Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange proposes to amend Section 303A of its Listed Company Manual ("Manual"), which comprises the Exchange's corporate governance standards for listed companies, and to eliminate current Section 307.00, regarding related party transactions.
Section 303A of the Manual currently requires a listed company to disclose the identity of its independent directors, the basis upon which its board may determine that a director is independent, and--if it is a controlled company--any exemptions from the independence requirements upon which it has relied. Disclosures relating to the same aspects of a company's corporate governance are now required by Item 407 of the Commission's Regulation S-K.
A listed company is required by the NYSE standards to post the charters of its audit, compensation, and nominating/corporate governance committees, its corporate governance guidelines, and its code of business conduct and ethics on the company's Web site, and to state in its proxy statement or annual report that these documents are so posted. The proposal would add that the listed company's Web site address must be included,
Section 303A currently also requires various other disclosures to be made in the company's proxy statement or annual report.
Section 303A.11 of the Manual currently requires a foreign private issuer to disclose any significant ways in which its corporate governance practices differ from those required of domestic companies under NYSE listing standards. Under the proposal, a foreign private issuer that is required to file an annual report on Form 20-F with the Commission would be required to include the statement of significant differences in that annual report.
The proposal also would eliminate the requirement in Section 303A.12(a) that a listed company disclose in its annual report (or on Form 10-K if the company does not prepare an annual report to shareholders) that its chief executive officer ("CEO") filed the certification regarding corporate governance required by the Exchange, and that the company complied with Commission certification requirements regarding public disclosure. The Exchange proposes to revise Section 303A.12(b) to provide that the CEO of a listed company must notify the Exchange in writing after any executive officer of the 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.
By way of background, NYSE's rules incorporate by reference Rule 10A-3 under the Act,
The Exchange's rules require that the nominating and compensation committees of a listed company also be composed solely of independent directors. However, companies listing in conjunction with an IPO are permitted a transition period for these committees to be composed solely of independent directors that is similar to that permitted by Rule 10A-3 for audit committees: at least one independent director member at the time of listing, a majority of independent director members within ninety days of listing, and a fully independent committee within one year.
The proposed rule change would allow a similar phase-in period for a company listing in conjunction with a spin-off or a carve-out transaction. In such transactions, there would need to be one independent director member on both the nominating and compensation committees by the date the transaction closes, at least a majority of independent director members on each committee within ninety days of the listing date, and fully independent committees within one year of the listing date. A company listing upon emergence from bankruptcy, for which the NYSE rules already provide a similar phase-in period, would continue to be required to have one independent director by the date of listing, as under the current rule. The same phase-in would be specified for a company that ceases to qualify as a controlled company and thereby loses its exemption from the independence requirements for these committees, but the first independent director member would be required to be in place for the nominating and compensation committees by the date the company's status changes.
The NYSE also proposes to allow a company listing in conjunction with an IPO or a spin-off or carve-out transaction a phase-in period with respect to the provision in Section 303A.07(a) which requires a company to have a minimum of three members on its audit committee. Such companies would be required to have at least one member on their audit committees by the listing date, at least two members within ninety days of the listing date, and at least three members within one year of the listing date.
NYSE proposes new rules for companies previously registered pursuant to Section 12(g) of the Act
A foreign private issuer is permitted to follow its home country practice in lieu of certain NYSE corporate governance standards for domestic listed companies. The proposed rule change would set forth a transition period for a foreign issuer that determines that it no longer qualifies as a foreign private issuer. The provision references Rule 3b-4 under the Act,
In addition, under Section 303A.08 of the NYSE standards, which concerns shareholder approval of equity compensation plans, a company that ceases to be a foreign private issuer would be granted a limited transition period with respect to discretionary plans and formula plans that were in place prior to the date that its status changed. A shareholder-approved formula plan could continue to be used after the end of the transition period if it is amended to provide for a term of ten years or less from the later of the date of its original adoption or its most recent shareholder approval. A formula plan could be used without shareholder approval if the grants after the date of the status change are made only from the shares available immediately before the Determination Date.
Finally, pursuant to language proposed in various sections of the Introduction to Section 303A.00, the proposal would permit the various types of newly-listed companies to comply with requirements for listed companies to post certain documents on their websites (discussed above) by the same date they are required, respectively, to have at least one independent director member on their nominating and compensation committees.
