Self-Regulatory Organizations; New York Stock Exchange, Inc. and National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Changes (SR-NYSE-2002-33 and SR-NASD-2002-141) and Amendments No. 1 Thereto; Order Approving Proposed Rule Changes (SR-NASD-2002-77, SR-NASD-2002-80, SR-NASD-2002-138 and SR-NASD-2002-139) and Amendments No. 1 to SR-NASD-2002-80 and SR-NASD-2002-139; and Notice of Filing and Order Granting Accelerated Approval of Amendment Nos. 2 and 3 to SR-NYSE-2002-33, Amendment Nos. 2, 3, 4 and 5 to SR-NASD-2002-141, Amendment Nos. 2 and 3 to SR-NASD-2002-80, Amendment Nos. 1, 2, and 3 to SR-NASD-2002-138, and Amendment No. 2 to SR-NASD-2002-139, Relating to Corporate Governance

Federal RegisterNov 12, 2003

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48745; File Nos. SR-NYSE-2002-33, SR-NASD-2002-77, SR-NASD-2002-80, SR-NASD-2002-138, SR-NASD-2002-139, and SR-NASD-2002-141]

Self-Regulatory Organizations; New York Stock Exchange, Inc. and National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Changes (SR-NYSE-2002-33 and SR-NASD-2002-141) and Amendments No. 1 Thereto; Order Approving Proposed Rule Changes (SR-NASD-2002-77, SR-NASD-2002-80, SR-NASD-2002-138 and SR-NASD-2002-139) and Amendments No. 1 to SR-NASD-2002-80 and SR-NASD-2002-139; and Notice of Filing and Order Granting Accelerated Approval of Amendment Nos. 2 and 3 to SR-NYSE-2002-33, Amendment Nos. 2, 3, 4 and 5 to SR-NASD-2002-141, Amendment Nos. 2 and 3 to SR-NASD-2002-80, Amendment Nos. 1, 2, and 3 to SR-NASD-2002-138, and Amendment No. 2 to SR-NASD-2002-139, Relating to Corporate Governance

November 4, 2003.

I. Introduction

On August 16, 2002, the New York Stock Exchange, Inc. (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”),

and Rule 19b-4 thereunder,

a proposed rule change (SR-NYSE-2002-33) to amend its Listed Company Manual (“NYSE Manual”) to implement significant changes to its listing standards that are aimed to ensure the independence of directors of listed companies and to strengthen corporate governance practices of listed companies (“NYSE Corporate Governance Proposal”). On April 4, 2003, the NYSE submitted Amendment No. 1 to the NYSE Corporate Governance Proposal.

On April 17, 2003, the proposed rule change, as amended by NYSE Amendment No. 1, was published for comment in the

Federal Register

The

Commission received 68 comment letters on the NYSE proposal.

On October 8, 2003, the NYSE filed Amendment No. 2 to the NYSE Corporate Governance Proposal.

On October 20, 2003, the NYSE filed Amendment No. 3 to the NYSE Corporate Governance Proposal.

15 U.S.C. 78s(b)(1).

17 CFR 240.19b-4.

See

letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Nancy J. Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated April 3, 2003 (“NYSE Amendment No. 1”). NYSE Amendment No. 1 replaced the original filing in its entirety. Telephone call between Annemarie Tierney, Office of General Counsel, NYSE, and Jennifer Lewis, Special Counsel, Division, Commission, on April 9, 2003.

See

Securities Exchange Act Release No. 47672 (April 11, 2003), 68 FR 19051 (“NYSE Notice”).

A list of commenters on the rule proposals of the NYSE and the National Association of Securities Dealers, Inc. (“NASD”), who submitted correspondence as of October 13, 2003, is attached as Exhibit A to this order. The public files for the NYSE and NASD rule proposals, including all comment letters received on the proposals, are located at the Commission's Public Reference Room, 450 Fifth Street, NW, Washington DC 20549-0102.

See infra,

note.

See

letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Nancy J. Sanow, Assistant Director, Division, Commission, dated October 8, 2003 (“NYSE Amendment No. 2”). NYSE Amendment No. 2 amended portions of the proposal as described below.

See

letter from Darla C. Stuckey, Corporate Secretary, NYSE, to Nancy J. Sanow, Assistant Director, Division, Commission, dated October 17, 2003 (“NYSE Amendment No. 3”). In Amendment No. 3, NYSE proposed to require that the audit committee charter of a closed-end or open-end management investment company address the responsibility of the audit committee to establish procedures for the confidential, anonymous submission of concerns regarding questionable accounting or auditing matters, but not to require the procedures to be set forth in the charter, as would have been required under Amendment No. 2.

On October 9, 2002, the NASD, through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Commission, pursuant to section 19(b)(1) of the Exchange Act, and Rule 19b-4 thereunder, a proposed rule change (SR-NASD-2002-141) to amend NASD Rules 4200 and 4350(c) and (d) to modify requirements relating to board independence and independent committees (“Nasdaq Independent Director Proposal”). On March 11, 2003, NASD, through Nasdaq, filed Amendment No. 1 to the Nasdaq Independent Director Proposal.

On March 25, 2003, the proposed rule change, as amended by Amendment No. 1 to the Nasdaq Independent Director Proposal, was published for comment in the

Federal Register

The Commission received 24 comment letters on the Nasdaq Independent Director Proposal.

On July 16, 2003, Nasdaq filed Amendment No. 2 to the Nasdaq Independent Director Proposal.

On October 10, 2003, Nasdaq filed Amendment No. 3 to the Nasdaq Independent Director Proposal.

On October 16, 2003, Nasdaq filed Amendment No. 4 to the Nasdaq Independent Director Proposal.

On October 30, 2003, Nasdaq filed Amendment No. 5 to the Independent Director Proposal.

On June 11, 2002, the NASD, through Nasdaq, filed with the Commission, pursuant to section 19(b)(1) of the Exchange Act, and Rule 19b-4 thereunder, a proposed rule change (SR-NASD-2002-77) to amend NASD Rule 4350(b) to add a requirement for issuers to announce publicly any audit opinions with going concern qualifications (“Nasdaq Going Concern Proposal”). On July 10, 2003, the NASD Going Concern Proposal was published for comment in the

Federal Register

The Commission received no comments on the proposal.

See

letter from Mary M. Dunbar, Vice President and Deputy General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated March 11, 2003. Amendment No. 1 to the Nasdaq Independent Director Proposal replaced the original filing in its entirety.

See

Securities Exchange Act Release No. 47516 (March 17, 2003), 68 FR 14451.

See

supra note.

See

letter from Sara Nelson Bloom, Associate General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated July 15, 2003.

See

letter from Mary M. Dunbar, Vice President and Deputy General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated October 9, 2003. Amendment No. 3 to the Nasdaq Independent Director Proposal replaced in full the Nasdaq Independent Director Proposal and Amendment Nos. 1 and 2 thereto.

See

Section IV.

infra,

describing aspects of the proposed revisions.

See

letter from Mary M. Dunbar, Vice President and Deputy General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated October 15, 2003. Amendment No. 4 to the Nasdaq Independent Director Proposal made several revisions to the narrative section of the previous amendment.

See

letter from Sara Nelson Bloom, Associate General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated October 29, 2003. Amendment No. 5 to the Nasdaq Independent Director Proposal related to the proposed requirement that investment company audit committees establish procedures for the confidential, anonymous submission of concerns regarding questionable accounting or auditing matters. Amendment No. 5 removed a sentence in the narrative section of the proposal that stated that the procedures would be required to be set forth in the audit committee charter.

See

Securities Exchange Act Release No. 48123 (July 2, 2003), 68 FR 41191 (“Nasdaq Notice”).

On June 11, 2002, the NASD, through Nasdaq, filed with the Commission, pursuant to section 19(b)(1) of the Exchange Act, and Rule 19b-4 thereunder, a proposed rule change (SR-NASD-2002-80) to amend NASD Rule 4350(h) to require an issuer's audit committee or another independent body of the board of directors to approve related party transactions (“Nasdaq Related Party Transactions Proposal”). On December 30, 2002, the NASD, through Nasdaq, submitted Amendment No. 1 to the Nasdaq Related Party Transactions Proposal.

On July 16, 2003, the proposed rule change, as amended, was published for comment in the

Federal Register

The Commission received no comments on the proposal. On October 3, 2003, the NASD, through Nasdaq, submitted Amendment No. 2 to the Nasdaq Related Party Transactions Proposal.

On October 6, 2003, the NASD, through Nasdaq, submitted Amendment No. 3 to the Nasdaq Related Party Transactions Proposal.

See

letter from John D. Nachman, Senior Attorney, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated December 30, 2002.

See

Securities Exchange Act Release No. 48137 (July 8, 2003), 68 FR 42152.

See

letter from John D. Nachman, Senior Attorney, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated October 2, 2003. In Amendment No. 2 to the Nasdaq Related Party Transactions Proposal, Nasdaq proposed to (1) add language to NASD Rule 4350(h) to clarify that each issuer shall conduct an appropriate review of all related party transactions for potential conflict of interest situations, and (2) require that the rule change become effective 60 days following Commission approval.

See

letter from John D. Nachman, Senior Attorney, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated October 3, 2003. In Amendment No. 3 to the Nasdaq Related Party Transactions Proposal, Nasdaq proposed that the rule change become effective on January 15, 2004.

On October 9, 2002, the NASD, through Nasdaq, filed with the Commission, pursuant to section 19(b)(1) of the Exchange Act, and Rule 19b-4 thereunder, a proposed rule change (SR-NASD-2002-138) to amend NASD Rule 4350(a) to require foreign issuers to disclose any exemptions they may receive from Nasdaq's corporate governance listing standards (“Nasdaq Issuer Applicability Proposal”). On July 10, 2003, the Nasdaq Issuer Applicability Proposal was published for comment in the

Federal Register

The Commission received one comment letter on the Nasdaq Issuer Applicability Proposal.

On August 15, 2003, the NASD, through Nasdaq, submitted Amendment No. 1 to the Nasdaq Issuer Applicability Proposal.

On October 10, 2003, the NASD, through Nasdaq, submitted Amendment No. 2 to the Nasdaq Issuer Applicability Proposal.

On October 23, 2003, the NASD, through Nasdaq, submitted Amendment No. 3 to the Nasdaq Issuer Applicability Proposal.

See

Securities Exchange Act Release No. 48124 (July 2, 2003), 68 FR 41193.

See supra note.

See

letter from Mary M. Dunbar, Vice President and Deputy General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated August 15, 2003. Amendment No. 1 replaced in full the Nasdaq Issuer Applicability Proposal. In Amendment No. 1 to the Nasdaq Issuer Applicability Proposal, Nasdaq proposed to exempt registered management investment companies, asset-backed issuers and other passive issuers, and cooperatives from most provisions of NASD Rule 4350.

See

letter from Mary M. Dunbar, Vice President and Deputy General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated October 9, 2003. Amendment No. 2 replaced in full the Nasdaq Issuer Applicability Proposal and Amendment No. 1

thereto. In Amendment No. 2 to the Issuer Applicability Proposal, Nasdaq proposed to clarify that (1) Investment companies (including business development companies) are subject to all the requirements of NASD Rule 4350, except that registered management investment companies are exempt from the requirements of NASD Rule 4350(c); (2) asset-backed issuers and certain other passive issuers are exempt from the requirements of NASD Rule 4350(c) and (d); and (3) certain cooperative entities are exempt from NASD Rule 4350(c), however, each of these entities must comply with all federal securities laws, including without limitation, section 10A(m) of the Exchange Act and Rule 10A-3 thereunder.

See

letter from Mary M. Dunbar, Vice President and Deputy General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated October 23, 2003. Amendment No. 3 replaced in full the Nasdaq Issuer Applicability Proposal and Amendment Nos. 1 and 2 thereto. In Amendment No. 3 to the Nasdaq Issuer Applicability Proposal, Nasdaq proposed to set forth the dates by which companies would be required to come into compliance with the proposed rule changes that are the subject of this Order; add new Rules 4200A and 4350A to incorporate the sections of Rules 4200 and 4350 that would continue to apply until the proposed rule changes become effective; and exempt registered management investment companies, asset-backed issuers, and unit investment trusts from the requirement of proposed subsection (n) of NASD Rule 4350 regarding codes of conduct.

On October 10, 2002, the NASD, through Nasdaq, filed with the Commission, pursuant to section 19(b)(1) of the Exchange Act, and Rule 194-4 thereunder, a proposed rule change (SR-NASD-2002-139) to amend NASD Rule 4350(n) to require listed companies to adopt a code of conduct for all directors, officers, and employees (“Nasdaq Code of Conduct Proposal”). On January 15, 2003, the NASD, through Nasdaq, submitted Amendment No. 1 to the Nasdaq Code of Conduct Proposal.

On July 10, 2003, the proposed rule change, as amended, was published for comment in the

Federal Register.

The Commission received two comment letters on the Nasdaq Code of Conduct Proposal.

On October 6, 2003, the NASD, through Nasdaq, submitted Amendment No. 2 to the Nasdaq Code of Conduct Proposal.

This order approves the NYSE Corporate Governance Proposal, as amended by NYSE Amendment Nos. 1, 2, and 3; the Nasdaq Independent Director Proposal, as amended by Amendment Nos. 1, 2, 3, 4, and 5 to the Nasdaq Independent Director Proposal; the Nasdaq Going Concern Proposal; the Nasdaq Related Party Transactions Proposal, as amended by Amendment Nos. 1, 2, and 3 to that proposal; the Nasdaq Issuer Applicability Proposal, as amended by Amendment Nos. 1, 2, and 3 to that proposal; and the Nasdaq Code of Conduct Proposal, as amended by Amendment Nos. 1 and 2 to that proposal. The Commission is granting accelerated approval to Amendment Nos. 2 and 3 to the NYSE Corporate Governance Proposal, Amendment Nos. 2, 3, 4, and 5 to the Nasdaq Independent Director Proposal, Amendment Nos. 2 and 3 to the Nasdaq Related Party Transactions Proposal, Amendment Nos. 1, 2, and 3 to the Nasdaq Issuer Applicability Proposal, and Amendment No. 2 to the Nasdaq Code of Conduct Proposal, as discussed below, and is soliciting comments from interested persons on these amendments.

