NYSE and NASDAQ Propose Rule Changes

This post from Eduardo Gallardo is based on a Gibson, Dunn & Crutcher LLP client memorandum by Amy Goodman, Gillian McPhee and Joelle Khoury.

On August 26, 2009, the New York Stock Exchange (“NYSE”) filed proposed amendments to its corporate governance listing standards with the Securities and Exchange Commission (“SEC”). The NYSE has proposed that they take effect on January 1, 2010. The proposals must be approved by the SEC before they become final, and will be the subject of a 21-day comment period following publication in the Federal Register.

The NYSE proposals would amend the corporate governance listing standards to: (1) codify certain staff interpretations; (2) clarify various disclosure requirements; and (3) incorporate applicable SEC disclosure requirements into the listing standards. Because most of the proposed changes would conform the NYSE listing standards to existing SEC rules, or are of a clarifying or updating nature, they should necessitate only minimal changes to listed company governance practices and disclosures. [1]

Below is an overview of the proposals in the NYSE filing, which includes a mark-up showing the proposed changes to the text of the corporate governance listing standards.

In addition, in August 2009, the NASDAQ Listing and Hearing Review Council sent a paper to companies listed on The NASDAQ Stock Market LLC (“NASDAQ”) seeking comment on whether NASDAQ should adopt a “comply or disclose” approach with respect to certain corporate governance practices. The paper is discussed in more detail below.

NYSE – The Proposed Amendments – A Brief Overview

A primary purpose of the proposed amendments is to update the NYSE’s corporate governance listing standards in light of the SEC’s 2006 adoption of Item 407 of Regulation S-K, which requires disclosure about director independence and certain other aspects of a company’s corporate governance practices. In this regard, the proposals would eliminate each disclosure requirement currently included in the NYSE corporate governance listing standards that also is required by Item 407 and reference the SEC requirements. Although the NYSE acknowledges in the proposing release that this approach may appear redundant, it will permit the NYSE to take action (including delisting) against companies with deficient Item 407 disclosure, as these companies also will be deemed out of compliance with NYSE rules. In addition, as discussed below, the changes would permit companies to make disclosures about certain matters on their websites instead of in their proxy statements.

The following provides a brief overview of the most significant amendments that the NYSE has proposed:

Director Independence Disclosure: The NYSE is proposing to replace its current director independence disclosure requirements with a requirement that listed companies provide the disclosures required by Item 407, which require that companies describe, for each director, by specific category or type, any transactions, relationships or arrangements that the board considered in determining that the director is independent. Current NYSE listing standards permit boards to adopt and disclose categorical standards to assist them in assessing independence, and allow companies to make a general disclosure that their independent directors meet these standards. Accordingly, if adopted, the proposals would eliminate the concept of categorical standards from the NYSE listing standards. However, we expect that the boards of many companies will continue to maintain these standards, because they provide a useful tool for assessing director independence.

Executive Sessions of Non-Management Directors: The NYSE listing standards require that non-management directors hold regular executive sessions. Because some companies have expressed a preference for holding regular executive sessions of only the independent directors, the proposals would clarify that this satisfies the NYSE requirement.

Communications with Directors: The NYSE listing standards require companies to provide “interested parties” with a method to communicate with the presiding director, or the non-management or independent directors as a group. The NYSE proposes clarifying that “interested parties” is not limited to shareholders.

Requirements for Audit Committees: Under current NYSE listing standards, if a member of a listed company audit committee simultaneously serves on the audit committees of more than three public companies, “and the listed company does not limit the number of audit committees on which its audit committee members serve to three or less,” then the board must determine that this service would not impair the member’s ability to serve on the listed company’s audit committee, and the company must disclose this determination in its proxy statement. According to the proposing release, the wording of this provision has led to uncertainty about whether the determination and related disclosure are necessary if a listed company does not limit outside audit committee service to three public company audit committees. The proposals would clarify that both the determination and disclosure are required whether or not a company limits the number of audit committees on which its directors may serve to three or less.

