Nasdaq Proposes to Amend Definition of “Family Member”

By Jason Martinez, Heyward Armstrong and Amy Batten

On June 12, 2019, the Securities and Exchange Commission (SEC) published a notice that Nasdaq is proposing to amend its definition of "family member" (as defined in Nasdaq Listing Rule 5605(a)(2), which sets forth the criteria for determining whether a director is independent) to bring it back in line with the NYSE’s definition.  Since 2002, the Nasdaq & NYSE definitions of "family member" have differed, causing companies that transfer their listings to have to undergo painstaking independence analysis – often after board members have already completed a questionnaire using the definition of the former exchange. According to the notice, the Nasdaq definition, which includes as a "family member" a stepchild of a director, was expanded inadvertently – the definition was never intended to be substantively different from the NYSE definition (which does not include stepchildren). 

Rule 5605(a)(2) provides a list of certain relationships that preclude a board from finding that a director is independent, including if the director has a "family member" who (i) during any 12-month period within the past three years has accepted compensation in excess of $120,000 from the company, (ii) has certain ownership relationships with organizations with which the company has a sizable (defined in the Rule based on the greater of $200,000 or 5% of the recipient’s consolidated gross revenue) business relationship, (iii) is employed as an executive officer of an entity that has, as a member of its compensation committee, an executive officer of the company, or (iv) is a current partner (or former partner who worked on the company’s audit during the past three years) of the company’s outside auditor. Nasdaq rules also preclude a director from being independent if he or she is a "family member" of someone who is, or during the past three years was, employed by the company as an executive officer.

If the amendment is approved, the Nasdaq definition will no longer include stepchildren and will also exclude domestic employees who share a home with the director (which goes beyond the intended "familial" scope of the Rule). The board will still be required to make an affirmative determination that no relationship exists that would interfere with a director’s ability to exercise independent judgment, and relationships such as the domestic employee living in the home should be considered in the context of that determination.

The SEC has invited interested persons to submit comments, including whether the proposed rule change is consistent with the Securities Act of 1933, as amended. Comments are expected to be due by mid-July. Until adopted, we recommend that Nasdaq-listed companies continue to include the current, broader definition of "family member" in their annual D&O questionnaires.

If you have questions or would like to provide written comments to the SEC, please contact your Smith Anderson Public Companies Group lawyer.