See

letter from Mary M. Dunbar, Vice President and Deputy General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated January 15, 2003.

See

Securities Exchange Act Release No. 48125 (July 2, 2003), 68 FR 41194.

See supra note.

See

letter from Mary M. Dunbar, Vice President and Deputy General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division, Commission, dated October 3, 2003. In Amendment No. 2 to the Nasdaq Code of Conduct Proposal, Nasdaq proposed to re-letter the section of NASD Rule 4350 addressing the code of conduct requirement as subsection (n), add cross-references to 17 CFR 228.406 and 17 CFR 229.406, and clarify that any waivers of the code for directors or executive officers would be required to be disclosed in a Form 8-K within five days.

II. Description of the NYSE and Nasdaq Proposals

A. History

In 1998, the NYSE and NASD sponsored a committee to study the effectiveness of audit committees. This committee became known as the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (“Blue Ribbon Committee”). In its 1999 report, the Blue Ribbon Committee recognized the importance of audit committees and issued ten recommendations to enhance their effectiveness.

In response to these recommendations, the NYSE and the NASD, as well as other exchanges, revised their listing standards relating to audit committees.

In February 2002, in light of several high-profile corporate failures, the Commission's Chairman at that time requested that the NYSE and NASD, as well as the other exchanges, review their listing standards, with an emphasis this time on all corporate governance listing standards, and not just those provisions relating to audit committees.

After reviewing their corporate governance listing standards, the NYSE and the NASD, through Nasdaq, filed corporate governance reform proposals with the Commission in 2002.

See

Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (February 1999). The Blue Ribbon Committee Report is available at

http://www.nyse.com.

See

Securities Exchange Act Release Nos. 42233 (December 14, 1999), 64 FR 71529 (December 21, 1999) (NYSE); 42231 (December 14, 1999), 64 FR 71523 (December 21, 1999) (NASD); 42232 (December 14, 1999), 64 FR 71518 (December 21, 1999) (American Stock Exchange); 43941 (February 7, 2001), 66 FR 10545 (February 15, 2001) (Pacific Exchange).

See

Commission Press Release No. 2002-23 (February 13, 2002).

See

File Nos. SR-NYSE-2002-33, SR-NASD-2002-77, SR-NASD-2002-80, SR-NASD-2002-138, SR-NASD-2002-139, SR-NASD-2002-141.

In January 2003, pursuant to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”),

the Commission proposed Rule 10A-3 under the Exchange Act,

which directs each national securities exchange and national securities association to prohibit the listing of any security of an issuer that is not in compliance with the audit committee requirements specified in Rule 10A-3. Because the provisions concerning audit committees in the NYSE and Nasdaq corporate governance reform proposals, as filed with the Commission, did not conform in all respects with the audit committee requirements set forth in Rule 10A-3 as proposed by the Commission, both the NYSE and Nasdaq revised their proposals.

In April 2003, the Commission adopted Rule 10A-3.

In order to conform their proposals to the requirements of final Rule 10A-3, and to incorporate comments from the public and revisions suggested by the Commission's staff, the NYSE and Nasdaq each filed further amendments to their proposals.

Significant aspects of the proposed rule changes, as amended, are described below.

Pub. L. 107-204, 116 Stat. 745 (2002).

See

Securities Exchange Act Release No. 47137 (January 8, 2003), 68 FR 2637, (January 17, 2003).

See

NYSE Amendment No. 1, supra note 3, and Amendment No. 1 to the Nasdaq Independent Director Proposal, supra note 8.

17 CFR 240.10A-3.

See

NYSE Amendment Nos. 2 and 3,

supra

notes 6 and 7; and NASD Amendment Nos. 2, 3, and 4,

supra

notes 11, 12, and 13 respectively.

B. NYSE Proposals

According to the NYSE, the NYSE Corporate Governance Proposal is designed to further the ability of honest and well-intentioned directors, officers, and employees of listed issuers to perform their functions effectively. The NYSE believes that the proposal also will allow shareholders to more easily and efficiently monitor the performance of companies and directors in order to reduce instances of lax and unethical behavior.

See

NYSE Corporate Governance Proposal.

1. Independence of Majority of Board Members

NYSE section 303A(1) of the NYSE Manual would require the board of directors of each listed company to consist of a majority of independent directors.

Pursuant to NYSE section 303A(2) of the NYSE Manual, no director would qualify as “independent” unless the board affirmatively determines that the director has no material relationship with the company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). The company would be required to disclose the basis for such determination in its annual proxy statement or, if the company does not file an annual proxy statement, in the company's annual report on Form 10-K

filed with the Commission.

In complying with this requirement, a board would be permitted to adopt and disclose standards to assist it in making determinations of independence, disclose those standards, and then make the general statement that the independent directors meet those standards.

See

NYSE section 303A(1).

See infra

Section II.B.12. concerning Controlled Companies and other entities that would be exempt from this requirement.

The NYSE proposes that for all provisions of NYSE section 303A that call for disclosure in a company's Form 10-K, if a company subject to such a provision is not a company required to file a Form 10-K, then the provision shall be interpreted to mean the annual periodic disclosure form that the company files with the Commission. If a company is not required to file either an annual proxy statement or an annual periodic report with the Commission, the disclosure shall be made in the annual report required under NYSE section 203.01.

See

NYSE Amendment No. 2, supra note, and NYSE section 303A—General Application—References to Form 10-K.

See

Commentary to NYSE section 303A(2)(a).

Id.

2. Definition of Independent Director

In addition, the NYSE proposes to tighten its current definition of independent director as follows. First, a director who is an employee, or whose immediate family member is an executive officer, of the company would not be independent until three years after the end of such employment relationship (“NYSE Employee Provision”).

Employment as an interim Chairman or CEO would not disqualify a director from being considered independent following that employment.

Second, a director who receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from the listed company, except for certain permitted payments,

would not be independent until three years after he or she ceases to receive more than $100,000 per year in such compensation (“NYSE Direct Compensation Provision”).

See

NYSE section 303A(2)(b)(i). In NYSE Amendment No. 2, supra note , the NYSE proposes the NYSE Employee Provision.

See

Commentary to NYSE section 303A(2)(b)(i).

Permitted payments would include director and committee fees and pension or other forms of deferred compensation for prior service, provided such compensation is not contingent in any way on continued service.

See

NYSE section 303A(2)(b)(ii). In addition, compensation received by a director for former service as an interim Chairman or CEO would not be required to be considered.

See

Commentary to NYSE section 303A(2)(b)(ii). In NYSE Amendment No. 2,

supra

note , the NYSE proposes to add that compensation received by an immediate family member for service as a non-executive employee of the listed company would also not be required to be considered. In NYSE Amendment No. 2,

supra

note , the NYSE also proposes to revise various look-back provisions from five years to three years.

See

NYSE section 303A(2)(b)(ii). In NYSE Amendment No. 2, supra note , the NYSE proposes to revise the NYSE Direct Compensation Provision to be a bright-line test, rather than a rebuttable presumption.

Third, a director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the company would not be independent until three years after the end of the affiliation or the employment or auditing relationship.

See

NYSE section 303A(2)(b)(iii).

Fourth, a director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the listed company's present executives serve on that company's compensation committee would not be independent until three years after the end of such service or the employment relationship (“NYSE Interlocking Directorate Provision”).

See

NYSE section 303A(2)(b)(iv).

Fifth, a director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company's consolidated gross revenues, would not be independent until three years after falling below such threshold (“NYSE Business Relationship Provision”).

The NYSE proposes to clarify this proposal with respect to charitable organizations by adding a commentary noting that charitable organizations shall not be considered “companies” for purposes of the NYSE Business Relationship Provision, provided that the listed company discloses in its annual proxy statement, or if the listed company does not file an annual proxy statement, in its annual report on Form 10-K filed with the Commission, any charitable contributions made by the listed company to any charitable organization in which a director serves as an executive officer if, within the preceding three years, such contributions in any single year exceeded the greater of $1 million or 2% of the organization's consolidated gross revenues.

See

NYSE section 303A(2)(b)(v).

See

NYSE Amendment No. 2,

supra

note 6, and Commentary to NYSE section 303A(2)(b)(v).

The NYSE also proposes to clarify this proposal by adding commentary explaining that both the payments and the consolidated gross revenues to be measured shall be those reported in the last completed fiscal year, and that the look-back provision applies solely to the financial relationship between the listed company and the director or immediate family member's current employer. A listed company would not need to consider former employment of the director or immediate family member.

Id.

The NYSE proposes to define “immediate family member” to include a person's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than domestic employees) who shares such person's home.

The NYSE also proposes that references to “company” include any parent or subsidiary in a consolidated group with the company.

See

General Commentary to NYSE section 303A(2)(b). In NYSE Amendment No. 2,

supra

note 6, the NYSE proposes to add that when applying the look-back provisions in NYSE section 303A(2)(b), listed companies need not consider individuals who are no longer immediate family members as a result of legal separation or divorce, or those who have died or become incapacitated.

See

NYSE Amendment No. 2,

supra

note 6, Commentary to NYSE section 303A(2)(a), and General Commentary to section 303A(2)(b).

The NYSE further proposes to revise the phase-in of the look-back requirement that the NYSE had previously proposed by applying a one-year look-back for the first year after adoption of these new standards.

The NYSE also proposes to change all of the look-back periods from five years to three years.

The three-year look-back would begin to apply from the date that

is the first anniversary of Commission approval of the proposed rule change.

See

NYSE Amendment No. 2,

supra

note 6, and General Commentary to NYSE section 303A(2)(b).

See

NYSE Amendment No. 2,

supra

note 6.

See

NYSE Amendment No. 2,

supra

note 6, and General Commentary to NYSE section 303A(2)(b).

3. Separate Meetings for Board Members

NYSE proposes to require the non-management directors of each NYSE-listed company to meet at regularly scheduled executive sessions without management.

See

NYSE section 303A(3).

In addition, NYSE proposes to require listed companies to disclose a method for interested parties to communicate directly with the presiding director of such executive sessions, or with the non-management directors as a group.

Companies may utilize the same procedures they have established to comply with Rule 10A-3(b)(3).

See

Commentary to NYSE section 303A(3). In NYSE Amendment No. 2, supra note , the NYSE proposes to delete the previously proposed requirement that interested parties be able to communicate confidentially, in addition to directly, with such parties.

See

Commentary to NYSE section 303A(3).

4. Nominating/Corporate Governance Committee

NYSE proposes to require each listed company to have a nominating/corporate governance committee composed entirely of independent directors.

The NYSE also proposes to require such committee to have a written charter that addresses, among other items, the committee's purpose and responsibilities, and an annual performance evaluation of the nominating/corporate governance committee (“NYSE Nominating/Corporate Governance Committee Provision”).

The NYSE further proposes to clarify that the committee would be required to identify individuals qualified to become board members, consistent with the criteria approved by the board.

See

NYSE section 303A(4)(a).

See infra

Section II.B.12. concerning Controlled Companies and other entities that would be exempt from this requirement.

See

NYSE section 303A(4)(b).

See

NYSE Amendment No. 2,

supra

note 6, and NYSE section 303A(4)(b).

5. Compensation Committee

NYSE proposes to require each listed company to have a compensation committee composed entirely of independent directors.

The NYSE also proposes to require the compensation committee to have a written charter that addresses, among other items, the committee's purpose and responsibilities, and an annual performance evaluation of the compensation committee (“NYSE Compensation Committee Provision”).

The Compensation Committee also would be required to produce a compensation committee report on executive compensation, as required by Commission rules to be included in the company's annual proxy statement or annual report on Form 10-K filed with the Commission.

Further, the NYSE proposes to (1) delete the previously proposed statement that the compensation committee has the sole authority to determine the compensation of the chief executive officer (“CEO”),

and provide that either as a committee or together with the other independent directors (as directed by the board), the committee would determine and approve the CEO's compensation level based on the committee's evaluation of the CEO's performance;

and (2) add a provision to the commentary on this section indicating that discussion of CEO compensation with the board generally is not precluded.

See infra

Sections II.B.12. concerning Controlled Companies and other entities that would be exempt from this requirement.

See

NYSE section 303A(5)(a).

See

NYSE Amendment No. 2,

supra

note 6, and NYSE section 303A(5)(b)(i)(C).

See

NYSE Amendment No. 2,

supra

note 6, and NYSE section 303A(5)(a).

Id.

See

NYSE Amendment No. 2,

supra

note 6, and Commentary to NYSE section 303A(5).

6. Audit Committee

a. Composition

NYSE sections 303A(6) and 303A(7) would require each NYSE-listed company to have a minimum three-person audit committee composed entirely of directors that meet the independence standards of both NYSE section 303A(2) and Rule 10A-3.

The NYSE also proposes to delete the previously proposed commentary relating to NYSE section 303A(6) and replace it with the following: “The Exchange will apply the requirements of Rule 10A-3 in a manner consistent with the guidance provided by the Securities and Exchange Commission in SEC Release No. 34-47654 (April 1, 2003). Without limiting the generality of the foregoing, the Exchange will provide companies with the opportunity to cure defects provided in Rule 10A-3(a)(3).”

See

NYSE sections 303A(6) and 303A(7). The Commission notes that new Rule 303A would incorporate various provisions of existing NYSE rules on corporate governance for listed companies, including, for example, requirements that an audit committee have a written charter and that such committee be comprised of at least three independent directors who meet certain financial literacy requirements.

See

NYSE Amendment No. 2,

supra

note 6, and Commentary to NYSE section 303A(6).