The following section describes several of the other, more substantive changes included in the proposal:
The Introduction to Section 303A would include Section 303A.08, "Shareholder Approval of Equity Compensation Plans" in the list of sections with which closed end funds must comply.
Controlled companies, which are exempt from certain requirements, currently are defined as companies of which more than 50% of the voting power is held by an individual, a group, or another company. The definition would be revised to make clear that the 50% criterion relates specifically to voting power for the election of directors. The proposal also would clarify that references to a "listed company" or "company" in the provisions relating to director independence include, in addition to any parent or subsidiary in a consolidated group with the listed company, any such other company as is relevant to any determination under the applicable independence standards of Section 303A.02(b).
The proposal would allow companies to hold regular executive sessions of independent directors as an alternative to the sessions of non-management directors currently required. A company would be required to enable all interested parties, not only shareholders, to communicate concerns regarding the company to these non-management or independent directors.
The Exchange proposes to add language to rule commentary in Section 303A.07 regarding audit committees to make clear that, if a closed-end fund chooses to voluntarily include a "Management's Discussion of Fund Performance" in its Form N-CSR, its audit committee is required to meet to review and discuss it. The Exchange also proposes to clarify that telephonic conference calls constitute meetings if allowed by applicable corporate law.
Section 303A.10, requiring a listed company to disclose to shareholders any waiver from its code of business conduct and ethics that is granted to an executive officer or director, would be amended to specify that the disclosure must be made within four business days of the determination by the company to grant the waiver, through a press release, Web site disclosure, or the filing of a current report on Form 8-K with the Commission.
Finally, the Exchange proposes to amend provision (c) of Section 303A.12 (Certification Requirements) to require each listed company to submit an interim Written Affirmation "as and when required by the interim Written Affirmation form specified by the NYSE," as opposed to "each time a change occurs to the board or any of the committees subject to Section 303A."
After careful consideration of the proposed rule change and the comments received, the Commission finds that the proposal is consistent with the Act and the rules and regulations promulgated thereunder applicable to a national securities exchange and, in particular, with Section 6(b)(5) of the Act
The Commission believes that it is reasonable for NYSE to revise its disclosure provisions in its corporate governance listing standards set forth in Section 303A of the Manual to align with the disclosure requirements of Item 407 of Regulation S-K, and to incorporate such standards by reference in those listing standards so as to reduce burdens on listed companies. The Commission notes that, as the Exchange has stated, companies that are deficient in their fulfillment of Item 407 disclosure requirements will be deemed to be out of compliance with the Exchange's rules. Consequently, the Exchange will be able to take actions against a noncompliant company, ranging from appending a below compliance ("BC") indicator to the company's ticker symbol, issuing a public reprimand letter, and, in appropriate cases, delisting.
In the Commission's view, the proposal improves upon the current rules by stating clearly that a listed company must provide its Web site address when it discloses in its proxy statement or annual report, as required, that its key committee charters, code of ethics, and corporate governance guidelines are posted on its Web site. The Commission believes that it is reasonable for the Exchange to allow a company to fulfill its disclosure obligations with respect to these documents by posting them on its Web site, without having to provide them in print form. Certain of the disclosures required by the Commission's own rules are permitted to be made on a company's Web site as long as the company's proxy statement makes reference to the information and provides a Web site address.
As discussed above, the proposal also would allow a company to make certain other Exchange-required disclosures on its Web site instead of in its proxy statement or annual report, provided that the company states in the proxy statement or annual report that it has done so and provides the Web site address. The Commission believes that it is reasonable for the Exchange to provide companies with this alternative approach with respect to the specified disclosures. Similarly, the Commission believes that the amendments to the Exchange's listing rules governing disclosure by a foreign private issuer are appropriate.
The Commission believes that the proposed amendments relating to the phase-in period for specified companies newly listing on the Exchange (or newly becoming subject to certain corporate governance listing standards as a result of change in status) are reasonable. The proposed rules would permit a phase-in schedule similar to that allowed under the current rules for a company listing in conjunction with an IPO, and would extend such a phase-in schedule appropriately to companies listing in conjunction with spin-off and carve-out transactions, while offering an acceptable minimal tolerance for the special circumstances of each of these types of new listings with respect to the point in time that the standards would begin to apply. The Commission notes that the Exchange's proposal does not make adjustments for compliance with any requirements of Rule 10A-3 under the Act.
