Proposed amendments to NYSE Corporate Governance Requirements

By Cydney Posner

The NYSE is proposing to modify a number of its governance and disclosure rules. In light of the SEC's new disclosure rules under Reg S-K, Item 407, the proposed amendments would eliminate disclosure requirements currently included in Section 303A that are also required by Item 407. These changes relate principally to disclosure regarding independent directors. The NYSE has also proposed a number of other changes based on practices developed to date or in response to SEC comments on its original proposal.

Section 303A.00 - General Application.

Currently, companies listing in conjunction with an IPO may phase in their independent audit, nominating and compensation committees, but are required to have one independent director on each committee as of the date of listing. The NYSE believes, however, that under current practice, a company would not normally appoint independent directors to its board in advance of the date it lists on the NYSE. Under the proposed amendments, companies would have until the earlier of the date of closing of the IPO (or spin-off or carve-out) or five business days from the date that trading on the NYSE commences to be in compliance with the applicable requirements of Section 303A, except that companies must be in compliance with the applicable provisions of the SEC’s audit committee requirements set forth in Rule 10A-3 as of the date of listing (the date the company’s securities first trade on the NYSE).

Section 303A.07(a) requires a company to have three directors on the audit committee as of the date of listing. The NYSE proposes to clarify that companies that are allowed under SEC rules to transition in their independent audit committee members over the first year of listing may also phase in compliance with the three-person minimum on the same schedule or, alternatively, may chose to have non-independent directors on the audit committee, subject to specified independent director phase-in requirements.

The proposed amendments also address the compliance requirements applicable to companies (i) that list upon emergence from bankruptcy, (ii) transfer from another market, (iii) cease to be a foreign private issuer or (iv) cease to be a controlled company. Under the proposed amendments, to be deemed a controlled company, more than 50% of the voting power for the election of directors must be held by an individual, group or another company. In addition, the NYSE proposes to eliminate the requirement that a controlled company disclose it is taking advantage of any of the controlled company exemptions and the basis for that determination since that disclosure is now required by Item 407.

The NYSE also proposes to add a new section on disclosure mechanics. That section would provide that companies may choose between providing certain disclosures either in the proxy statement or, if the company does not file an annual proxy statement, in the company’s annual report filed with the SEC, or on or through the company’s website. In addition, in light of the website posting requirements of Item 407 for committee charters, codes of ethics and corporate governance guidelines, the NYSE is proposing to eliminate its redundant requirements relating to website postings. The NYSE is also proposing to eliminate from Section 303A all references to annual reports previously required under Section 203.01 and summary annual reports previously permitted under Section 103 of the NYSE’s Listed Company Manual.

Section 303A.02 –Independence requirements.

As noted above, the NYSE is proposing to eliminate the director independence disclosure requirements currently set out in Section 303A.02(a).

In addition, the NYSE is proposing to amend the bright line test set out in Section 303A.02(b)(ii) relating to direct compensation. The amendment would increase the dollar threshold from $100,000 to $120,000, consistent with the Item 404 threshold for related-person transactions. Another proposed amendment relates to the bright line test set out in Section 303A.02(b)(iii) relating to a listed company’s internal or external auditor. The current standard with respect to immediate family members has had the effect of precluding a director from being deemed independent in cases where an immediate family member had no relationship to the listed company’s audit. In addition, the proposed change would be more in line with the auditor tests used by Nasdaq. The NYSE proposes to modify the current test with respect to a director’s immediate family member to cover only an immediate family member who:

• is a current partner of such a firm;
• is a current employee of such a firm and personally works on the listed company's audit; or
• was, within the last three years, a partner or employee of such a firm and personally worked on the listed company's audit within that time.

The definition of the term "immediate family member" would be clarified to exclude adult stepchildren that do not share a stepparent’s home, and the in-laws of such stepchildren; and to clarify that the terms "listed company " and "company" each include any parent or subsidiary that would be required under U.S. GAAP to be in a consolidated group with the company.

Section 303A.03 - Requirement for meetings of non-management directors.