In addition, the Commentary to NYSE section 303A(7)(a) would require that each member of the audit committee be financially literate, as such qualification is interpreted by the board in its business judgment, or must become financially literate within a reasonable period of time after his or her appointment to the audit committee.

In addition, at least one member of the audit committee would be required to have accounting or related financial management expertise, as the company's board interprets such qualification in its business judgment.

The NYSE also proposes to clarify that while the Exchange does not require that a listed company's audit committee include a person who satisfies the definition of audit committee financial expert set forth in Item 401(e) of Regulation S-K, a board may presume that such a person has accounting or related financial management experience.

See

Commentary to NYSE section 303A(7)(a).

Id.

See

NYSE Amendment No. 2,

supra

note 6, and Commentary to NYSE section 303A(7)(a).

If an audit committee member simultaneously serves on the audit committee 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, each board would be required to determine that such simultaneous service would not impair the ability of such member to effectively serve on the listed company's audit committee and to disclose such determination.

b. Audit Committee Charter and Responsibilities

NYSE section 303A(7)(c) would require the audit committee of each listed company to have a written audit committee charter that addresses: (i) The committee's purpose; (ii) an annual performance evaluation of the audit committee; and (iii) the duties and responsibilities of the audit committee (“NYSE Audit Committee Charter Provision”).

The NYSE Audit Committee Charter Provision provides details as to the duties and responsibilities of the audit committee that must be addressed. These include, at a minimum, those set out in Rule 10A-3(b)(2), (3), (4) and (5),

as well as the responsibility to

annually obtain and review a report by the independent auditor; discuss the company's annual audited financial statement and quarterly financial statements with management and the independent auditor; discuss the company's earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies; discuss policies with respect to risk assessment and risk management; meet separately, periodically, with management, with internal auditors (or other personnel responsible for the internal audit function), and with independent auditors; review with the independent auditors any audit problems or difficulties and management's response; set clear hiring policies for employees or former employees of the independent auditors; and report regularly to the board.

See

NYSE section 303A(7)(c). In NYSE Amendment No. 2,

supra

note, the NYSE proposes to cross-reference the sections of Rule 10A-3 that set forth the required duties and responsibilities of the audit committee, instead of detailing these requirements in NYSE Rule 303A as it had previously proposed.

See

NYSE section 303A(7)(c)(iii).

7. Internal Audit Function

NYSE section 303A(7)(d) would require each listed company to have an internal audit function.

See

NYSE section 303A(7)(d).

8. Corporate Governance Guidelines

NYSE section 303A(9) would require each listed company to adopt and disclose corporate governance guidelines. The following topics would be required to be addressed: director qualification standards; director responsibilities; director access to management and, as necessary and appropriate, independent advisors; director compensation; director orientation and continuing education; management succession; and annual performance evaluation of the board.

Each company's website would be required to include its corporate governance guidelines and the charters of its most important committees, and the availability of this information on the Web site or in print to shareholders would need to be referenced in the company's annual report on Form 10-K filed with the Commission.

See

Commentary to NYSE section 303A(9).

Id.

9. Code of Business Conduct and Ethics

NYSE section 303A(10) would require each listed company to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and to promptly disclose any waivers of the code for directors or executive officers.

The commentary to this section sets forth the most important topics that should be addressed, including conflicts of interest; corporate opportunities; confidentiality of information; fair dealing; protection and proper use of company assets; compliance with laws, rules and regulations (including insider trading laws); and encouraging the reporting of any illegal or unethical behavior. Each code would be required to contain compliance standards and procedures to facilitate the effective operation of the code. Each listed company's Web site would be required to include its code of business conduct and ethics, and the availability of the code on the website or in print to shareholders would need to be referenced in the company's annual report on Form 10-K filed with the Commission.

See

NYSE section 303A(10).

See

Commentary to NYSE section 303A(10).

10. CEO Certification

NYSE section 303A(12)(a) would require the CEO of each listed company to certify to the NYSE each year that he or she is not aware of any violation by the company of the NYSE's corporate governance listing standards. This certification would be required to be disclosed in the company's annual report or, if the company does not prepare an annual report to shareholders, in the company's annual report on Form 10-K filed with the Commission.

See

NYSE section 303A(12)(a).

In addition, NYSE section 303A(12)(b) would require the CEO of each listed company to promptly notify the NYSE in writing after any executive officer of the listed company becomes aware of any material non-compliance with any applicable provisions of the new requirements.

See

NYSE section 303A(12)(b). In NYSE Amendment No. 2,

supra

note, the NYSE proposes to clarify that the notification would be required to be in writing.

11. Public Reprimand Letter

NYSE section 303A(13) would allow the NYSE to issue a public reprimand letter to any listed company that violates an NYSE listing standard.

See

NYSE section 303A(13). In NYSE Amendment No. 2,

supra

note, the NYSE proposes to clarify that this lesser sanction was not intended for use in the case of companies that fail to comply with the requirements of Rule 10A-3.

See

Commentary to NYSE section 303A(13).

12. Exceptions to the NYSE Corporate Governance Proposals

The NYSE proposes to exempt any listed company of which more than 50% of the voting power is held by an individual, a group or another company (“Controlled Company”) from the requirements that its board have a majority of independent directors, and that the company have nominating/corporate governance and compensation committees composed entirely of independent directors. A company that chose to take advantage of any or all of these exemptions would be required to disclose that choice, that it is a Controlled Company, and the basis for the determination in its annual proxy statement or, if the company does not file an annual proxy statement, in the company's annual report on Form 10-K filed with the Commission.

Limited partnerships and companies in bankruptcy proceedings also would be exempt from requirements that the board have a majority of independent directors and that the issuer have nominating/corporate governance and compensation committees composed entirely of independent directors.

See

NYSE section 303A—General Application—Equity Listings—Controlled Companies.

Id.

The NYSE considers the requirements of section 303A to be unnecessary for closed-end and open-end management investment companies that are registered under the Investment Company Act of 1940 (“Investment Company Act”)

, given the pervasive federal regulation applicable to them. However, the NYSE proposes that registered closed-end management investment companies (“closed-end funds”) would be required to: (1) Have a minimum three-member audit committee that satisfies the requirements of Rule 10A-3; (2) comply with the requirements of the NYSE Audit Committee Charter Provision; and (3) comply with the certification and notification provisions regarding non-compliance.

Closed-end funds also would be excluded from the disclosure requirement relating to an audit committee member's simultaneous service on more than three audit committees, but would be subject to the requirement for the board to determine that such simultaneous service would not impair the ability of such member to effectively serve on the listed company's audit committee.

15 U.S.C. 80a-1

et seq.

See

NYSE section 303A—General Application—Equity Listings—Closed-End and Open End Funds.

Id. See also

NYSE Amendment No. 2,

supra

note.

The NYSE also proposes to require business development companies, which are a type of closed-end management investment company defined in section 2(a)(48) of the

Investment Company Act

that are not registered under the Investment Company Act, to comply with all of the provisions of NYSE section 303A applicable to domestic issuers, except that the directors of such companies, including audit committee members, would not be required to satisfy the independence requirements set forth in NYSE section 303A(2) and 303A(7)(b).

For purposes of NYSE sections 303A(1), (3), (4), (5), and (9), a director of a business development company would be considered to be independent if he or she is not an “interested person” of the company, as defined in section 2(a)(19) of the Investment Company Act.

15 U.S.C. 80a-2(a)(48).

See

NYSE Amendment No. 2,

supra

note and NYSE section 303A—General Application—Equity Listings—Closed-End and Open-End Funds.

15 U.S.C. 80a-2(a)(19).

Open-end management investment companies (“open-end funds”), which can be listed as Investment Company Units, and are more commonly known as Exchange Traded Funds or ETFs, would be required to: (1) Have an audit committee that satisfies the requirements of Rule 10A-3, and (2) notify the Exchange in writing of any material non-compliance.

See

NYSE Amendment No. 2,

supra

note, and NYSE section 303A—General Application—Closed-End and Open-End Funds.

In addition, the NYSE proposes also to require the audit committees of closed-end and open-end funds to establish procedures for the confidential, anonymous submission by employees of the investment adviser, administrator, principal underwriter, or any other provider of accounting related services for the investment company, as well as employees of the investment company, of concerns regarding questionable accounting or auditing matters.

This responsibility would be required to be addressed in the audit committee charter.

See

NYSE Amendment No. 2,

supra

note, and NYSE section 303A—General Application—Equity Listings—Closed-End and Open-End Funds.

See

NYSE Amendment No. 3.

NYSE proposes that except as otherwise required by Rule 10A-3, the new requirements also would not apply to passive business organizations in the form of trusts (such as royalty trusts) or to derivatives and special purpose securities (such as those described in NYSE sections 703.16, 703.19, 703.20, and 703.21). To the extent that Rule 10A-3 applies to a passive business organization, listed derivative, or special purpose security, the requirement to have an audit committee that satisfies the requirements of Rule 10A-3, and the requirement to notify the NYSE in writing of any material non-compliance, also would apply.

See

NYSE section 303A—General Application—Other Entities. In NYSE Amendment No. 2,

supra

note, the NYSE proposes to add language to clarify the application of Rule 10A-3 to passive business organizations.

The new requirements generally would not apply to companies listing only preferred or debt securities on the NYSE. To the extent required by Rule 10A-3, however, all companies listing only preferred or debt securities on the NYSE would be required to: (1) Have an audit committee that satisfies the requirements of Rule 10A-3, and (2) notify the Exchange in writing of any material non-compliance.

See

NYSE section 303A—General Application—Preferred and Debt Listings. In NYSE Amendment No. 2,

supra

note, the NYSE proposes to add language to clarify the application of Rule 10A-3 to companies listing only preferred or debt securities.

13. Application to Foreign Private Issuers

NYSE section 303A would permit NYSE-listed companies that are foreign private issuers, as such term is defined in Rule 3b-4 under the Exchange Act,

to follow home country practice in lieu of the new requirements, except that such companies would be required to: (1) Have an audit committee that satisfies the requirements of Rule 10A-3; (2) notify the NYSE in writing after any executive officer becomes aware of any non-compliance with any applicable provision; and (3) provide a brief, general summary of the significant ways in which its governance differs from those followed by domestic companies under NYSE listing standards.

Listed foreign private issuers would be permitted to provide this disclosure either on their website (provided it is in the English language and accessible from the United States) and/or in their annual report as distributed to shareholders in the United States in accordance with Sections 103.00 and 203.01 of the NYSE Manual.

100

If the disclosure is made available only on the website, the annual report would be required to state this and provide the web address at which the information may be obtained.

101

17 CFR 240.3b-4.

See

NYSE section 303A—General Application—Equity Listings—Foreign Private Issuers, and NYSE section 303A(11). In NYSE Amendment No. 2,

supra

note , the NYSE proposes to clarify the application of Rule 10A-3 to foreign private issuers.

100

See

Commentary to NYSE section 303A(11).

101

Id.

14. Proposed Implementation of New Requirements

In NYSE Amendment No. 2, the NYSE proposes a revised implementation schedule for the new requirements. Pursuant to the new schedule, listed companies would have until the earlier of their first annual meeting after January 15, 2004, or October 31, 2004, to comply with the new standards. However, if a company with a classified board is required to change a director who would not normally stand for election in such annual meeting, the company would be permitted to continue such director in office until the second annual meeting after such date, but no later than December 31, 2005. Notwithstanding the foregoing, foreign private issuers would have until July 31, 2005, to comply with any Rule 10A-3 audit committee requirements.

102

See

NYSE Amendment No. 2,

supra

note, and NYSE section 303A—General Application—Effective Dates/Transition Period.

Companies listing in conjunction with their initial public offering

103

would be required to have one independent member at the time of listing, a majority of independent members within 90 days of listing, and fully independent committees within one year. They would be required to meet the majority of independent board requirement within 12 months of listing.

104

103

In NYSE Amendment No. 2,

supra

note, NYSE proposes that for purposes of section 303A, a company would be considered to be listing in conjunction with an initial public offering if, immediately prior to listing, it does not have a class of common stock registered under the Exchange Act. The NYSE also proposes to permit companies that are emerging from bankruptcy or have ceased to be Controlled Companies within the meaning of section 303A to phase in independent nomination and compensation committees and majority independent boards on the same schedule as companies listing in conjunction with an initial public offering. However, for purposes of the requirement that a company have an audit committee that complies with the requirements of Rule 10A-3, and the requirement that a company notify the Exchange in writing of any material non-compliance, a company will be considered to be listing in conjunction with an initial public offering only if it meets the conditions of Rule 10A-3(b)(1)(iv)(A). Investment companies are not subject to this exemption under Rule 10A-3(b)(1)(iv)(A), however.

See

NYSE section 303A—General Application—Effective Dates/Transition Period.

104

See

NYSE Amendment No. 2,

supra

note, and NYSE section 303A—General Application—Effective Dates/Transition Period.

Companies listing upon transfer from another market would have 12 months from the date of transfer in which to comply with any requirement to the extent the market on which they were listed did not have the same requirement. To the extent the other market has a substantially similar requirement but also had a transition period from the effective date of that

market's rule, which period had not yet expired, the company would have the same transition period as would have been available to it on the other market. This transition period for companies transferring from another market would not apply to the audit committee requirements of Rule 10A-3 unless a transition period is available under Rule 10A-3.

105

Id.

C. Nasdaq Proposals

According to Nasdaq, the purpose of the Nasdaq Independent Director Proposal is to provide greater transparency regarding certain relationships that would preclude a board of directors from finding that an individual can serve as an independent director, and to increase the role of independent directors on board committees.

106

In Nasdaq's view, the proposal is intended to enhance investor confidence in the companies that list on Nasdaq.

