Nasdaq Is Advocating for U.S. Public Market Reform

In May 2017, Nasdaq published a report titled The Promise of Market Reform: Reigniting America’s Economic Engine.  The report stems from Nasdaq’s concern about the state of U.S. pubic markets, which have become “more complex and costly for issuers, particularly for publicly-listed small and medium growth companies and for private companies that might consider public offerings.”

The report emphasizes that “companies increasingly question whether the benefits of public ownership are worth the burdens” and warns that if such burdens are not addressed, it “could ultimately represent an existential threat to our markets” as “a growing number of companies have been choosing to remain private—and some public companies are reversing course and going private.”

But Nasdaq’s report does not just create an alarm, it sets forth a blueprint for “critically-needed reforms.”

The report identifies the following three specific problems and offers concrete solutions in these areas:

(i) a complex patchwork of regulation disincentivizes market participation and creates the need to reconstruct the regulatory framework;

(ii) a one-size-fits-all market structure deprives companies of the benefits they need to participate in public markets (particularly for small and medium growth companies), which can be fixed by modernizing the market structure; and

(iii) a culture in the investment community and in the mainstream media that values short-term returns that should be changed to promote long-termism.

For example, Nasdaq suggests that the reconstruction of the regulatory framework would involve: (i) reforming the proxy proposal process; (ii) reducing the burden of corporate disclosure; (iii) rolling back politically-motivated disclosure requirements; (iv) reducing the burden of meritless class action lawsuits; and (v) a tax reform to incentivize long-term investing.

The implementation of most Nasdaq-suggested reforms would involve a lengthy rulemaking process, but it’s important that a dialogue about these issues “among investors, public and private companies, industry groups, and policymakers” has been launched.

 

 

NYSE Proposes New Global Market Capitalization Test for Listing Companies

On September 30, 2014, the SEC published an NYSE amendment, effective as of such publication, to adopt a new initial listing standard, and to eliminate all but one of the current NYSE initial listing standards, for US operating companies.

The amendment provides for a global market capitalization test to serve as a new initial listing standard for US operating companies. The global market capitalization test requires that a listing operating company have a minimum total global market capitalization of $200 million at the time of initial listing. A company that is already publicly traded at the time it applies to list on the NYSE must meet the $200 million global market capitalization requirement for at least 90 consecutive trading days immediately preceding the date on which it receives clearance to submit an application to list on the NYSE.

The amendment also eliminates four of the NYSE’s five current initial listing standards for US operating companies: (1) the valuation/revenue with cash flow test, (2) the pure valuation/revenue test, (3) the affiliated company test, and (4) the assets and equity test.

Despite the proposed global market capitalization test, companies listing must also meet both the existing distribution requirements of Section 102.01A, and the stock price and market value of publicly-held shares requirements of Section 102.01B, of the Listed Company Manual. In addition, companies listing under the proposed global market capitalization test must comply with all other applicable NYSE listing rules.

The notes relating to the amendment highlight that Nasdaq and Nasdaq Global Market have a competitive advantage over the NYSE under existing listing standards, particularly with respect to pre-revenue research and development companies. The amendment, and the implementation of the global market capitalization test, is the NYSE’s attempt to level the playing field.

NASDAQ Proposal to Amend its Independence Standards for Compensation Committee Members Is Effective

Last week we blogged that NASDAQ proposed to amend its independence standards for compensation committee members, which amendments would align NASDAQ’s approach to compensation committee independence with that employed by the NYSE.   On December 11th, the SEC published a notice of filing and immediate effectiveness of the proposed rule change. Companies are required to comply with the compensation committee independence rules by the earlier of the date of their first annual meeting after January 15, 2014, or October 31, 2014.

NASDAQ Proposes to Align its Independence Standards for Compensation Committee Members with the NYSE’s Approach to Such Standards

On November 26, 2013, The NASDAQ Stock Market LLC proposed to amend its listing rules on compensation committee composition (Rule 5605(d)(2)(A) and IM-5605-6) to replace the prohibition on the receipt of compensatory fees by compensation committee members with a requirement that a board of directors instead consider the receipt of such fees when determining eligibility for compensation committee membership.  NASDAQ cited the feedback that it had received from listed companies as the reason for these changes.  The proposed rules are almost identical to the NYSE’s rules related to compensation committee independence and, if adopted, would remove the anomaly of NASDAQ listing rules being more stringent than NYSE rules.

The proposed Rule 5605(d)(2)(A) states that in affirmatively determining the independence of any compensation committee member, the board must consider all factors specifically relevant to determining whether a director has a relationship to the company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to:

  • the source of compensation of such director, including any consulting, advisory or other compensatory fee paid by the company to such director; and
  • whether such director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

In IM-5605-6, NASDAQ proposes to clarify that when considering the sources of a director’s compensation in determining compensation committee member independence, the board should consider whether the director receives compensation from any person or entity that would impair the director’s ability to make independent judgments about the company’s executive compensation, including compensation for board or board committee services. 

