SEC Bans Non-Executive Directors From Taking On Executive Roles Within The Same Company

The Securities and Exchange Commission (SEC) has issued a new directive stopping Independent Non-Executive Directors (INEDs) from becoming Executive Directors within the same company or group. The Commission said this is to protect board independence and improve corporate governance.

In a circular published on its website, the SEC warned that allowing INEDs to switch into executive roles weakens the objectivity required of independent directors.

It also said such transitions conflict with the principles of neutrality and oversight which these board members are meant to uphold.

“This practice clearly erodes the neutrality of the transmuting INEDs,” the SEC stated. “It compromises their ability to provide objective judgment going forward.”

The Commission explained that the policy is guided by both the National Code of Corporate Governance and the SEC’s governance guidelines.

Cooling-Off Period Introduced for CEO-to-Chairman Transition

In addition to stopping the INED-to-Executive switch, the SEC has introduced a mandatory cooling-off period. A Chief Executive Officer or Executive Director must now wait three years before being appointed Chairman of the same company or group.

The Commission said that merging top management and board leadership roles too quickly can concentrate power and weaken internal checks. U

nder the new rule, any CEO or Executive Director stepping down after long service must take a break before returning as board chair.

The Commission said: “A Chief Executive Officer or Executive Director who steps down after 10 or 12 consecutive years, as the case may be, cannot be appointed as Chairman until the expiration of a 3-year ‘cool off period’.” If they eventually return as Chair, they may serve for only four years.

Tenure Limits Now Set for Directors in Key Capital Market Firms

The SEC has also capped how long directors can serve in a single company or group. Directors at capital market operators considered to be of significant public interest may serve only 10 consecutive years in one company. Across a group structure, the limit is 12 consecutive years.

These new rules take effect immediately and apply to all public companies and capital market operators. The SEC also made it clear that years already served by directors will count toward the new tenure cap.

According to the Commission, these directives fall under its powers in Section 355(r)(iv) of the Investments and Securities Act (ISA) 2025. This section empowers the SEC to set standards that protect investors and promote transparency and accountability within the financial system.

The SEC said the decisions were necessary due to “the prevalence in recent times of the rotation of various directorship positions among individuals within the same entity or Group of companies.”

This will stop role-swapping that blurs the line between oversight and management, and instead strengthen corporate boards to act in the best interests of shareholders and stakeholders.

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