SRO activity

By: Cydney Posner

The SEC has approved the NYSE proposed rule relating to distribution of annual reports to shareholders. More specifically, the rule changes eliminate the current requirement to distribute an annual report to shareholders, amend the current requirements for notices to and filings with the NYSE, add a requirement that listed companies maintain a website, specify more precisely certain requirements applicable to listed foreign private issuers, and effect certain incidental and conforming changes to the manual.

Instead of requiring that companies distribute annual reports, the new rule will allow a listed company to satisfy the NYSE’s annual financial statement distribution requirement by making its annual report on Form 10-K, 20-F, 40-F or N-CSR available on, or by a link to, its corporate website. A listed company will also be required to post a prominent undertaking to provide to all holders (including preferred shareholders and bondholders), upon request, hard copies of its complete audited financial statements free of charge. At the same time, the company must also issue a press release, published pursuant to the NYSE's press release policy, stating that its annual report has been filed with the SEC, indicating that shareholders may request a hard copy of its complete audited financial statements free of charge and identifying the website where shareholders may access the annual report. A company must provide the hard copies within a reasonable period of time following the request. The NYSE will also eliminate the current requirement that a company inform the NYSE if it is unable to file its annual report with the SEC in a timely manner. The SEC notes that, because U.S. companies listed on the NYSE must still distribute annual financial information under the proxy solicitation rules, the NYSE's rule change will currently have minimal impact on U.S. issuers, although it will have an effect on foreign private issuers.

The new rules will also eliminate NYSE guidance regarding the interval between the end of a listed company’s fiscal year and its annual meeting of shareholders, although the NYSE continues to believe that best practice is to hold the annual meeting within a reasonable time after the close of the company’s fiscal year. The new rules also amend Section 703.09 of the Listed Company Manual to eliminate requirements relating to the disclosure of options, stock purchase and other remuneration plans. This change will eliminate duplicative, and potentially confusing, disclosure requirements that are already more fully described under the securities laws.

Under the new rules, a listed company would be required to have and maintain a publicly accessible website, which would generally be required to include a printable version of the applicable charters of its compensation, nominating and audit committees, as well as its corporate governance guidelines and code of business conduct and ethics. A foreign private issuer would be required to include certain disclosure in English on its website, which must be accessible from the United States.

NASDAQ

The SEC has also posted for comment the proposed rule changes to Nasdaq's corporate governance requirements, including changes related to director independence. Although the rules would become effective immediately upon SEC approval, there would be a 90-day transition period for directors deemed not to be independent as a result of the changes.

In particular, the proposals would:

• Clarify that acceptance by a director or family member of "compensation," as opposed to "payments," of more than $60,000 will taint independence. (Payments to a director's (or family member's) political campaign would be considered direct compensation. Non-preferential payments made in the ordinary course of providing business services, such as payments by financial institutions or insurance companies, would not preclude independence, nor would payments arising solely out of investments in the company's securities or loans permitted under SOX, so long as those payments were non-compensatory in nature. They could be compensatory if they were on terms not generally available to the public.)
• Clarify that a "non-executive employee" means an employee other than an executive officer as defined in SEC Rule 16a-1(f).
• Clarify that, for independence purposes, the limitation on receipt by or payment to an organization of which the director is a partner, controlling shareholder or executive officer would apply to payments by or to parents or subsidiaries of the company, as well as by or to the company itself.
• Clarify that the audit committee requirements are not applicable to companies with a listed parent.
• Provide that independence would not be impaired by
  • employment of a director as an interim executive officer for no longer than one year (although the director would not be considered independent while serving as an interim officer and, if while serving as an interim officer, the director participated in the preparation of the financial statements, the director would be precluded from service as an audit committee member for three years), or
  • receipt of compensation for former service in that capacity. (However, the board must still consider whether the employment or compensation would interfere with the director's exercise of independent judgment under the more subjective part of the Nasdaq independence test, depending, for example, upon the magnitude of the compensation and the length of service.)