On July 19, 2012, the SEC approved a proposed Nasdaq rule change to modify the exception to Nasdaq Rule 5605 that allows a non-independent director of a listed company to serve on its audit committee, compensation committee or nominations committee under exceptional and limited circumstances.
Nasdaq’s listing rules generally require that a listed company’s audit, compensation and nominations committees consist of “independent directors.” However the rules also include an exception to permit a listed company, under exceptional and limited circumstances, with proper disclosure, and under specified conditions, to allow one non-independent director to serve on the audit, compensation or nominations committee for up to two years.
Prior to the approved rule change, a listed company could not utilize this exception for a non-independent director who would otherwise qualify if that director had a family member who is an employee of the listed company, even if that family member is not an executive officer of the company. Nasdaq noted in its proposal, however, that the same family relationship would not otherwise preclude a director from being considered independent.
Based on this inconsistency, Nasdaq proposed, and the SEC approved, amending Rule 5605 to allow a non-independent director who is a family member of a non-executive employee of a listed company to serve on the listed company’s audit committee, compensation committee or nominations committee under exceptional and limited circumstances as long as the listed company’s board concludes that the director’s membership on the relevant committee is required by the best interests of the company and its shareholders, after considering the family relationship between the non-independent director and the non-executive employee of the company.