- Require shareholder approval for stock option plans that include executive officers or directors;
- Tighten the definition of an independent director;
- Require that related-party transactions be approved by an issuer's audit committee or comparable body;
- Clarify that a company can be delisted for misrepresenting information to Nasdaq;
- Require that companies disclose the receipt of an audit opinion with a going concern qualification; and
- Permit companies to disseminate material information via Regulation FD-compliant methods of disclosure, instead of solely by a press release.
These rule changes grew out of a series of recommendations by the Nasdaq Listing and Hearing Review Council that were endorsed by the Nasdaq executive committee of the board of directors and submitted to SEC Chairman Harvey Pitt on February 12, 2002.
On May 8, in San Jose, California, and on May 14, in New York City, Nasdaq also hosted its Corporate Governance Summits. Over 130 senior executives of Nasdaq-listed companies attended. Speakers included leaders from the investment community, investor advocates, the accounting profession, and the SEC. A report will be written and forwarded to the SEC and may also serve as the basis for future Nasdaq initiatives in this area.
Stock Option Plans
Nasdaq rules generally require shareholder approval for all plans in which officers and directors participate. However, the rules contain an exception for broadly based plans, that is, plans in which at least a majority of the participants are not officers or directors. In response to comments by SEC Chairman Pitt and others, the board voted to strengthen the rule by requiring shareholder approval for all plans in which officers and directors participate. The board also voted to preserve the existing exemption that allows listed companies to provide inducement grants to new executive officers, but conditioned such grants upon the approval an independent compensation committee or a majority of the company's independent directors.
An exception for Employee Stock Ownership Plans (ESOP) and rights and warrants offered generally to all shareholders was retained.
Independent Directors
In light of recent events, the board strengthened the definition of an independent director. The definition, which currently prohibits independent directors from receiving more than $60,000 in compensation, will be extended to prohibit any payments, including political contributions, in excess of $60,000 and will extend to receipt of such payments by a family member of the director. Furthermore, a director will not be considered independent if the company makes payments to a charity where the director is an executive officer and such payments exceed the greater of $200,000 or five percent of either the company's or the charity's gross revenues.
Related Party Transactions
Nasdaq's conflict of interest review requirement was also expanded to require that a company's audit committee or a comparable body of the board of directors review and approve all related-party transactions. The current requirement is limited only to a review of such transactions. A related party is one who can exercise control or significant influence over another party, to the extent that one of the parties may be prevented from pursuing its own separate interests.
Explicit Prohibition on Misrepresenting Information to Nasdaq
Nasdaq rules were clarified to provide explicitly that an issuer that makes an intentional misrepresentation to Nasdaq, intentionally omits necessary material information in a communication with Nasdaq, or otherwise fails to provide requested information, may be delisted.
Requirement to Disclose Audit Opinions with Going Concern Qualifications
If an auditor concludes that substantial doubt exists about the entity's ability to continue as a going concern for a reasonable period of time, however, the auditor provides this conclusion through an explanatory paragraph in the auditor's report. While the audit opinion is available in the Form 10-K, the rule requires that a going concern qualification should be brought to the attention of investors and potential investors through a press release. While some companies disclose this today, many do not, and the rule would make the receipt of a going concern qualification uniformly transparent.
Disclosure of Material Information
Current Nasdaq rules require that, except in unusual circumstances, companies promptly disclose to the public through the news media any material information that would reasonably be expected to affect the value of their securities or influence investors' decisions. "News media" refers to news services such as Bloomberg, Dow Jones, Reuters, Business Wire or PR Newswire.
In order to align Nasdaq disclosure options with those outlined in the SEC Reg FD (adopted on August 10, 2000), the board approved modification of the disclosure of material information rule to include all Reg FD-compliant disclosure methods. In addition to a broadly disseminated press release, these methods include conference calls, press conferences and webcasts, so long as the public is provided adequate notice (generally by press release) and granted access. Companies would still be required to provide prior notification of certain planned material news announcements to the Nasdaq MarketWatch department.
These rule changes were also approved by the National Association of Securities Dealers (NASD) board of governors, acting in its capacity as Nasdaq's self-regulatory organization until the Securities and Exchange Commission (SEC) approves Nasdaq's exchange registration application. They will now be forwarded to the SEC for final approval.
Nasdaq is the world's largest stock market. With more than 4,000 companies, Nasdaq lists more companies and trades more shares per day than any other U.S. market. Over the past five years, Nasdaq has outpaced all other U.S. markets in listing IPOs. It is also home to category defining companies that are leaders across all areas of business including technology, retail, communications, transportation, media and healthcare industries. With operations on three continents, Nasdaq is a key driver of global capital formation. For more information about Nasdaq, visit the Nasdaq Web site at www.nasdaq.com or the Nasdaq NewsroomSM at www.nasdaqnews.com.