107

According to Nasdaq, the purpose of the Nasdaq Going Concern Proposal is to bring notice of a going concern qualification to investors and potential investors;

108

the purpose of the Nasdaq Related Party Transactions Proposal is to improve investor protection;

109

the purpose of the Nasdaq Issuer Applicability Proposal is to alert investors to the exemptions that may be granted to foreign issuers;

110

and the purpose of the Nasdaq Code of Conduct Proposal is to provide further assurance to investors, regulators, and Nasdaq that each of Nasdaq's issuers has in place a system to focus attention throughout the company on the obligation of ethical conduct, encourage reporting of potential violations, and deal fairly and promptly with questionable behavior.

111

106

See

Nasdaq Independent Director Proposal.

107

Id.

108

See

Nasdaq Going Concern Proposal.

109

See

Nasdaq Related Party Transactions Proposal

110

See

Nasdaq Issuer Applicability Proposal.

111

See

Nasdaq Code of Conduct Proposal.

1. Independence of Majority of Board Members

Nasdaq proposes to amend Nasdaq Rule 4200, which sets forth definitions, and Nasdaq Rule 4350, which governs qualitative listing requirements for Nasdaq National Market and Nasdaq SmallCap Market issuers (other than limited partnerships). Under the amendment to NASD Rule 4350(c)(1), a majority of the directors on the board of a Nasdaq-listed company would be required to be independent directors, as defined in NASD Rule 4200. Nasdaq proposes to require each listed company to disclose in its annual proxy (or, if the issuer does not file a proxy, in its Form 10-K or 20-F) those directors that the board has determined to be independent under NASD Rule 4200.

112

See

Amendment No. 3 to the Nasdaq Independent Director Proposal,

supra

note, and NASD Rule 4350(c)(1).

If an issuer fails to comply with this requirement due to one vacancy, or one director ceases to be independent due to circumstances beyond their reasonable control, Nasdaq proposes to require the issuer to regain compliance with the requirement by the earlier of its next annual shareholders meeting or one year from the occurrence of the event that caused the failure to comply with this requirement.

113

Nasdaq proposes to require any issuer relying on this provision to provide notice to Nasdaq immediately upon learning of the event or circumstance that caused the non-compliance.

114

113

Id.

114

Id.

Pursuant to current NASD Rule 4200(a)(15), a director would not be independent if the director is an officer or employee of the company or its subsidiaries, or any other individual having a relationship which, in the opinion of the company's board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

115

See

NASD Rule 4200(a)(15).

The NASD proposes to revise NASD Rule 4200(a)(15)(A) through (E) and add subparagraphs (F) and (G). NASD Rule 4200(a)(15) provides a list of relationships that would preclude a board finding of independence. First, a director who is, or at any time during the past three years was, employed by the company or by any parent or subsidiary of the company, would not be deemed independent (“Nasdaq Employee Provision”).

116

See

NASD Rule 4200(a)(15)(A).

Second, a director who accepts or has a Family Member

117

who accepts any payments from the company, or any parent or subsidiary of the company, in excess of $60,000 during the current fiscal year or any of the past three fiscal years, other than certain permitted payments,

118

would not be deemed independent (“Nasdaq Payments Provision”).

119

117

In Amendment No. 3 to the Independent Director Proposal,

supra

note, Nasdaq proposes to define “Family Member” as “a person's spouse, parents, children and siblings, whether by blood, marriage or adoption, or anyone residing in such person's home.”

See

NASD Rule 4200(a)(14).

118

Permitted payments would include compensation for board or board committee service; payments arising solely from investments in the company's securities; compensation paid to a Family Member who is a non-executive employee of the company or a parent or subsidiary of the company; benefits under a tax-qualified retirement plan, or non-discretionary compensation; and loans permitted under section 13(k) of the Exchange Act. 78 U.S.C. 78m(k).

See

NASD Rule 4200(a)(15)(B). In Amendment No. 3 to the Independent Director Proposal,

supra

note, Nasdaq proposes to add compensation for board committee service and loans permitted under section 13(k) of the Exchange Act to permitted payments.

See also supra

note.

152

See

NASD Rule 4350(d)(2)(A)(i)-(iv). In Amendment No. 3 to the Independent Director Proposal,

supra

note 12, Nasdaq proposes to: (1) Add a cross-reference to Rule 10A-3; and (2) add the third requirement noted above.

One director who is not independent as defined in NASD Rule 4200 and meets the criteria set forth in section 10A(m)(3) of the Exchange Act

153

and the rules thereunder, and is not a current officer or employee of the company or a Family Member of such person, may be appointed to the audit committee if the board, under exceptional and limited circumstances, determines that membership on the committee by the individual is required by the best interests of the company and

its shareholders, and the board discloses, in the next annual proxy statement subsequent to such determination (or, if the issuer does not file a proxy, in its Form 10-K or 20-F), the nature of the relationship and the reasons for that determination. A member appointed under this exception would not be permitted to serve longer than two years and would not be permitted to chair the audit committee.

154

Nasdaq proposes to add to Interpretive Material the recommendation that an issuer disclose in its annual proxy (or, if the issuer does not file a proxy, in its Form 10-K or 20-F) if any director is deemed independent but falls outside the safe harbor provisions of Rule 10A-3(e)(1)(ii).

155

153

15 U.S.C. 78j-1(m).

154

See

NASD Rule 4350(d)(2)(B). In Amendment No. 3 to the Independent Director Proposal,

supra

note 12, Nasdaq proposes to delete a previously proposed provision that would have permitted membership on the audit committee, under certain circumstances, of a director who owns or controls a specified percentage of the issuer's voting securities.

155

See

Amendment No. 3 to the Independent Director Proposal,

supra

note 12. Among other criteria, section 10A(m) of the Exchange Act and Rule 10A-3 thereunder provide that a member of an audit committee of an issuer is not considered “independent” if the member is an “affiliated person” of the issuer or a subsidiary. An “affiliated person” includes, among other things, a person who “controls” the issuer. The safe harbor of Rule 10A-3(e)(1)(ii) provides that a person who is not an executive officer of the issuer and is not the beneficial owner, directly or indirectly, of 10% or more of any class of voting equity securities of the issuer is deemed not to control the issuer for purposes of determining affiliation. However, a person who exceeds the 10% beneficial ownership is not presumptively deemed to control the issuer, and thus could still be deemed independent under the particular facts and circumstances.

See

Rule 10A-3(e)(1)(ii)(B).

In addition, Nasdaq will retain the requirement that at least one member of the audit committee have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.

156

See

NASD Rule 4350(d)(2)(A). In Amendment No. 3 to the Independent Director Proposal,

supra

note 12, Nasdaq proposes to clarify in Interpretive Material that a director who qualifies as an audit committee financial expert under Item 401(h) of Regulation S- -K or Item 401(e) of Regulation S-B is presumed to qualify as a financially sophisticated audit committee member.

Nasdaq proposes to delete from the Interpretive Material the discussion relating to determining whether a person is an affiliate solely by virtue of stock ownership.

157

See

Amendment No. 3 to the Independent Director Proposal,

supra

note 12.

8. Cure Periods

Nasdaq proposes to add a cure period provision, as follows: (1) If a listed issuer fails to comply with the audit committee composition requirements under Rule 10A-3 and NASD Rule 4350(d)(2), because an audit committee member ceases to be independent for reasons outside the member's reasonable control, the audit committee member could remain on the committee until the earlier of the issuer's next annual shareholders meeting or one year from the occurrence of the event that caused the failure to comply with the requirements; and (2) if an issuer fails to comply with the audit committee composition requirements due to one vacancy on the audit committee, and the aforementioned cure period is not otherwise being relied upon for another audit committee member, the issuer would have until the earlier of the next annual shareholders meeting or one year from the occurrence of the event that caused the failure to comply with this requirement.

158

An issuer relying on either of these provisions would be required to provide notice to Nasdaq immediately upon learning of the event or circumstance that caused the non-compliance.

158

See

NASD Rule 4350(d)(4)(A) and (B).

9. Notification of Noncompliance

Nasdaq proposes to require that an issuer provide Nasdaq with prompt notification after an executive officer of the issuer becomes aware of any material noncompliance by the issuer with the requirements of NASD Rule 4350.

159

See

NASD Rule 4350(m), which was added by Amendment No. 3 to the Independent Director Proposal,

supra

note 12.

10. Code of Business Conduct and Ethics

In the Nasdaq Code of Conduct Proposal, as amended,

160

Nasdaq proposes NASD Rule 4350(n) and related Interpretive Material, which would require each listed company to adopt a code of conduct applicable to all directors, officers and employees, and to make such code publicly available. The code of conduct would be required to comply with the definition of a “code of ethics” set forth in Section 406(c) of the Sarbanes-Oxley Act and any regulations thereunder. In addition, the code must provide for an enforcement mechanism that ensures prompt and consistent enforcement of the code, protection for persons reporting questionable behavior, clear and objective standards for compliance, and a fair process by which to determine violations. Moreover, any waivers of the code for directors or executive officers must be approved by the board and disclosed in a Form 8-K within five days.

160

See

the Nasdaq Code of Conduct Proposal, as amended,

supra

notes 25 and 28.

In the Interpretive Material, Nasdaq proposes that the requirement of a publicly available code of conduct applicable to all directors, officer and employees of an issuer is intended to demonstrate to investors that the board and management of Nasdaq issuers have carefully considered the requirement of ethical dealing and have put in place a system to ensure that they become aware of and take prompt action against any questionable behavior. Nasdaq states that, for company personnel, a code of conduct with enforcement provisions provides assurance that reporting of questionable behavior is protected and encouraged, and fosters an atmosphere of self-awareness and prudent conduct.

11. Public Announcement of Audit Opinions With Going Concern Qualifications

In the Nasdaq Going Concern Proposal,

161

Nasdaq proposes to amend NASD Rule 4350(b) to require each Nasdaq-listed company that receives an audit opinion that contains a going concern qualification to make a public announcement through the news media disclosing the receipt of such qualification. Under the proposal, the issuer, prior to the release of the public announcement, would be required to provide the text of the public announcement to the StockWatch section of Nasdaq's MarketWatch Department. The public announcement must be provided to Nasdaq StockWatch and released to the media not later than seven calendar days following the filing of the audit opinion in a public filing with the Commission.

162

161

See

the Nasdaq Going Concern Proposal.

162

See

NASD Rule 4350(b)(1)(B).

12. Related Party Transactions

In the Nasdaq Related Party Transactions Proposal, as amended,

163

Nasdaq proposes to amend NASD Rule 4350(h) to specify that each issuer shall conduct an appropriate review of all related party transactions for potential conflict of interest situations on an ongoing basis and all such transactions would have to be approved by the listed

company's audit committee or another independent body of the board of directors. For purposes of the rule, “related party transactions” would refer to transactions required to be disclosed pursuant to Commission Regulation S-K, Item 404.

164

Nasdaq proposes that the Related Party Transactions Proposal become operative on January 15, 2004.

165

163

See

the Nasdaq Related Party Transactions Proposal, as amended,

supra

notes 16, 18, and 19.

164

See

NASD Rule 4350(h).

165

See

Amendment No. 3 to the Nasdaq Related Party Transactions Proposal,

supra

note 19.

13. Application to Foreign Issuers and Certain Other Issuers

NASD Rule 4350 currently provides that foreign issuers are not required to do any act that is contrary to a law, rule or regulation of any public authority exercising jurisdiction over such issuer or that is contrary to generally accepted business practices in the issuer's country of domicile. Currently, Nasdaq may provide exemptions from the requirements of NASD Rule 4350 as may be necessary or appropriate to carry out this intent. In the Nasdaq Issuer Applicability Proposal, as amended,

166

Nasdaq proposes to amend this rule and add Interpretive Material to clarify that the authority to grant exemptions from the corporate governance standards applies only to foreign private issuers and does not apply to the extent that such exemption would be contrary to the federal securities laws, including, without limitation, section 10A(m) of the Exchange Act and Rule 10A-3 thereunder. Nasdaq also proposes to provide that a foreign issuer that receives an exemption from NASD Rule 4350 would be required to disclose in its annual reports filed with the Commission each requirement from which it is exempted and describe the home country practice, if any, followed by the issuer in lieu of these requirements. In addition, a foreign issuer making its initial public offering or first U.S. listing on Nasdaq would be required to disclose any such exemptions in their registration statement.

166

See supra

notes 22 to 24.

In addition, Nasdaq proposes that management investment companies (including business development companies) would be subject to all of the requirements of NASD Rule 4350, except that management investment companies registered under the Investment Company Act would be exempt from the requirements of NASD Rule 4350(c) and (n), which pertain to board and key committee independence requirements and codes of conduct.

167

Nasdaq proposed these exemptions in light of the fact that registered management investment companies are already subject to a pervasive system of federal regulation.

167

Id.

Finally, Nasdaq proposes that cooperative entities, such as agricultural cooperatives that are structured to comply with relevant state law and federal tax law and that do not have a publicly traded class of common stock would be exempt from NASD Rule 4350(c); however, such entities would be required to comply with all federal securities laws, including, without limitation, section 10A(m) of the Exchange Act and Rule 10A-3 thereunder.

168

Id.

Nasdaq proposes that asset-backed issuers and other passive issuers,

169

such as unit investment trusts, would be exempt from NASD Rule 4350(c) and (n), which pertain to board and key committee independence requirements and codes of conduct, and the audit committee requirements of NASD Rule 4350(d).

170

Nasdaq noted that these revisions are commensurate with provisions contained in Rule 10A-3.

169

These are issuers that are organized as trusts or other unincorporated associations that do not have a board of directors or persons acting in a similar capacity and whose activities are limited to passively owning or holding (as well as administering and distributing amounts in respect of) securities, rights, collateral or other assets on behalf of or for the benefit of the holders of the listed securities.

170

See

Amendment Nos. 2 and 3 to the Nasdaq Issuer Applicability Proposal.

