the prohibition of compensation committee members from receiving any compensation beyond board fees.  Instead, Nasdaq-listed issuers will merely need to consider whether the compensation impairs the director’s ability to make independent judgments about the issuer’s executive compensation.  Nasdaq’s revised independence requirement is substantially the same as the NYSE.  Nasdaq expects to adopt the rule amendment prior to the start of issuers’ 2014 annual meetings.