[Federal Register: November 9, 2004 (Volume 69, Number 216)]
[Notices]
[Page 65006-65011]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09no04-99]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50625; File No. SR-NYSE-2004-41]
Self-Regulatory Organizations; Order Granting Approval of
Proposed Rule Change by the New York Stock Exchange, Inc. and Notice of
Filing and Order Granting Accelerated Approval to Amendment Nos. 2 and
3 Thereto To Amend Section 303A of the NYSE Listed Company Manual
Relating to Corporate Governance
November 3, 2004.
I. Introduction
On August 3, 2004, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change (SR-NYSE-2004-41) to amend certain provisions of
Section 303A of the NYSE
[[Page 65007]]
Listed Company Manual (``Listed Company Manual'') regarding corporate
governance standards for companies listed on the Exchange. On August
30, 2003, the NYSE submitted Amendment No. 1 to the proposal.\3\ The
proposed rule change, as amended by Amendment No. 1, was published for
comment in the Federal Register on September 8, 2004.\4\ The Commission
received ten comment letters on the proposed rule change.\5\ On October
28, 2004, the NYSE filed Amendment No. 2 to the proposed rule
change.\6\ On November 2, 2004, the NYSE filed Amendment No. 3 to the
proposed rule change.\7\ This order approves the proposed rule change,
as amended by Amendment Nos. 1, 2, and 3. The Commission is granting
accelerated approval of Amendment Nos. 2 and 3, and is soliciting
comments from interested persons on those amendments.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy J. Sanow, Assistant Director, Division of Market
Regulation, Commission, dated August 27, 2004 (``Amendment No. 1'').
\4\ See Securities Exchange Act Release No. 50298 (August 31,
2004), 69 FR 54328 (``Notice'').
\5\ See Letters to Jonathan G. Katz, Secretary, Commission,
from: Sarah A.B. Teslik, Executive Director, Council of
Institutional Investors, dated September 15, 2004 (``CII letter'');
Dale McCormick, Maine State Treasurer, dated September 17, 2004
(``Maine Treasurer Letter''); Richard Curtis, Executive Director,
Highway Patrol Retirement System, William Estabrook, Executive
Director, Ohio Police and Fire Pension Fund, Laurie Hacking,
Executive Director, Public Employees Retirement System of Ohio,
Damon Asbury, Executive Director, State Teachers Retirement System
of Ohio, James Winfree, Executive Director, School Employees
Retirement System of Ohio, Keith Overly, Executive Director, Public
Employees Deferred Compensation, dated September 21, 2004 (``Ohio
Retirement System Letter''); Colin Melvin, Director-Corporate
Governance, Hermes Investment Management Limited, dated September
22, 2004 (``Hermes Letter''); Joseph M. Huber, Senior Corporate
Counsel, Federated Investors, Inc., dated September 27, 2004
(``Federated Letter''); Henry H. Hubble, Vice President, Investor
Relations and Secretary, Exxon Mobil Corporation, dated September
28, 2004 (``ExxonMobil Letter''); Steve Odland, Chairman, President
and CEO, AutoZone, Inc., and Chairman, Corporate Governance Task
Force, Business Roundtable, dated September 29, 2004 (``Business
Roundtable Letter''); Kay R.H. Evans, Executive Director, Maine
State Retirement System, dated September 29, 2004 (``Maine
Retirement System Letter''); Michael J. Holliday, Chair of the
Committee, Committee on Securities Regulation of the Business Law
Section of the New York State Bar Association, dated September 29,
2004 (``NYSBA Committee Letter''); and letter to William H.
Donaldson, Chairman, Commission, from The Honorable Diana DeGette,
The Honorable Edward Markey, and The Honorable Janice Schakowsky,
Members of Congress, dated October 14, 2004 (``Representatives'
Letter'').
\6\ See letter from Mary Yeager, Assistant Corporate Secretary,
NYSE, to Nancy J. Sanow, Assistant Director, Division of Market
Regulation, Commission, dated October 28, 2004, and accompanying
Form 19b-4 (``Amendment No. 2''). In Amendment No. 2, the NYSE
withdrew a proposed change to the Commentary to Section
303A.02(b)(iii) that would have revised the definition of
``immediate family member'' for purposes of the bright line test
relating to a director's relationships with the listed company's
auditor. See also Section IV. below.
