Governance: NYSE and NASDAQ Propose Rule Changes - 20 Sep 2009
NYSE and NASDAQ Propose Rule Changes
(Editor’s Note: This post 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:
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:
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.
Footnotes:
[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.
(go back)
[2] Proxy Disclosure and Solicitation Enhancements, SEC Release No. 33-9052, 34-60280, 74 Fed. Reg. 35,076 (July 17, 2009).
(go back)
http://blogs.law.harvard.edu/corpgov/2009/09/20/nyse-and-nasdaq-propose-rule-changes/
| Topic | Replies | Likes | Views | Participants | Last Reply |
|---|---|---|---|---|---|
| RSUs & McDonalds CEO Sex Scandal | 0 | 0 | 103 | ||
| ESPPs Provided Big Gains During March-June Market Swings | 0 | 0 | 93 | ||
| myStockOptions.com Reaches 20-Year Mark | 0 | 0 | 137 |