Originally published August 15, 2008

Keywords: New York Stock Exchange, NASDAQ Stock Market, corporate governance, NYSE amendments, director independence, Marketplace Rules, director compensation, NYSE Listed Company Manual

The New York Stock Exchange and the NASDAQ Stock Market have modified several of their bright line tests for determining director independence pursuant to their respective corporate governance listing standards. These amendments are currently effective, although the NYSE amendments cannot be complied with until September 11, 2008.1

The first change made by both the NYSE and NASDAQ is to increase the director compensation bright line test for director independence set forth in Section 303A.02(b)(ii) of the NYSE Listed Company Manual and Rule 4200(a)(15(B) of the NASDAQ Marketplace Rules, respectively. Prior to the amendments, these rules barred a determination that a director was independent if the director or any immediate family member received more than $100,000 in director compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service that is not contingent on continued service. This amount has been increased to $120,000 so that the threshold is consistent with the dollar threshold for transactions that need to be disclosed under Item 404 of Regulation S-K with respect to related person transactions.

The second change made only by the NYSE relates to the auditor test set forth in Section 303A.02(b)(iii) of the NYSE Listed Company Manual as it applies to immediate family members of directors. Prior to the amendment, the bright line test barred a determination that a director was independent if he or she had an immediate family member who was a current employee of the internal or external auditor. This had the effect of precluding a director from being independent based on an immediate family member's employment with the listed company's audit firm, even where that family member had no involvement on the listed company's audit, such as where a child graduating from college accepted an entry-level job in the audit practice of the listed company's audit firm without personally working on the listed company's audit.

This bright line test has been modified so that a director is barred from being considered independent as a result of an immediate family member's employment only if the immediate family member:

  • Is a current partner of the 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 employee of such a firm and personally worked on the listed company's audit within that time.

This change to the NYSE auditor independence test will bring this NYSE independence requirement in closer alignment with the NASDAQ and American Stock Exchange auditor based tests for director independence.

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Footnote

1. The complete text of the NYSE filing with the SEC is available at http://apps.nyse.com/commdata/pub19b4.nsf/docs/ 07DD57A6CC5EB6B9852574A40044CEEF/$FILE/NYSE-2008-75.pdf . The complete text of the NASDAQ filing with the SEC is available at http://cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2008/SR-NASDAQ-2008-053.pdf .

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