\7\ See letter from Mary Yeager, Assistant Corporate Secretary,
NYSE, to Nancy J. Sanow, Assistant Director, Division of Market
Regulation, Commission, dated November 2, 2004 (``Amendment No.
3''). In Amendment No. 3, the NYSE proposed to give listed companies
until their first annual meeting after June 30, 2005 to replace a
director who was independent under the NYSE's existing bright line
test relating to relationships of a director or the director's
immediate family member to the auditor of the company, but would not
be under the revised rule. As originally proposed, the extension
would have been granted until the first annual meeting after January
1, 2005. Amendment No. 3 also proposes to include this provision in
the text of Section 303A.
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II. Description of the Proposed Rule Change
On November 4, 2003, the Commission approved Section 303A of the
Listed Company Manual, which sets out the Exchange's corporate
governance requirements applicable to listed companies.\8\ In the
instant proposal, the Exchange proposes certain clarifying and
substantive changes to Section 303A, described in detail below.\9\
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\8\ See Securities Exchange Act Release No. 48745 (November 4,
2003), 68 FR 64154 (November 12, 2003) (SR-NYSE-2002-33).
\9\ The proposed rule change also includes various technical and
stylistic revisions to the language of Section 303A. See notice.
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Definition of Independent Director
Section 303A.02 of the Listed Company Manual sets forth a
definition of ``independent director'' for purposes of the Exchange's
corporate governance standards for listed companies, which, among other
things, includes a series of bright line tests that directors must
satisfy in order to be eligible to be deemed independent for purposes
of board and committee membership. Many of the proposed changes relate
to these independence tests.
As an initial matter, the Exchange proposes to amend Section
303A.02(a) of the Listed Company Manual to clarify that companies are
required to identify which of their directors have been deemed
independent. The Exchange also proposes to amend Section 303A.02(b)(i)
to add a definition of the term ``executive officer,'' and to amend
other provisions throughout Section 303A by including use of this term.
Additionally, the Exchange proposes to amend the Commentary to
Sections 303A.02(b)(i) and (ii), which set forth bright line tests of
independence for directors who are, or whose family members are,
current or former employees or recipients of compensation from a listed
company, to state that service as an interim executive officer (and not
only an interim Chairman or CEO, as currently provided) will not
trigger the look-back provisions in those sections.
The Exchange further proposes to amend Section 303A.02(b) to
reformulate the wording of the bright line independence tests to
provide more clarity with respect to how the applicable look-back
periods should be applied. In particular, with respect to Section
303A.02(b)(ii), the Exchange proposes to amend the rule text to state
that a director is not independent if the director ``has received or
has an immediate family member who has received, during any twelve-
month period within the last three years, more than $100,000 in direct
compensation from the listed company, other than director and committee
fees and pension or other forms of deferred compensation for prior
service (provided such compensation is not contingent in any way on
continued service).'' \10\
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\10\ This language would replace the current rule text, which
provides: ``A director who receives, or whose immediate family
member receives, more than $100,000 per year in direct compensation
from the listed company, other than director and committee fees and
pension or other forms of deferred compensation for prior service
(provided such compensation is not contingent in any way on
continued service), is not independent until three years after he or
she ceases to receive more than $100,000 per year in such
compensation.''
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The NYSE is also proposing a change to Section 303A.02(b)(iii), the
bright line test relating to relationships of a director or the
director's immediate family member to the auditor of the company
(``Director-Auditor Relationship Test''). Section 303A.02(b)(iii)
currently provides that: ``A director who is affiliated with or
employed by, or whose immediate family member is affiliated with or
employed in a professional capacity by, a present or former internal or
external auditor of the company is not 'independent' until three years
after the end of the affiliation or the employment or auditing
relationship.'' An ``immediate family member'' is defined currently for
all the independence tests in Section 303A.02(b) to include ``a
person's spouse, parents, children, siblings, mothers and fathers-in-
law, sons and daughters-in-law, brothers and sisters-in-law, and anyone
(other than domestic employees) who shares such person's home.''
The Exchange proposes to revise this standard to provide that a
director is not independent if: ``(A) The director or an immediate
family member is a current partner of a firm that is the company's
[[Page 65008]]
internal or external auditor; (B) the director is a current employee of
such a firm; (C) the director has an immediate family member who is a
current employee of such a firm and who participates in the firm's
audit, assurance or tax compliance (but not tax planning) practice; or
(D) the director or an immediate family member was within the last
three years (but is no longer) a partner or employee of such a firm and
personally worked on the listed company's audit within that time.''
