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Frequently Asked Questions
  Staff Interpretation Letter 2005-54
Identification Number 901
This is in response to your letters regarding the applicability of the audit committee eligibility requirements.  Specifically, your question relates to Marketplace Rules 4200(a)(15)(B) and 4350(d)(2)(A) and to SEC Rule 10A‑3(b)(1) under the Securities Exchange Act of 1934 (the “Rules”).  You asked whether a potential candidate (the “Candidate”) could satisfy the requirements after having served as a financial consultant to the audit committee.
 
According to the information you provided, the company currently has three members on its audit committee, each of whom has the ability to read and understand financial statements, and two of whom are considered to have “financial sophistication”  as described in Marketplace Listing Rule 4350(d)(2)(A).  The company has not, however, designated one of these audit committee members to be an “audit committee financial expert,” as defined in Item 402(h)(2) of SEC Regulation S-K.  You stated that the company has conducted a search for an individual with the necessary experience, education, background, and knowledge to qualify as the audit committee financial expert.  The timing of the appointment of any such candidate, however, will be affected by the regulations applicable to the company.  Specifically, as a manufacturer and distributor of supplies in a regulated industry, any member of the company’s board of directors must be found suitable by the applicable regulatory authorities in most of the over 100 jurisdictions where the company operates.
 
You stated that to access the financial expertise of the Candidate during the screening process but prior to appointment to the board of directors, the company proposed to engage the Candidate as a paid financial consultant to the audit committee.  The payment for the consulting services (the “Consulting Payments”)  would not exceed $60,000 in any twelve-month period, and you stated that the Candidate would be eligible to be an independent director under the criteria for independence set forth in the Listing Rule 4200(a)(15).  The Candidate would advise the audit committee members on topics or situations that are under the purview of the audit committee but would not directly participate in the preparation of the company’s financial statements and would not provide any advice or other consulting services directly to management of the company.  The consulting relationship and the Consulting Payments would cease prior the Candidate’s becoming a member of the board and the audit committee.
 
Following our review of the information you provided, we have determined that the company’s board would not be precluded by the Rules from finding that the Candidate would be eligible to serve on the audit committee.  The Consulting Payments would not preclude the Candidate from being independent under Listing Rule 4200(a)(15)(B) because such payments would be less than $60,000 during any period of twelve consecutive months.  Further, because the payments would cease prior to the Candidate’s appointment to the Audit Committee, the Consulting Payments would not otherwise preclude the Candidate from audit committee eligibility.*  In addition, service as a consultant to the audit committee in the manner you described will not be considered to be participation in the preparation of the financial statements of the company.  Please note, however, that pursuant to IM-4200, the company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s board to make such a finding.
*We note that SEC Rule 10A-3 does not contain a look-back period in its prohibition on payments to directors, and, as noted above, the NASDAQ lookback period would not be applicable as the payment is less than $60,000.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 901
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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