Codes of Conduct: The NYSE listing standards require that companies “promptly” disclose any waivers of their codes of conduct granted to executive officers and directors. The proposals would clarify that companies must disclose waivers within four business days, consistent with SEC requirements governing Form 8-K disclosure of waivers from a company’s code of ethics applicable to its CEO and senior financial officers. The proposals also would specify that companies can make the disclosure through a press release, on their websites or on a Form 8-K. The NYSE notes in the proposing release that this timing varies slightly from the guidance in the staff’s Frequently Asked Questions, which state that companies may make the disclosure using one of these alternatives within two to three business days.

Notification of Non-Compliance with Corporate Governance Listing Standards: The NYSE listing standards currently require that companies notify the NYSE in writing after any executive offer becomes aware of a “material” non-compliance with the corporate governance listing standards. The proposals would amend this provision to require notification when an executive officer becomes aware of any non-compliance.

Certification Requirements: Under the current NYSE listing standards, listed company CEOs annually must certify to the NYSE that they are not aware of any violation of the NYSE corporate governance listing standards, qualifying the certification to the extent necessary. The certification is due within 30 days of a company’s annual shareholder meeting. In addition, in their annual reports to shareholders, companies must disclose that they filed the previous year’s CEO certification and any certifications required by SEC rules. According to the proposing release, this requirement has caused significant confusion because it relates to filings that were made in the previous year, and the NYSE believes it is no longer necessary in light of the SEC rules requiring Form 8-K disclosure of any material non-compliance with exchange rules. In view of these considerations, the NYSE is proposing to eliminate the disclosure requirement relating to these certifications, but is retaining the certification requirement.

Website Discussion of NYSE-Mandated Corporate Governance Disclosures: The NYSE is proposing to give companies the option to make specific corporate governance disclosures required only under the NYSE’s rules on their websites, instead of in the proxy statement. However, if they choose to make such disclosures on their website, that fact and the company’s website address must be provided in the proxy statement. These disclosures would include information about:

• contributions made by the company to any non-profit organization where an independent director is an executive officer, if the contributions exceeded the greater of $1 million or 2% of the organization’s revenues in any single fiscal year during the past three years;• the identity of the director chosen to preside at executive sessions;

• the method for interested parties to communicate directly with the presiding director or the non-management or independent directors as a group; and

• the board’s determination that an audit committee member’s service on more than three public company audit committees does not impair the member’s ability to serve effectively on the company’s audit committee (discussed above).

Website Requirements: The NYSE has proposed minor changes to various aspects of its rules on website disclosure, including:

• Creating new subsections on web posting and disclosure within each of the provisions governing audit, compensation and nominating/governance committee charters, corporate governance guidelines and codes of conduct. These provisions would set forth existing NYSE requirements that companies post these documents on their websites, disclose in the proxy statement that the documents are available on the website, and provide the website address.

• Eliminating the requirement that companies make hard copies of their governance documents available in print on request in light of fact that the documents are available on company websites.

• Moving the requirement that listed companies maintain a publicly accessible website out of the corporate governance listing standards and into a stand-alone section (Section 307.00) of the Listed Company Manual. This is intended to clarify that the requirement applies to companies that are subject to web posting requirements under any part of the Listed Company Manual (and not just the corporate governance listing standards).

• Specifying that, to the extent any provision of the Listed Company Manual requires a company to make documents available on its website, the website must be accessible from the United States, must clearly indicate, in the English language, the location of the documents and must include a printable version of the documents in English.

Provisions Applicable to Specific Circumstances: The NYSE also is proposing certain changes and clarifications to the transition periods applicable to companies listed in conjunction with an initial public offering, spin-off or carve-out with regard to timing for compliance with its corporate governance requirements. In addition, the NYSE is proposing to add sections detailing the compliance requirements applicable to companies when they list upon emergence from bankruptcy, transfer from another market, cease to be controlled companies or cease to be foreign private issuers (as discussed below).

