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Frequently Asked Questions
  Staff Interpretation Letter 2010-13
Identification Number 712
This is in response to your correspondence asking whether the Director can be considered independent under Listing Rule 5605(a)(2)(F) (the “Rule”), even though a member of his family (the “Family Member”) is a partner in a foreign affiliate of a major accounting firm that currently serves as the company’s outside auditor (the “Foreign Affiliate”).
According to the information you provided, the company’s outside auditor (“the Auditor”) is based in the United States and is a member of an international cooperative (the “International Cooperative”), along with over 50 other member firms located in various foreign countries, including the Foreign Affiliate. Each member firm of the International Cooperative is an independent, legally separate entity with no overlap of equity, control, or governance functions and no sharing of revenues. Member firms are required to comply with the International Cooperative’s policies and regulations, including quality standards governing how they operate.
The Rule states that a director is not independent if the director “is, or has a Family Member who is, a current partner of the company's outside auditor, or was a partner or employee of the company's outside auditor who worked on the company's audit at any time during any of the past three years.” In our view, the proper way to address your question is to consider the meaning of the term “auditor” in the Rule. As we explain below, we have determined that the Director is not independent within the meaning of the Rule.
We believe that the term “auditor” in the Rule should be accorded the same meaning as the term “accounting firm” under the Securities and Exchange Commission (“SEC”) rules (described below) on auditor independence. Both the Rule and the SEC rules are concerned with ensuring auditor independence, and, given the importance of maintaining regulatory consistency in this area, it has always been NASDAQ’s intent that the Rule be interpreted in a manner that is consistent with the SEC’s approach. The SEC’s Regulation S-X Rule 2-01(f)(2) defines an “accounting firm” as “an organization... that is engaged in the practice of public accounting ... and all of the organization’s departments, divisions, parents, subsidiaries, and associated entities, including those located outside of the United States.” Given that the Auditor and the Foreign Affiliate are each members of the International Cooperative, we believe that the SEC would consider them “associated entities” under this rule and, therefore, part of the same accounting firm.
As explained above, we believe the term “auditor” should be accorded a meaning that is consistent with how the SEC defines the term “accounting firm.” Therefore, we consider the Auditor and the Foreign Affiliate each to be part of the company’s “auditor,” and the Family Member is deemed to be a partner of the company’s outside auditor. Since the Director has a family member who is a current partner of the company’s outside auditor, the Director cannot be considered independent under the Rule.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 712
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