The New York Stock Exchange (“NYSE”) and The Nasdaq Stock Market (“Nasdaq”) recently modified their bright-line director independence tests. The modifications provide listed companies with slightly more flexibility.
Both the NYSE and Nasdaq have increased the compensation threshold from $100,000 to $120,000. As a result of this change, a director of a listed company now will not be considered independent if the director or an immediate family member accepts compensation from the listed company in excess of $120,000 in any 12- month period over the last three years. For purposes of the calculation, director and committee fees and pensions and other forms of deferred compensation for prior service, so long as not contingent on continued service, are excluded. These changes harmonize the bright line compensation tests with changes previously made by the SEC to Item 404 of Regulation S-K, which requires registrants to disclose related party transactions in excess of $120,000.
In addition, the NYSE narrowed its auditor affiliation test. As amended, a director who has an immediate family member that works or worked for the listed company’s audit firm can qualify as independent unless the immediate family member:
- is a current partner of the listed company’s internal or external auditor;
- is a current employee of such a firm and personally works on the listed company’s audit; or
- was, within the last three years, a partner or an employee who personally worked on the listed company’s audit.
Previously, a director could not qualify as independent if the family member was a current employee of the audit firm and participated in the audit firm’s audit or tax compliance practice, even if the family member was an entry level employee with no connection to the listed company’s audit. This modification follows similar rule changes previously made by Nasdaq and the American Stock Exchange.
Listed companies should reflect these new standards in their form of director questionnaires for the upcoming annual report and proxy season.
These changes do not modify the requirement that a listed company board separately engage in a qualitative independence analysis. In order for a director to be considered independent, the board still must make an affirmative determination that the director has no relationship with the listed company that, in the board’s opinion, would interfere with the exercise of the director’s independent judgment in carrying out the responsibilities of a director. A board may conclude that a transaction that complies with a bright line test nevertheless precludes an affirmative determination of independence.
The complete texts of the NYSE and Nasdaq amendments are available at