In the proposed rule change as published in the Notice, NYSE also
proposed to revise the definition of ``immediate family member'' for
purposes of the Director-Auditor Relationship Test. In Amendment No. 2,
NYSE withdrew this proposed revision.\11\
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\11\ See Amendment No. 2.
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As amended by Amendment No. 3, the proposal would give listed
companies until their first annual meeting after June 30, 2005 to
replace a director who was independent under the NYSE's existing
Director-Auditor Relationship Test, but would not be under the revised
rule.\12\
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\12\ As originally proposed, the extension would have been
granted until the first annual meeting after January 1, 2005. See
Amendment No. 3, which also proposes to include this provision in
the text of Section 303A.
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The Exchange proposes to revise the Commentary to Section
303A.02(b)(v), the bright line test regarding, among other things, the
independence of a director who held, or whose immediate family held,
certain positions in a company that received payments from the listed
company. The revised language would state that contributions made to
tax exempt organizations shall not be considered ``payments'' under the
test. The proposed change is meant to clarify that payments to a
charitable organization related to a listed company's business
relationship with that organization would be subject to the test.\13\
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\13\ See notice.
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Requirements for Non-Management Directors
The Exchange proposes to revise Section 303A.03(b) of the Listed
Company Manual to clarify that a non-management director must preside
over each executive session of the non-management directors, although
the same director is not required to preside at all executive sessions
of the non-management directors.\14\
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\14\ See proposed rule text as published in notice for further
proposed clarifications in this subsection.
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Requirements for Compensation Committees
The Exchange proposes to revise Section 303A.05(b)(i)(B) of the
Listed Company Manual to clarify, among other things, that the non-CEO
compensation regarding which a compensation committee must make
recommendations to its board is that of the executive officers. The
Exchange also proposes to make clear that nothing in the aforementioned
provision is intended to preclude the board from delegating its
authority over the matters that this provision addresses to the
compensation committee.
Duties of the Audit Committee
The Exchange proposes to revise Section 303A.07(c)(iii)(B) of the
Listed Company Manual to add that the audit committee of a listed
company must meet to review the company's financial statements and must
review the company's specific Management's Discussion and Analysis
(``MD&A'') disclosures.
Disclosures of Guidelines and Codes and Methods of Communication
The Exchange proposes to amend Sections 303A.03, .09 and .10 of the
Listed Company Manual to specify that the relevant disclosures must be
in the listed company's annual proxy statement (or, if the company does
not file a proxy statement, then in the Form 10-K).
Foreign Private Issuer Disclosures
The Exchange proposes to revise Section 303A.11 of the Listed
Company Manual to clarify that foreign private issuers are required to
provide disclosure of the significant ways in which their actual
corporate governance practices (as opposed to their home country
practices, as in the current version) differ from those required of
domestic companies under Section 303A.
Certifications and Affirmations
Section 303A.12 of the Listed Company Manual provides that each
listed company CEO must certify to the NYSE each year that he or she is
not aware of any violation by the company of the NYSE corporate
governance listing standards. The Exchange proposes to amend this
provision by adding the phrase ``qualifying the certification to the
extent necessary.'' Any qualifications would need to be included in the
disclosure of the certification required under the provision. The
Exchange also proposes to add new Section 303A.12(c) to require that a
listed company submit annual Written Affirmations to the NYSE, in a
form specified by the Exchange, regarding details of compliance or non-
compliance with Section 303A, as well as interim Written Affirmations
each time a change occurs to the board of any of the committees of the
company that are subject to the provisions of Section 303A.
The proposed rule change would also amend the General Application
section of Section 303A to specify that listed open-end management
investment companies (which can be listed as Investment Company Units,
more commonly known as Exchange Traded Funds or ETFs), foreign private
issuers, and preferred and debt listed companies (to the extent such
companies must comply with Section 303A.06 of the Listed Company
Manual) would be required to submit the annual and interim Written
Affirmations.