14. Proposed Implementation of New Requirements

In Amendment No. 3 to the Nasdaq Issuer Applicability Proposal,

171

Nasdaq proposed to set out in NASD Rule 4350(a)(5) the proposed dates by which listed companies would be required to comply with the rule changes to NASD Rules 4200 and 4350 that are the subject of this Order. In order to allow companies to make necessary adjustments in the course of their regular annual meeting schedule, and consistent with Exchange Act Rule 10A-3, the rule would establish the deadlines for compliance listed below. During the transition period between the date of approval of the rule filing by the Commission and the deadline indicated for each rule change, companies that have not brought themselves into compliance with the new rules would be required to comply with the previously existing rules, as applicable.

172

171

See supra

note 24.

172

To make the application of the rules easier to understand, Nasdaq also proposed in Amendment No. 3 to the Nasdaq Issuer Applicability Proposal to adopt Rules 4200A and 4350A, which would set forth the sections of existing Rules 4200 and 4350 that will continue to be applicable until the deadlines for compliance with the proposed changes.

Companies would be required to be in compliance with the new rules by the following dates:

The provisions of Rule 4200(a) and Rule 4350(c), (d) and (m) regarding director independence, independent committees, and notification of noncompliance would be required to be implemented by:

• July 31, 2005 for foreign private issuers

173

and small business issuers (as defined in Rule 12b-2

174

); and

173

See

Section II.C.13.,

supra

for a discussion of the treatment of foreign private issuers under the Nasdaq proposals.

174

17 CFR 240.12b-2.

• For all other listed issuers, by the earlier of: (1) The listed issuer's first annual shareholders meeting after January 15, 2004; or (2) October 31, 2004.

In the case of an issuer with a staggered board, with the exception of the audit committee requirements, the issuer would have until its second annual meeting after January 15, 2004, but not later than December 31, 2005, to implement all new requirements relating to board composition, if the issuer would be required to change a director who would not normally stand for election at an earlier annual meeting. Such issuers would be required to comply with the audit committee requirements pursuant to the implementation schedule noted above.

Issuers that have listed or will be listed in conjunction with their initial public offering would be afforded exemptions from all board composition requirements consistent with the exemptions afforded in Rule 10A-3(b)(1)(iv)(A). That is, for each committee that the company adopts, the company would be required to have one independent member at the time of listing, a majority of independent members within 90 days of listing, and all independent members within one year. The rule would note, however, that investment companies are not afforded the exemptions in Rule 10A-3(b)(1)(iv)(A). Issuers could choose not to adopt a compensation or nomination committee and could instead rely upon a majority of the independent directors to discharge responsibilities under the rules. These issuers would be required to meet the majority independent board requirement within one year of listing.

Companies transferring from other markets with a substantially similar requirement would be afforded the

balance of any grace period afforded by the other market. Companies transferring from other listed markets that do not have a substantially similar requirement would be afforded one year from the date of listing on Nasdaq. The rule would stipulate that this transition period is not intended to supplant any applicable requirements of Rule 10A-3 under the Exchange Act.

Compliance with the limitations on corporate governance exemptions to foreign private issuers would be required by July 31, 2005. However, the requirement that a foreign issuer disclose the receipt of a corporate governance exemption from Nasdaq would apply to new listings and filings made after January 1, 2004.

Compliance with proposed Rule 4350(n), requiring issuers to adopt a code of conduct,

175

would be required six months after approval by the Commission. Proposed Rule 4350(h), requiring audit committee approval of related party transactions, would be operative January 15, 2004. The remainder of Proposed Rules 4350(a) and 4350(b) would be effective upon approval by the Commission.

175

See

Section III.C.10.

supra

for a discussion of the Code of Conduct Proposal.

III. Summary of Comments on NYSE and Nasdaq Proposals

The Commission received a total of 90 comment letters on the NYSE and Nasdaq proposals.

176

Many of the commenters expressed their support for the goals of the proposals.

177

While some commenters praised specific provisions of the proposals,

178

other commenters argued that specific provisions of the proposals were too restrictive or too lenient.

179

Many commenters believed that certain aspects of the proposals needed clarification.

180

The commenters generally addressed issues falling into one or more of the categories discussed below.

176

Of the comment letters received, 63 related to the NYSE Corporate Governance Proposal, 19 related to the Nasdaq Independent Director Proposal, five related to both the NYSE Corporate Governance Proposal and the Nasdaq Independent Director Proposal, two related to the Nasdaq Code of Conduct Proposal, and one related to the Nasdaq Issuer Applicability Proposal. The public files for the NYSE and Nasdaq proposals are located at the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549-0102. The public files for the rule proposals contain all comment letters on the proposals. A list of commenters on the NYSE and Nasdaq proposals (along with the citations to the letters referenced in this order), is included as Exhibit A to this order. The summary of comments contained in this section and the list of commenters contained in Exhibit A to this Order reflect comments received as of October 13, 2003.

177

See

Independent Community Bankers NYSE Letter, TIAA-CREF NYSE Letter, Herman E-mail, American Bankers Association NYSE Letter, Walden NYSE Letter, Railways Pension NYSE Letter, Social Investment NYSE Letter, Ethical Funds NYSE Letter, Ursuline Sisters NYSE Letter, Barclays NYSE Letter, SIO NYSE Letter, Council on Foundations NYSE Letter, Committee on Securities Regulation NYSE Letter, Intel Nasdaq Letter, Committee on Securities Regulation Nasdaq Letter, Paul Weiss Nasdaq Letter, National Venture Nasdaq Letter, and Qualcomm Nasdaq Letter.

178

See

American Bankers Association NYSE Letter, Walden NYSE Letter, Ursuline Sisters NYSE Letter, Barclays NYSE Letter, SIO NYSE Letter, America's Community Bankers NYSE Letter, America's Community Bankers Nasdaq Letter, Committee on Securities Regulation NYSE Letter, National Venture NYSE Letter, Investment Company Institute NYSE Letter, American Bankers Association Nasdaq Letter, Council on Foundations Nasdaq Letter, Committee on Securities Regulation Nasdaq Letter, National Venture Nasdaq Letter, Investment Company Institute Nasdaq Letter, and TI-USA Nasdaq Letter.

179

See

Council on Foundations NYSE Letter, Independent Community Bankers NYSE Letter, American Bankers Association NYSE Letter, Wachtell NYSE Memo, General Motors NYSE Letter, New York State Bar NYSE Letter, Wells Fargo NYSE Letter, Anadarko NYSE Letter, Winston & Strawn NYSE Letter, CNF NYSE Letter, Aetna NYSE Letter, Dow Lohnes NYSE Letter, Ameren NYSE Letter, Visteon NYSE Letter, Exxon NYSE Letter, Morrison Cohen NYSE Letter, Mirant NYSE Letter, American Society of Corporate Secretaries NYSE Letter, Computer Sciences NYSE Letter, Rockwell NYSE Letter, America's Community Bankers NYSE Letter, National Venture NYSE Letter, Peoples Energy NYSE Letter, Lorsch NYSE Letter, International Paper NYSE Letter, Agilent NYSE Letter, America's Community Bankers Nasdaq Letter, Whitney Nasdaq Letter, People's Energy Nasdaq Letter, America's Community Bankers Nasdaq Letter, Independent Community Bankers Nasdaq Letter, Kreider Nasdaq Letter, Committee on Securities Regulation Nasdaq Letter, Fulton Nasdaq Letter, and National Venture Nasdaq Letter (too restrictive), Herman E-mail, Eisenberg NYSE Letter, Mercer Delta NYSE Letter, TI-USA Nasdaq Letter, and Kolber Nasdaq E-mail (too lenient).

180

See

LeBoeuf NYSE Letter, New York State Bar NYSE Letter, America's Community Bankers NYSE Letter, Aetna NYSE Letter, Exxon NYSE Letter, Agilent NYSE Letter, Perkins Coie NYSE Letter, Mirant NYSE Letter, Computer Sciences NSYE Letter, Winston & Strawn NYSE Letter, General Motors NYSE Letter, Council on Foundations NYSE Letter, Committee on Federal Regulation on Securities Letter, New York City Bar NYSE Letter, Rutledge NYSE Letter, Intel Nasdaq Letter, America's Community Bankers Nasdaq Letter, Cenex Harvest Nasdaq Letter, People's Energy Nasdaq Letter, Paul Weiss Nasdaq Letter, and Committee on Securities Regulation Nasdaq Letter.

A. Independence of Majority of Board Members

General

Many commenters supported the proposals by NYSE and Nasdaq to require each listed company to have a majority of independent directors on its board,

181

to tighten the definition of independent director,

182

and to require the board to affirmatively determine that directors are independent.

183

There were some who disagreed, however. One commenter argued, in general, that boards should not be required to have a majority of independent directors.

184

With respect to NYSE's proposal to tighten the definition of independent director, one commenter expressed disapproval for what it described as an “expanding list of defined relationships.”

185

With respect to Nasdaq's proposal to tighten the definition of independent director, another commenter stated its concern that the proposed standards would lead to smaller boards or to boards composed of individuals that might not have the best or most valuable experience.

186

181

See

Independent Community Bankers NYSE Letter, Hermann E-mail, American Bankers Association NYSE Letter, Walden NYSE Letter, Railways Pension NYSE Letter, Social Investment NYSE Letter, Ethical Funds NYSE Letter, Ursuline Sisters NYSE Letter, Barclays NYSE Letter, SIO NYSE Letter, TIAA-CREF NYSE Letter, American Bankers Association Nasdaq Letter, and Independent Community Bankers Nasdaq Letter.

182

See

TIAA-CREF NYSE Letter, Railways Pension NYSE Letter, Barclays NYSE Letter, and SIO NYSE Letter.

183

See

American Bankers Association NYSE Letter, TIAA-CREF NYSE Letter, and American Bankers Association Nasdaq Letter.

184

See

Johnsson E-Mail.

185

See

KPMG NYSE Letter.

186

See

America's Community Bankers Nasdaq Letter.

With respect to the NYSE proposal regarding the manner in which boards may disclose determinations of independence, one commenter stated its belief that permitting boards to adopt categorical standards of independence and to disclose generally that directors meet these standards would ensure that privacy is maintained concerning the specifics of private financial matters.

187

Another commenter requested that, with respect to the barrier to independence of individuals having specified affiliations with “organizations” having a material relationship with the company, the NYSE clarify what “organization” means.

188

With respect to Nasdaq's proposed definition of independence, one commenter requested that Nasdaq clarify that “employee” does not include independent contractors and employees of other goods and service providers.

187

See

American Bankers Association NYSE Letter.

188

See

New York State Bar NYSE Letter.

Proposals Regarding Prohibited Compensation for Independent Directors

With respect to the kinds of compensation received by a director or family member that would preclude a finding of independence, one commenter described the NYSE Direct Compensation Provision as a

“reasonable approach,'

189

while another commenter thought the proposal was too rigid because it would disqualify employees who were paid more than $100,000 and did not have significant decision-making authority.

190

Some commenters requested clarification of this proposal. For example, one of these commenters asked whether “compensation” had a similar meaning to that given by the Commission in Rule 10A-3,

191

and whether any of the following could be excluded: gains from investments in securities and dividends,

192

restricted stock received by directors as part of their compensation for service as directors,

193

payments from banking transactions in the ordinary course of business,

194

and deferred compensation.

195

One commenter expressed its preference for the NYSE Direct Compensation Provision over the Nasdaq Payments Provision because the Nasdaq Payments Provision excluded individuals who received “payments,” which the commenter believed was too broad.

196

One commenter argued that either the $100,000 threshold of the NYSE Direct Compensation Provision should be increased for larger companies, or the board should have the discretion to establish the appropriate threshold.

197

With respect to the Nasdaq Payments Provision, one commenter argued that an indication of non-independence based on the threshold amounts of payments received should be a rebuttable presumption as in the NYSE Direct Compensation Provision, rather than a bright line test.

198

Commenters advocated that the following should be excluded from these amounts: indirect payments, such as payments to related organizations,

199

payments from banking or brokerage transactions in the ordinary course of business,

200

other items excluded from disclosure per Commission rules such as Item 404 of Form S-K,

201

and compensation for service on board committees.

202

In contrast, one commenter stated that director's fees should be the only compensation an independent director could receive from the company.

203

In addition, one commenter stated its belief that the three-year look back should not apply to the Nasdaq Payments Provision because the board would already be required to consider previous employment in making an affirmative determination of director independence.

204

One commenter expressed its strong support for the exception in the NYSE Direct Compensation Provision for compensation received by a director for former service as an interim Chairman or CEO, and recommended that Nasdaq include this exception in its proposal.

205

189

See

America's Community Bankers NYSE Letter.

190

See

GM NYSE Letter.

191

See

America's Community Bankers NYSE Letter.

192

See

Aetna NYSE Letter.

193

See

Exxon NYSE Letter.

194

See

America's Community Bankers NYSE Letter.

195

See

New York State Bar NYSE Letter.

196

See

American Bankers Association NYSE Letter.

197

See

Wells Fargo NYSE Letter.

198

See

Committee on Securities Regulation Nasdaq Letter.

199

See

ABC Nasdaq Letter.

200

See

America's Community Bankers Nasdaq Letter, American Bankers Association Nasdaq Letter, Whitney Nasdaq Letter, and People's Bank Nasdaq Letter.

201

See

Whitney Nasdaq Letter.

202

See

People's Bank Nasdaq Letter.

203

See

TI-USA Nasdaq Letter.

204

See

America's Community Bankers Nasdaq Letter.

205

See

Arrow Electronics Letter.

Business Relationship Provisions

One commenter supported the NYSE Business Relationship Provision and represented that members of its corporate governance task force (which consists of representatives from both large and small, public and non-public banking organizations) were confident that the majority of directors sitting on the boards of banking organizations impacted by these listing standards would be able to satisfy this requirement.

206

Other commenters argued that the NYSE Business Relationship Provision would be difficult to implement and would not, in many cases, be the most accurate measure of the materiality of a business relationship.

207

Likewise, commenters argued that NYSE's threshold of 2% was too low,

208

the proposal was not appropriate for smaller companies,

209

the proposal was ambiguous,

210

and that the existence of a commercial relationship should give rise only to a rebuttable presumption of lack of independence.