The NYSE's current rule requires that listed companies hold regular meetings of "non-management" directors and recommends that companies schedule a meeting of "independent" directors at least once a year. Because some companies have expressed a preference for holding regular executive sessions of just independent directors, the NYSE is proposing to revise the Commentary accordingly. The NYSE is also proposing to clarify that all interested third parties, not only shareholders, must be able to communicate their concerns regarding the listed company to the presiding director or to the non-management or independent directors as a group.

Section 303A.05 – Requirements for Compensation Committees.

The NYSE is proposing to eliminate, as duplicative, the requirement relating to preparation of the compensation committee report set out in Section 303A.05(b)(i)(C).

Section 303A.06 – Requirements for Audit Committees.

The NYSE is proposing to revise the Commentary to Section 303A.06 to specifically point out that Rule 10A-3 requires disclosure of reliance on certain exceptions contained in that rule.

Section 303A.07 – Duties of the Audit Committee.

The NYSE is proposing to amend the language in Section 303A.07(a) to make clear that disclosure is required of the board's determination that simultaneous service by the listed company's audit committee member on the audit committees of more than three public companies would not impair the ability of that member to effectively serve, whether or not the listed company limits the number of audit committees on which its audit committee members may serve. The NYSE is also proposing to eliminate, as duplicative, the requirement relating to preparation of the audit committee report set out in Section 303A.07(c)(i)(B). Section 303A.07(c)(iii)(B) requires that audit committees meet to review and discuss the company’s financial statements and That they must review the company’s specific MD&A. The NYSE intends to clarify that telephonic conference calls constitute meetings for that purpose, but that polling of directors is not allowed in lieu of a meeting.

Section 303A.10 – Code of Business Conduct and Ethics.

Section 303A.10 requires that listed companies disclose any waiver of the code of business conduct and ethics granted to executive officers and directors. The NYSE proposes to specify that the waiver must be disclosed to shareholders within four business days of such determination and that disclosure must be made by distributing a press release, providing website disclosure or by filing a current report on Form 8-K with the SEC.

Section 303A.11 – Foreign Private Issuer Disclosure.

Section 303A.11 requires that a foreign private issuer disclose the significant differences between the corporate governance practices followed by the company in its home country and the requirements of Section 303A applicable to U.S. companies. The NYSE is proposing that foreign private issuers be required to make the available disclosure on or through their websites.

Section 303A.12 – Certification Requirements.

The NYSE proposes to eliminate, as unnecessary, its disclosure requirement in Section 303A.12(a) that listed companies disclose in the following year’s proxy statement or annual report that they filed the CEO certification required by the NYSE and any certifications required by the SEC.

The NYSE is also proposing to revise Section 303A.12(b) to specify that listed companies must notify the NYSE in writing after any executive officer of the listed company becomes aware of any non-compliance with Section 303A, as opposed to requiring notification in the event of "material non-compliance" as provided by the current rule.

Section 303A.14 – Website requirement.

The NYSE proposes to redesignate Section 303A.14 relating to websites as Section 307.00 and to add in the Commentary that this requirement also applies to companies subject to the requirements of Section 203.01.

Section 307.00 and Section 314.00 – Guidance re related parties.

The NYSE proposes to eliminate, as outdated, Sections 307.00 and 314.00, which set out guidance regarding related-party transactions that dates back to the early 1980s.

Section 203.01 – Annual Financial Statement Requirement.

Section 203.01 currently requires companies to make their annual reports filed with the SEC simultaneously available on or through their websites (as opposed to physical delivery) and to issue press releases stating that the filing is available. Because U.S. companies are still currently subject to physical distribution requirements under SEC rules and will have the option to continue physical delivery even after the SEC’s electronic proxy rules become effective in July 2007, the NYSE proposes to amend Section 203.01 to provide that a listed company that is subject to the U.S. proxy rules, or is a foreign private issuer that provides its audited financial statements (as included on Forms 10-K, 20-F and 40-F) to beneficial owners in a manner that is consistent with the physical or electronic delivery requirements applicable to annual reports set forth in the

U.S. proxy rules, is not required to issue the press release or post the undertaking required by Section 203.01.