III. Summary of Comments on the Proposed Rule Change
The Commission received ten comment letters on the proposed rule
change. Four comment letters generally supported the objective of the
proposed amendments, or specifically the proposed changes to the
Director-Auditor Relationship Test,\15\ although two of these
commenters recommended revisions with respect to certain aspects of the
proposal,\16\ while a third urged the Exchange to consider further
input before finalizing the amendments.\17\ Six comment letters opposed
the proposal, most specifically with respect to the Director-Auditor
Relationship Test.\18\ The following is a summary of comments set forth
by topic:
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\15\ See Business Roundtable Letter, ExxonMobil Letter,
Federated Letter, NYSBA Committee Letter.
\16\ See Business Roundtable Letter, NYSBA Committee Letter.
\17\ See ExxonMobil Letter.
\18\ See CII Letter, Hermes Letter, Ohio Retirement Systems
Letter, Maine Retirement Systems Letter, Maine Treasurer Letter.
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A. Proposed Changes to Director-Auditor Relationship Test
Four comment letters supported the proposed changes to the
Director-Auditor Relationship Test.\19\ One commenter, for example,
believed that the amendments are appropriate because ``they focus on
those relationships that have the potential to impact a director's
independence.'' \20\ Two commenters expressed the view
[[Page 65009]]
that the changes, or aspects of them, would harmonize the NYSE's
standards more closely with those of other markets.\21\
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\19\ See Business Roundtable Letter, ExxonMobil Letter,
Federated Letter, NYSBA Committee Letter. Some of the comments
related to the proposed revision to the definition of ``immediate
family member,'' which NYSE has withdrawn. See supra note 6.
\20\ See Business Roundtable Letter.
\21\ See Federated Letter, Business Roundtable Letter. One
commenter added that the enumeration of specific relationships in
the text of the standard would provide clarity to listed companies
in applying the standard. Business Roundtable Letter.
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One commenter favoring the changes stated that ``[b]ecause the
current standard is so broadly drafted, it reaches a wide range of
individuals, including individuals who never served on the listed
company's audit.'' \22\ The commenter noted that deeming a director as
not independent based on this standard results in the loss of the
director's ability to serve on the three key board committees, and
added that the pool of accounting firms with the necessary expertise
and resources to audit the financial statements of large, multinational
companies is limited, and listed companies have limited options when
selecting an auditor.
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\22\ See Business Roundtable Letter.
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Commenters supporting the proposed changes believed that the
amended standard would still reach those family member relationships
that are the most likely to impact a director's independence,\23\ and
that the greater coverage of the current standard does not reach any
relationship that is likely to meaningfully affect independence.\24\
One commenter argued that ``it seems strange that the current standard
could deem directors not independent even though the auditor with a
similar relationship to the company was deemed independent under the
test applicable to it relative to the company.'' \25\
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\23\ Id.
\24\ See NYSBA Committee Letter.
\25\ Id.
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Six comment letters, in contrast, opposed the proposed changes to
the Director-Auditor Relationship Test,\26\ believing it would weaken
corporate governance standards and investor protections \27\ and erode
investor confidence.\28\ These commenters believed, for example, that
the changes would allow a director to qualify as independent
notwithstanding ``close relationships and/or employment ties'' \29\ and
``obvious conflicts.'' \30\
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\26\ See CII Letter, Hermes Letter, Ohio Retirement Systems
Letter, Maine Retirement Systems Letter, Maine Treasurer Letter;
Representatives' Letter. Some of the comments related to the
proposed revision to the definition of ``immediate family member,''
which NYSE has withdrawn. See supra note 6.
\27\ See CII Letter, Maine Treasurer Letter, Ohio Retirement
Systems Letter, Representatives' Letter.
\28\ See CII Letter, Hermes Letter, Ohio Retirement Systems
Letter.
\29\ See Maine Retirement Letter.
\30\ See Maine Treasurer Letter.
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In the view of some commenters, the proposed changes not only do
not advance the goal of reducing corporate wrongdoing, ``but could
actually precipitate more malfeasance by opening the door to conflicts
of interest, which could ultimately compromise a director's ability to
protect the interest of shareholders.'' \31\
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\31\ See Representatives' Letter.