211

Commenters were also concerned about the application of the proposal to family members.

212

In addition, commenters argued that the proposal should not apply to the following: Executive officers or employees of a company making the payments who seek to be independent directors of the company that is on the receiving end of the payments,

213

certain loans,

214

non-executive employees,

215

disqualification due to consolidation accounting principles,

216

and gross revenues received in certain competitively bid and public utility transactions.

217

206

See

American Bankers Association NYSE Letter.

207

See

Mirant NYSE Letter, Winston and Strawn NYSFE Letter, CNF NYSE Letter, America's Community Bankers NYSE Letter, and New York State Bar NYSE Letter.

208

See

Anadarko NYSE Letter.

209

See

Agilent NYSE Letter.

210

See

Perkins Coie NYSE Letter and Winston & Strawn NYSE Letter.

211

See

Anadarko NYSE Letter, Aetna NYSE Letter, and Ameren NYSE Letter.

212

See

Aetna NYSE Letter, Visteon NYSE Letter, and Mirant NYSE Letter.

213

See

CNF NYSE Letter.

214

See

Aetna NYSE Letter.

215

Id.

216

See

Dow, Lohnes NYSE Letter.

217

See

Ameren NYSE Letter.

With respect to the Nasdaq Business Relationship Provision, one commenter recommended defining “controlling shareholder.”

218

See

America's Community Bankers Nasdaq Letter.

Interlocking Directorate Provisions

Two commenters supported the NYSE and Nasdaq Interlocking Directorate Provisions.

219

One commenter does not believe that the look-back provisions of the NYSE and Nasdaq Interlocking Directorate Provisions should apply because independence would seem to be compromised only if the listed company's executives had the current ability to participate in determining the director's compensation as an executive officer of the other entity.

220

The commenter suggests that if the NYSE and Nasdaq look-back provisions are applied, then the service of the listed company's executive, and the employment of the listed company's director, at the other company should be required to have occurred at the same time during that five-year period.

221

219

See

Council on Foundations Nasdaq Letter and American Bankers Association NYSE Letter.

220

See

America's Community Bankers Nasdaq Letter and America's Community Bankers NYSE Letter.

221

Id.

Relationships of a Director with the Company's Auditors

With respect to the NYSE's proposal concerning relationships with an auditor, one commenter did not believe that the NYSE had sufficiently explained why a director's affiliation with a company's auditor would compromise the director's independence.

222

In addition, several commenters argued that applying the proposals to family members would be too burdensome, given the small number of accounting firms that provide audit services to large publicly traded companies, and would be difficult to monitor. These commenters suggested

limiting the scope of the proposal.

223

Furthermore, commenters requested clarification of the terms “external auditors,''

224

“internal auditors,''

225

“affiliated with,''

226

and “executives.”

227

One commenter supported this proposal.

228

222

See

Computer Sciences NYSE Letter.

223

See

Aetna NYSE Letter, Exxon NYSE Letter, Wells Fargo NYSE Letter, Morrison Cohen NYSE Letter, and New York State Bar NYSE Letter.

224

See

Mirant NYSE Letter, America's Community Bankers NYSE Letter, and Computer Sciences NYSE Letter.

225

See

America's Community Bankers NYSE Letter.

226

Id.

227

See

Aetna NYSE Letter.

228

See

American Bankers Association NYSE Letter.

With respect to the Nasdaq proposal on the same topic, one commenter suggested limiting the scope of the proposal by excluding from its prohibition partners or employees that provide only a minimal amount of work on the company's audit or who are brought in to assist on technical or industry-specific issues.

229

See

America's Community Bankers Nasdaq Letter.

Definition of Family Member

In general, many commenters criticized the proposed NYSE and Nasdaq definitions of family members for being too broad and impractical to apply.

230

One commenter expressed its preference for NYSE's proposed definition,

231

and another commenter stated that NYSE's proposed definition is reasonable.

232

230

See

Intel Nasdaq Letter, People's Bank Nasdaq Letter, America's Community Bankers Nasdaq Letter, American Bankers Association Nasdaq Letter, Independent Community Bankers Nasdaq Letter, Kreider Nasdaq Letter, Mirant NYSE Letter, American Society of Corporate Secretaries NYSE Letter, America's Community Bankers NYSE Letter, Winston & Strawn NYSE Letter, Computer Sciences NYSE Letter, Aetna NYSE Letter, Exxon NYSE Letter, Wells Fargo NYSE Letter, New York State Bar NYSE Letter, and Rockwell NYSE Letter.

231

See

American Bankers Association Nasdaq Letter.

232

See

America's Community Bankers NYSE Letter.

Look-Back Periods and Their Phase-In

With respect to the look-back periods proposed by the NYSE and Nasdaq to disqualify former employees, auditor personnel, interlocking directors and their families, as applicable, for a specified time, two commenters argued that no look-back periods were necessary.

233

One of these commenters recommended that Nasdaq clarify that the look-back would apply to any time within the three-year period, not the entire three-year period.

234

Two commenters

235

approved of NYSE's proposal to phase-in the look-back periods but, along with other commenters,

236

argued that a five-year look-back period would be too long. Some commenters argued that Nasdaq's look-back provisions should be phased-in as in the NYSE's proposal.

237

233

See

America's Community Bankers Nasdaq Letter and Independent Community Bankers Nasdaq Letter.

234

See

America's Community Bankers Nasdaq Letter.

235

See

America's Community Bankers NYSE Letter and American Bankers Association NYSE Letter.

236

See

National Venture NYSE Letter and Independent Community Bankers NSYE Letter.

237

See

American Bankers Association Nasdaq Letter, Committee on Securities Regulation Nasdaq Letter, Whitney Nasdaq Letter, and Independent Community Bankers Nasdaq Letter.

Affiliates

With respect to how NYSE proposes to define independent directors, two commenters asked, absent other disqualifying factors, if a director that sits on the board of a company's affiliate could be an independent director with respect to that company.

238

See

Cleary NYSE Letter and LeBoeuf NYSE Letter.

Application to Investment Companies

With respect to how Nasdaq proposes to define independent director, one commenter stated that whether a director of an investment company is independent should be determined exclusively under the provisions of section 2(a)(19) of the Investment Company Act.

239

See

Investment Company Institute Nasdaq Letter.

Banks and Banking Transactions

Several commenters stated their concern about the impact of both the NYSE and Nasdaq proposals on small community banks and the disqualification of otherwise independent directors due to ordinary course of business banking transactions.

240

These commenters recommended that Nasdaq and NYSE amend their proposals accordingly. However, one of these commenters expressed its support for the NYSE proposal and represented that members of its corporate governance task force (which consists of representatives from both large and small,public and non-public banking organizations) were confident that the majority of directors sitting on the boards of banking organizations impacted by these listing standards would be able to satisfy the proposed requirements.

241

240

See

Independent Community Bankers NYSE Letter, American Bankers Association NYSE Letter, Wachtell NYSE Letter, America's Community Bankers NYSE Letter, Whitney Nasdaq Letter, American Bankers Association Nasdaq Letter, America's Community Bankers Nasdaq Letter, and Independent Community Bankers Nasdaq Letter.

241

See

American Bankers Association NYSE Letter.

Charities

One commenter argued that both companies and the charities they support would benefit from a bright line uniform rule that would apply to all charitable contributions without regard to the market on which a company is traded. The commenter stated its belief that Nasdaq's Business Relationship Provision would be a reasonable standard for assessing the effect of charitable contributions on a director's independence, and expressed its concern that NYSE-listed companies would be more likely to discontinue giving to charities than to expend the time and effort necessary to craft the categorical standards that would be needed under the NYSE proposal.

242

See

Council on Foundations Nasdaq Letter and Council on Foundations NYSE Letter.

Other Comments on Independence Proposals

Some commenters recommended strengthening the independence standards. For example, two commenters recommended that a former CEO should never be eligible to serve as an independent director.

243

One of these commenters argued that the board should be reqluired to take into account a director's relationship with senior management and other directors in making a determination of independence.

244

Another commenter recommended barring investment institutions from having board seats in companies they have investments in.

245

Three commenters recommended adding considerations such as ethnic and gender diversity of the board to the discussion of independence.

246

243

See

TIAA-CREF NYSE Letter and Coleman NYSE Letter.

244

See

TIAA-CREF NYSE Letter.

245

See

Hermann E-mail. Social Investment NYSE Letter, Ethical Funds NYSE Letter, and Calvert NYSE Letter.

246

See

Social Investment NYSE Letter, Ethical Funds NYSE Letter, and Calvert NYSE Letter.

With respect to the Nasdaq proposal, one commenter suggested defining “executive officer”—which appear in the Nasdaq Payments Provision, the Nasdaq Family of Executive Officer Provision, and the Nasdaq Business Relationship Provision—as defined in Rule 16a-1(f) of the Exchange Act, to prevent these proposals from disqualifying employees who have no policy-making role at the corporate level.

247

The same commenter also recommended clarifying the maning of

“subsidiary,” which appears in the Nasdaq Employee Provision, the Nasdaq Payments Provision, and the Nasdaq Family of Executive Officer Provision.

247

See

Intel Nasdaq Letter.

One commenter expressed its strong support for the position taken by both the NYSE and Nasdaq not to disqualify independent directors for ownership of even a significant amount of stock.

248

See

National Venture Nasdaq Letter and National Venture NYSE Letter.

Two commenters recommended that NYSE and Nasdaq apply a more lenient independence standard to smaller companies.

249

See

Independent Community Bankers NYSE Letter, Independent Community Bankers Nasdaq Letter, and America's Community Bankers Nasdaq Letter.

With respect to the NYSE proposal, one commenter recommended that NYSE adopt the provision permitted by Rule 10A-3 that would allow a listed issuer to have one audit committee member that ceases to be independent for reasons outside the member's reasonable control for a limited amount of time, and to extend such provision to all independent directors and the other non-Rule 10A-3 independence requirements.

250

Another commenter recommended adding a provision relating to appropriate procedures for a company to cure any defects in its compliance with the proposed new independence standards.

251

250

See

Cleary NYSE Letter.

251

See

Financial Services Agency NYSE Letter.

B. Separate Meetings for Independent Directors

Several commenters were in favor of the NYSE proposal to require separate executive sessions for non-management directors.

252

One commenter stated that it regarded this requirement as among the most important in improving the independence of the board.

253

Another commenter criticized the proposal because it believes that it could lead to decisions being made without critical information available to management, and could raise liability issues for the non-management directors under state law if their decisions are determined to be harmful to the company or not in its best interest.

254

The commenter suggested that the NYSE encourage these meetings, but not make them mandatory, so that each company could determine if the sessions would be productive. A third commenter stated its belief that requiring executive sessions would have a divisive effect within boards of listed companies and would deprive directors of guidance by management.

255

Another commenter argued that independent directors, not non-management directors, should be required to attend executive sessions, and that an independent director should be required to preside over the executive sessions.

256

252

See

TIAA-CREF NYSE Letter, Walden NYSE Letter, Social Investment NYSE Letter, Ethical Funds NYSE Letter, Barclays NYSE Letter, and SIO NYSE Letter.

253

See

TIAA-CREF NYSE Letter.

254

See

America's Community Bankers NYSE Letter.

255

See

Independent Community Bankers NYSE Letter.

256

See

Eisenberg NYSE Letter.

With respect to the Nasdaq proposal to require separate sessions for independent directors, one commenter stated its view that such a requirement could be burdensome, and recommended requiring regular meetings of non-management directors.

257

Another commenter recommended that Nasdaq clarify what would be expected to occur at these meetings.

258

257

See

People's Bank Nasdaq Letter.

258

See

America's Community Bankers Nasdaq Letter.

C. Communications with Independent Directors

Commenters recommended that NYSE clarify its proposal that interested parties should have the ability to freely communicate with a company's non-management directors with respect to the identity of “interested parties;''

259

how they should communicate with independent directors;

260

what topics would be appropriate to direct to independent directors, instead of the entire board;

261

and whether management could be involved in screening communications and in reviewing and responding to concerns.

262

Another commenter recommended limiting the proposal to employees.

263

With respect to the Nasdaq proposal, one commenter advocated that companies ensure that employees know that they would not be retaliated against for reports made in good faith.

264

259

See

Committee on Securities Regulation NYSE Letter.

260

See

America's Community Bankers NYSE Letter, Winston & Strawn NYSE Letter, Kerr-McGee NYSE Letter, Agilent NYSE Letter, and Committee on Securities Regulation NYSE Letter.

261

See

Winston & Strawn NYSE Letter.

262

See

Kerr-McGee NYSE Letter, Agilent NYSE Letter, and JP Financial NYSE Letter.

263

See

Agilent NYSE Letter.

264

See

America's Community Bankers Nasdaq Letter.

D. Compensation of Officers

Many commenters disapproved of the NYSE Compensation Committee Provision because the compensation committee would be given the sole authority to determine CEO compensation.

265

Commenters argued that the full board should have a role in making CEO compensation decisions,

266

or that all independent directors should have a role in making CEO compensation decisions, perhaps even by deciding how CEO compensation decisions would be made.

267

One commenter stated that the board should be permitted to allocate this responsibility to other committees or other groups of directors, as long as all members are independent, and that the compensation committee should be permitted to make a recommendation to be approved by all of the independent directors.

268

Another commenter recommended that the NYSE make clear that the compensation committee could be given the discretion to make other decisions.

269

Other commenters supported the proposal.

270

One commenter provided recommendations for how the compensation committee should evaluate CEO performance.

271

265

See

Business Roundtable NYSE Letter, American Society of Corporate Secretaries NYSE Letter, International Paper NYSE Letter, Lorsch NYSE Letter, Computer Sciences NYSE Letter, Peoples Energy NYSE Letter, and Pfizer NYSE Letter.

266

See

Computer Sciences NYSE Letter, Pfizer NYSE Letter, and International Paper NYSE Letter.

