Moseying to compliance: Nasdaq’s 348-day cure…

June 25, 2012

The exchanges make a big deal out of the rules they impose on their listed companies, and there are certainly plenty of hoops for companies to jump through. But sometimes, we have to wonder how much anyone is actually thinking about them.

These musings were prompted by a very real filing we spotted relatively early in the Friday night dump last week: an 8-K from Discovery Communications (DISCA), filed at 4:45 p.m., disclosing that the science-and-gee-whiz cable broadcaster had fallen out of compliance with Nasdaq’s audit-committee rules, and that it had received a letter from the exchange warning it to get its act together posthaste — within a mere 348 days, give or take.

Here’s what happened: On June 1, Discovery director and audit-committee member Lawrence Kramer submitted his resignation to the rest of the board, effective immediately, after being appointed publisher of USA Today. (Congrats!) The resignation was disclosed the same day.

Unfortunately, Kramer’s departure also left Discovery with just two independent members on its audit committee — one short of the three required by Nasdaq Listing Rule 5605 [PDF]. We’re not sure just what wheels had to turn within the Nasdaq’s compliance offices over the next 17 days, but on June 18, Discovery received the deficiency notice.

In that notice, the company got its marching orders:

“NASDAQ has provided the Company a cure period to regain compliance until the earlier of the next annual meeting of the Company’s stockholders (currently anticipated to be held in May 2013) or June 3, 2013…”

Yes, that’s right. Nasdaq has a rule in place that a listed company absolutely must have three independent directors on its audit committee — but apparently the company is allowed to go for as much as a year without that critical third independent member before it has to “cure” the deficiency. We figure it works out to about 348 days, assuming Discovery holds its next annual meeting on May 15, as it did this year.

We can only assume that this kind of “cure” period is a relic of that bygone era when Nasdaq correspondence traveled by smoke signal or fast pony from New York to the distant listed companies of the U.S. (like Discovery, in downtown Silver Spring, Maryland, 223 miles from Nasdaq’s Manhattan headquarters), and board members had to travel to meetings from around the country by steamship and Pullman car.

Your interpretation will probably vary depending on your general attitude toward regulation. Either this is yet another example of bureaucratic red tape run amok (if Discovery can go two weeks shy of a year with only two independent audit-committee members, why not a full year? Or indefinitely?) or it’s yet another example of a self-regulatory organization coddling one of its own (since when does it take a company of any size a year to find a board member?).

Either way, we suspect Discovery’s board will move a little faster. The company said in its Friday filing that it “expects to regain compliance … prior to the end of the cure period”, and we assume this is classic lawyerly understatement. Presumably a company of Discovery’s size is capable of finding an independent audit-committee member in much less than a year — and, one would hope it has had its eye on some potential candidates for a while, given the inevitability of the occasional sudden board departure.

As for Nasdaq, it’s already facing plenty of grief over the botched Facebook (FB) IPO, which Nasdaq’s own chief executive, Robert Greifeld, chalked up to “arrogance,” “overconfidence” and a lack of sufficient business judgment. When the exchange is done finding humility and judgment, maybe it can find some time to update a few of its deadlines as well.

Image source: Galapagos tortoise on a walk via Shutterstock.com

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