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Specifically with regard to the proposed change to the look-back
requirement of the test, which would make it applicable only to former
partners and employees of an auditing firm who worked on the audit,
some commenters believed that the change would only invite more
conflicts of interest.\32\ Commenters opposing the proposal further
believed that justifying it as necessary in order to make NYSE's rules
consistent with those of The Nasdaq Market (``Nasdaq'') and the
American Stock Exchange (``Amex'') was not appropriate,\33\ and that
NYSE should be enforcing the toughest standards rather than matching
weaker ones.\34\
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\32\ See Representatives' Letter.
\33\ See Ohio Retirement Systems Letter.
\34\ See CII Letter. See also Representatives' Letter.
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With regard to the proposed change in the definition of ``immediate
family member'' for this test--subsequently withdrawn \35\--commenters
noted that, under the proposal, a director would not be disqualified if
his or her parent, child, sibling, mother- or father-in-law, son- or
daughter-in-law, or brother- or sister-in-law, was, for example, a
partner in the listed company's auditing firm.\36\ Some commenters
expressed concern that the change ``would only work toward making
directors less-independently minded, not more so.'' \37\ These and
other commenters believed that the proposed change would diverge
significantly from other exchanges' standards.\38\
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\35\ See supra note 6.
\36\ See CII Letter, Maine Treasurer Letter, Ohio Retirement
Systems Letter.
\37\ See Representatives' Letter.
\38\ Id. See also CII Letter, Ohio Retirement Systems Letter.
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``The audit process is sacrosanct and should be above suspicion,''
stated one commenter generally.\39\ ``Any analysis,'' stated another,
``should focus on whether directors or their relatives (broadly
defined) have or have had an employment connection to the audit firm--
regardless of their title or specific role at the firm.'' \40\
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\39\ See Hermes Letter.
\40\ See CII Letter.
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Some commenters also questioned why the NYSE is proposing to amend
listing standards adopted less than a year ago after substantial
discussion,\41\ and believed that the current standards ``have not been
in place long enough to be declared unworkable.'' \42\
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\41\ See CII Letter, Maine Treasurer Letter.
\42\ See Maine Retirement Systems Letter.
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B. Proposed Amendment Concerning Look-Back Period for Compensation Test
One commenter expressed concern regarding the proposed change to
clarify that the look-back prohibition on an independent director
receiving more than $100,000 in compensation from the listed company
per year applies to any twelve-month period within the last three
years.\43\ This commenter believed that a ``rolling 12-months'' test
would entail an amount of work and burden of research for listed
companies that is unwarranted for any incremental benefit it might
provide. The commenter recommended that the test instead refer to
payments in any of the last three fiscal years, following the format in
the NYSE's test of independence with respect to payments made by or
received from a company where a director is an employee, as well as in
Commission rules for similar disclosure of transactions with directors
and officers.
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\43\ See NYSBA Committee Letter.
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C. Proposed Amendment Concerning Audit Committee Responsibilities
One commenter addressed the proposed changes to the rules regarding
audit committee responsibilities.\44\ The commenter believed that the
provision as proposed to be amended could be read to suggest that the
audit committee should have greater involvement in reviewing MD&A
disclosures relative to earnings releases. The commenter stated that
this suggestion does not accurately reflect the current practices of
audit committees, many of which, consistent with emerging best
practices, review individual earnings releases prior to publication.
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\44\ See Business Roundtable Letter.
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Additionally, the commenter maintained that the meaning of the
proposal to require review of ``specific'' disclosures under MD&A is
unclear. The commenter believed the proposed amendments should be
accordingly modified.
[[Page 65010]]
D. Additional Comments
One commenter recommended additional changes to clarify other
aspects of the proposal.\45\ Some commenters believed that the new
definition of ``immediate family member'' that NYSE had proposed for
the Director-Auditor Relationship Test should be used uniformly for all
the director independence tests in Section 303A.\46\ In addition, some
commenters took the opportunity to suggest other changes, or raise
concerns with respect to other aspects of the NYSE's corporate
governance listing standards, that are beyond the scope of the instant
proposal. Finally, one commenter believed there was need for more
general comment on the standards, and urged the Exchange to consider a
broad range of input before finalizing the proposed amendments.\47\
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\45\ See NYSBA Committee Letter. The commenter included
suggestions to: add language to subsection Section 303A.02(b)(v) to
clarify the treatment of payments for property or services from or
to tax-exempt organizations in ordinary course commercial
transactions; revise the Commentary of that subsection, in
consonance with the proposed change to the text of the rule, to
refer to ``each of the last three fiscal years'' rather than the
``last completed fiscal year,'' so as to avoid confusion; and revise
the proposed changes to the text of Section 303A.05(b)(i)(B) to
clarify the extent to which determinations of non-CEO compensation
may be delegated by a company's board to its compensation committee.