267

See

Business Roundtable NYSE Letter, Lorsch NYSE Letter, and Peoples Energy NYSE Letter.

268

See

Business Roundtable NYSE Letter.

269

See

Wells Fargo NYSE Letter.

270

See

TIAA-CREF NYSE Letter, Walden NYSE Letter, Social Investment NYSE Letter, and Ethical Funds NYSE Letter.

271

See

MVC Associates NYSE E-mail.

With respect to the Nasdaq Compensation of Executives Provision, one commenter argued that it would not be necessary or appropriate to apply this proposal to investment companies.

272

With respect to both the NYSE Compensation Committee Provision and the Nasdaq Compensation of Executives Provision, two commenters asked how other compensation would be determined.

273

272

See

Investment Company Institute Nasdaq Letter.

273

See

KPMG NYSE Letter and America's Community Bankers Nasdaq Letter.

E. Nomination of Directors

Several commenters supported the NYSE Nominating/Corporate Governance Committee Provision,

274

and one commenter supported the exception that provides that nominating committee approval is not required where the right to nominate a director

legally belongs to a third party.

275

However, one commenter argued that the NYSE should permit director nomination responsibilities to be allocated to other committees or other groups of directors so long as all members are independent.

276

274

See

TIAA-CREF NYSE Letter, Walden NYSE Letter, Social Investment NYSE Letter, Ethical Funds NYSE Letter, and Ursuline Sisters NYSE Letter.

275

See

National Venture NYSE Letter.

276

See

American Society of Corporate Secretaries NYSE Letter.

With respect to the role of board committees generally, one commenter recommended that the proposed listing standards explicitly recognize the oversight role and the responsibilities of the board of directors as a whole.

277

See

Securities Committee NYSE Letter.

While one commenter supported the Nasdaq Director Nomination Provision,

278

another commenter believed that the full board should be involved in the director nomination process, because otherwise all the independent directors may be friends and may not be independent in thought from one another.

279

One commenter recommended clarifying that the proposal's exception for cases where the right to nominate a director legally belongs to a third party includes arrangements other than contractual arrangements.

280

Another commenter recommended changing the 20% shareholder exception that had been included in Nasdaq's original proposal by deleting the phrase, “and is not independent as defined in Rule 4200 because that director is also an officer.”

281

In addition, another commenter argued that the proposal should not apply to investment companies whose independent directors are nominated by independent directors.

282

278

See

National Venture Nasdaq Letter.

279

See

Kolber Nasdaq Letter.

280

See

Cenex Harvest Nasdaq Letter.

281

See

Kreider Nasdaq Letter.

282

See

Investment Company Institute Nasdaq Letter.

F. Controlled Company Exemption

While one commenter supported both the NYSE and Nasdaq proposals to exempt controlled companies from some of the independent director requirements,

283

two commenters did not support the NYSE proposal.

284

One of these commenters argued that it would disenfranchise minority shareholders,

285

and the other commenter argued that the exemption should apply only where the measure of “control” is both voting and economic control, because corporations with two-tier classes of voting stock, where the minority economic interests exercise voting control because of supermajority voting rights, are particularly subject to the potential for abuse.

286

With respect to the Nasdaq proposal, one commenter recommended adding language to make clear that controlled companies choosing not to rely on the exemption need not include any special disclosures about their controlled status.

287

283

See

National Venture NYSE Letter and National Venture Nasdaq Letter.

284

See

International Corporate Governance NYSE Letter and Cascade NYSE Letter.

285

See

International Corporate Governance NYSE Letter.

286

See

Cascade NYSE Letter.

287

See

People's Bank Nasdaq Letter.

G. Audit Committee Charter

In general, several commenters supported increasing the authority and responsibility of the audit committee.

288

However, one commenter argued that final authority over audit committee issues should rest with all the independent directors.

289

With respect to the NYSE Audit Committee Charter Provision, several commenters were concerned with the extent of the audit committee's proposed new responsibilities.

290

For example, one of these commenters argued that the audit committee should be permitted to delegate non-financial risk management activities to other committees so long as such committee reports to the audit committee.

291

Another commenter argued that the audit committee should not be responsible for legal and regulatory compliance, and that investing a single committee with an overload of functions may dilute resources of the committee that should be available to its accounting and financial oversight role.

292

A third commenter argued that there were too many items for the audit committee to discuss and that the audit committee needs the flexibility to set its agenda to focus on the company's most significant financial reporting and corporate governance issues.

293

One of the commenters also argued that financial statements are the representations and responsibility of management, not the audit committee.

294

288

See

TIAA-CREF NYSE Letter, National Association of State Treasurers NYSE Letter, Railways Pension NYSE Letter, Barclays NYSE Letter, and SIO NYSE Letter.

289

See

Computer Sciences NYSE Letter.

290

See

American Society of Corporate Secretaries NYSE Letter, KPMG NYSE Letter, and Computer Sciences NYSE Letter.

291

See

American Society of Corporate Secretaries NYSE Letter.

292

See

KPMG NYSE Letter.

293

See

Computer Sciences NYSE Letter.

294

See

KPMG NYSE Letter.

Further, one commenter requested clarification of whether advance discussion of quarterly financial statements would be required and, if so, argued that the audit committee should be permitted to decide whether this requirement should apply to the earnings release or the quarterly financial statements.

295

Another commenter recommended excluding investment companies from the proposed requirement that audit committee members discuss earnings press releases as well as financial information and earnings guidance provided to analysts and rating agencies.

296

295

See

Wells Fargo NYSE Letter.

296

See

Investment Company Institute NYSE Letter.

With respect to the Nasdaq Audit Committee Charter Provision, the same commenter supported the proposed requirements regarding complaints, particularly their flexibility; and favored the proposal to grant the audit committee the authority to engage and fund outside advisors.

297

However, the commenter also argued that the Nasdaq proposal should be revised to make clear that each Nasdaq-listed company would be required to provide appropriate funding to the audit committee.

298

Another commenter argued that the Nasdaq proposal should be revised to require audit committee charters to state that one of the audit committee's purposes must be to assist the board in oversight of the company's compliance with laws and regulations, which would be consistent with the NYSE Audit Committee Charter Provision.

299

297

See

Investment Company Institute Nasdaq Letter.

298

Id.

299

See

TI-USA Nasdaq Letter.

Several commenters, writing before the NYSE and Nasdaq filed amendments to the proposals, pointed out that the NYSE and Nasdaq Audit Committee Charter Provisions should be revised so that the responsibilities required of the audit committee would comply with the requirements of Rule 10A-3.

300

See

Committee on Securities Regulation NYSE Letter, New York State Bar NYSE Letter, Financial Services Agency NYSE Letter, and Investment Company Institute Nasdaq Letter.

H. Audit Committee Independence

With respect to the NYSE proposal on audit committee independence, two commenters supported the proposal to require an independent audit committee.

301

However, several commenters were concerned about the interplay between the proposal and the requirements of Rule 10A-3. For example, one commenter argued that the proposal should incorporate the various exceptions and accommodations

codified in Rule 10A-3.

302

Another commenter recommended clarifying whether the Commission's Rule 10A-3 definition of impermissible compensation should be applied.

303

A third commenter asked: (1) Which definition of “immediate family member” should be used; (2) whether NYSE intends to apply a five-year look-back; (3) whether NYSE intends to consider payments made in any period prior to board service; and (4) whether NYSE intends to consider whether payments are made to a family member or to a firm providing advisory or professional services to the listed company with which a director is or was associated in the capacities referred to in Rule 10A-3(e)(8).

304

301

See

Social Investment NYSE Letter and Ethical Funds NYSE Letter.

302

See

Cleary NYSE Letter.

303

See

America's Community Bankers NYSE Letter.

304

See

Committee on Federal Regulation of Securities Letter.

Another commenter requested that NYSE determine that banking transactions in the ordinary course of business between banks and their directors and their affiliated companies would not constitute a material relationship that would impair an audit committee member's independence.

305

See

Independent Community Bankers NYSE Letter.

With respect to the Nasdaq proposal on audit committee independence, one commenter disapproved of the application of a three-year look back, and was concerned that this provision would deprive a company of a high-quality audit committee member who has an appreciation for the operational aspect of the business.

306

The commenter argued that no look-back was necessary because directors have a legal duty to act independently of previous allegiances. Although the commenter opposed any look-back, it commented that shortening the look-back to one year would significantly mitigate the adverse effect.

306

See

National Venture Nasdaq Letter.

Two commenters approved of the provisions in Nasdaq's original proposal to include a bright line test that would bar directors who own or control 20% or more of a company's stock.

307

One commenter requested further clarification of this provision.

308

Another commenter argued that directors who own more than 20% of a company's stock are the directors who are most independent of management because they have a stake in the firm apart from the compensation they receive as directors, and often there is no indicia whatsoever of control.

309

The same commenter argued that the proposed standard could be highly disruptive, expensive and counterproductive.

310

307

See

National Venture Nasdaq Letter and Paul Weiss Nasdaq Letter.

308

See

America's Community Bankers Nasdaq Letter.

309

See

Wachtel Nasdaq Letter.

310

Id.

Other commenters requested clarification of who Nasdaq would consider to be an affiliate.

311

For example, one of these commenters requested more guidance as to what factors ought to be considered in determining whether an individual is an affiliate.

312

Another commenter asked whether a director could serve on both the board of a holding company and the board of a subsidiary of the holding company.

313

Two other commenters expressed concern about the effect of banking relationships.

314

311

See

Paul Weiss Nasdaq Letter, America's Community Bankers Nasdaq Letter, American Bankers Association Nasdaq Letter, and Investment Company Institute Nasdaq Letter.

312

See

Paul Weiss Nasdaq Letter.

313

See

America's Community Bankers Nasdaq Letter.

314

See

American Bankers Association Nasdaq Letter and Independent Community Bankers Nasdaq Letter.

Although one commenter supported Nasdaq's proposal to allow certain leniencies in exceptional and limited circumstances, it argued that a company should not be required to disclose its use of these exceptions in a proxy because that would discourage use of the exceptions. The commenter stated that, instead, a company should be required to disclose its use of these exceptions in a report to Nasdaq.

315

Another commenter stated that it would be helpful for Nasdaq to clarify the relationship between the Nasdaq proposal and the requirements of Rule 10A-3, such as whether the same definition of family member and application of a look-back applies to both.

316

315

See

Paul Weiss Nasdaq Letter.

316

See

Committee on Securities Regulation Nasdaq Letter.

One commenter requested clarification of the relationship between current Nasdaq rules addressing audit committees and the Nasdaq Audit Committee Provision.

317

See

America's Community Bankers NYSE Letter.

I. Financial Background of Audit Committee Members

With respect to the NYSE and Nasdaq proposals on the requisite background of audit committee members, two commenters recommended harmonizing the two proposals.

318

One of these commenters recommended modifying the NYSE proposal to require audit committee members to be financially literate at the time they join the audit committee.

319

The other commenter recommended modifying the Nasdaq proposal to provide that an individual who satisfies the Commission's definition of an audit committee financial expert would be qualified to be an audit committee member.

320

318

See

Investment Company Institute NYSE Letter, Investment Company Institute Nasdaq Letter, and Committee on Securities Regulation Nasdaq Letter.

319

See

Investment Company Institute NYSE Letter.

320

See

Committee on Securities Regulation Nasdaq Letter.

With respect to the NYSE and Nasdaq proposals to require at least one member of the audit committee to have accounting or related financial management expertise, one commenter requested confirmation that past and current employment as a venture capitalist would allow a director to meet this requirement on a per se basis.

321

The commenter also recommended that the NYSE make clear that “accounting or related financial management experience” does not require any particular background, certification or education.

322

321

See

National Venture NYSE and Nasdaq Letters.

322

See

National Venture NYSE Letter.

J. NYSE Audit Committee Member Simultaneous Service Provision

With respect to the NYSE proposal limiting the permissibility of simultaneous service on more than three audit committees, one commenter recommended moving this proposal to a different section of the NYSE proposal because it does not relate to independence.

323

Another commenter questioned whether the proposed requirement would be mandatory because it appears in the commentary, and argued that because it is difficult to generalize about which directors are likely to have adequate time to carry out the duties of the committee, it should apply only to directors who are currently functioning in active senior executive roles of listed companies.

324

A third commenter strongly recommended that in application of the proposed requirement to investment companies, a “fund complex” should be treated as one company because: (1) It is common practice in the investment company industry for the same directors to serve on the audit committee of one or more funds in a complex; (2) an investment company's financial

statements are less complicated and therefore audit committee oversight requires less time; and (3) all funds in a fund complex typically rely on the same accounting system and are subject to the same internal controls and policies.

325

323

See

American Society of Corporate Secretaries NYSE Letter.

324

See

GM NYSE Letter.

325

See

Investment Company Institute NYSE Letter.

K. Internal Audit Function

With respect to the NYSE proposal to require an internal audit function at all listed companies, one commenter recommended evaluating whether this requirement would be identical to the requirements of Rule 10A-3.

326

If the rules were not identical, the commenter recommended delaying the imposition of additional requirements until those required by federal law have been adopted and implemented, and their efficacy evaluated after a reasonable amount of time.

327

Two commenters argued that investment companies should be excluded from the internal audit requirement.

328

A third commenter strongly recommended that Nasdaq implement the same requirement.

329

326

See

Committee on Securities Regulation NYSE Letter.

327

Id.

328

See

Investment Company Institute NYSE Letter and Sullivan & Cromwell NYSE Letter.

329

See

TI-USA Nasdaq Letter.

L. NYSE Corporate Governance Guidelines

With respect to the NYSE proposal relating to corporate governance guidelines, one commenter strongly supported the proposal, particularly the concept of requiring director orientation for new directors and continuing education for all directors.

330

Two other commenters also supported requiring director orientation.

331

Another commenter strongly supported requiring annual evaluations by the board,

332

and one commenter supported requiring board and committee assessments.