The approach to the affiliation prong of the independence analysis is not significantly changed in the proposed rules.  However, NASDAQ proposes to revise IM-5605-6 to explain that the board should consider whether the affiliate relationship places the director under the direct or indirect control of the company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair the director’s ability to make independent judgments about the company’s executive compensation.

Companies are required to comply with the compensation committee composition aspects of the NASDAQ rules by the earlier of their first annual meeting after January 15, 2014, or October 31, 2014.  NASDAQ intends to implement the proposed changes before companies suggest changes to board and committee composition in connection with their 2014 annual meetings.

The July 1st Compliance Date for Certain of the New NASDAQ and NYSE Compensation Committee Rules is Around the Corner

On January 11, 2013, the SEC approved proposed changes to the listing standards of the New York Stock Exchange and NASDAQ Stock Market related to compensation committees. Both exchanges created transition periods to comply with the new rules. We want to remind companies that the following new requirements take effect on July 1, 2013[1]:

Compensation Committee Charter Amendments

NASDAQ and NYSE listed companies will be required to comply with the new rules relating to the authority of a compensation committee to retain compensation consultants, legal counsel, and other compensation advisers; the authority to fund such advisers; and the responsibility of the committee to consider independence factors before selecting, or receiving advice from, such advisers[2].

NASDAQ.  The requirement that such authority and responsibilities of the compensation committee be included in the compensation committee’s written charter does not apply until a later date (see below) for NASDAQ listed companies.  Accordingly, NASDAQ listed companies should consider whether to grant such specific responsibilities and authority by July 1, 2013 through the adoption of a charter, the amendment to an existing charter, or by resolution or other board action. The requirement to adopt a compensation committee charter will not have to be complied with by NASDAQ listed companies until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014.

NYSE NYSE listed companies will have to amend their existing charters by July 1, 2013 to address these additional rights and responsibilities of the compensation committee related to compensation consultants, legal counsel, and other compensation advisers.

Assessing the Independence of Compensation Consultants

The new NASDAQ and NYSE rules provide that the compensation committee may only select, or receive advice from, a compensation consultant, legal counsel, or other compensation adviser after considering the following factors[3]:

  • the provision of other services to the company by the person that employs the adviser;
  • the amount of fees received from the company by the person or firm that employs the adviser, as a percentage of the total revenue of the person or firm that employs the adviser;
  • the policies and procedures of the person or firm that employs the adviser that are designed to prevent conflict of interests;
  • any business or personal relationship of the adviser with a member of the compensation committee;
  • any stock of the company owned by the adviser; and
  • any business or personal relationships between the executive officers of the company and the adviser or the person or firm employing the adviser.

Compensation committees must conduct an independence assessment for all of its advisers, with limited exceptions for in-house counsel and compensation advisers that act in a role limited to (i) consulting on broad-based plans that are generally applicable to all salaried employees, or (ii) providing information that is either not customized for the issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.

We note that in evaluating compensation committee adviser independence, the NYSE requires consideration of all factors relevant to an adviser’s independence from management, in addition to the six enumerated factors listed above. NASDAQ does not have a similar catch-all requirement.

Both NASDAQ and NYSE listed companies should assess the independence of their current advisers prior to July 1, 2013.  Ordinarily, this assessment will be performed before a potential adviser is selected and will then be re-assessed on an annual basis.  We would suggest utilizing a compensation committee questionnaire to solict information from the compensation consultant in order to complete this assessment. 

 


[1] The new compensation committee independence requirements do not need to be complied with by NASDAQ or NYSE listed companies until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014. Nevertheless,  NASDAQ and NYSE listed companies should begin preparing to comply with such new independence requirements. 

 

[2] To the extent a NASDAQ listed company does not have a compensation committee by July 1, 2013, this requirement will apply to the independent directors who determine, or recommend for the board’s determination, the compensation of the CEO and other executive officers of the company.

 

[3] To the extent a NASDAQ listed company does not have a compensation committee by July 1, 2013, this requirement will apply to the independent directors who determine, or recommend for the board’s determination, the compensation of the CEO and other executive officers of the company.

 

Update to Nasdaq Proposed Rule Relating to Internal Audit Function

As we discussed previously in our recent Up to Date  issue, the Nasdaq Stock Market recently proposed a rule that would require Nasdaq listed companies to establish and maintain an internal audit function. The proposal provides that each company listed on Nasdaq on or before June 30, 2013 establish an internal audit function by no later than December 31, 2013. Companies listed after June 30, 2013 would be required to estab­lish an internal audit function prior to listing. The SEC was scheduled to approve or disapprove such proposed rule on or before April 22, 2013. However, on April 18, 2013, the SEC designated June 6, 2013, as the date by which the SEC should either approve or disapprove or institute proceedings to determine whether to disapprove the proposed rule change.