The Commission notes that a company listing upon emerging from
The proposed rule change also would allow a company listing in conjunction with an IPO, a spin-off, or a carve-out a phase-in period with respect to the NYSE requirement that the audit committee of a listed company have at least three members. In the Commission's view, permitting a company to have only one member on its audit committee by the listing date, at least two members within ninety days of the listing date, and three members within a year of the listing date, affords a reasonable accommodation for such companies. The Commission notes that a company emerging from bankruptcy will continue to be required to have at least three members on its audit committee from the day its securities begin to trade on the Exchange.
The Commission further notes that the proposed rule change does not grant an exemption or phase-in period to any newly-listed company with respect to the provision set forth in Section 303A.07 of the Manual that requires every listed company's audit committee--without distinction as to the committee's size--to have at least one member who has accounting or related financial management expertise. In addition, Rule 10A-3 under the Act requires at least one member of a listed company's audit committee to be independent as of the listing date, even when the company is allowed a phase-in period with respect to the independence of other audit committee members.
With respect to NYSE's Section 303A.08 governing shareholder approval of equity compensation plans, the Commission believes that it is reasonable for NYSE to incorporate the determination date in Rule 3b-4 under the Act
The Commission understands that the Exchange proposes to clarify in the Introduction to Section 303A.00 that closed-end funds are subject to Section 303A.08. The fact that this provision does not currently appear to require closed-end funds to comply with Section 303A.08 apparently results from an oversight on the part of the Exchange. The inclusion of securities governed by Section 703.22 of the Manual (Equity Index-Linked Securities, Commodity-Linked Securities and Currency-Linked Securities) among the list of preferred and debt securities to which the NYSE governance standards do not apply is an appropriate update of the rules and is consistent with NYSE's treatment of similar securities.
The Commission agrees with the Exchange that allowing companies to hold executive sessions of independent directors rather than of non-management directors is consistent with the intention of the current rule. The proposal to require that all interested parties, not only shareholders, be able to communicate concerns regarding a listed company to the director(s) also is appropriate. The Commission further believes that it is appropriate to provide that if a closed-end fund voluntarily includes a Management's Discussion of Fund Performance in its Form N-CSR, its audit committee should be required to meet and review it.
Currently, Section 303A.10 of the Manual provides that waivers of a company's code of business ethics and conduct must be "promptly disclosed to shareholders" and does not specify how such disclosure should be made. The proposed rule change sets a timeframe that is consistent with the requirements set by the Commission in Item 5.05 of Form 8-K
The proposal would remove the provision in Section 303A.12(a) that requires a company to disclose in its annual report to shareholders (or, if the company does not prepare an annual report, in its annual Form 10-K) the specified certifications regarding any non-compliance filed with the NYSE and the Commission. The Exchange states that that this provision has caused confusion because it relates to certifications made in the prior year. Further, the Commission now requires a company to provide certifications by its principal executive officer and principal financial officer as an exhibit to the company's Form 10-Q and 10-K, and the Commission's disclosure requirements now include detailed provisions relating to a company's obligation to file a Form 8-K in instances where the company notifies the Exchange or the Exchange notifies the company of non-compliance with Exchange listing standards. In addition, the NYSE appends a BC indicator to the ticker symbol of an issuer that is non-compliant with the Exchange's corporate governance standards. In view of these changes, the Commission agrees that it is reasonable to delete the certification disclosure requirement of Section 303A.12(a). The Commission also believes that it is reasonable to allow NYSE to modify Section 303A.12(c) to require companies to submit a Written Affirmation as and when required by the Exchange's interim Written Affirmation form, as opposed to each time a change occurs to the board or any of the committees subject to Section 303A.
The two comment letters on the proposed rule change generally support its revisions, but oppose the amendment to require the CEO of a company to notify the NYSE after any executive officer becomes aware of "any" non-compliance with Section 303A, rather than "any material" non-compliance.
The Commission believes that it is not unreasonable for the NYSE to require a company that is listed on its facility to notify the Exchange when it becomes aware that it is out of compliance with the Exchange's listing standards. With respect to the concern that the BC indicator provides no details about the reasons why the BC indicator was appended to the company's stock symbol, the NYSE's Web site provides the reason why a company has been placed on the non-compliant list.
Finally, the Commission believes that the technical and other minor changes in the proposal improve and add to the clarity of the Exchange's corporate governance listing rules.