On April 4, 2003, the New York Stock Exchange (NYSE) amended and replaced its August 16, 2002 and March 12, 2003 proposed corporate governance listing standards. The SEC is currently soliciting comments on the proposed rules, which may become effective as early as mid-May 2003. Material changes include:
Compensation received by director for former service as an interim Chairman or CEO does not need to be a factor in determining director independence.
- A current employee of the issuer will never be considered independent of management.
- Audit committee member independence standards were amended to follow Section 301 of the Sarbanes-Oxley Act.
- Executive sessions of non-management directors must provide a means by which interested parties can communicate with non-management directors in confidence.
- Compensation committee has sole authority to determine CEO compensation and must make recommendations to the board of directors with respect to non-CEO compensation and incentive compensation and equity-based plans.
- CEOs must notify NYSE after any executive officer becomes aware of material non-compliance with any corporate governance listing standards.
Revised Definition of "Independent Director"
The March 2003 NYSE proposed listing standards relating to board independence (which the amendment incorporates with a few changes) provided that a director generally is not deemed to be independent if he or she is, or an immediate family member of the director is, or within the preceding five years has been, a person that:
- receives over $100,000 per year in compensation from the issuer,
- is affiliated with the issuer's auditor,
- serves on an interlocking directorate, or
- has a significant business relationship with the issuer.
The April 2003 proposal changes the March 2003 board independence proposed listing standards in two significant ways. First, it provides that compensation received by a director for former service as an interim Chairman or interim CEO does not need to be considered a factor in determining independence. Second, it provides that a current employee of the listed issuer may never be deemed independent of management. While allowing issuers more flexibility in compensating interim CEOs and Chairmen, the amendment leaves open the issue of when a consultant may be considered independent.
Definition of "Independence" for Audit Committee Member and Composition of Audit Committee
The August 2002 NYSE corporate governance proposals provided that director's fees were the only compensation an audit committee member could receive from the issuer. The April 2003 proposal now requires issuers to follow Section 301 of the Sarbanes-Oxley Act when determining whether audit committee members are independent.
The April 2003 proposal provides (subject to certain foreign private issuer exceptions) that each member of the audit committee must be financially literate or become financially literate within a reasonable period of time after his or her appointment. In addition, at least one member of the audit committee must have "accounting or related financial expertise" as determined by the board of directors. A board may presume that a person who meets the standards set forth in Item 401(e) of Regulation S-K has sufficient accounting or related financial expertise to meet the revised NYSE listing standards.
Regular Executive Sessions of Non-Management Directors
The August 2002 proposed listing standards, adopted in the April 2003 amendment, require each listed issuer to hold regular executive sessions of non-management directors and to disclose to interested parties the method by which they can directly communicate with the non-management directors. The April 2003 proposal provides that the communication process must also provide for confidentiality. The new confidentiality provisions in the proposed standards are designed to encourage important communication between interested parties and the board of directors regarding accounting or financial concerns and complaints. Under the April 2003 proposal, an issuer may implement the same type of process as the Sarbanes-Oxley mandated process for providing anonymous employee complaints regarding accounting or auditing concerns to the audit committee.
Compensation Committee Duties
The April 2003 proposal provides that the compensation committee must have sole authority to determine CEO compensation, and (if other compensation issues are determined outside the compensation committee) the committee is required to make recommendations to the board with respect to non-CEO compensation and incentive compensation plans and equity-based plans.
Audit Committee Duties
The April 2003 proposal requires that audit committees of listed issuers follow the mandates set forth in Section 301 of the Sarbanes-Oxley Act.
NYSE requires listed issuers to maintain an "internal audit function." The amendment gives this concept some clarification by noting that the internal audit function must "provide management and the audit committee with ongoing assessments of the [issuer]'s risk management processes and system of internal control." The issuer may retain a firm other than its independent auditor to carry out this function.
CEO Certification of Compliance With Corporate Governance Listing Standards
As previously set forth in the August 2002 proposals, each listed issuer CEO must certify to NYSE on an annual basis that he or she is not aware of any violation by the issuer of NYSE corporate governance listing standards. The April 2003 proposal creates a new obligation for a CEO to promptly notify NYSE after any executive officer of the issuer becomes aware of any material non-compliance with any corporate governance listing standards. This obligation to notify NYSE also extends to foreign private issuer CEOs with respect to any applicable corporate governance listing standard.
Executive officers of listed issuers will need to know and understand the corporate governance listing standards and must be able to identify any material non-compliance. The new notification obligation will likely result in careful observance of corporate governance listing standards and may increase investor confidence in listed issuers.
Limited Applicability-Foreign Private Issuers
Foreign private issuers are allowed to follow home country practice in lieu of NYSE corporate governance listing standards except that these issuers must disclose any significant ways in which their corporate governance practices differ from those followed by domestic issuers under NYSE listing standards. As set forth in the August 2002 proposals, any listed foreign private issuer must have an independent audit committee.
Disclosure Obligations and Method
The April 2003 proposal clarifies that disclosures required by the corporate listing standards must be included in the issuer's proxy statement or in the issuer's Form 10-K if no proxy statement is filed. A listed foreign private issuer may provide this disclosure either on its web site (provided it is in the English language and accessible in the United States) and/or in its annual report distributed to shareholders in the United States.
Effective Dates and Transition Periods
Issuers that do not already have majority-independent boards will be given 18 months following publication of SEC approval of NYSE listing standards in the Federal Register to comply with the new listing standards. Listed issuers with classified boards where a change would be required for a director who would not normally stand for election within the 18-month period will be given an additional year (30 months total) to effect a change in the director position. Issuers will be given the same 18-month and 30-month periods to comply with new qualification standards applicable to audit, nominating and compensation committee members.
Issuers listing in connection with their initial public offering must comply with listing standards within 24 months of listing. Issuers listing upon transfer from another market have 24 months from the date of transfer to comply with any requirement to the extent that its previous market did not have the same requirement. To the extent the transferring issuer's previous market had a substantially similar requirement but also had an unexpired transition period, the issuer will be allowed to use the unexpired time period to effect NYSE required changes.
The following standards are effective six months following publication of SEC approval:
- Executive sessions of non-management directors;
- Nomination and compensation committees with requisite charters;
- Audit committee with requisite charter;
- Corporate governance guidelines and code of business conduct and ethics;
- Foreign private issuer statement of significant differences from NYSE standards; and
- CEO certificate of compliance with listing standards.
Failure to Comply With Listing Standards
The April 2003 proposal allows NYSE to issue a public reprimand letter to an issuer if NYSE determines the issuer has violated a listing standard. The proposed standards will become effective immediately upon publication of the SEC's approval. Issuers who repeatedly or flagrantly violate, or fail to come into compliance with, NYSE listing standards will face trading suspension and delisting.
The proposed listing standard relating to shareholder approval of equity compensation plans and to the amendment of the discretionary voting rule continues to be considered by the SEC and is not included in this amendment.
Text of Amendment
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