NYSE and NASDAQ to Change Director Independence Standards

Last month the SEC approved a proposal by NASDAQ to change the definition of director independence. The NYSE is seeking approval for an identical change to its independence tests, which is still in the comment phase. While the rule change does not significantly alter independence requirements, we follow all developments in this area with great interest.

NASDAQ Rule 4200(a)(15)(B) and NYSE Rule 303A.02 previously disqualified any director from being considered independent who received, or had an immediate family member who received, over one hundred thousand dollars in compensation from the company during any twelve month period in the last three years. The new rules adopted by the exchanges increases this threshold amount to one hundred twenty thousand dollars. The SEC notes in its releases that this is the same amount requiring disclosure of a single transaction between a director and the company under Reg. S-K, Item 404.

The NYSE has also requested a change to the independence test for a director’s relationship to the company’s outside auditor. The current NYSE standard disqualifies a director from being considered independent if the company’s external auditor employs an immediate family member of the director. This applies even if the family member has never worked on an audit of the company. The NYSE is requesting a new test that only includes family members that are partners of the company’s outside auditor or have worked on the company’s audit during the past three years.

Both SEC releases are available on the DU Corporate Governance web site.