By: Cydney Posner
The NYSE has proposed a number of amendments to its corporate governance rules intended to clarify and interpret existing rules. The NYSE is proposing the following changes:
Section 303A.02 - Independence definition:
- To amend Section 303A.02(a) to clarify that companies are required to identify which of their directors have been deemed independent.
- To amend Section 303A.02(b)(i) to add a definition of the term "executive officer," including minor cleanup changes throughout Section 303A. The commentary would be changed to clarify that service as an interim executive officer (and not just an interim Chairman or CEO, as currently provided) will not trigger the look-back provisions in those sections.
- To reformulate the bright line independence tests to more accurately reflect how the applicable look-back periods should be applied. For example, Section 303A.02(b)(ii), which precludes independence where a director or family member receives more than $100,000 in direct compensation, would be revised to make clear that the look-back period should not be read to be longer than 36 months.
- To clarify in the commentary to Section 303A.02(b)(v) the treatment of payments to "charitable organizations." This provision is not intended to except payments as a result of business relationships (as a vendor, for example) with a charitable organization. Rather, the NYSE intended to distinguish "contributions" made to a charitable or tax- exempt organization.
- To revise the test in Section 303A.02(b)(iii), which precludes independence where a director or family member is employed by or affiliated with a present or former internal or external auditor, to be closer the Nasdaq test. The proposed revision would cover any director or immediate family member who is a current partner of the audit firm, any director who is a current employee of the audit firm, any immediate family member who is a current employee of the audit firm participating in the firm’s audit, assurance or tax compliance (but not tax planning) practice and any former partner or employee of the audit firm who personally worked on the listed company’s audit during the past three years.
- To revise the definition of "immediate family member" for purposes only of Section 303A.02(b)(iii) to parallel the description of family member utilized by the SEC in Rule 10A-3(e)(8). Under the revised standard, a director with a family member who is a current partner of the audit firm would now be precluded from being considered independent. Under the existing standard, a family member so employed did not affect the director’s independence if the family member did not act in "a professional capacity" at the audit firm. As a transition matter, the NYSE will allow companies until their first annual meeting after January 1, 2005 to replace a director who was independent under the existing rule but not under the revised rule.
Section 303A.05 - Requirements for Compensation Committees:
- To revise Section 303A.05(b) to clarify that, in addition to the CEO, the compensation committee should focus on compensation of the other executive officers.
- To clarify that the board has the ability to delegate its authority to approve non-CEO executive officer compensation to the compensation committee.
Section 303A.07 - Duties of the Audit Committee:
- To revise Section 303A.07( c) (iii)(B) to clarify that the audit committee must meet to review and discuss the company’s financial statements and must review the company’s specific MD&A disclosures.
Sections 303A.09 and .10:
- To amend these sections to specify that the disclosure related to the availability on the company's website of corporate governance guidelines and the code of business conduct and ethics must be in the annual proxy statement (or, if the company does not file a proxy statement, then in the Form 10-K) to be consistent with the other disclosure requirements of Section 303A.
- To amend Section 303A.11 to clarify that foreign private issuers are required to provide disclosure of the significant differences between the Section 303A requirements and the actual corporate governance practices of the foreign private issuer, as opposed to the general corporate governance practices of the foreign private issuer’s home country.
- To clarify that any qualifications to the annual CEO certification must be specified and disclosed.
- To add Section 303A.12(c) to specifically require that companies submit Annual and Interim Written Affirmations to the NYSE t o provide the NYSE with ongoing details of compliance or non-compliance with Section 303A.
- To amend the General Application section to specify that listed Exchange Traded Funds that are open end management investment companies, foreign private issuers, and preferred and debt listed companies (to the extent these companies must comply with Section 303A.06) will be required to submit the Annual and Interim Written Affirmations.