The commenter also urged that, for the sake of clarity, NYSE use a
different phrase to define family member for purposes of the
Director-Auditor Relationship Test.
\46\ See ExxonMobil Letter, NYSBA Committee Letter.
\47\ See ExxonMobil Letter.
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IV. Amendment Nos. 2 and 3 to the Proposed Rule Change
In Amendment No. 2, the NYSE withdrew the proposed revision to the
definition of ``immediate family member'' for purposes of the Director-
Auditor Relationship Test, and addressed comments received concerning
the proposed rule change.
With respect to the comments relating to the Director-Auditor
Relationship Test, the Exchange referred to its statement in its
original proposal noting that a number of NYSE listed companies are
finding directors precluded from independence because of past personal
or family member affiliation with an auditing firm, even though the
person involved never worked on the listed company account. The
Exchange stated that during the 2004 proxy season, it was contacted by
a number of listed companies that noted what it believes is the
problematic nature of the broad application of the current test, and
provided examples of cases that arose in which directors were precluded
from being deemed independent under the current Director-Auditor
Relationship Test due to what the Exchange regards as its unintended
broadness.
The NYSE stated that, in considering alternative approaches with
respect to immediate family members, it noted that the Nasdaq and Amex
listing standards are more targeted than the current NYSE standard,
implicating, for example, only former partners or employees of the
audit firm who worked on the company's audit. The NYSE stated that
because the Nasdaq and Amex outside auditor bright line tests were
subject to Commission review and public comment, the Exchange felt that
adapting its bright line test to reflect their approach would be an
appropriate and non-controversial change.
In response to a comment that the three-year look-back should apply
to all former auditing partners and employees, as it does under the
NYSE's current standard, and that a change to this standard would be
``only inviting more conflicts of interest into the corporate
boardrooms,'' \48\ the Exchange responded that, ``in fact, our proposal
to cover all partners of the audit firm is a strengthening of its
current standard, which only applies to partners or former partners who
participate in the audit firm's audit, assurance or tax compliance (but
not tax planning) practice.'' With respect the proposed revision to the
``immediate family member'' definition applicable to the Director-
Auditor Relationship Test, NYSE noted comments supporting and opposing
the proposal, and stated that, based on comments from the Commission
staff and the public, it had determined to withdraw this specific
amendment at this time.
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\48\ See Representatives' Letter.
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Finally, the NYSE discussed comments on the additional proposed
changes to Sections 303A.02(b)(ii), 303A.02(b)(v), 303A.05(b)(i)(B),
303A.07, 303A.08 and 303A.12. With regard to these comments, the NYSE
stated that it will consider these suggestions as part of its ongoing
review of Section 303A, but does not feel that additional
clarifications or amendments to these sections are appropriate at this
time.
In Amendment No. 3, NYSE revised the proposed applicability date of
the amended Director-Auditor Relationship Test for certain listed
companies, and included a proposed reference to this date in the text
of Section 303A. NYSE stated: ``Due to this proposed tightening of the
independence test and to avoid a sudden change to the status of a
current director, companies will have until their first annual meeting
after June 30, 2005, to replace a director who was independent under
the prior test but who is not independent under the current test.''
V. Discussion
After careful consideration of the proposal and the comments
received, the Commission finds that the proposed rule change, as
amended, is consistent with the requirements of the Act and the rules
and regulations thereunder applicable to a national securities
exchange,\49\ and, in particular, with the requirements of Section 6(b)
of the Act.\50\ Specifically, the Commission finds that the proposal is
consistent with Section 6(b)(5) \51\ of the Act, which requires that
the rules of a national securities exchange, among other things, be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to, and perfect the mechanism of a free and open market and, in
general, to protect investors and the public interest.
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\49\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\50\ 15 U.S.C. 78f.
\51\ 15 U.S.C. 78f(b)(5).
