December 18, 2003

Nasdaq Finally Issues Written Interpretation

Tucked amidst existing FAQs on governance on its “Legal & Compliance” page, the Nasdaq issued the following two interpretative positions yesterday (this confirms my blog from last Thursday about the NYSE and Nasdaq positions are now back to being split in this area):

“Independent Directors & Audit Committee Composition

The new NASDAQ rules approved by the Securities and Exchange Commission (“SEC”) on November 4, 2003 require certain annual proxy disclosures relating to director independence.

Is a company required to make these disclosures in the 2004 proxy season or can it wait until the following year?

A company must generally disclose its board determinations relating to director independence in the proxy statement for the first annual meeting occurring after January 15, 2004. Similarly, a company relying upon the Controlled Company exemption must generally make required disclosures in this same 2004 timeframe. See Rule 4350(c)(1), which requires that a company disclose those directors that the board of directors has determined to be independent under Rule 4200, and Rule 4350(c)(5), which provides an exemption to certain of the requirements of Rule 4350(c) for a Controlled Company (provided the company discloses that it is relying on this exemption and the basis for the determination that it is a Controlled Company). For example, if a company holding its annual meeting on February 25, 2004 files a proxy on January 8, 2004, that proxy must include these disclosures. Note: Since foreign private issuers and small business companies have until July 31, 2005 to comply, proxy disclosure would need to occur in the proxy for any annual meeting preceding that date.

On the other hand, disclosures by a company using the “exceptional and limited circumstances” provision, in order to have a non-independent director on the audit committee, compensation committee, or nominating committee, are required in the proxy statement for the next annual meeting subsequent to such determination (or, if the company does not file a proxy, in its Form 10-K or 20-F). See Rules 4350(c)(3)(C), 4350(c)(4)(C) and 4350(d)(2)(B). This longer timeframe is appropriate because a company using this exception would not have appointed committee members until following the election of directors at the annual meeting, and as such, no disclosure regarding reliance on this exception is required until the company’s 2005 annual meeting proxy statement.

Must a company obtain approval from NASDAQ in order to utilize the “exceptional and limited circumstances” according to Marketplace Rule 4350(d)(2)(B)?

No, a company may choose to rely on the exception without getting NASDAQ’s approval. Of course, the company must make the disclosure required by the Rule in its next proxy statement.”

MD&A Transcript is Posted!

For members, we have posted the transcript of last Wednesday’s webcast – “The New MD&A” – featuring Ron Mueller of Gibson Dunn, Karl Groskaufmanis of Fried, Frank and Richard Harrison of GSI.

SEC Issues SAB 104 Regarding Revenue Recognition

Yesterday, the SEC cleaned up its guidance regarding how companies should recognize revenue in Staff Accounting Bulletin No. 104. SAB 104 revises and rescinds portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make the SEC’s interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The principal revisions relate to the rescission of material no longer necessary because of private sector developments in GAAP.