The proposal is discussed at length in this PubCo post. In approving the proposal, the SEC stated that, with regard to the various proposed phase-in periods, consistent with its prior approval of the NYSE’s analogous corporate governance requirements, the SEC believed the “phase-in periods for specified companies newly listing on the Exchange or newly becoming subject to certain corporate governance listing standards as a result of a change in status are reasonable. The proposal would permit a phase-in schedule similar to that allowed under the current rules for a company listing in conjunction with an IPO, and would extend such a phase-in schedule appropriately, to companies listing in connection with a carve-out or spin-off transaction.”  These proposed rules “offer an acceptable minimal tolerance for the special circumstances of each of these types of new listings with respect to the point in time that the standards would begin to apply.”

But the SEC also emphasized a few points in particular—especially related to audit committee requirements.  Notably, the SEC highlighted that the proposal on the phase-in periods “does not make any changes to the requirements for companies to comply with any of the provisions of Rule 10A-3 under the Act,” that is, with regard to audit committees.  Companies listing in conjunction with an IPO, a carve-out or a spin-off, in addition to companies listing securities previously registered under Section 12(g) of the Act, would be allowed a phase-in period for the Nasdaq requirement that the audit committee have a minimum of three members. While the SEC believed that the phase-in—one member on the audit committee by the listing date, at least two members within 90 days of the listing date and at least three members within a year of the listing date—provided a reasonable accommodation, the SEC underscored that

“the proposed rule change does not grant an exemption or phase-in period to any newly-listed company with respect to the provision set forth in Rule 5605(c) that requires every listed company’s audit committee, and without distinction as to the committee’s size, to have at least one member who has past accounting or finance experience and other comparable experience or background which results in financial sophistication. In addition, Rule 10A-3 under the Act requires at least one member of a listed company’s audit committee to be independent as of the listing date, even when the company is allowed a phase-in period with respect to the independence of other audit committee members. Thus, if a newly listed company that is eligible for a phase-in period with respect to the size requirement chooses to have initially only one member on its audit committee, that member would need to be independent and also have to meet the Exchange’s financial sophistication requirement.”  [Emphasis added.]

Under Rule 5615(a)(3),  a Foreign Private Issuer may follow its home country practice in lieu of most Nasdaq rules, but must comply with certain of the rules, including some relating to audit committees. An FPI that ceases to qualify as an FPI becomes subject to all relevant corporate governance requirements of Rule 5605. With regard to the proposal to allow a phase-in for certain corporate governance requirements for companies that cease to be FPIs, the phase-in would allow an FPI that ceases to qualify as an FPI to comply with certain corporate governance requirements, such as the majority independent board requirement and the three-person audit committee requirement, six months after the date of determination of the loss of FPI status. Once again, however, the SEC focused on particular audit committee requirements. Here, the SEC stressed that FPIs “are not permitted to follow home country practice with respect to the independent audit committee requirements under Rule 5605(c)(2)(A)(ii) and the audit committee requirements in Rule 5605(c)(3) and the phase-in rule for Foreign Private Issuers makes clear that the company must continue to have an audit committee meeting these requirements during any phase in for other corporate governance requirements provided for in the new provision.” The SEC considered the phase-in provisions for companies ceasing to be FPIs to be “consistent with NYSE rules and appear to be a reasonable accommodation.”

With respect to cure periods, Nasdaq proposed (among other changes) to amend Rules 5605(b)(1), 5605(c)(4), 5605(d)(4) and 5810(c)(3)(E) to codify its current position that, if a company complied with the audit or comp committee composition or majority independent board requirements during a phase-in period but fell out of compliance before the end of the phase-in period, the company could be eligible for a cure period provided by Rule 5810(c)(3)(E). Otherwise, a company relying on any phase-in period in Rule 5615(b) was not eligible for a cure period immediately following the expiration of the phase-in period;  Nasdaq believed it would be inappropriate because it would, in effect, be like extending the phase-in period.  In that case, Nasdaq would issue a Staff Delisting Determination letter to delist the Company’s securities. The SEC observed that Nasdaq “seeks to limit the maximum time a company may remain listed without fully complying with independent committees or the independent board requirements.”  The SEC agrees, “given the importance of these requirements to assure adequate oversight, that it is reasonable not to provide a cure period under such circumstances because the company has already had a phase-in period and failed to comply throughout that period. The greater clarity and uniformity of treatment afforded by the proposal can help to foster accountability of companies’ corporate governance practices.”

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