NYSE Submits Changes to Corporate Accountability and Listing Standards to SEC for Approval

09/18/2002

To Our NYSE-Listed Clients:

The New York Stock Exchange (“NYSE”) has filed with the Securities and Exchange Commission (“SEC”) proposed changes to its listing standards aimed at helping to restore investor confidence by adopting new corporate governance rules.  The NYSE board of directors adopted the final recommendations of its Corporate Accountability and Listing Standards committee at its regular meeting on August 1, 2002, following a two-month comment period in which more than 300 comment letters were received.  The rules will become final once approved by the SEC (probably before the year end). The new standards will become effective for NYSE-listed companies six months following SEC approval, with limited exceptions that are highlighted in the discussion below.

Highlights of the Proposed Listing Standards

  • NYSE–listed companies must have a majority of independent directors within 24 months of SEC approval of the standards;

  • NYSE–listed companies must have a nominating committee and compensation committee with disclosed charters, with at least one independent member within 12 months of SEC approval of the standards and all independent members within 24 months of SEC approval of the standards;

  • Non-management directors must meet and publicly disclose the designated director to chair the executive sessions beginning six months after SEC approval of the standards;

  • Audit committees must meet enhanced independence standards within 24 months of SEC approval of the standards and will have new mandated responsibilities within six months of SEC approval of the standards;

  • NYSE–listed companies must adopt corporate governance guidelines and codes of ethics and business conduct within six months after SEC approval of the standards; and

  • Stockholders of NYSE–listed companies must approve all equity-based compensation plans, subject to limited exceptions, effective immediately after SEC approval of the standards.

The proposed new NYSE-listed company standards require that:

Companies Must Have a Majority of Independent Directors

Independent directors must comprise a majority of a NYSE-listed company’s board.  An exemption is provided for “controlled companies,” but such companies must still have an audit committee comprised of independent directors.  Companies must comply within 24 months of SEC approval of the new standards.

Companies Must have a Nominating/Corporate Governance Committee and Compensation Committee Composed of Independent Directors

NYSE-listed companies must have a nominating/corporate governance committee and compensation committee (or committees of the companies’ own denomination with the same responsibilities), composed entirely of independent directors.  Both committees must have one independent member within 12 months of SEC approval of the new standards and all independent members within 24 months.  Both committees must have a written charter addressing: (i) the committee’s purpose; (ii) the committee’s goals, responsibilities, structure and operations; (iii) committee member qualifications, and appointment and removal procedures; (iv) the committee’s sole authority to retain and terminate any search firm to identify director candidates; and (v) annual performance evaluations of the committee.

Companies Must Have an Audit Committee Composed of Independent Directors

NYSE-listed companies must have an audit committee composed entirely of independent directors.  Director’s fees must be the sole remuneration an audit committee member receives from the company.  Directors serving on the company’s audit committee may receive more compensation than other directors; however, fees paid directly or indirectly for services including consulting, financial advising and legal advising are prohibited.  In addition, at least one member of the audit committee will be required to have accounting or related financial management expertise.  These standards regarding the composition and compensation of the audit committee become effective 24 months after SEC approval of the standards.

The Definition of “Independent” Director Is Tightened

For a director to be deemed “independent,” the board must affirmatively determine that the director has no material relationship with the NYSE-listed company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the company).  No director will be able to qualify as independent until the board determines that the director has no material relationship with the Company.  Companies must disclose these determinations in their annual proxy statements.  In addition, NYSE-listed companies must observe a five-year “cooling-off” period for purposes of satisfying the definition of independence for (i) former employees of the company; (ii) former employees of its independent auditor; (iii) former employees of any company whose compensation committee includes an officer of the company; and (iv) immediate family members of the foregoing.

Please note that the Nasdaq Stock Market (“Nasdaq”) has proposed standards that are more restrictive on the definition of an “independent” director.  They propose to: (i) require regularly convened executive sessions of the independent directors; (ii) require audit committee review and approval of all related-party transactions; (iii) prohibit an independent director and their family members from receiving payments in excess of $60,000 other than for board service; and (iv) prohibit a director from being considered independent if the company makes payments to a an entity, including a charity, where the director is an executive officer, of greater than $200,000 or five percent of either company’s gross revenues.  In addition, the Nasdaq proposed standards provide that: (i) a stockholder owning or controlling 20% or more of the company’s voting securities is not independent; (ii) any relative of an executive officer or its affiliates will not be considered independent; (iii) former partners or employees of the outside auditors who worked on the company’s audit will not be deemed independent; and (iv) a three-year “cooling off” period is required for directors who are not independent.  The SEC may consider these Nasdaq recommendations and incorporate some or all of them into the NYSE proposed standards.