When Do You Need to Start Complying With New NASDAQ and NYSE Compensation Committee Rules?

On January 11, 2013, the SEC approved proposed changes to the listing standards of the New York Stock Exchange LLC and NASDAQ Stock Market LLC related to compensation committees. Both exchanges created transition periods to comply with the new rules.

As of July 1, 2013, NASDAQ and NYSE listed companies will be required to comply with the new rules relating to the authority of a compensation committee to retain compensation consultants, legal counsel, and other compensation advisers; the authority to fund such advisers; and the responsibility of the committee to consider independence factors before selecting such advisers. The requirement that such authority and responsibilities of the compensation committee be included in the compensation committee’s written charter does not apply until a later date (see below) for NASDAQ listed companies and such companies should consider under state corporate law whether to grant such specific responsibilities and authority through a charter, resolution or other board action. In contrast, NYSE listed companies will have to amend their existing charters as of July 1, 2013 to address these additional rights and responsibilities of the compensation committee related to compensation consultants, legal counsel, and other compensation advisers. To the extent a NASDAQ listed company does not have a compensation committee by July 1, 2013, these requirements will apply to the independent directors who determine, or recommend for the board’s determination, the compensation of the CEO and other executive officers of the company.

The remaining new rules, for example, compensation committee charter and independence standards for compensation committee members, will not have to be complied with by NASDAQ listed companies until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014.

NYSE listed companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee director independence.

SEC Approves Nasdaq’s Proposed Rules Relating to Disclosures of Deficiencies in Listing Standards

 

On  December 3, 2012, the SEC approved Nasdaq’s proposed rule changes which (i) modify certain disclosure requirements to require issuers to publicly describe the specific basis and concern identified by Nasdaq when a listed issuer does not meet a listing standard; and  (ii) give Nasdaq the authority to make a public announcement when a listed issuer fails to make a public announcement.   See our November issue of Up to Date and our October 26th blog where we describe in more detail these Nasdaq rule changes.

Time Period for SEC Action on Exchanges’ Proposed Compensation Committee Rules Was Extended until January 13, 2013

On September 25, 2012, each of The NASDAQ Stock Market LLC and New York Stock Exchange filed with the SEC proposed rules amending their listing standards for compensation committees.  Generally, under the Securities Exchange Act of 1934, the SEC should decide whether to approve or disapprove proposed rule changes within 45 days of the publication of notice of the filing of a proposed rule change or within such longer period (up to 90 days) as the SEC may designate.  The 45th day from the publication of notice of filing of the compensation committee proposed rule changes by the exchanges was November 29, 2012. The SEC extended the 45-day time period for SEC action on these proposed rule changes and designated January 13, 2013, as the date by which the SEC should either approve or disapprove these changes.

HAS YOUR COMPANY RECEIVED A DELISTING NOTICE? – ANNOUNCE IT PROPERLY OR NASDAQ MAY ANNOUNCE IT FOR YOU

Generally, under Nasdaq Rule 5810(b), a company listed on Nasdaq that receives from Nasdaq a notification of deficiency, a Staff Delisting Determination or a Public Reprimand Letter (collectively, a “Deficiency Notice”) is required to make a public announcement disclosing receipt of such notice and the Nasdaq Rule(s) upon which the Deficiency Notice is based.  Generally, a company can satisfy its obligation to make a public announcement by filing a Form 8-K with the disclosure required by Item 3.01.  However, if the notice or delisting determination relates to the requirement to file a periodic report, the company is required to file a press release, in addition to filing a Form 8-K.   

As described in its proposed rule changes filed with the SEC, Nasdaq is concerned that companies are not disclosing information sufficient to allow the public to understand the deficiency that led to the Deficiency Notice and the underlying basis of the deficiency.  Nasdaq also expressed concern that companies may fail to make the disclosure at all.  In particular, Nasdaq noted that, as the remedy for failing to provide the required public disclosure of the receipt of a Deficiency Notice is to halt trading in the company’s securities, a company that has already been halted may decline altogether to make the required disclosure. 

To address these concerns,  Nasdaq proposes modifying Rules 5250(b)(2) and 5810(b) and IM-5810-1 to require that a company receiving a Deficiency Notice  described in its public disclosure “each specific basis and concern identified by Nasdaq in reaching its determination that the [c]ompany does not meet the listing standard.”  In addition, Nasdaq proposes modifying IM-5810-1 and adding Rule 5840(l) to provide Nasdaq clear authority to make a public announcement, including by press release, describing a Deficiency Notice or other event involving a company’s listing or trading on Nasdaq.  The amendment to IM-5810-1 would permit Nasdaq to make a public announcement of the notice if the company does do so or the company’s announcement does not include all of the required information.  New Rule 5840(l) would permit Nasdaq to make a public announcement even when the company has not failed to do so.   

The proposed changes will not become effective until approved by the SEC.