Yesterday, the SEC posted, and declared immediately effective, a Nasdaq rule proposal that would modify the requirements related to waiver of the code of conduct in Listing Rules 5610 and IM-5610. Under current listing rules, all listed companies must adopt a code of conduct (which must meet the definition of a “code of ethics” in SOX 406(c)), applicable to all directors, officers and employees, and make that code publicly available. Each code of conduct must also contain an enforcement mechanism that ensures prompt and consistent enforcement of the code, protection for persons reporting questionable behavior, clear and objective standards for compliance, and a fair process by which to determine violations. Under current listing rules, waivers of the code for directors or executive officers must be approved by the Board and must be publicly disclosed. The proposal expands the approval authority for code waivers and adds new time deadlines for disclosure of code waivers by foreign private issuers. Companies may want to review their codes of conduct to make changes as appropriate.
As noted above, under current listing rules, waivers of the code for directors or executive officers must be approved by the Board of the listed company. Under the proposal, waivers of the code for directors or executive officers could also be approved by a board committee. According to Nasdaq, this expansion of authority “would give listed companies flexibility to place the oversight of a company’s code of conduct within the jurisdiction of a particular committee if that structure is more effective and appropriate, while following the obligations of ethical conduct required by Listing Rules 5610 and IM-5610.” The approach is also consistent with Listing Rule 5630 (regarding approval of related-party transactions by the audit committee or another independent body of the board) and with the requirements of NYSE Rule 303A.10. The release notes that “Nasdaq reviewed recent code of ethics disclosure of a sample of NYSE listed companies and observed that a number of companies provide for waivers to the code of conduct to be approved by the board or a board committee.”
In addition, under current listing rules, for companies other than FPIs, waivers of the code must be disclosed, along with the reasons for the waiver, within four business days by filing a current report on Form 8-K or, if a Form 8-K is not required, by distributing a press release. Under current listing rules, FPIs must disclose code waivers either by distributing a press release or including disclosure in a Form 6-K or in the next Form 20-F or 40-F. Notably, the deadline is potentially remote. However, Nasdaq believes that FPIs, like other Nasdaq-listed companies, should be required to make the required disclosure within four business days. Under the proposal, FPIs would need to provide disclosure, within four business days, either in a press release or in a Form 6-K; the option to provide disclosure in a Form 20-F or 40-F would be eliminated. Alternatively, under current listing rules, a company, including an FPI, may disclose waivers on the company’s website in a manner that satisfies the requirements of Item 5.05(c) of Form 8-K. The proposal would make clear that the website disclosure must be made within four business days. (Note that, if a company elects to disclose the information through its website, the information must remain available on the website for at least a 12-month period. Following the 12-month period, the company must retain the information for a period of not less than five years.)
Although the proposal was declared immediately effective, it appears that Nasdaq did not ask the SEC to waive the 30-day operative delay of Rule 19b-4(f)(6) so that the proposal may become immediately operative. Accordingly, the proposal will not become operative until September 20, which is 30 days after the date of filing, August 21.
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