NASDAQ Amends Rules For Waivers To Code Of Conduct

On September 5, 2023, Nasdaq adopted amendments to Listing Rule 5610 and IM-5610 requiring listed companies to maintain a code of conduct and to disclose certain waivers.  This is also a good time to discuss the code of conduct/code of ethics requirements applicable to all companies subject to the Securities Exchange Act of 1934 (“Exchange Act”) reporting requirements.

Code of Conduct/Code of Ethics

Section 406(c) of the Sarbanes-Oxley Act of 2002 (“SOX”) requires all companies that are subject to the Exchange Act reporting requirements to disclose whether they have adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  If the company has not adopted such a code, it must explain why it has not done so.

SOX defines a code of ethics as written standards reasonably designed to deter wrongdoing and to promote: (i) honest and ethical conduct including related to conflicts of interest; (ii) full, fair, accurate, timely and understandable disclosure in reports filed with the SEC and public communications; (iii) compliance with applicable laws, rules and regulations; (iv) prompt internal reporting of violations of the code; and (v) accountability.

SOX requires that companies file a copy of their code of ethics as an exhibit to their annual report and post the code on their website.  The annual report must include a statement that the code is posted to the website with the corresponding URL.  Moreover, companies must agree to provide any requesting person with a copy of the code free of charge.

A code of ethics is important enough to warrant its own disclosure item in Form 8-K.  In particular, Item 5.05 to Form 8-K requires the disclosure of amendments to or waiver of a provision of a company code of ethics.  Waiver disclosures must include a description of the nature of the waiver, the name of the person to whom it was granted and the date of the waiver.  However, Form 8-K and SOX allow a company to instead disclose amendments and waivers on its website as long as it has clearly indicated its intention to do so in its most recent annual report, maintains the website disclosures for at least 12 months and retains the information for at least five years.

Nasdaq Code of Conduct

The Nasdaq rules are both broader and more specific than SOX.  Nasdaq Listing Rule 5610 requires all listed companies to adopt a code of conduct applicable to all directors, officers and employees, (not just those enumerated in SOX) and to make the code of conduct publicly available.  The code of conduct must comply with SOX Section 406 described above.

The new amendment: (i) allows a board committee to approve a waiver; and (ii) requires waivers to be disclosed within four business days.

Building on the SOX provisions, Nasdaq requires (including the recent amendments) that: (i) the code provide for an enforcement mechanism; (ii) any waivers be approved by the board or a committee of the board; (iii) that domestic filers file a Form 8-K or press release within four business days of any waivers; and (iv) that foreign private issuers disclose any waivers in a Form 6-K, press release, 20-F or 40-F within four business days of such waiver.  Nasdaq rules also allow for alternative disclosure on a company’s website in accordance with Item 5.05 of Form 8-K, within four business days of such waiver.

Nasdaq Listing Rule IM-5610 expounds on the code of conduct ideology.  The basic premise is that ethical behavior is required and expected regardless of written codes.  The written code is meant to let investors know that a company takes this responsibility seriously and has a system in place to enforce violations.