Director Independence: NYSE and NASDAQ Amend Rules

Corporate & Finance Alert
(Thomas More Griffin)
November 4, 2008
Effective August 12, 2008, the New York Stock Exchange LLC ("NYSE") and The NASDAQ Stock Market LLC ("Nasdaq") modified their bright line director independence tests to provide more flexibility to listed companies and consistency with existing rules of the Securities and Exchange Commission ("SEC").

Direct Compensation Test
Under former NYSE and Nasdaq director independence rules, a director was not deemed independent if he or she had received, or had an immediate family member who had received, during any twelve-months during the last three years, more than $100,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior services (provided such compensation was not contingent on continued service). The modified NYSE and Nasdaq rules increase the dollar threshold in the test from $100,000 to $120,000. This change mirrors the SEC's August 2006 amendment to the dollar threshold (increasing it from $60,000 to $120,000) for related party transactions that must be disclosed under Item 404 of Regulation S-K. Both the NYSE and Nasdaq believe that it is important for their rules to be consistent with SEC rules.

Auditor Test
Additionally, the NYSE amended its bright line test for director independence relating to a listed company's internal or external auditor. As modified under NYSE rules, a director that has an immediate family member that works or worked for the listed company's audit firm can qualify as an independent director unless the immediate family member: (a) is a current partner of the company's internal or external auditor; (b) is a current employee of such firm and personally works on the listed company's audit; or (c) was within the last three years a partner or employee of such firm and personally worked on the listed company's audit within that time. The NYSE noted that its prior standard in this area had the effect of precluding a director from being deemed independent where an immediate family member had no relationship to the listed company's audit. The revised auditor change of the NYSE brings NYSE standards in line with the auditor tests utilized by Nasdaq and the American Stock Exchange.

In its release adopting the amended NYSE and Nasdaq director independence rules, the SEC noted that even if a director (or a family member) received less than $120,000 in compensation from the listed company, the listed company's board of directors still would have to affirmatively determine that the director has no relationship with the listed 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. Boards of listed companies should pay close attention to this recommendation. There are many situations in which a director will fall below the bright line test of $120,000, but not be independent because of other relationships or affiliations with the listed company.

We recommend that companies with their securities listed on Nasdaq or the NYSE amend their director questionnaires and annual reports and proxies (if such revised disclosure is required) in connection with these director independence rule modifications.

Should you have any questions regarding your own situation, please contact Thomas More Griffin or Cheryl A. Gorman of our Corporate Department.