NYSE Proposes Significant Changes to Its Corporate Governance Listing Standards

In a filing with the SEC, the NYSE has proposed significant changes to its corporate governance listing standards, in part to conform the standards to the requirements of Item 407 of Regulation S-K, which consolidates director independence and related corporate governance disclosure requirements under a single item. Essentially, the NYSE would eliminate each disclosure requirement currently included in the listing standards that is also required by Item 407 and incorporate directly into the standards the applicable disclosure requirement of Item 407. Upon SEC approval, the changes would take effect on January 1, 2010. Release No. 34-60653.

The NYSE also proposes to move the audit, compensation and nominating committee charter, corporate governance guidelines and code of business conduct and ethics website posting requirements to a new Website Posting Requirement section in the listing standards manual. The NYSE would change the disclosure regarding website postings to just require a listed company to disclose in its annual proxy statement or Form 10-K that the applicable charters, corporate governance guidelines and code of business conduct and ethics are available on the company’s website, and provide the website address.

This is designed to conform the Exchange’s disclosure requirements with respect to committee charters to the disclosure required by Instruction 2 to Item 407. At the same time, the NYSE would eliminate the requirement that the company disclose that hard copies of the charters, guidelines and code are available in print upon request. The exchange believes that it is unnecessary to require companies to provide physical copies of these documents upon request when they are readily accessible on the company’s website.

Under current NYSE rules, companies listing in conjunction with an IPO can phase in their independent audit, nominating and compensation committees, but are required to have one independent director on each committee as of the date of listing. Market practice, however, is that a company does not normally appoint independent directors to its board in advance of the date it lists on the NYSE. In light of this, the NYSE would require companies listing in conjunction with an IPO, spin-off or carve-out to be in compliance with the applicable provisions of the SEC’s audit committee requirements set forth in Rule 10A-3 as of the listing date, defined as the date the company’s securities first trade on the exchange.

The exchange also would require that a company listing in conjunction with its IPO, spin-off or carve-out have a majority of independent members on its audit committee within 90 days of the effective date of its registration statement; and a fully independent committee within one year of the effective date of its registration statement.

Similarly, the NYSE would require companies listing in conjunction with an IPO to have at least one independent member on its nominating and compensation committees by the earlier of the date the IPO closes or five business days from the listing date, at least a majority of independent members on each committee within 90 days, and fully independent committees within one year.

The current standards require that, if an audit committee member 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 in each case the board must determine that such simultaneous service would not impair the ability of the member to effectively serve on the audit committee and disclose such determination. The current language has led to confusion that disclosure is only required to the extent that the listed company does not limit the number of audit committees on which its audit committee members serve to three or less. The NYSE would clarify that the mandated disclosure is required to the extent that an audit committee member simultaneously serves on the audit committees of more than three public companies.

Currently, companies must disclose any waiver of the code of business conduct and ethics granted to executive officers and directors. The NYSE proposes to require that the waiver be disclosed to shareholders within four business days by distributing a press release, providing website disclosure, or by filing a current report on Form 8-K with the SEC. The new four-day period would be uniform with the requirements of Item 5.05 of Form 8-K regarding disclosure of waivers from codes of ethics.

Companies are currently required to disclose that they filed the CEO certification required by the NYSE and any certifications required by the SEC in the following year’s annual report. This requirement has caused significant confusion due to the fact that it relates to filings that were made in the previous year. Thus, the NYSE proposes to eliminate this disclosure requirement in light of amendments to the exhibit requirements of Form 10-K to require that the SEC certification be included as an exhibit to the company’s annual report.

In addition, investors now have timely notification of all material non-compliance with the NYSE’s listing standards due to the SEC’s amended requirements relating to Form 8-K. Item 3.01 of Form 8-K requires the filing of an 8-K disclosing any noncompliance with NYSE rules and any action or response that, at the time of filing, the company has determined to take regarding its noncompliance.

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