Foreign Private Issuer Disclosure: The NYSE also has proposed changes applicable only to foreign private issuers:

• The NYSE rules currently require that foreign private issuers disclose significant differences between their home country corporate governance practices and NYSE requirements applicable to U.S. companies. Foreign private issuers may make these disclosures in their annual shareholder report or on their websites. However, as a result of a rule change effective for filings relating to fiscal years ending on or after December 15, 2008, SEC rules now require this disclosure in the Form 20-F. Accordingly, the NYSE is proposing to require foreign private issuers that file annual reports on Form 20-F to include a statement of significant differences in the Form 20-F. All other foreign private issuers will continue to have the option of disclosing this statement either in their annual reports or on their websites.• The NYSE is proposing to set forth specific timing requirements for compliance with its corporate governance listing standards for companies that cease to be foreign private issuers. Under the proposals, companies generally would have to comply with the corporate governance listing standards within six months of the date they fail to qualify for foreign private issuer status under applicable SEC rules, which enable foreign private issuers to test their status annually at the end of the most recently completed second fiscal quarter (“determination date”).

• The NYSE is proposing to add a transition period on shareholder approval of equity compensation plans for companies that cease to qualify as foreign private issuers. Under the proposals, these companies will have a limited transition period with respect to certain equity compensation plans that were not shareholder-approved, so that companies can make additional grants under the plans without shareholder approval after they cease to qualify as foreign private issuers. Subject to certain exceptions, the transition period generally would end on the later of six months after the date a company ceases to qualify as a foreign private issuer or the first annual meeting after that date, but in no event later than one year after the determination date.

NASDAQ Request for Comment on “Comply or Disclose” Approach

On August 3, 2009, the NASDAQ Listing and Hearing Review Council sent a paper to NASDAQ companies seeking comment on whether it should adopt a “comply or disclose” approach for certain corporate governance practices as an alternative to additional, substantive requirements, noting that some non-U.S. markets follow a “comply or disclose” model and that it “offers flexibility to companies and transparency to investors and allows practices to evolve in a logical manner.” Accordingly, the NASDAQ paper solicits comment about a range of practices, including board leadership, resignation policies for directors that fail to receive majority votes, annual director elections, and shareholder ratification of a company’s outside auditor. Any required disclosures would appear either in a company’s proxy, in the case of most U.S. companies, or in its annual report filed with the SEC for all other companies. Comments are due by October 30, 2009.

What Companies Should Do Now

For NYSE companies, most of the amendments conform the listing standards to existing SEC rules or are of a clarifying or updating nature. Accordingly, if the amendments are adopted, they should necessitate only minimal changes to companies’ corporate governance practices and disclosures. The most significant potential amendment is the proposal to require that companies notify the NYSE in writing after any executive officer becomes aware of any non-compliance, as opposed to a “material” non-compliance, with the corporate governance listing standards. Companies may wish to comment on this aspect of the proposal.

In addition, NYSE companies will need to review their proxy disclosures and governance documents (including committee charters and D&O questionnaires), to determine whether any section references to the NYSE listing standards need updating. We expect that companies will need to update their D&O questionnaires this fall in any event, in light of pending SEC proposals to require enhanced proxy disclosure about compensation and corporate governance matters. [2] Companies also should consider whether they will eliminate disclosures about the filing of CEO certifications and the undertaking to provide hard copies of governance documents upon request, although companies may want to continue this latter offer as a matter of good investor relations.

NASDAQ companies should consider whether to comment on the NASDAQ paper. If NASDAQ decides to move forward with additional corporate governance requirements, companies may find a “comply or disclose” approach preferable because it would preserve flexibility and allow them to adopt the practices that work best for them. Accordingly, it may be useful for companies to provide input to NASDAQ as it moves forward with this process.


[1] The NYSE originally filed an earlier version of these proposals with the SEC in 2005, and later amended the proposals following the SEC’s comprehensive changes to its proxy disclosure rules in 2006, but no SEC action was taken on these proposals.
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[2] Proxy Disclosure and Solicitation Enhancements, SEC Release No. 33-9052, 34-60280, 74 Fed. Reg. 35,076 (July 17, 2009).
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