333

Two of the commenters also recommended that evidentiary protection be provided in connection with any evaluations or assessments made by the board or its committees.

334

330

See

TIAA-CREF NYSE Letter.

331

See

Walden NYSE Letter and Ursuline Sisters NYSE Letter.

332

See

Mercer Delta NYSE Letter.

333

See

Boardroom Consultants NSYE Letter.

334

See

Mercer Delta NYSE Letter and Boardroom Consultants NYSE Letter.

While two other commenters supported requiring corporate governance guidelines, they argued that such guidelines should promote ethical guidelines for conducting core business, and that director orientation should include social and environmental risk management, as well as training on corporate social responsibility.

335

See

Social Investment NYSE Letter and Ethical Funds NYSE Letter.

Another commenter stated that the reference to charitable contributions in the proposed commentary to the guideline topic relating to director compensation was too vague.

336

This commenter recommended deleting the reference in its entirety or revising it to cover only the situation in which a director is permitted, as a perk of his or her position, to recommend a corporate gift to a favorite charity.

337

336

See

Council on Foundations NYSE Letter.

337

Id.

M. Code of Business Conduct and Ethics

With respect to the NYSE proposal regarding codes of business conduct and ethics, one commenter supported the proposal and stated that it will help companies manage conflicts of interest.

338

Five other commenters also supported the proposal,

339

but four of these commenters argued that it should deal with a broader scope of issues including environmental and social practices.

340

Two of these commenters promoted the Global Reporting Initiative, which provides a uniform disclosure policy and extends the reach of corporate social responsibility to economically, environmentally and socially sustainable business practices.

341

In addition, one commenter recommended that the NYSE require that CEOs endorse the codes with their signatures.

342

338

See

TIAA-CREF NYSE Letter.

339

See

Barclays NYSE Letter, Walden NYSE Letter, Social Investment NYSE Letter, Ursuline Sisters NYSE Letter, and SIO NYSE Letter.

340

See

Walden NYSE Letter, Social Investment NYSE Letter, Ursuline Sisters NYSE Letter, and SIO NYSE Letter.

341

See

Walden NYSE Letter, and SIO NYSE Letter.

342

See

Social Investment NYSE Letter.

One commenter supported the proposal to require companies to disclose waivers.

343

Another commenter argued that the NYSE should require companies to disclose only a waiver of material terms of their codes because requiring disclosure of any waivers would be too burdensome and would discourage companies from adopting comprehensive codes.

344

With respect to the Nasdaq Code of Conduct Proposal, one commenter supported the proposal, but recommended that Nasdaq require its listed companies to publish a summary of the compliance processes in place to support the code.

345

Another commenter also supported the proposal, but recommended that Nasdaq limit the proposed disclosure requirement to waivers of material terms of the code, because requiring disclosure of any waivers would be too burdensome and would discourage companies from adopting comprehensive codes.

346

The commenter also stated that the proposal should address “implicit waivers,” which would occur when a company fails to take action against a violation of the code. The commenter also recommended that Nasdaq permit waivers to be approved either by the board or a committee of the board to give listed companies the flexibility to place the oversight of a company's code of conduct within the jurisdiction of a particular committee if that structure would be more effective and appropriate.

343

See

Railways Pension NYSE Letter.

344

See

America's Community Bankers NYSE Letter.

345

See

TIAA-CREF Nasdaq Letter.

346

See

America's Community Bankers Nasdaq Letter.

Another commenter recommended that Nasdaq modify its proposal to provide that investment companies that are already subject to code of ethics and other requirements pursuant to rules under the Investment Company Act would be deemed to satisfy any new Nasdaq requirements regarding codes of conduct.

347

The commenter argued that this modification would be consistent with Nasdaq's intentions and the NYSE proposal.

347

See

ICI 2002-139 Letter.

N. Noncompliance

One commenter urged the NYSE and Nasdaq to modify their proposals to permit transitional periods of noncompliance, distinct from any similar procedures for other listing standards.

348

See

Committee on Federal Regulation of Securities Letter.

O. CEO Certification

Several commenters supported the NYSE proposal to require a company's CEO to certify annually that he or she is not aware of any violation of the Exchange's corporate governance rules.

349

One of these commenters claimed that requiring CEO certification has caused many companies to engage in better due diligence about their financial statements.

350

Other commenters disapproved of the proposal.

351

One of the commenters opposing the proposal argued that

requiring CEO certification is too high of a standard given the myriad of rules and standards facing listed companies, and recommended requiring a representation from the CEO, rather than a certification.

352

The other commenter argued that the NYSE proposal should be modified to require notification of material noncompliance with the new standards by the company, and not the CEO in his or her individual capacity, for the following reasons: (1) Certification could still be made if the CEO was unavailable or unwilling to make the certification; (2) the proposal adds an element of personal liability to the CEO that the commenter believes is unduly burdensome and is not contemplated by Rule 10A-3, which only applies to non-compliance with audit-related matters; and (3) the requirement is more onerous and time-consuming than the annual certification requirement.

353

The commenter also recommended that the NYSE make clear that the event that triggers the reporting requirement would not create a private cause of action against the company or the CEO.

349

See

TIAA-CREF NYSE Letter, Walden NYSE Letter, Railways Pension NYSE Letter, Ursuline Sisters NYSE Letter, and Barclays NYSE Letter.

350

See

TIAA-CREF NYSE Letter.

351

See

Computer Sciences NYSE Letter and Agilent NYSE Letter.

352

See

Computer Sciences NYSE Letter.

353

See

Agilent NYSE Letter.

One commenter recommended that the proposal be modified to provide that the CEO certify that he or she is not aware of any “material and ongoing” violations, and that the NYSE should clarify what is not material or ongoing.

354

See

Committee on Securities Regulation NYSE Letter.

Another commenter asked whether a company would be required to include a full text of these certifications, or a statement that the certifications have been made in its annual report.

355

See

Ogden Newell NYSE Letter.

P. NYSE Public Reprimand Provision

Two commenters supported the NYSE proposal to permit the Exchange to issue public reprimand letters to non-compliant companies.

356

One commenter recommended that the NYSE specify that any new NYSE corporate governance rules should not create a private right of action for non-compliance.

357

Another commenter recommended that the NYSE research and revise this proposal separately from the remainder of the corporate governance reforms.

358

The commenter also stated that a provision for due process prior to issuance of a reprimand letter would be necessary for fact checking and an opportunity to remedy the company's non-compliance.

359

356

See

TIAA-CREF NYSE Letter and Barclays NYSE Letter.

357

See

Committee on Securities Regulation NYSE Letter.

358

See

Computer Sciences NYSE Letter.

359

Id.

Q. Other Exemptions

One commenter strongly concurred with NYSE's exemption for closed-end funds.

360

Another commenter approved of the NYSE exemption for companies in bankruptcy and urged Nasdaq to adopt a similar exemption.

361

360

See

Investment Company Institute NYSE Letter.

361

See

Committee on Federal Regulation of Securities Letter.

R. Application of Rules to Foreign Private Issuers

Several commenters supported the NYSE proposal regarding private foreign issuers.

362

A few commenters recommended that the NYSE modify the proposal to clarify that foreign issuers would be permitted to take advantage of the accommodations for foreign issuers set forth in Rule 10A-3.

363

362

See

Committee on Securities Regulation NYSE Letter, TIAA-CREF NYSE Letter, and Walden NYSE Letter.

363

See

Cleary NYSE Letter and Financial Services Agency NYSE Letter.

With respect to the Nasdaq proposal regarding foreign private issuers, one commenter argued that, consistent with the NYSE proposal, the Nasdaq proposal should be amended to: (1) Automatically exempt foreign private issuers from the proposed corporate governance requirements (except for Rule 10A-3 requirements); (2) synchronize its effective date with Rule 10A-3 requirements; and (3) require disclosure of exemptions and alternative measures in a company's first annual report covering the fiscal year ending on or after July 31, 2005.

364

See

S&C 2002-138 Letter.

S. Implementation Schedule

With respect to the NYSE's proposed implementation schedule, one commenter criticized what it viewed as a long delay in implementation of the new requirements.

365

Another commenter recommended coordinating the effective dates and transition periods with Rule 10A-3 requirements.

366

365

See

Eisenberg NYSE Letter.

366

See

Computer Sciences NYSE Letter.

With respect to Nasdaq's proposed implementation schedule for its Independent Director Proposal, one commenter recommended that Nasdaq adopt transition periods for compliance for newly-listed companies similar to the transition periods outlined in the NYSE proposal.

367

Two commenters recommended that Nasdaq adopt transition periods for compliance for companies with classified boards similar to the transition periods outlined in the NYSE proposal.

368

Another commenter recommended granting small business issuers additional time to come into compliance.

369

367

See

Committee on Securities Regulation Nasdaq Letter.

368

See

Committee on Securities Regulation Nasdaq Letter and Whitney Nasdaq Letter.

369

See

National Venture Nasdaq Letter.

IV. Amendments to NYSE and Nasdaq Proposals

The discussion in Sections II.B. and C. above reflects revisions proposed in the amendments to the NYSE and Nasdaq proposals that were submitted by the NYSE and Nasdaq following publication of the NYSE Notice and the Nasdaq Notice. The discussion below summarizes those revisions.

In Amendment No. 2 to its Corporate Governance Proposal, the NYSE proposed revisions in a number of areas. The proposed revisions in Amendment No. 2 would:

• Conform the compliance dates and transition periods with those mandated for audit committees by Rule 10A-3 under the Exchange Act;

• Provide phase-in periods with respect to certain requirements for companies listing in conjunction with an initial public offering, companies emerging from bankruptcy, and companies that ceased to be Controlled Companies;

• Revise the “look-back” periods so that the independence tests would have a one year look-back during the first year after Commission approval of the new standards, with the full look-back period becoming applicable after the end of that first year, and would shorten the periods from five years to three years;

• Clarify that when applying look-back provisions to family members, listed companies need not consider individuals who are no longer family members due to separation or divorce, or individuals who have died or become incapacitated;

• Indicate that references to “company” would include any parent or subsidiary in a consolidated group with the company;

• Clarify the NYSE Employee Provision to provide that a director who is an employee, or whose immediate family member is an executive officer, of the company would not be considered independent until three years after the end of such employment relationship;

• Provide that employment as an interim Chairman or CEO would not

disqualify a director from being considered independent following that employment;

• Revise the NYSE Direct Compensation Provision to be a bright-line test, rather than a rebuttable presumption and clarify that immediate family member compensation would need only to be considered if the family member is an executive officer of the listed company;

• Revise the NYSE Business Relationship Provision to test all payments (whether to or from the listed company) against the consolidated gross revenues of the director's company, rather than also testing them against the listed company;

• Apply the look-back period in the NYSE Business Relationship Provision only to the financial relationship between the listed company and the current employer of the director, and not require the listed company to consider former employment of the director or family member;

• Clarify in the Commentary to the NYSE Business Relationship Provision that listed companies must disclose contributions to a charity of which a director serves as an executive officer, if the contributions satisfy the proposal's threshold test;

• Recommend that listed companies should hold an executive session limited solely to independent directors at least once a year;

• Revise the NYSE Compensation Committee Provision to clarify that all independent directors may be involved in approving the CEO's compensation and that the board in general is not precluded from discussing CEO compensation;

• Restructure the audit committee provisions to clearly define the audit committee requirements applicable to listed companies pursuant to Rule 10A-3;

• Exclude closed-end funds from specified provisions of section 303A, in recognition of the additional regulation to which closed-end funds are subject under the Investment Company Act;

• Require open-end funds to comply with the requirements of section 303A(6), which implement Rule 10A-3 under the Exchange Act;

• Require business development companies to comply with all of the provisions of section 303A applicable to domestic issuers, but use the “interested person” standard under section 2(a)(19) of the Investment Company Act for purposes of determining director independence; and

• Require the audit committees of open-end and closed-end funds to establish procedures for the confidential, anonymous submission of concerns regarding questionable accounting or auditing matters by employees of the investment adviser, administrator, principal underwriter, or any other provider of accounting related services for the fund, as well as employees of the fund.

In Amendment No. 3 to its Corporate Governance Proposal, NYSE proposed to require that the audit committee charter of a closed-end or open-end fund address the responsibility of the audit committee to establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters, but not to require the procedures to be set forth in the charter, as would have been required by Amendment No. 2.

In Amendment No. 3 to the Nasdaq Independent Director Proposal, Nasdaq proposed revisions to various aspects of its proposal. The proposed revisions in Amendment No. 3 would:

• Narrow the definition of “Family Member;'

• Expand the relationships that would preclude a finding of independence to apply not only to directors, but also to family members of directors;

• Exclude non-discretionary charity match programs from the definition of payments that would preclude a finding of independence;

• Exclude from the Nasdaq Payments Provision loans permitted under section 13(k) of the Exchange Act;

• Expand the scope of the relationships with the company's outside auditor that preclude a finding of independence;

• Amend the Interpretive Material associated with the definition of independence to provide clarification regarding applicability of the rule, particularly with respect to directors associated with law firms, and with respect to the meaning of the term “executive officer;'

• Retain bright-line tests for determining whether a director is independent;

• Retain the same standards for both large and smaller companies;

• Add a requirement that issuers identify in their proxy those directors that the board has determined to be independent;

• Clarify that independent committees may either take action or recommend that the board take action;

• Clarify that the new requirements relating to nominations committees would not apply in cases where the right to nominate a director legally belongs to a third party, or the company is already subject to a legally binding obligation that requires a director nomination structure inconsistent with the rule;

• Add a requirement for a nominations committee charter;

• Add a requirement that Controlled Companies be subject to the independent director executive session requirement;

• Remove a provision that would have allowed one director holding 20% or more of the company's stock to serve on the nominations committee although the director would not be independent because that director is also a company officer;

• Conform the proposals relating to audit committees to Rule 10A-3;

• Clarify that directors who have participated in the preparation of th

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