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In the Commission's view, the proposed rule change provides
appropriate clarification, and, in some cases, enhancement, of several
of the corporate governance listing standards contained in Section 303A
of the Listed Company Manual. For example, the proposed rule change
clarifies that listed companies must identify which of their directors
have been deemed independent; sets forth a definition of executive
officer as used in these rules; rewords the look-back test regarding
compensation received by a director or immediate family member in a
manner that makes it easier to understand and apply; and specifies that
only contributions to a tax-exempt organization are not to be
considered ``payments'' for purposes of Section 303A.02(b)(v), but not
payments to such organization made in the context of a business
relationship.
The proposal further requires audit committees to meet to review
and discuss their companies' financial statements and to review their
companies' specific MD&A disclosures; clarifies the responsibilities of
compensation committees with respect to non-CEO compensation; requires
more meaningful disclosure by foreign private issuers regarding how
their practices differ from the practices required of domestic
companies;
[[Page 65011]]
clarifies various disclosure requirements generally; and provides for
the inclusion and disclosure of any qualifications to the
certifications that CEOs submit to the NYSE. The addition of a
provision requiring Written Affirmations from listed companies of their
ongoing compliance with these standards should help assure that
companies are meeting the requirements.
With respect to Section 303A.02(b)(iii), the Director-Auditor
Relationship Test, the Commission notes that the proposed rule change,
as amended, clarifies and tightens NYSE's standard of independence with
respect to current relationships of a director or immediate family
member with the listed company auditor, while more closely aligning the
look-back provision of the test with similar provisions adopted by Amex
and Nasdaq, which, unlike NYSE's current standard, apply a look-back
test only to former partners or employees of the audit firm who
personally worked on the audit.
For example, under the current NYSE standard, an immediate family
member of a director who is ``affiliated with or employed in a
professional capacity by'' the company's internal or external auditor
would preclude the director from independence. As interpreted by the
NYSE, under the current standard an immediate family member who is a
current partner, but does not act in a ``professional capacity'' at the
audit firm, would not impact the director's independence. Under the
proposed revision, however, a director would not be considered
independent if any of the director's immediate family members is a
current partner of the audit firm. With respect to family members of a
director who are current employees of the auditor, the proposed rule
change clarifies, in consonance with NYSE's response to Frequently
Asked Questions regarding its current rule, that the director is
precluded from independence only if the family member employee
participates in the firm's audit, assurance, or tax compliance (but not
tax planning) practice.
With respect to the look-back provision of the test, NYSE's current
standard precludes a director from being considered independent if the
director was affiliated with or employed by the auditor, or the
director's immediate family member was affiliated with or employed in a
professional capacity by the auditor, until three years after the end
of the affiliation or relationship. NYSE is proposing to revise this
provision so that the director is precluded from independence only when
the director or his or her immediate family member was a partner or
employee of the audit firm and personally worked on the listed
company's audit within the three-year look back period. As noted by the
NYSE, the Commission has previously approved analogous look-back
provisions in the director-auditor relationship tests of other markets
as consistent with the Act. The Commission further believes that
approval of the proposed change in the NYSE standard is in accord with
principles of fair competition and equal regulation of markets.
The Commission finds good cause for approving Amendment Nos. 2 and
3 before the thirtieth day after the date of publication of notice of
filing thereof in the Federal Register. The only revision to the
original proposal made by Amendment No. 2 was the withdrawal of a
proposed change to the definition of ``immediate family member'' for
purposes of the Director-Auditor Relationship Test. The amendment
proposes no new changes to the corporate governance standards for
listed companies and raises no new regulatory issues. In Amendment No.
3, the NYSE proposed to give listed companies until their first annual
meeting after June 30, 2005, rather than their first meeting after
January 1, 2005, as set forth in the original proposal, to replace a
director who was independent under the current test but who would not
be independent under the revised test. The amendment also would include
this extension in the text of Section 303A. The Commission believes
this extension of time for listed companies that based decisions on the
current test of independence is reasonable, and acceleration of the
amendment should help facilitate planning by listed companies.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 2
and 3 are consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2004-41 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-NYSE-2004-41. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
NYSE. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NYSE-2004-41 and should be submitted on or before November 30, 2004.
VII. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\52\ that the proposed rule change (SR-NYSE-2004-41), as amended,
be, and hereby is, approved and Amendment Nos. 2 and 3 are approved on
an accelerated basis.
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\52\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant to
delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E4-3080 Filed 11-8-04; 8:45 am]
BILLING CODE 8010-01-P