Friday, January 01, 2010

SEC-Approved Revised NYSE Corporate Governance Listing Standards Take Effect January 1, 2010

Effective January 1, 2010, the SEC approved significant changes to the New York Stock Exchange 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, and in part to conform the listing standards to Form 8-K. Essentially, the changes 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. Release No. 34-61067.

The SEC said that it is reasonable for the NYSE to align the disclosure provisions in its corporate governance listing standards with the disclosure requirements of Item 407 and to incorporate such standards by reference in the listing standards in order to reduce burdens on listed companies. Companies that are deficient in their fulfillment of Item 407 disclosure requirements will now be deemed to be out of compliance with NYSE rules, noted the SEC, and, consequently, the NYSE will be able to take action against a noncompliant company, ranging from appending a below compliance indicator to the company’s ticker symbol, issuing a public reprimand letter, and, in appropriate cases, delisting.

The NYSE has moved the audit, compensation and nominating committee charter, corporate governance guidelines and code of 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 require a listed company to disclose in its annual proxy statement or Form 10-K that the applicable committee charters, corporate governance guidelines and code of 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 eliminates the requirement that the company disclose that hard copies of the charters, guidelines and code are available in print upon request.

The NYSE 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. 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 website, without having to provide them in print form.

NYSE listing standards also require various other disclosures to be made in the company’s proxy statement or annual report, such as contributions to tax exempt organizations; executive sessions of, and communications with, independent directors, and simultaneous service of an audit committee member on the audit committees of more than three public companies. The rule changes will allow a company alternatively to make these disclosures on its website. If a company chooses to do so, it would be required to disclose this in its proxy statement or annual report and provide the website address.

The revised rules 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 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. However, 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 NYSE

In addition, the revised rules do not grant an exemption or phase-in period to any newly-listed company with respect to the requirement that every listed company’s audit committee, without distinction as to the committee’s size, have at least one member with accounting or related financial management expertise. Moreover, SEC Rule 10A-3 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. Thus, if a newly-listed company that is eligible for a phase-in period with respect to the size requirement chooses to have initially only one member on its audit committee, that member would need to be independent and also meet the financial expertise requirement.

The SEC 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 N­CSR, its audit committee should be required to meet and review it.

Previously, the listing standards provided that waivers of a company’s code of ethics must be promptly disclosed to shareholders, without specifying how such disclosure should be made. The revisions set a timeframe that is consistent with the requirements set by the Commission in Item 5.05 of Form 8-K regarding such waivers and improve the listing standard by setting forth specific alternatives by which the disclosures may be made. The NYSE will now 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 previous standards required 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. That language 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 changes 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.Companies had been 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 caused significant confusion due to the fact that it relates to filings that were made in the previous year. Thus, the NYSE will 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.

The revised rules will require the CEO of a company to notify the NYSE after any executive officer becomes aware of any non-compliance with NYSE corporate governance listing standards rather than any material non-compliance. Commenters were concerned that dropping the word "material" from the requirement would burden companies with a duty to report minor or inadvertent breaches and result in companies being labeled below compliance. The SEC finds it not unreasonable, however, for the NYSE to require a listed company to notify it when the company becomes aware that it is out of compliance with the Exchange’s listing standards. With respect to the concern that the below compliance indicator provides no details about the reasons why such was appended to the company’s stock symbol, reasoned the SEC, the NYSE’s website provides the reason why a company has been placed on the non-compliant list.

A foreign private issuer is permitted to follow its home country practices in lieu of certain NYSE corporate governance standards for domestic listed companies. When a foreign private issuer ceases to qualify as such under SEC rules, it could become subject to corporate governance standards that were not imposed by its home country, such as independent board committees.

The revised rules 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 Exchange Act Rule 3b-4, which enables a foreign private issuer to test its status once a year on the last business day of its second fiscal quarter (the determination date), and requires a foreign private issuer to comply with the reporting requirements and use the forms prescribed for domestic companies beginning on the first day of the fiscal year following the determination date.

The company must satisfy the independent board requirement and have fully independent compensation and nominating committees within six months of the determination date. Similarly, the company must have an independent and three-member audit committee within six months of the determination date.

In addition, under NYSE standards concerning 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.

With respect to listing standards governing shareholder approval of equity compensation plans, the Commission believes that it is reasonable for the NYSE to incorporate the determination date in Exchange Act Rule 3b-4 for a transition period for a company that ceases to be a foreign private issuer and to provide its issuers guidance on the continued use of formula plans, both with and without shareholder approval, after its status changes from a foreign private issuer.

The NYSE requires a foreign private issuer to disclose any significant ways in which its corporate governance practices differ from those required of domestic companies under the listing standards. Previously, foreign private issuers could make that disclosure either in their annual report to shareholders or on their corporate websites. Recent amendments to Form 20-F mandate that foreign private issuers that file their annual report on Form 20-F are now required to include the disclosure of significant differences in the Form 20-F.

Therefore, to avoid confusing and duplicative requirements, the NYSE will require foreign private issuers required to file an annual report on Form 20-F with the SEC to include the statement of significant differences in that annual report. All other foreign private issuers will have the choice to either include the statement of significant differences in an annual report filed with the SEC or make the statement of significant differences available on the company’s website. If the statement of significant differences is made available on its website, the company must disclose that fact in its annual report filed with the SEC and provide the website address.


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