The New York Stock Exchange and the Nasdaq Stock Market recently adopted revisions to some of the “bright-line” director independence tests under their corporate governance listing standards. Relationships identified in the bright-line tests are absolute bars to director independence if they currently exist or if they existed during a prescribed “look-back” period measured from the independence determination date. It will be necessary to modify the current form of D&O questionnaire to solicit information required to make independence determinations under the amended tests.

NYSE Amendments

The pending NYSE amendments are consistent with the NYSE’s proposed corporate governance amendments submitted to the SEC in June 2007. The amendments will make two changes to the prior bright-line director independence tests set forth in Section 303A.02(b) of the NYSE’s Listed

Company Manual.

  • Increase in Direct Compensation Threshold. The NYSE listing standards previously provided that a director may not be deemed independent if the director had received, or has an immediate family member (as defined under the NYSE listing standards) who had received, more than $100,000 in direct compensation from the company during any 12-month period within the last three years, other than director and committee fees and certain other types of compensation. The dollar threshold in this test will be increased to $120,000, consistent with the dollar threshold under Item 404(a) of Regulation S-K, which governs the SEC’s disclosure requirements for related person transactions. Item 404(a) establishes $120,000 as the amount above which financial transactions and relationships involving a company and its directors must be disclosed. The NYSE indicated that using a consistent standard would enhance its ability to assess compliance with the independent director requirements, because companies are required under Item 404(a) to disclose compensation in excess of $120,000, but are not necessarily required to disclose compensation between $100,000 and $120,000.
  • Narrowing of Auditor Affiliation Test. The prior NYSE listing standard precluded a director from being deemed independent if the director’s immediate family member served as a current employee in the audit, assurance or tax compliance practice of the company’s outside auditor. Under the amended test, director independence will be precluded only if a director’s immediate family member is a current employee of the company’s auditor and personally works on the company’s audit. The NYSE explained that the prior standard with respect to immediate family members was overbroad and had the effect of precluding a director from being deemed independent even in cases where an immediate family member had no relationships to the listed company’s audit. The amended test will bring the NYSE standard into line with the similar Nasdaq listing standard.

These changes will be effective as of September 11, 2008. The other amendments to the corporate governance standards proposed by the NYSE in June 2007 have not been adopted and remain under consideration at the SEC.

Nasdaq Amendment

On August 8, the SEC approved a Nasdaq proposal to amend Nasdaq Rule 4200(a)(15)(B) to increase its bright-line direct compensation threshold from $100,000 to $120,000, consistent with the NYSE rule amendment and Item 404(a) of Regulation S-K. In approving the change, the SEC noted that, even if a director (or a family member) received $120,000 or less in compensation from the company, the company’s board of directors is still required to make an affirmative determination that the director has no relationship with the company that, in the board’s opinion, would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director.