Non-Management Directors Must Meet Regularly

The non-management directors of NYSE-listed companies must meet at regularly scheduled executive sessions without management beginning six months after SEC approval of the standards.  The independent directors are required to designate and disclose in the company’s proxy statement, the name of the director who will preside over the executive session.  The proposed standards contain no guidance as to how frequently these meetings should occur.  This standard is effective six months after SEC approval of the standards.

Companies’ Audit Committee Has Increased Authority and Responsibility

The new standards increase the authority and responsibilities of the audit committee, including granting it the sole authority to hire and fire independent auditors and to approve any significant non-audit relationship with the independent auditors.  The audit committee must have a written charter addressing: (i) discussions with management and the independent auditor regarding the annual and quarterly financial statements; (ii) reviewing and discussing earnings press releases, financial information, and earnings guidance; (iii) setting clear hiring policies for employees or former employees of the independent auditors; (iv) reviewing earnings press releases; and (v) reviewing the company’s internal control procedures.  Every NYSE–listed company must have an internal audit function.  The NYSE noted that this "does not necessarily mean that a company must establish a separate internal audit department or dedicate employees to the task on a full-time basis; it is enough for a company to have in place an appropriate control process for reviewing and approving its internal transactions and accounting." A NYSE-listed company can outsource this function, although the Sarbanes-Oxley Act strictly prohibits the company’s independent auditors from providing internal audit services.  These standards regarding audit committees authority and responsibility are effective six months after SEC approval of the standards.

Stockholders Have Increased Control Over Equity-Compensation Plans

Stockholders must be given the opportunity to vote on all equity-compensation plans.  Stockholder approval is not required for employment inducement options, plans acquired through mergers or acquisitions, and tax qualified and excess benefit plans.  Brokers are precluded from voting customer shares on such plans, unless the broker received instructions to do so.  When equity compensation plans are not subject to stockholder approval, the compensation committee must approve such plans.  The NYSE has indicated that they currently are of the opinion that equity-compensation plans adopted prior to the effectiveness of this rule would not be subject to stockholder approval of grants under such plan.  However, they did indicate that if the plan is subsequently amended in a material fashion, stockholder approval would be required.  The NYSE has indicated that they expect to clarify this issue prior to the standards becoming effective.  These standards become effective immediately after SEC approval and the NYSE has indicated that the SEC intends to approve this standard on an expedited basis, as soon as mid-October.

Companies Must Adopt and Disclose Corporate Governance Guidelines

NYSE-listed companies must adopt corporate governance guidelines concerning qualifications, responsibilities, compensation, orientation and continuing education of directors, the selection of the CEO and a succession plan.  Such guidelines must be published on the company’s web sites, together with key committee charters (e.g. nomination, compensation and audit) and the code of business conduct and ethics.  This standard is effective six months after SEC approval of the standards.

Companies Must Adopt and Disclose Code of Business Conduct and Ethics

NYSE-listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.  Such code of business conduct and ethics must address: (i) conflicts of interest; (ii) corporate opportunities; (iii) confidentiality;
(iv) fair dealing; (v) use of company assets; (vi) compliance with laws; and (vii) regulations encouraging the reporting of illegal and unethical behavior.  This standard is effective six months after SEC approval of the standards.

CEOs Must Make Annual Certifications

CEOs of NYSE-listed companies must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance standards.  This certification will be required beginning six months after SEC approval of the rules.

NYSE May Issue Public Reprimand Letters for Violations of NYSE Listing Standards

Effective immediately after SEC approval of the standards, the NYSE will be able to issue a public reprimand letter to any NYSE-listed company that violates a NYSE corporate governance standard, in addition to the existing penalty of delisting.

Further Information

We expect that the SEC will approve the proposed standards by the end of the year after the proposals are submitted for public comment. We will regularly update you with regard to material developments concerning any changes to the proposed standards as well as implementation of the final standards.

This Alert is a publication of Haynes and Boone, LLP and should not be construed as legal advice on any particular facts or circumstances.  This Alert is for general informational purposes only, and may not be quoted or referred to in any other documents or legal proceeding without our prior written consent.  The publication of this Alert is not intended to create an attorney-client relationship.

If you would like to learn more about the proposed standards, please feel free to contact your regular Haynes and Boone attorney or any member of our Corporate Governance Practice Group.

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